What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. In this episode of Hidden Forces, I republished the audio from a Twitter Spaces event that I hosted earlier this week, headlined by Brent Johnson and Michael Kow, who were later joined by Michael Nicolettos and Michael Howell. Brent is CEO of Santiago Capital and the author of the Dollar milkshake theory, which we delved into during his previous appearance on the podcast for episode 250. Michael Kow is CIO and portfolio manager of Kow family offices and is well known for coining the quote, dollar wrecking ball as a similar metaphor for describing the dynamics of dollar hegemony. Michael Nicolettos is a macro investor and the founder and former CIO at Apple Tree Capital. And Michael Howell is the CEO of Crossborder (1/92)
Capital and a regular contributor and active member of our Hidden Forces genius community. The purpose of this conversation and why I convene the panel is to help advance our understanding of the dynamics of dollar strength, something that has befuddled many analysts and which runs counter to common perceptions of how currency and sovereign debt crises unfold. It turned into a very lively discussion about a topic that has become increasingly relevant in recent months, as the US dollar has appreciated dramatically against the basket of international currencies from the pound sterling and the euro to the Japanese yen and the Chinese yuan. Because of the dollar's outsized role as a global funding currency, dollar strength often translates into foreign weakness, not just for other currencies, but also for their respective economies and asset markets. The consequences of a further strengthening dollar, how long it can continue and possible end game scenarios for economies and governments (2/92)
are all topics that we discuss. For anyone new to the program, Hidden Forces is listener supportive. I don't rely on advertisers or commercial sponsors, which is why the second hour of our conversations is normally available to premium subscribers only. If you want access to our full episode library, as well as the transcripts and intelligence reports, which include my takeaways from every episode and my thoughts on what comes next, head over to hiddenforces.io, select the episode that you're interested in and click on the premium extras, where you can then sign up to one of our premium content tiers. If you have questions about our Genius tier, which includes access to the Hidden Forces community, Q&A calls with guests, in-person events and dinners, feel free to send an email to info at hiddenforces.io, an I or someone from our team will get right back to you. And with that, please enjoy this lively and engaging conversation. So guys, let's start off first by clarifying what we mean. (3/92)
When we talk about the Dollar milkshake or when we talk about the Dollar wrecking ball, what is it fundamentally about the Dollar system that each of you have described in your own particular metaphors that explains its strengths? In other words, what is the common dynamic that you are all speaking to? Well, first of all, thanks for having me, Dimitri. I'm glad you did this. I think it's rather timely as what we've seen go on in the markets over the last few months. And I guess really year to date. To really break it down in a very simplified manner, the Dollar milkshake is really nothing more than a framework for how I see a sovereign debt crisis and a sovereign currency crisis playing out. At its base core, what it says is that over the last, call it 10 to 15 years, as we've gotten into these financial crises, these perpetual crises, the solution has been to borrow more money, kick the can down the road, print money for lack of a better way of saying it, and pray for a brighter day (4/92)
in the future. And so the whole world has, quote unquote, mixed this milkshake. But for a number of reasons, based on the design of the system, whether it's fair or not fair, whether it's moral or immoral, the simple fact is that the US Dollar has several advantages that none of its competing currencies do. And as a result, as this milkshake gets mixed in order to combat these financial crises, I believe the US is the only one that has the straw, or at least has the biggest and the best straw, and will therefore drink that milkshake that the rest of the world is mixing. I don't think it's so important who prints the money. It's more important who captures the money. And I think, again, for better or for worse, I think the US Dollar and the US markets are going to capture most of the capital that's being provided. Before we go to Cal, I have one more question, Brent, which is when you talk about, when you say capturing, what matters is who captures the money. It's not as important who (5/92)
prints it. What do you mean? Well, so this is where it starts to get a little confusing when you use terminology, because we could probably spend two hours debating whether or not any money is actually printed or not. But just to keep it very simple, let's just use the term money printing. The central banks provide liquidity, print money, do stimulus, however you want to describe that process. And what I mean by capture is that I think in many ways, capital that is able to move will seek out where it is treated best. And for better or for worse, I think capital will be treated best in the United States. Now, I want to be clear, that doesn't necessarily mean that it's treated well, it just treated best. It's a relative game here. And I think as we get further into a crisis, because the world needs dollars, and because the system is designed to favor dollars over other currencies, I think capital will flow into the dollar at the expense of other currencies. And I think that liquidity (6/92)
will flow to the United States. And when it flows the United States, it will deprive the places that it's leaving of that liquidity. And it will become a self-reinforcing doom loop that will squeeze the dollar higher. That's the thesis. Now, whether it will play out, I don't know for sure. I have a high degree of confidence, but nothing is ever certain. So, but that's what I mean. I mean, the US will be seen as a relative safe port in the coming storm. Great. So, we'll get into that as the discussion progresses. So, Michael Cow, why don't you jump in here? You are the author, as we said, of the dollar wrecking ball, a much more aggressive thesis, though. It describes, I think, a very similar dynamic. What are you capturing in your description of the dollar system? And how does it similar to Brent's? What are the differences? And how would you describe it? Sure. Thanks a lot for doing this. I've been looking forward to this discussion. And Brent and Michael Nicolettis and I have, we've (7/92)
all spoken separately offline about this, but I find it interesting that each of us have come at it from slightly different angles, but yet kind of arrive at the same place. So, I spent most of my career, I started my career in macro and then spent most of my career in micro and micro, meaning in the world of capital structure and reorgs, bankruptcies, et cetera. And since the bear market in oil of around 2015, I've been very, very enmeshed in the oil space and getting to understand the nitty gritty fundamentals of it. So, I'm approaching this dollar wrecking ball from a very commodity, specifically oil-centric perspective, because in the beginning of 2021, I wrote a number of threads talking about how the combination of a number of factors, long-term cap X starvation for years in the oil space, plus this hell bent for leather, ESG mandate, and exacerbated by Ukraine, Russia, et cetera, have conspired to create this very, very structural inflation that originated in oil, but then has (8/92)
leapt into now much stickier components. In the middle of 2021, I also got into a number of, that's really when I started my sort of Twitter adventures and I got into a number of debates online about how, well, about the dollar, implications on the dollar and how this sticky structural inflation, originating in oil would create an aggressively hawkish fed well ahead of the rest of the world's central banks. And in turn, create, that's when I first started using the word dollar wrecking ball. And here we are. I think there's a lot we can talk about, but the determinants where I agree a lot with what Brent says, the determinants of a currency's value are manyfold. First of all, it's a relative value. Despite years and years of money printing and an overt weak dollar policy, if you want to talk about insults to the dollar, our Fed has done it with the amount, the aggressive, five to six trillion of balance sheet expansion, plus aggressive MMT. And yet during that process, you saw the DXY (9/92)
basically go no lower than around 90. The reason is because other central banks were doing the same. So I call the US dollar the least dirty shirt, amongst a bunch. And then we can also talk about, I know that we can also talk about some of the geopolitical factors. So it's not just a matter of debt to GDP that guarantees the safety and soundness of a country's currency. You have to also look at the left side of the left side of the balance sheet, the sovereign balance sheet, looking at natural resources, geographical advantages, military, hard and soft power advantages. So all of these things, I encapsulated in a thread about how this, back in May of last year, when Bitcoin was all the rage and people were talking about Bitcoin being the solution to the end of dollar hegemony. And I said, well, not so fast because I think all this talk about the US dollar going the way of the Reichsmark ignores so many other factors. So I guess I'll leave it there for now. That's a great summary, (10/92)
Michael. And it's easy to forget. I've forgotten all those J-Powell, Money Printer, Go Burr memes that were so popular making the rounds on the internet during that period. So let's go to Michael, Nicolettos, we're going to call you Michael number two for this Twitter spaces. So why don't you introduce yourself, unlike with Brent and Michael, I didn't give you a formal introduction. Please make sure to introduce yourself, tell us a little bit about you, and then talk to us about how where you come to this dynamic from like what's your perspective, how do you tackle it? Hi, Dimitri. Thank you for having me. It's a pleasure talking to you and to Brent and to Michael Cow. As Michael said, we've been speaking a lot offline and with Brent, we've known each other for quite a few years. I spent the last 10 years being the CIO and co-founder of Apple Tree Capital, which was running a long short emerging market fund. So I spent most of my life looking at emerging markets. And when you spend (11/92)
your life looking at emerging markets, you spend a lot of time looking at currencies. So a few years ago, actually, speaking to Brent, who was telling me about his milkshake theory, and something clicked. And it clicked because when you're an American or you live in the States, you tend to see the world through the US dollar. And when you look at the world through the US dollar, you feel that the US is doing a lot of things wrong, which it is. But you fail. Actually, most people fail to see what the other countries are doing wrong. So having spent a lot of time in emerging markets, I could understand what the effects of the dollar could be on other countries. Now, being a European as well, and having seen the European crisis, and having seen what is going on right now, it's pretty clear for me and to still Michael Kakao, Michael Kakao's line about the cleanest shirt, which I share the, I share the SKU. The US, even though it's not a clean shirt, it appears to be the cleanest shirt, (12/92)
which means it's, let's say, in a lot less, there's not so much trouble in the US dollar versus the other currencies. Now, if we go to the world we live in today, we see that the main theme tends to be inflation. And inflation is a fact, but not each country faces the same issues when we talk about inflation. When we talk about inflation, it's not the same thing about every country. So for the US, there's a demand side inflation, which is, you know, the labor market is very tight. So there's a lot of demand, but there's also supply side issue, which is the energy crisis. And when we talk about the energy crisis, people think about the energy as a standalone problem, but fertilizers use a lot of energy. So that means higher food prices. And what's the problem with higher food prices and higher energy prices? These are both inelastic goods. So it's not like you can live without, you might stop having another drink or you might not buy a second shirt, but you'll need energy and you'll (13/92)
need food. So when we go to Europe, for example, or we go to Japan or we go to the UK, and commodities are priced in dollars, and you get a supply shock like the one we got, it means that the inflation you get in the rest of the countries is more supply sided because of the economy, the labor market is not that tight. So the demand side is not that tight. And the supply side has just got a shock, which is a supply shock. So monetary policy is really effective when inflation is coming from the demand side. When it's coming from the supply side, you face a serious issue which the monetary policy can't really fix unless it crashes demand. And to crash the demand, it takes a big downturn for the economy. So the US is raising rates to fight that in both the demand side of its inflation problem, it raises the value of the dollar, and all the rest of the world is chasing the US in order to keep their currencies from falling and reducing the import pressure of inflation. So right now, the way (14/92)
the world is structured, and Brent is actually really good at explaining this. He's been on it for a few years and I have to say he's been early, but he's been there and he never changes the view and this is really admirable, even though it wasn't working, his thesis wasn't working for him for a few years, but he kept on saying that this would happen. And having been there, I can say this is a very tough to keep your position and not change your mind, even though markets are going against you. So the structure of the world right now is favoring the dollar. And as the Fed raises rates, everyone chases the Fed, and this creates a vicious loop which is self-reinforcing. Can I say something real quick to what Michael and Nicolettis just pointed out? Yes, please. Go ahead. Sure. So what Michael just said about, especially EM countries or any countries that are dependent on energy, I think that's a very critical component of this because last week, we saw the PBOC intervene to actually (15/92)
strengthen the yuan, which had been weakening precipitously throughout the year. And that, I think, is a tell on just how worried China is on inflation because when you think about China's economy, it's an export-driven economy, right? And they are very dependent on their current account surplus. So one would think that if their economy is on the back foot, given the property crisis, the zero COVID policies, one would end the fact that all of their neighboring countries have devalued currencies, that they would jump at the opportunity to allow the Reming B or the yuan to weaken. But instead, they did the opposite. So to me, that really is a tell on how worried they are about importing commodity inflation. So guys, a lot of things were said in the course of the three of you speaking separately. And I wrote down some notes. And I'm thinking, let's go to this one first, something that came up in my mind while I was listening to Brent talking, which had to do with the source of dollar (16/92)
strength. How much, and in trying to understand really what is it that maybe people have a hard time understanding about the source of dollar strength, how much of the dollar's strength is endogenous? It is an outgrowth of the structure of the system and its place within that system. And how much of it is exogenous factors having to do with America's maybe role in the world or the bounty of its economy or its capital account, its current account, etc. How do you guys think about that? Whoever wants to take a stab at that first, go ahead. Well, I'll jump in here. This is Brent. I think it has a lot to do with it, Dimitri. And I can't put a percentage on it, but I would say not all of it, but 70 or 80% of it, I think has to do with the structure of the system itself. And then I would put another big portion on the US, as the global hegemon, putting pressure on everyone else to keep the system as it is. And what I mean by that is the basic design of the system basically ensures that the (17/92)
US dollar will fall last. Now, the only way that the US dollar is going to fall first before these other currencies is if the Fed or the Treasury or the US government in general all got together and agreed that overnight we are going to devalue it just unilaterally, right? In which case the dollar falls versus all the other currencies. I don't think we're anywhere close to that happening. But anything outside of that, the structure of the system almost ensures that eventually we will get back to right where we are now. And a follow on to that is that there's a lot of people who have said, well, the dollar will fall when the Fed pivots and goes back to QE. And that's probably true. QE would probably put a dent in the dollar's rise and maybe even make it fall, right? It would definitely be a headwind and probably make it fall. But to Michael's point at the beginning, look at everything they did between 2020 and 2022. I mean, they threw everything at it and yet here we are at the 20-year (18/92)
high, right? And so the point I want to make is that until the system is completely redesigned, we will end up right back where we are today. Now, I don't know if it will take six months to end up back where we're at or if it will take six years to end up back where we are. But until the system is reset, until all the debts are wiped off the table, the system design basically ensures we end up back where we are. And then the second thing I would say regarding the US's role in the world is this system favors the United States. And it kind of goes to what Michael Cowell was saying about you can't just look at the liability side of the balance sheet. You got to look at the asset side of the balance sheet. And then you can't just look at the supply of currency. You have to look at the demand for the currency. So the system design ensures there's more demand for the dollar than there is for any other currency. And then the US roles as a global hegemon and the global military power ensures (19/92)
that if anybody gets out of line, they can very either nicely or very not nicely encourage them back in line, right? And every now and then somebody tries to take them on and escape the system. And it works to varying degrees. But in the last 100 years, it's never worked, you know, totally. And until the whole world gets together and decides that we are all at the same time going to leave the system and move to another system, and they're willing to fight a war to do it, the US is going to keep the global reserve currency. And I'll just do one little add on to that. And then I'll be quite handed off to a couple of the other guys is that in the last year, since the dollar started to rise again, first of all, QE was going to solve everything and the dollar was going to be debased and, you know, the rest of the world was going to rise versus the US. When that kind of started to go by the wayside, then this new theory kind of popped up that the US no longer benefited the US to have the (20/92)
global reserve currency. In fact, it was no longer an exorbitant privilege. It was becoming an exorbitant burden. And therefore, the US would prefer to lose the global currency or the global reserve currency and perhaps, you know, give away some of this power and the burden that came with it. And the problem with, and part of the burden there was an economic burden. And so they said, for these economic reasons, it would benefit the US to change the structure of the system. The problem with that is global reserve currencies are not about economics. I mean, they sort of are, but they're really about power. They're really about enforcing your will and the rest of the globe. And I know people don't like to hear that, but if you really get down to the real politic of it, that's the way it is. It doesn't really have to make sense. It's kind of like when you're a kid and you do something and your parents don't want you to do it. And you say, why not? And they say, because I told you to. And (21/92)
you say, but what's the reason? And they give you some stupid reason that doesn't make any sense. But it's still the way it is because they're bigger and they're more powerful than you. And as a kid, you just kind of have to live with it. And that's kind of how the global reserve currency is. It doesn't always make sense. It's not always the most efficient. It's not always fair. It's not moral. But it's the way it is. And it's the way it is because the US is the most powerful entity on the planet. Now, that could change someday. And when that happens, then maybe the rules will change. But as of right now, that's kind of the way I see it. I love that metaphor. So this is a question for all of you guys again, but maybe Brent, you can take it first if you want. If you think you can be concise. Again, I just try to want to manage everybody's. Everyone's got such great comments to make. But I wonder if people have the order of operations wrong in their macro frameworks, so many investors (22/92)
and so many commentators in macro, when it comes to where markets are situated within the political system itself, situated within the national security paradigm, because they've been living within a very anomalous period in human history during a unipolar period with the United States guaranteed security for almost every country in the world, with the exception of a few rogue states. And so the appreciation for the primacy of politics and where power is situated in all of that maybe doesn't exist for a lot of folks. I'm curious what you guys think of that. The fact that we are now in this phase of transitioning manifestly, it's undeniable that unipolarity is not the world we're living in today. And that just is obvious based on the geopolitical challenges and ruptures that we're seeing in the world. Do you guys think that that dynamic, that shift from unipolarity to multi-polarity or maybe to a new bipolarity is something that's messing with so many investors' models because they grew (23/92)
up in a world where all they knew was the neoliberal international order? I'll take a stab at that. I like how you framed it originally where the sources of dollar strength, are they endogenous or exogenous? And I would say it's actually both. So let's break down the endogenous sources. So as Brent said, after World War II, there was this Bretton Woods one where essentially the overlords decided that this was going to be the new world order. But since then, I would say that the market has chosen to keep the dollar primacy. It's not as if there's behind closed doors that the overlords are still trying to keep prop the dollar up and against the market's wishes. The market has chosen the dollar system because of its unrivaled liquidity, adoption, underlying depth of bond market liquidity, which is another key importance. And all of that in turn stems from geopolitical advantages. To borrow Peter Zahan's phrase, he called in 2014, he wrote a book called The Accidental Superpower. He calls (24/92)
the United States the accidental superpower because despite all of our, I guess you could argue, bad policy choices on the world stage, ephemeral presidential cycles that lead to inconsistent policies from one administration to another, we've become an accidental superpower by dint of our unrivaled geographical advantages. So you can break it down into a number of categories. Our river networks, our bicoastal oceanic buffers, just on arable land. Here's an interesting stat for you. Our arable land per capita is 15 times that of China's. So how do you put a price, a relative price on that? How do you put a relative price on the relative hard and soft power? So these are all factors that go into a very complex calculation, well beyond simple debt to GDP metrics and even interest rate differentials. So let's talk about interest rate differentials for a second because that's what kind of drives the exogenous source of current dollar strength, which I would say is a more cyclical thing. So (25/92)
from what I started with, with the commodity angle, it's interesting that usually in the past people have associated oil strength with dollar weakness. But this time around, I note that this bout of dollar strength stemmed from commodity strength to begin with. And the reason why there is a US dollar wrecking ball is our Fed is now ahead of the cycle. We were ahead of everybody else in the world in terms of easing and heaping loads and loads of liquidity into this COVID environment. But now we're the first to emerge out of it. And from an economic relative strength perspective, there is no major economic region that can compare. So even though nothing moves in a straight line, and it's debatable whether or not we've seen a local high in the USD, DXY, I would say that the real test for when we see a high in the dollar is when you come at a point in time where the other major regional blocks, economic blocks, are comparatively weaker than the United States economy that allow their (26/92)
central banks to essentially outhawk the Fed. And right now, if I'm looking at the Eurozone and the ECB or Japan with the BoJ or China with the PBOC, all of them are in far weaker relative positioning to the dollar. So I think that that's my answer to your endogenous, exogenous question. Great. And Michael N, you've been sitting there patiently. Feel free to respond to anything that we've discussed so far. Yeah, sure. I was listening carefully to what my predecessor was saying. It's very interesting the point you made about unipolarity and multipolarity. I think the world or the rest of the world is trying to go to a multipolar system. But trying to do that, it means that they're trying to change, let's say, quote unquote, the benchmark. The reason that the dollar is so popular is not only because US is 25% of global GDP. It's also because it has the most liquid financial market. You can raise capital easy. You can, you're very liquid, you can raise credit as well. So you can switch (27/92)
from dollars to any currency at any moment. You can buy dollars, you can sell dollars. So the fact that the economy is so open gives it, it's a sign of strength, not a sign of weakness. Because if it was the other way around, then the PBOC would probably be the strongest currency around there, out there. Now, the US is 25% of global GDP, but it's 87% of global trade. So when everyone needs the dollar to trade, and you can see that from commodities, which is pretty clear, everyone's settling in dollars, there have been some exercises and some attempts to trade in other currencies. But this is a very small amount in terms of percentage versus a total amount traded. You see that everyone wants the dollar. Now, the thing is, having been an emerging market fan manager, I've seen what emerging markets do and what do they do? They borrow in dollars. Why do they borrow in dollars? Because the interest rates in their local currency are so expensive. So they go to the US dollar, which is a (28/92)
liquid market, it has lower rates, and they can borrow these rates. So this happened on a global scale. And as a dollar strengthens, this means that all these countries and all these corporations in these countries need to repay these dollars at the more expensive FX trade, and they need to pay a higher interest rate because interest rates are going up. So they have a double whammy when it comes to their interest payments in their interest debt. So this thing is a self-reinforcing loop. And to go back to the earlier points regarding if it's an endogenous or an exogenous, everyone who watches the US comes out and says, the Fed is monetizing the debt, the Fed cannot fund the US deficit, and so on. But if you look at the rest of the balance sheets, the BOJ is around 120%, 128% of Japan's GDP. The eurozone is 81% of the eurozone GDP. The Bank of England is 39%, and the Fed is 35%. So if you are the biggest economy in the world, everyone wants your currency. Everyone trades in your (29/92)
currency, and your Fed has only 35% only, well, only the relative world in this discussion, you understand. And everyone, and you have only 35% is owned by your Fed. Actually, you've not monetized so much debt versus other people, versus other central banks. So I think that talking about the dollar, we tend to focus on the bad things. But if you go specifically and check all the other, especially the developed economies, you'll see that the central banks balance sheets are in the worst position than the US. You see that everyone wants to trade in US dollars, and this hasn't changed. So as we speak, the structure is still the same. A lot of countries try to go to a multipolar world, but they find out that when they try to do that, their currencies start to fall, and then they are facing serious problems. So I'm not sure this attempt will work at this stage. It could work someday, but I think the more they try, the higher the friction will be, and that friction will cause at some point (30/92)
something to break. We've seen a few signs the last 20 days, 10 days actually, the BOJ intervening, the BOE hard to intervene. And I think these are only the first signs. We're going to see more issues such as these in the future, unless of course the Fed pivots, which I tend to agree with Brent, that we do not believe, I don't believe that this will happen anytime soon. Although history suggests that whenever the ISM number in the US goes below 50, the Fed either poses or pivots, I think at this stage, the way things are and the way and what the Fed has communicated, they want the US economy to slow down. And I think as they overdid it in QE, they will overdo it in raising rates. So I think we're going to see the same way of doing monetary policy. And again, the Fed will be criticized if it stops early, if it stops late, they will switch. So I don't think it's easy for them to stop early and say, yes, we believe it's done enough. They need to see the number come down, the inflation (31/92)
number come down before they stop. Yeah. Hey, Dmitry, before I forget, Michael, I want to piggyback on something that both Michael's talked about with regards to the potential for a move from unipolar to multipolar. It's not that we don't see it, and we've all three of us, and we've discussed this, it's not that we don't see the attempts, it's not that we don't believe there is a desire to do it. The fact is, it's much easier to talk about doing it than actually doing it for a couple reasons that I don't think we've talked about yet. And part of it is the amount of dollar debt that is out there in the world. Everybody knows about the US dollar debt is like $30 trillion. An unfunded lab at Bilities is probably multiple hundred trillion dollars. But the fact is there's a Euro dollar market out there, which is dollars that exist outside the United States. That's probably bigger, or actually it is bigger, the Euro dollar market is bigger than the domestic US dollar market. And so then a (32/92)
lot of people will say, well, why don't the rest of the world just default on all of these loans that they have, and then just there won't be any demand left for the dollar? Well, the problem with doing that is that they would not be defaulting on the United States. It's not the United States that lent the Euro dollar market all this money. I mean, they lent them some of it. But the fact is, is that the Euro dollar market lent other people in the Euro dollar market all this Euro dollar debt. So if all this dollar debt that sits outside the United States gets defaulted on, they're defaulting on themselves. So this would be like if you're living in New York City and you have a bank account with dollars, and you get transferred to Hong Kong, and you're, or you get transferred to Germany, and you fly over to Germany and you rent an apartment and now you got to use euros. Well, you don't just destroy your bank account over there that has dollars in it, right? You want to convert those into (33/92)
something else. You wouldn't just burn them and let them go to zero just because you're not going to be using them anymore. But that's what the Euro dollar market would have to do. Yeah, they would get rid of their dollar debt, but they'd be like if you found a bunch of black mold in your house and you had to get rid of the black mold. Yeah, you get to get rid of the black mold, but you got to burn your house down to do it, right? So it's easy to talk about, yeah, let's just do it. But when it actually involves you losing assets in the process, it's much easier or it's much harder to pull off. The second thing I would say is that there's, earlier this year when the U.S. quote unquote weaponized the dollar and seized Russian assets and froze bank accounts, there was a big uproar. I'm really not sure why. I mean, this has happened before in history, but there's this big uproar that nobody in the rest of the world would no longer trust the dollar and they will go elsewhere because this is (34/92)
just immoral and the wrong way to behave. And I would say again, it makes a lot of sense just to say that, but to actually do it is something different. And the example I'll give is we're hosting this call right here on Twitter. Now in the last year, Twitter has canceled people. Twitter has denied freedom of speech. Twitter has shadow banned different people. And so we're still all here though. And the reason we're here is because this is where the action is. This is where the social media liquidity is, right? And so it's one thing to say, yeah, we wish it wasn't this way. Yeah, we wish it was a little better. But where else are you going to go? And it's just not that easy. There are competing social media programs or platforms that we could all go to. But the reason we don't is there's just not that many people there, right? This is again, this is where it's at. And it's hard to get everybody to migrate to a different system. Now you can get a few here and there and you can get a (35/92)
bunch of big announcements. And you know, Trump can say, I'm leaving Twitter and I'm going to go start my own thing. But look at the relative size. It's just very, very hard to transition. Yeah, I just want to say one thing real quick there, maybe a couple of things. One is, so a great example is Russia's inability to pay debts, dollar denominated debts, euro denominated debts, but let's just stick to the dollar. They went out of their way to try to pay dollar denominated liabilities. So that's how powerful the dollar is in the international system at the same time as they were being sanctioned. And to your point, the euro dollar market didn't grow up. It wasn't something that America imposed on the world. Foreign institutions and actors wanted to transact in dollars and the US, if anything, facilitated the growth of the euro dollar market in response to the demand for dollar usage. In terms of censorship, I think it's Michael Dooley. I was going to look for the paper, but it was too (36/92)
much multitasking. I think Michael Dooley and other authors authored a paper some years ago that looked at the benefits of censorship to running the global reserve currency. That in other words, some level of censorship, some level of the ability to impose sanctions is a feature to a system like this, not a bug. So that is, I think, also speaks to your point. Cal, were you going to jump in if you want to go ahead? Sure. I wanted to riff on a couple of different themes, but first I wanted to talk about what Brent just said about the weaponization of the dollar. And again, it comes back to relative advantages and disadvantages because people, I find it kind of funny that the, you know, a lot of the reasoning behind, you know, sort of, you know, Bitcoin and crypto adoption was network effects and Metcalf's law, etc., etc. Well, you want to know what has the ultimate network effects. It's the US dollar system. And so when you talk about alternatives to the dollar, you know, yes, there's (37/92)
some oil trade being conducted in between, you know, the Yuan and Russia directly between Iran and China. But let's turn the tables for a second and think about, okay, do any of them even present a remotely, even remotely an alternative to the US dollar as a global reserve currency? In other words, you know, despite the occasional bad policies of the United States, I would say that generally the world would probably agree that as a, as the sort of the benefactor, if you will, of the global reserve currency that the United States has generally been a fairly benevolent benefactor, would you trust your reserves to be in Rubles, or in the Iranian Riyal, or in the North Korean currency, or the Chinese R&B? So I think it's, you know, there's a lot, it's all a relative game. The other thing that I wanted to talk about that Mike Nicolettos alluded to is this differing of incentives between the different regions. And, you know, to the Greeks on stage here, you'll appreciate that I made a drink (38/92)
last night and I dedicated it to the Fed. I called it the Silla and Cariptus, because that is, that represents the choice that our Fed has right now. And, you know, it used to be that, you know, if everybody were aligned cyclically, economically, then the Fed can be the plunge protection team for the rest of the world, right? But as last week's Bank of England intervention in the gilt market showed, there are things about the current situation that make the macro setup very, very unstable, because there are differing incentives. The Bank of England had to intervene in the gilt market because of how levered their pension systems were, right? So they cannot allow longer rates to go up. In other words, they cannot allow for a bear steepening. However, because England doesn't have longer dated mortgages beyond five years, if they keep hiking the short end to keep up with the Fed, they're going to break homeowners. The third choice they had is they do nothing and then they break everybody (39/92)
through inflation, right? And so if you notice what happened, trust had to backpedal on her fiscal stimulus for exactly that reason. England will probably see double digit inflation if they go that route. Now, let's talk about the Fed for a second. Our choices aren't exactly, are very different because I've been espousing this notion that the least bad option for the United States might be to bear steepen the curve. So if we bear steepen... Can you tell people what bear steepening means, Mike, also as you continue? Yeah. So a bear steepening means that longer rates go higher even as the Fed is hiking the front end. Compare and contrast that to a bull steepening where the yield curve steepens when the Fed is easing the front end, right? So the knee jerk response guided by decades of easy money is that the yield curve only steepens through bull steepening. But I have news for you because during periods of stagflation, bear steepening is possible. In fact, I believe it was last week, both (40/92)
Jay Powell and Brainard said that they would like to see all points on our yield curve to have positive real rates and their measure of inflation being the core PCE deflator. So we're talking 4.6 to 4.8%. So they're talking about having nominal rates all along our yield curve higher than potentially 4.8%. Now, think about that for a second. If we did that, it would crush demand for long dated assets like residential real estate, which is a big component of CPI. So they kind of want to do that. They want to weaken wealth effects, but it might allow the Fed to ease up on the Fed funds rate, right? And so, the problem here is that if we bear steepen, what are the knock-on effects for the rest of the world? And I think that the presence of structural inflation is what is different this time around, and it presents all sorts of problems because the presence of structural inflation creates an every man for himself dynamic where our Fed is not necessarily aligned with the other central banks (41/92)
of the world and will not count on our Fed to go back to QE just because the Bank of England has to do so or that the Bank of Japan has to do so. And so, that obviously has implications on the US dollar as well. So this is a perfect setup because I want to ask the other Michael a question having to do with the negative effects that tightening dollar liquidity has on some of the European countries in the context of the war in Ukraine and the national security concerns in Europe. Quick point before I do that, the paper I mentioned written by Michael Dooley and a couple of other authors is titled US sanctions reinforce the dollar's dominance. And that's, I think NBER, it's published on the NBER's website, the National Bureau of Economic Research. So anyone that wants to check that out. So Michael, I'm curious, one of the things that I have talked about on the show multiple times, and I think Brent has also alluded to this, and I've seen Cal also make some similar statements on Twitter at (42/92)
various moments, which is that, well, what I have specifically felt is that the Fed would be less concerned this time around about the negative impacts of a rising dollar globally because a rising dollar would have a negative impact on commodity prices and therefore Russia's ability to procure the funds it needs to prosecute its war against Ukraine. During a time when really there was a great sense of urgency around trying to stall the progress they were having in their initial month of their invasion, whatever progress they were going to have. And I'm curious if, one, you agree with that, and in two, if you think that that dynamic is no longer as important because now the consequence of a strong dollar have negative political implications for the Europeans. And so I'm curious what the view is over there. You're talking to us from Athens right now. Is there a threshold at which dollar strength risks undermining the economic and political stability of U.S. allies during a time when they (43/92)
are going into winter without a regular supply of energy? Like, I'm just curious what your thoughts are. Well, let's start from the fact that the euro was created and when it was created, it was supposed to become a challenger for the U.S. dollar global reserve currency. So 20 years have gone by and this hasn't happened. And as we speak, the euro is probably in its most fragile state since inception. And the reason I'm saying this is, yes, when the dollar goes up, traditionally commodities go down. However, this is usually done when there is, it's driven by demand. Commodity oil has gone up in Europe, especially, and most, most importantly, natural gas has gone just to put the number. In November of 2020, natural gas was in Europe was around 10 euros per, I don't know what the metric is exactly. And now it's 200. So you understand that the cost being at 200 is the equivalent of oil being around $500. So Europe imports 50% of its energy from Russia. So suddenly you have a war, you have (44/92)
a supply constraint, the prices go up, and that supply constraint creates inflationary pressures across Europe. Now, given that it's supply sided and not demand sided, there's not much the ECB can do. But the ECB is forced to raise rates in order to stop the euro from falling versus a U.S. dollar. So Europe is between a rock and a hard place actually, because they can't do much. And everyone, supposedly, Europe was supposed to be helping each other. And right now, as we saw today, or this week, at least a few last few days, Germany decided to launch a stimulus of 200 billion for itself. Now, here, Germany can do that. Not all countries in Europe can do the same. So suddenly, everyone's for themselves. ECB cannot stop inflation. They can only crush the economy. And if they crush the economy, yes, inflation will come down. But again, as we pointed out earlier, energy and food are in the last goods. You need to move around. You need to eat. You need to heat your house, your home. So going (45/92)
into winter, these things will likely, these pressures will likely exacerbate and become worse. So the dollar getting stronger poses, in this case, a bigger threat for Europe, because it reduces the value of the euro. And Europe has to import commodities, which as the euro falls, the price of these commodities become more expensive. So right now, Europe is facing a big, let's say, is about to face a big crisis, because not all European countries have benefited as much from the euro. And most notably, Italy has suffered the most, being that since getting into the euro, it hasn't seen much, many benefits from being in the euro. And right now, Italy is in a tough situation, as everyone has noticed, they just had elections, and we were going to see what they're going to do. But I'm pretty sure that after a certain point, Italy will not accept Germany being able to borrow 200 billion, and Italy not having energy, because it cannot afford to buy or it cannot borrow. Now, let me give you (46/92)
another example, where the problem is. As the crisis exacerbated, European spreads started to widen, meaning that all sovereign bonds versus the German bonds started to widen. So as this happened, the ECB had to intervene and say that we'll not let the spreads widen any further. For example, in Italy, inflation is around 9%. When you cap the bond yields, and they haven't given a specific number, but let's say they cap the bond yields at 5%, it means that the investor who buys the Italian bond is willing to lose 4% in real terms. Given that inflation is 9%, the bond yield is 5%. Now, who will be the marginal bond buyer for Italy? Who will be the marginal bond? At some point, yes, initially, someone will come up and say, okay, I'm getting 5%, I used to get 0%. 5% is good. But after a certain point, when they realize that inflation is not coming down, they'll say, ah, no, 5% is not that good. So who's going to be the marginal buyer? So ECB will be forced to start buying more and more and (47/92)
more. And this thing will come to a point where things will get very ugly because Germany, Netherlands, the Northern country will say, enough is enough. And the Southern country will say, what do you mean enough is enough? We need to survive. So there will be a political issue going forward, which we don't know how it will be resolved. So I think Europe is in a very tough spot and things are likely to get worse before they get any better because ECB is going to raise rates. They cannot do anything regarding demand. So they'll have to crush the economy in order to reduce demand. And again, but crushing the economy will not reduce demand for these goods so much because there are in elastic and necessary goods for everyone. So I think this thing is going to get much worse before it gets any better for Europe at least. Yeah. So Michael, you're on board with a secular inflation thesis. You think that inflation is here to stay and its primary drivers are going to be energy? Or I'm just (48/92)
curious to understand exactly what you're thinking is there because I would like to also talk to you guys about what the role of energy policy is here and what kind of role you expect that to play and support for that because so much of what has driven investment in the space has been mandates around climate change and meeting those climate goals. So anyway, go ahead Michael and then Cal can jump in. Okay. So as I said in the beginning, inflation is not the same. When we talk about inflation, we don't talk about the same thing everywhere. In regards to Europe, given that it's a supply driven and meaning that energy feeds into fertilizers and fertilizers feed into food prices, which are both necessary goods that we need on our daily lives. And these are in elastic goods. I think that as the war continues, the inflation will not come down in Europe unless there's a big crash or unless there's a big shock to the system provided that none of these happen in the meantime. Yes, Europe will (49/92)
keep having inflation and even if we have a shock, I don't think you'll see inflation coming down from 9, 10% to 2%. It might come to 4%. Okay, it's more manageable, but inflation will stay as is. You mentioned the green energy. I want to say that one of the big causes that Europe is in such a mess is because it decided to become green before being ready to be green. So they decided by 2025 or 27, Europe would be green and they thought that natural gas is green and they would turn into solar and wind and they would be fine. But they thought this would happen much faster without even putting a plan in place and they got so fixated with this idea that Europe became so dependent on Russia and that's why Europe is here right now. So unless the war stops, which doesn't look likely at least in the next few months, and unless a big shock happens in the economy, I think inflation in Europe is here to stay. It won't be easy for it to come down. Cal, you want to jump in? Yeah, I wanted to (50/92)
actually underline what Michael has been saying about how the criticality of oil in this entire debate, it all rests with oil. And as Michael alluded to, I call oil an OPEX commodity. You compare and contrast that to CAPEX commodities like for instance copper, cement, etc. that are more based upon economic growth. Oil is an operating expense, right? So it is definitely demand inelastic in the short term. However, there is more demand elasticity in the longer term. So one thing to note is that on the day of the BOE intervention in the gilt market, you remember that we had a huge risk on market across the board. And that day, I basically tweeted out the following. I said, the plunge protection team is back today with the vengeance, re-injecting fed pivot hopium back into bonds and risk assets. But here's the rub, oil. If there is a real pivot, oil will moon and we will be right back to where we started. Now, let's examine the risk-rip today. What's interesting about today, I found, was (51/92)
aside, you could talk about all the technicals and the oversold conditions and whatnot, but a new stakeholder has entered the mosh pit, so to speak. That new stakeholder is OPEC plus, who is now jaw boning. And I have my reasons to perhaps doubt the jaw boning, but they are saying that they're willing to potentially cut up to a million barrels per day. Now, my doubts stem from the fact that I think them entering the fray this early with prices this high, especially with the eurozone on the precipice of falling into a depression with a capital D is not the most politically astute thing for OPEC to do here. And I think there are potential repercussions for them to do that. But if they did that, it would bring about what I call the structural supply and demand singularity point in oil that much closer. Let me talk about that for just a second. My base case for this whole sort of stagflationary setup is that it started with commodity price inflation. It leapt into stickier components that (52/92)
are now in wages and rents, which is core inflation. And at some point, you're going to see those indicators start turning down. But I predict that even absent any OPEC cuts in the next several years, we're going to reach a point in time where because of the lack of investment in the space, we're going to reach a point in time where even a recession impacted demand is going to exceed global spare capacity. I don't believe we are there yet. And I can say that with some confidence because otherwise we would not have seen oil go from 130 down to 70s. But I think we are getting close to that point. Now, so my thesis has been that throughout potentially the rest of this decade, we could see this start-stop sort of tag team effect where just as core starts slowing down, energy starts picking back up again, and then vice versa. So kind of like a asynchronous start-stop between core inflation and energy inflation. If OPEC plus actually cuts and enters the fray, then instead of this sort of (53/92)
asynchronous tag team effect, you have a synchronous wallop that pushes the Fed pivot even further out. So to me, this is it's very, very interesting because there are so many sort of every man for himself dynamics here. And OPEC plus is now in the mosh pit. So I want to bring an additional speaker on here, guys. Before I bring him on, and that speaker is Michael Howell, the CEO and founder of Crossborder Capital. I want to give Brent a chance just to comment on anything he wants. And then I can bring Michael on. And this is the thing, this is the second spaces in a row where I find myself surrounded by Michaels. And I wonder if that is it them or is it me? I'm much, if I have too many Michaels in my life. But anyway, Brent, go ahead if you have anything that you want to say. Well, I'm actually excited to hear what Michael, Michael Howell has to say because I love his work. The one thing I would say is I think everybody can now see in real time the fact that these green initiatives, (54/92)
we've had these announcements for the last three, four, five, ten years of these green initiatives, they're going to completely change the entire energy system. And the problem is, is we've run into the wall before these new systems are up and running, right? And as a result, it's just too little too late on the green front. I would encourage everybody to think of that same thing in terms of dollars and de-dollarization. For one, two, three, five, ten years, we've heard all these plans that there's going to be a competing currency system, there's going to be a competing payment system, there's going to be a new trade block. But I would tell people to consider what happens if it's too little too late. It's not that the desire is not there, it's not that the temps aren't being made. But if you hit the wall before these systems are up and running in the same way that Europe has hit the wall before their green projects are up and running, what happens to the price of the dollar just the (55/92)
same way as what's happening to the price of oil and gas? And again, there's a big difference between saying you're going to do something and actually being able to pull it off. So I'll leave it at that and I'll pass the baton to Michael. I also want to say this kind of highlights something that we talked about earlier, which is the move from unipolarity to a new system that has not come into being yet. It's not formed. We're in this period of undoing and then creating something new. And these initiatives are possible in a liberal world where you have a security guarantor. But in the world that we're moving into, national security comes front and center again. And you know that something, again, I don't want to put out too many thoughts here, but when Michael N. was talking, one of the things that came to mind for me is something that I've talked about on the show quite a bit on numerous occasions, which is that the European Union itself came into being in response to security (56/92)
concerns, a desire to tie the Germans into a European economy. It was the European coal and steel community. And I wonder whether or not the right framework to think about whether or not the euro and the European Union survives in the face of the challenges that we see today is one that puts economics first or one that puts national security first. Because I tend to think that so long as the United States continues to lead and is able to sustain its role as the leader of this alliance in NATO and in Asia, the European Union will stay together. And I want to actually point people on this Twitter space to one episode in particular, went back a couple of years with John Meersheimer on Hidden Forces, where we talked about exactly this. It was about the power of nationalism and the failure, the coming apart of American hegemony and the wide nationalism, Trump's liberalism every single time. So Michael Howell, why don't you jump in here? As I mentioned, Michael Howell is the CEO and founder (57/92)
of Crossborder Capital, which is a London-based independent research and investment company. Michael is also one of our regular contributors and researchers for genius tier members of Hidden Forces. So Michael, why don't you share your thoughts, tell us a little bit about where you're coming from on this? Sure. Hi, everyone. Thanks to me, too. Thanks for the introduction. I suppose all we need now is Michael Green to come on and we've got four, Michael. So let's look forward to that. A few years ago, I wrote a book called Capital Wars, which essentially addressed the whole idea about the hegemony of the dollar and the challenge to that by from China. And American hegemony is basically about currency imperialism. It gives America a great exorbitant privilege, as it was called. Other countries, Britain had that for 100 years through the 19th century. It's a great underpinning of power. And the US can't lose that or it shouldn't you lose that. But China is basically coming. Now, I think (58/92)
we've all got to distinguish between the use of a currency and the level of a currency because the two things can be completely different. I happen to think that we're somewhere near the peak in the dollar at the moment, but I don't think we're near the peak in the use of the dollar. And I think that's the thing that is really sustained. Now, one of the things that my book addressed was the whole idea about the architecture as Brent says, that's really important. It is probably 80% of the story here. And a lot of people talk about Bretton Woods 2, Bretton Woods 3, Bretton Woods 1. Actually, we've never left Bretton Woods 1. And if you look at Bretton Woods 1, what was it really about? It wasn't really about fixed exchange rates. That was, if you like, an accident that came out of the Bretton Woods Agreement. What Bretton Woods 1 was principally about was creating a system where you get the free flow of trade and ultimately capital, where the dollar was the centerpiece of those (59/92)
arrangements, where the IMF and the World Bank pleased errant countries, and where the US military essentially backstopped the system. Now, if you look at what we've got today, that's exactly what we've got. There's been no change. We haven't got a Bretton Woods 2. We're not going to get a Bretton Woods 3 based on commodities, whatever people may say. It's basically about the role of the dollar. China is coming and China is coming fast here. And what China basically is trying to do is to unseat the dollar, and they've been very explicit about doing that. And it's definitely what the US has to do to address this challenge. What China is doing, and there's the number of avenues it's pushing at, the number of doors it's pushing at. But one of the most important is the whole idea about redenominating trade in dollars, sorry, in yuan. China is the world's biggest importer and exporter, but it basically is also outside of America, the world's biggest dollar user. It re-exports dollars, and (60/92)
what it should be doing is exporting yuan, if that's in its long-term interest. And basically what China has done in the last few years is to set up swap lines around the region. I think there are 36 swap lines with other countries with their currencies into yuan. Now, the only reason that that will be done, or is being done, is that China basically intends at some stage overnight to re-denominate trade, its trade in yuan, and basically try and kick the dollar out of its trade. Now, what we're moving to is a world which is basically segmented into or cleaved in half. You've got a free world, which was actually the Bretton Woods One World, which basically excluded the Soviet Union and excluded China. Welcome to the new world, because that's pretty much where we are now. Russia is excluded, China is excluded, Iran is excluded, North Korea is excluded, etc. And basically that is the challenge that America has to face. China's opened up its bond markets to try and get more capital. That's (61/92)
not a particular success at the moment. Capital is leaving China, and they're trying to embark on a digital initiative with a digital yuan that will allow peer-to-peer transfers. But again, America is still very much in the lead, despite what the SEC is doing to try and hamper US innovation. The second question is about the level of the dollar. And I think here is an interesting insight about the UK. Now, I went back and looked at the math of the US, the UK fiscal situation. And there's been a lot of nonsense spoken about the UK, particularly in some of the liberal media in the last week or so. Basically, the situation is that if you look at the debt coverage of the UK fiscal situation, looking at, let's say, entitlement spending plus military expenditure relative to tax, and then looking at that surplus against interest payments, interest was covered before the budget in the UK 1.8 times. So it was 180% coverage. After the budget and excluding the backtracking on these taxes, it was (62/92)
still 120%. Where is America now? Right now, America is at 80%. So currently, entitlement spending plus military subtract taxes does not cover the interest bill on US debt. There's a 20% shortfall, which means the US has to borrow. In five years time, that 80% goes to 25%. So the US fiscal situation is deteriorating fast, which is basically something that could undermine the dollar. So one of the things we've got to keep sight of here is that, number one, the challenge from China and number two, the challenge domestically in terms of the deterioration of US debt and the rise of entitlement spending, which kind of looks out of control in many ways. The US may be the dirtiest shirt in the room, but there's a lot of shirts coming and some people are finding soap. Michael, I have a question about this, and I'm not going to articulate it super well because I'm still working on getting a coherent theory around it. But it seems to me that China disproportionately benefits from being plugged (63/92)
into the international trading system. It also depends on the US export market and export markets in general in order to build up its capital base. And the other point I was going to make was, I'm not entirely convinced, and there are many other reasons why people would be reticent to hold the yuan. I'm not entirely convinced that while the Chinese do want some of the benefits of being able to use their own currency, that they're willing to bear the costs of actually doing that. And so what do you think of that line of argument for why the Chinese and the Chinese yuan is not close to replacing the dollar anytime soon? And that doing so, I suppose, would lock it into a trading system that really sits outside of where the main value chains are created, case in point, the semiconductor supply chain, where all the major difficult, high value processes of that chain happen outside of China so that the US and its allies can actually produce high-end semiconductors, whereas the Chinese would (64/92)
not be able to do that without being plugged into that system. Yeah, I think those are all really good points. And I think with hindsight, being sort of 2020 vision, it was a mistake to let China into the World Trade Organization in 2001. And if you look at the dynamic since then, I think that's what's created the deflationary background in the West and the slow growth environment and saddled us with a lot more debt. And if you look at how China has benefited from that stage, in year 2000, China basically was responsible for 6% of global liquidity. Currently, China accounts for over 30%. It's just overtaking the US. So in other words, China has got some huge, huge benefits in terms of monetizing a lot of these surpluses that it enjoyed following entry into World Trade. So I think that there is a clear benefit. I'm not too sure what the cost would be in that, but I think there are some clear benefits that China has got, particularly if it gets the yuan to become a major currency. And (65/92)
it's got a foothold in the international markets right now. So I would be, I'm still a rapture of the view that China needs to be addressed to or the Chinese problem needs to be addressed. Now, maybe the Russian attack on Ukraine and the response to that is some way recognizing that there is a bigger problem out there with China. Maybe China is the end goal. And what I mean by that is coming back to this Bretton Woods one idea that backstopping the system is the US military. China needs to import a huge amount of oil. It can get that oil from the Gulf, which it's doing now, or it can get it from Russia, which is not doing, but it will do, but in the ideal world for China in the future. The problem we're getting Middle Eastern oil or Gulf oil for China is that there's a long serial route back to China where the Chinese tankers are vulnerable to any attack. So in any military conflict, the supply chain that China would run, the would run a gauntlet basically through Southeast Asia, it (66/92)
would be very, very vulnerable. There would be nothing able to protect the Chinese convoys. And basically China doesn't have the naval strength yet to do that. It really depends on the US. Now, if China got its oil from Russia, there would be far, far less of a problem. It'd be more defendable. So I think ultimately maybe a lot of this or the subtext here is that we want the Russian regime to fail. And that way it would support China's ambitions in the longer term. And that may be left field, but I think currencies are geopolitics. Yeah, super. Go ahead. Yes, go, Mike. I want to say that I tend to agree that there is a geopolitical aspect to what's happening in Russia. Russia, China, I think is importing about 75% of its energy. So if you can control the energy sources that China is getting, definitely you can put some pressure on it. Regarding the Chinese one becoming a global reserve currency, in order to do that, it would have to open up its capital account and have its currency (67/92)
free float. Now, there's a problem there, which right now we can see because China cannot raise rates right now because it's facing some real estate issues domestically while the US is raising rates. So it's putting an extra pressure on China. But if China were to open up its capital account, if you look at, and I mentioned this, I've had this discussion with Michael Cow previously, if you look at M2 versus its FX reserves in China, you will see that the ratio is about 8%. So if it were the Chinese Tigers, the Asian Tigers in 87, the pegs broke when that number breached 25%. So now imagine with an 8% M2 to FX reserves and China opening its capital account, everyone with one will convert their money and leave, if at least most of them. So I don't think, even though China wants to make a reserve currency, in order to make it an actual reserve currency, it will need to be able to be freely converted. And I'm not sure at this stage, China can do that. So I just wanted to mention that to (68/92)
put it on note. Can I ask Michael Howell a question? Please do. Michael, I thought what your comments about China's sort of end game in setting up these swap lines, I thought that was very, very interesting. The question is, what is the time frame involved? Because, as Mike Nicoletta said, I think that if they actually freely floated the Yuan right now, they would have a nine handle at least. So what's the saying? You could lead a horse to water, but you can't make them drink. I don't see any foreign banks taking them up on their swap lines in the near future. Yeah, I agree. I mean, I don't think that the Yuan as a major threat to the dollar is coming in the near term. I'm absolutely one with you on that. But China, we know, plays the long game. But I think the other thing is, history is often a good teacher in these situations. And if you go back and take the UK example, and this is a slightly colorful one, but it's an interesting point, is that in 1897, in the UK, it was Queen (69/92)
Victoria's Diamond Jubilee. And to celebrate the Diamond Jubilee, they had a sail pass of the British fleet, which she was allegedly watching and giving a salute. That fleet took eight hours to pass by the Queen. It showed the military power that the UK had in 1897. And that involved a fleet where no ships from Asia or India were included. It was purely the Atlantic and Mediterranean fleets. So that basically showed the, if you like, the military prowess of the UK. Within 20 years, sterling have been eclipsed by the US dollar. So 20 years from now, the same could happen. And all I'm indicating is that basically, wars can happen. And what happened in World War I is that Britain basically suspended all overseas lending by UK banks. US banks muscled in. They developed a trade credit market. And that was the beginnings of Dollar Hagemene. The dollar went from nowhere to being the major reserve currency in foreign exchange reserves of major countries by 1921. In 1914, the Austro-Hungarian (70/92)
Pengo, what it was called, was used more widely than the US dollar was. That's how quickly these things can change. Except the big wrinkle here is demographics. Because if you believe Peter Zahan's demographics, and it's hard to argue the math, by 2050, he thinks the Chinese population could be half of what it is today. Oh, look, I'm not promoting China. I'm not, and I agree absolutely. These are big demographic challenges. China's not in a good place, that's for sure. But in terms of their motivation and what they're trying to do, this is clearly, they're clearly trying to attack US Dollar Hagemene in the Asian region. What they'd like to do is basically get the yuan used more widely. And I would suggest that if you'd look, if you go back and look at the period from 2016 after what is labeled the Shanghai Accord, when there was an attempt to get the dollar down among the G20 countries, from that time until March of this year, what you basically have seen or what you saw was (71/92)
unbelievable stability across the Asian units, cross currency, volatility, basically subsided. And that, I think, was most countries were targeting the yuan. And that clearly wasn't a healthy situation. But fortunately, that was broken in March, April of this year, where you started to see some big devaluations of other Asian currencies. Now, that may have been, if you like, a Trojan horse to try and destabilize the yuan. But it certainly worked because the yuan is now a much, much weaker currency. I want to give Brent an opportunity to jump in here, because I know that Brent is going to have to leave soon. And of course, Michael Nicolettos is over, like it's like 3 a.m. over there. So I just want to make sure everyone gets a chance to leave when they need to. Also, I want to say, if you're interested in the way that Michael how views the world, where he's coming from, like I've said, he's a really, really, really, really smart guy and a contributor to our Genius tier. We're doing a (72/92)
live Q&A with him this Friday. So if you have any questions or you want to get a link to that, we can share one with you. You can just send me an email at info at hiddenforces.io. Just don't DM me. Brent, jump in here. Let us know some of your thoughts before you have to jump off. Yeah, thanks. Thanks, Dimitri. And I'll say thank you to all the Michaels right now for joining me in this. And I want to say a big thank you to Michael how for jumping in because I thought he did a masterful job of explaining Bretton Woods, the role of the United States, the role of the dollar, the role of the IMF, the role of the World Bank. I wish I could speak as eloquently and I wish I could speak with an English accent. Unfortunately, you guys are stuck with a kid from the Midwest who talks about milkshakes. But what I would say, what I'd like to leave with is I would definitely recommend people read Michael's book, because it will give you again an understanding of kind of the framework of the world (73/92)
monetary system, the powers that be so to speak. There's another book that I would encourage everybody to read and it's called The Political Economy of International Relations and it's by a guy named Robert Gilpin. And you should put it by your bed because it is boring and it will put you to sleep, but it will also tell you how the world works and how or the institutions that run the world. And I think it's important to have those as a framework. And I'm going to make a couple points here because then I've got to jump and so I apologize for kind of monopolizing the time here, but just give me a minute or two. And I want to leave people with these thoughts and that is, I listen, I don't know if I'm going to be right or not. I really don't. I'm not so arrogant as to think that I couldn't be wrong. But what I do know is I've put an incredible amount of work into this and I've come to the following conclusions. One is that based on the design of the system, the dollar will be the last to (74/92)
fall and it's just kind of built that way. So if we get into a death of fiat scenario, betting against the dollar is, in my opinion, a fool's game. Secondly, the dollar falling is not a problem. So if they go back to QE and they're able to get the dollar back to, I don't know, 195, even 90, that's going to extend the game. That's not going to bring the system to an end. That actually helps perpetuate the status quo as opposed to bringing it down. The third thing I'd say is there's nothing that the rest of the world can do to bring the dollar down that the Fed didn't try to do over the last two years. And there's nothing that they can do that would bring the dollar down more than what the Fed did. They can do things that would ultimately bring the system down, but in the short term, all that chaos would drive the dollar higher, in my opinion. The next thing I'd say is the dollar might fall from here. It's had a heck of a run. And I've never said it can go up in a straight line forever. (75/92)
I think this could actually play out over several, several years. We could have one, two, three more bouts of QE before this is all said and done. There's nothing that says this all has to play out in the next three to six months. It could easily take another three to six years. One thing I'd say is if the Fed pivots, again, that's just a temporary solution. It just kicks the can down the road and we end up right back where we are now unless they completely change the system. And then I would say that, and I touched on this earlier, those who think that the U.S. will rank the global reserve currency because of some economic benefits, I would encourage you to take a look through a different lens. I don't think the dollar is necessarily viewed as an economic tool only. It is a power tool and it is used to exert force as opposed to just make this profit or make that profit. And then the final thing I'm going to say is I know that in many cases and in many times and in many of the (76/92)
discussions I've had with people on this topic, it becomes very clear that my position is not necessarily liked because that's not what the other side wants to see happen. And it shouldn't be this way and that it's an immoral system and all these different adjectives that you can put on it. And I just want to be clear that advocating for something is completely different than acknowledging something. I am not an advocate for the system. I just acknowledge that it exists and I'm doing my best to help everybody see what's happening. Now, whether it actually plays out this way, I don't know. But so far, a lot of the things seem to be firing. And so if you have big bets against the dollar, I would encourage you just to at least think where you could potentially be wrong. I know I always think always how I can potentially be wrong. And I've been proven wrong several times before and I may be proven wrong again. But I would encourage you to look hard and deep and put your own desires aside (77/92)
and just look at the world as it actually is. And with that, unfortunately, I guys, I have to jump. Well said, Brent. Anyone who hasn't heard Brent's appearance on Hidden Forces, that was episode 250. The title of that episode was The Revenge of the Dollar. So I strongly suggest listening to that episode as well as our episodes with Michael Howell and a recent episode with Lev Menand on the shadow banking system, which also describes much of what we talked about today. Let's talk end game here to end the space and kind of think about where all of this goes. Michael Cowell, why don't you take this first? Brent said he didn't talk about how it ends, but he did say that it's going to take a lot longer than folks think that these types of unwinding and changes in the global monetary order take a very long time to work themselves out. I'm curious how you think this ends and feel free to incorporate into that conversations about war and anything else. So I've used this analogy on another (78/92)
space before, but I've, you know, this whole notion that the global debt levels have to keep rising forever, and there's no way out of that loop. To me, that reminds me of the Tacoma Narrows Bridge, which was a bridge that many physics professors used to highlight the physical concept of resonance. Resonance is a positive feedback loop in physics where, you know, if the breeze starts swing the bridge to its natural harmonic, that it creates a self-reinforcing positive feedback loop, and the oscillations get larger and larger until it exceeds the physical capacity of the bridge, and the entire thing crashes. So the financial equivalent of that would be a complete system meltdown where, you know, the oscillations and the debt levels just get so large that eventually the entire system breaks, right, which is kind of what you saw during, like, the Weimar hyperinflation. So, you know, today I had an interesting discussion on my feed. I said, here's a thought experiment. Let's say that BOJ (79/92)
bought up 100% of its outstanding JGBs and then just canceled all the debt. What happens to the Jpy? What happens to the stock market? And, you know, I've got a number of different questions, but, you know, I guess in a perfect, you know, my thoughts on that end game are that, well, in a perfect world where they no longer need access to global markets, then maybe nothing happens. Maybe the yen actually appreciates. But to me, that's a very unlikely scenario. To me, it's very unlikely that there's such a thing as a free lunch and a perpetual motion machine, because if you're a country that has been profligate enough in its spending ways to have gotten to the point where you need to do yield curve control to the point where your central bank owns, you know, a significant portion of all debt outstanding, then the world is going to view your currency as trash. And so, you know, I mentioned at the outset, you know, so I spent much of my career in corporate bankruptcies and restructurings. (80/92)
And so the thought that I want to kind of throw to the panel is, what is the sovereign analog to a corporate restructuring? What is the sovereign analog to a post-reorg equity where debt gets canceled, right? If debt gets so large that the debtor can no longer afford the interest payments, right? There's something called the bankruptcy process that cancels the debt, and the debt gets restructured into post-reorg equity, right? So here, I'll start by just saying my own thoughts, and I would love to hear the panel's points of view on this. Here is where I feel that even if it came to that, the US once again stands at the top of the heap because it comes down to what is on the left side of the national balance sheet. Because if you're talking about an end-game scenario where debt has to be restructured into some sort of sovereign post-reorg equity, well, then those equity claims are going to be based upon what the country owns as assets. What are its natural resources? What are its gold (81/92)
reserves? What's its ability to just create economic rents? So I don't know how the end-game, if that is really the end-game, that there is an endlessly bigger amount of debt, then that has to be the end-game, right? But the alternative is, and I think that there's no better way to, or there's no better excuse to try to put in, to sort of dampen the oscillations in that mental model, than 9% or 10% inflation. Sooner or later, you have to acknowledge that there is something called a business cycle, and that austerity actually may have to come to pass. And national balance sheets need to be shrunken one way or the other. So those are my thoughts as to end-game. I would love to hear the panel's thoughts. So whichever Michael wants to go next, feel free to unmute yourself and take a stab at it. Okay. Well, hearing your question, I wish I was Michael J. Fox in Back to the Future and having the Almanang to give that answer. It's one of the hardest questions I get to think about because there (82/92)
are so many variables here that if one of them changes, for example, the war ends or the dollar gets stronger, where it changes the whole story. I don't mean to... And by the way, that you're totally right. So like 100%, in some ways, these are ridiculous questions to ask. So feel free to answer it however you want, Mike. No, no, no, no, no. I'm putting it out there the way I'm trying to think about it because... Sure. Yeah, believe me, I think anyone who runs money or looks at markets thinks this question over and over and over and tries to figure out what's going to happen. Again, I don't think there is an end game in the sense that there is an end game because it's an ongoing process that never ends when we talk about market. But what do you think happens to Europe? That was something that we were talking about earlier. What's your view? Does the EU stay together? Incorporate that into your answer. No, no, I think that the euro is either the probabilities of the euro lasting as it (83/92)
is are very small. And why do I say that? Because in order for a currency block to work, interests need to be aligned. And I don't see how interests will be aligned going forward. So I think at the years past, the frictions get stronger and stronger and at some point, something breaks. I don't know if it breaks, let's say in a controlled manner, being that one day 19 countries decide altogether to go back to their currencies with a peg and steadily go back to their currencies free-floating while keeping, let's say, all the EU benefits. That could be one scenario or it could be one country deciding to leave because it had enough and it can't take it anymore. I don't know what that is, but I can't see the euro lasting as it is past 2030. I would say I would put 2030 because it's 30 years since it started. So I think frictions will increase. And there's a famous quote by Henry Kissinger when he said, when I call Europe, who do I call? And that embeds actually the answer. Who do you call (84/92)
when you call Europe? Who is Europe? It used to be Germany, it used to be Angela Merkel. Now who is it? Macron. It's not a clear answer. So I think unless this question is resolved and it resolved clearly, Europe, it will be very hard for Europe, for the euro to last. So I think this is a main challenge, a very big challenge. The other challenge that is out there is as Michael said, it's the debt. What happens to the debt? What happens to the BOJ, for example? Do they cancel their debt? Or do they do the Treasury Secretary gets with the central bank and says, hey man, how much do I owe you? You owe me XYZ, okay, let's do a swap and issue a 100-year bond at 1%. And that debt goes 100 years out. That could be a scenario. What happens to the Yen then? Does it rally or does it fall? It's a hard question. What I can say with a strong conviction is that the two things that will play will be the most important things in the next couple of months and years is liquidity risk. People need to (85/92)
focus more on liquidity risk because when there's no liquidity, a lot of things go bad. So you need to focus on that. And the second thing that a lot of investors will need to start paying attention to, which they haven't been for a long time, is counterparty risk, which everyone thinks that their counterparty is safe. But assets with no counterparty risk, I think in the next few years, will deserve a premium. So I think that's something to pay attention to. So I think this is where people should focus. I do believe that the dollar gets stronger. I don't believe it goes get strong in a straight line. So I think we haven't seen the end of this move. Probably it goes back and then it goes back higher. And I think that if something breaks and the Fed pivots, as Michael Cowell said earlier, then commodities shoot the moon, and then we go back to square one and inflation goes back up. And I heard Muhammad Al-Ara'in's interview a few days ago, where he suggested that we might be entering a (86/92)
period where the Fed goes back and forth, where it pivots with rate hikes, and then it pivots with rate cuts, and then it's forth back to rate hikes. So this could be a scenario which has been in my mind for some time now. But I would focus on liquidity risk and on counterparty risk. And I would be very patient and very prudent, because I think well, the ability is here to stay in slightly to increase. And in 2008, all the debt from the banks went to the government. And now the government, we're seeing the government experiencing issues which are seen in their currencies. So I think people need to be very careful. And if I were an investor running other people's money, because I'm not right now, I would reduce my exposure. I'd be having a low gross exposure just to be safe, because I think we haven't seen the end of it. This is the end of the beginning as Brent likes to say. So let's be patient and wait it out. That's my two cents. Michael, you and the other Michael Cow are both two (87/92)
people who haven't been and need to come on Hidden Forces both individually. So we're going to have to make that happen at some point. And we'll have a chance to dig into your views about markets in the world more deeply. But great analysis. Thank you. Michael H, why don't you give us your view, whatever it is again, like very impossible question to answer. So take a stab at it however you like. Yeah, I think the big issue is liquidity risk. I mean, that's what we see. And my simple take on what policy was this year was that US policy was pretty much about getting the Fed balance sheet down and getting the US dollar up. I think policy in 23 is going to be about getting the balance sheet up and the US dollar down. And I think because the reason for that is the Fed is going to break something. And I think things are breaking fast. If you look at the ISM survey today, you look at the internals on that, it looked really quite bad in my view. So the economy is definitely weakening a lot. If (88/92)
you think the US economy is weakening, just look outside of the US, it's a lot worse out there. So we're looking at world recession. Look at what FedEx announced 10 days ago. If you extrapolate FedEx's announcement, it's telling you pretty much that world trade is going to be down 30%. That's what it's consistent with. So the outlook is not great. What are they going to do? My view is that, and I think that was largely underscored by what the Bank of England did last week, the alacrity with which they moved suggested that yield curve control is coming back. And yield curve control is something that we've seen in Japan, we've seen in Australia. The US did it between 1942 and 1951, pretty successfully, generally. Interestingly, I looked today at previous FOMC statements about yield curve control. And to my great surprise, I discovered that Leal Brainard and Janet Yellen, when she was chair, were big advocates of yield curve control. And the endorsement on yield control came from a paper (89/92)
by the St. Louis Fed that basically said it's had great success. So I think that's the way the policymakers move. Although I see the illogic, if you like, of printing money or whatever, I just think that what policymakers are going to do is kick the can down the road. And is that a 10-year road, a 20-year road, a 30-year road? I don't know. But I think it's in most of our lifetimes that they're going to keep kicking the can down the road. And we suffer the consequences. But ultimately, the consequences seem to be some form of asset market inflation. What that does is it creates a huge skew in society. It disadvantages a huge amount of people. But for the moment, that's the world we're living in. And I don't really see there's any alternative or anybody's coming up with an alternative, sadly, perhaps. Well said, Michael. Again, if anyone wants to join our live Q&A with Michael, this Friday where we also take audience questions as part of our Genius tier, you can either subscribe to our (90/92)
Genius tier at hiddenforces.io slash subscribe. Or if you want to try it out, you just want to see what the live is like, shoot me an email at info at hiddenforces.io. And my team can send you guys a link. This was awesome, guys. I've really enjoyed doing these live spaces. I'm going to republish this on the Hidden Forces feed. And of course, the audio remains on Twitter as well for anyone that wants to listen to it. But our main guests were also recording locally on their microphones. So in certain cases where you heard Brent breakup, or I don't know that it happened that often to cow, that you'll be able to hear it because we have that original recording. Again, thanks so much. And I hope everyone has a great night. Thank you very much for having us. Thanks. It was a great discussion. Thank you, Dimitri. Thanks, everybody. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free (91/92)
email list. If you want to access the full episodes, transcripts and intelligence reports, which include additional notes, resources, links and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io slash subscribe. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation on Twitter at hiddenforcespod or send me an email at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (92/92)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Simon Mihailovic, founder and managing partner of the Bullion Reserve, a professionally managed private vehicle that holds only physical gold, while at the same time providing a full service solution that ensures legal compliance, jurisdictional diversification, liquidity, physical access and deliverability, all within a single structure that maximizes flexibility and in the words of TBR's founders, enables the use of gold bullion as a deep, out of the money put option on the failure of extreme monetary policies with an asymmetric upside. Because Simon and I go back some years, this is a more congenial episode that you might otherwise expect though, I think in this case it (1/96)
actually makes for a much better conversation because Simon has a very interesting personal story and one that he recently shared in an episode of the Grant Williams podcast back in June as part of his Endgame series. And while I've known Simon for a decade now, I never actually heard him speak at such length about his experience living in and emigrating from the Soviet Union and how that experience informs his political and investment philosophy today. We spent most of the first hour and change discussing that experience and drawing from it economic, political and social lessons that we can apply to the present moment. The last 20 to 25 minutes or so is spent specifically on TBR and the value proposition of holding gold bullion in a world where the traditional safe haven asset of US treasuries no longer inspires the same degree of investor confidence that it did only 10 or 20 years ago. And what that means for not only portfolio construction, but political and social stability as (2/96)
well. Because some of today's conversation deals with investing, it's important to make absolutely clear that nothing we discuss on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this special midweek episode with my guest, Simon Mihailovich. Simon Mihailovich, welcome to Hidden Forces. Thank you for having me. It's great having you on, my friend. It's great to be here. You and I have known each other for what, 10 years, Simon? At least. Do you remember where we met? I think it was at Grant's Conference, right? It was at Grant's Conference many years ago and when you were a producer of, I've got the name of the program. Capital account. Capital account. That's exactly right. That's how we met. Yeah. I think we actually met down at the bar after the conference was over. I don't know that we met before that. I (3/96)
think it's an easy assumption. Yeah. It's a good assumption. I've met a lot of folks through Jim Grant either directly or as a result of the conference. That's how I met Chris Cole and I can't even remember now. I mean, I first saw Mark Cahodas there. He has a great gathering. He's had great gatherings over the years, but now with the pandemic, I don't know how that's going to play. At some point, I guess it'll come back. Look, life is going to come back. I mean, but this is not the first pandemic or epidemic in the world. This too shall pass. It's great having you on the podcast. You were recently on Grant Williams' podcast, another mutual friend. I believe that podcast was June 11th or something like that. I even though we've known each other, I was used to talking to you about precious metals or financial markets. Of course, I knew that you emigrated from the Soviet Union, but I didn't know the specifics of your story. I was captivated by it. I was captivated by the way you (4/96)
described not just your journey, but also the end of the Soviet Union, your personal experience of it in the final years when you were there, as well as your general experience of it as you were watching it, I assume, collapse. If maybe we could think of a better word, dissolve. Maybe that's actually the ideal word to use. Because it wasn't just the Soviet Union as an institution that dissolved. It was an ideology. It was a way of life. That's something I really want to get into as a prelude or a stepping stone into a larger discussion that I think can be instrumental for understanding where we are today in the United States and as Westerners. But first of all, another thing I didn't know about you was that not only did you grow up in the Soviet Union, I did know that, but I didn't know that you grew up in Leningrad in St. Petersburg. Of course, Leningrad is the famous place of the siege of Leningrad. I think almost two years or two and a half years of basically starvation conditions (5/96)
that the people had to endure through. I presume your grandparents lived through that. They did. 900 days. I mean, that's wild. I'm always fascinated by these types of the people that survive these types of cataclysms, the qualities that you find in those types of folks, whether it's the Nazi death camps or in this case, again, Leningrad. I guess, first of all, we'll have a chance also to get into what you do professionally. So first of all, why don't you just tell me a little bit about what that was like? Who are you? What's your personal story? Can you walk us down the path? Where I grew up and who I am is a bigger topic. But I mean, I grew up in, I was born in Leningrad or now St. Petersburg. My parents were born there as well and grew up there as well. My grandparents came from different parts of Russia, mostly Ukraine and Latvia, which is the western Russia. But they all moved after the revolution. They moved to St. Petersburg or Leningrad and they had their kids there and my (6/96)
parents met there and married there. I guess of the four grandparents, one was evacuated during World War II, but three were in the siege as were my great grandparents and survived the siege, which was, that's a whole separate story. It's incredible. Did they talk about it at all to you? Yes, of course. Yes, yes. But three of the grandparents that were there, they were all in the armed forces. So one grandmother was a military surgeon and my grandfather was a, he was an economist. He was a municipal transportation planner. So he was working at what was called the road of life, which was the only connection that the besieged city had to the mainland across a lake. And so he was in charge of planning, you know, trucks and transportation and all that. Right. Because there were periodically supply lines from the south. They were either by air or by water or by ice, depending on the time of year. I mean, to the point where you told me stories about the commanding general, who's actually the (7/96)
real person. I've looked him up since then, you know, standing there with a gun and telling the drivers, if you don't go on this ice, I'm shooting you right here and now, because people didn't want to, you know, nobody wanted to drive because the Germans were shelling, the cars were going underwater. I mean, just to understand, I mean, the depth of the predicament there is these trucks, they had to take off the doors off the trucks. This is 40 below winter. They're going on ice. They had to take off the doors because whenever the shell fell in the wrong place and the truck would start going down, if the doors weren't off, you'd be trapped and drowned. At least with the doors off, drivers had a chance to jump out before the truck went down. But can you imagine driving with open doors with no doors at 40 below? And how long was the drive? Probably a couple of hours. I mean, it's crazy. Yeah, yeah, it was crazy. Anyway, so my, yes, I've heard those stories and how they survived and all (8/96)
that. And of course, by the time my parents were evacuated, they were not, they were children, so they were not there. They were evacuated to Siberia or Kazakhstan, whatever, Far East. And yeah, it was a real experience. And then a lot of stories from that, then they came back and they grew up there and I was born there and I grew up there. And we left in 1978. So you were, yeah, you were born in 1961, right? I was born in 59. 1959. Okay, so you lived for the first 20 years of your life, your adolescence, your formative years in the Soviet Union. Yes, I went to nursery school, kindergarten, school through high school and two years of college. What was that like? I'm curious, your general impressions of it, looking back on it now as an adult who lives in the West? Well, it's, what's an interesting question, because, you know, from a child's point of view, I don't know. I mean, I guess it's like going to school and reciting the Plegio allegiance and thinking that very similar. It's very (9/96)
similar. You know, before we had this injury, I was thinking about this conversation. Yeah, I realized that a lot of people, a lot of Americans think of, you know, know anything they know from the Soviet Union is sort of connected to Reagan's evil empire kind of thing. And so they think that, I don't know what they think was going on there, but I would encourage anybody who wants to understand a little better how it was growing up in the Soviet Union to Google, I'm going to say to Google, it's called the moral code of the builder of communism. So the moral code of the builder of communism was 12 commandments, if you will, that were adopted in 1960 or 61, I don't remember, that all members of the Communist Party and all members of the young Communist League, to whom all children from, I think, 13 to 20 or something belonged almost automatically, were signed up. And to read those commandments to understand what it's all about, because people think that like there was people were eating (10/96)
people there, but it's actually based on 10 commandments. And communism is mentioned in two of the 12. And the rest of it is about taking care of your community, about one for all and all for one, about mutual respect within the family and caring for the children, about modesty and personal and public affairs. I mean, not terrible stuff. Now, of course, didn't necessarily have anything to do with what actually was going on, which I guess is somewhat of the topic of today's conversation as it applies to where we are today. But the principles, the ideology itself, it was not like, let's go and kill some people. It's the Soviet Union is the, I mean, we were told is the beacon of freedom for all progressive mankind. Yeah. Well, I actually, I wondered to what degree a lot of people alive today have really no concept of the Soviet Union at all, right? Like for many Americans, they had an image that was provided to them by the American media. But today it's for most people, it's ancient (11/96)
history. And it isn't necessarily even history that's taught in school. My recollection is that we didn't really learn much about the Soviet Union. But to that point, I'm curious, growing up, what was your impression or understanding of the United States? How did you guys learn about the Western world? Well, I mean, the official version of the United States or the imperialist aggressors, it was in the middle of, you know, as I was growing up, it was Vietnam War was going on. And so in that context, there was always a discussion of the United States as the forces of darkness, just like the United States was presenting the Soviet Union as the forces of darkness. And so it just was a complete, I mean, take the US quote unquote propaganda, whatever ideology and flip it on its head and say everything the opposite. But in a positive way, meaning like, yes, we have freedom and they don't. We have, you know, one of those 12 commandments is intolerance towards racial and national, whatever (12/96)
intolerance or prejudice. So we were told, well, in America, they exploit black people and working people. And here we are standing for the cause of freedom and equality for all people. And in the meantime, you know, I was Jewish, I mean, I am Jewish. So as a Jewish person, I mean, you're massive discrimination. Couldn't get into college, couldn't get a job, couldn't do this, couldn't do that. But in the meantime, the commandments is complete intolerance towards any racial or religious or any kind of prejudice. So what I'm curious then, because this now, you know, I want to bring us to your, your move to the United States, what prompted that move? And who was it? Was it you and all of your family that left? And what made that possible? The move was prompted by myself and my father. I became politically aware at a much earlier age than most children. How did that happen? How did you inform yourself? It was an accident in a way, because when my grandfather passed away, my grandfather was (13/96)
from Latvia. Latvia is a Western Republic that was not part of the Soviet Union until 1940. It was part of the Baltic States that was annexed in 1940. So when my father passed away, for some reason, we sort of rekindled the connections with his family in Latvia and started spending summers there. And our relatives there were very differently politically inclined, because their parents and they, when they were young, I mean, they were the older generation. I mean, so this was early 70s. Let's say this started in 1970. So they were quote unquote liberated in 1940. Then of course, during the war, they were occupied by the Germans and they were liberated again in the 40s. Some of the members of that distant relatives ended up in Siberia and pretty much spending life there because they were shop owners or whatever. And they were the Soviets took them and send them out there. So they were small business people. I mean, they had a completely different view of the Soviet Union. Some relatives (14/96)
there had emigrated to Israel, because again, they knew differently and they didn't see the Soviet system in the same way that people who grew up there saw it. And so between that and the letters and the conversations, a month, a summer for a few years, that that would kind of for a young impressionable child, you know, that leaves an impression. And then of course, my father, who was a freelance photographer, which is a very unusual situation, so it didn't everybody had to have a job and he had sort of a job, but his job was freelance. So he was by, I don't know, by design or by construction, much more of a free spirit, in a sense that he didn't have to go to an office. He had his own little studio. And so between that and the relatives and listening to the voice of America and listening to the BBC and the German stations and Israeli radio, whatever, all were broadcasting at the Soviet Union and the Soviet Union was massively trying to jam all that. So it was hard to hear. I had a (15/96)
professor of Soviet studies. I took one class on the history of the Soviet Union. And he recounted, this is like seared in my mind because it was so funny, he talked about what his early experiences were like going to the Soviet Union and speaking with people there who would laugh and say, oh, you Americans, you're so, he would say that they, in fact, Russians were better informed than he was or his friends were. That's what he found to be true. And he said that they would sort of jokingly say, oh, you Americans, you don't know how to read the news. You got to flip the newspaper upside down. We look here in the corner. And so I guess that's another way of asking, was there a different approach? I mean, by that time, by the 1970s, let's say, were people already beginning to become aware or had they already become aware? Or is this even not the right framing of the disconnect between what they were told by the state apparatus and what they either felt to be true or knew to be true or was (16/96)
true? Well, I think this started in a big way in 1956. In that year, so this was, so Stalin passed away in 1953, three years later, Khrushchev, who was his successor, gave a speech that essentially unmasked Stalin and the purges and the horrors that went on during that time. And it's almost like you can think of it as like Germans after Hitler in a way. But here, there was no victory defeat. This is the government itself admitted that this God on earth, that people worshiped or were told to worship was mass murder and a criminal. And people's ideas or ideals were put up on there completely upside down. So you can't... It's the period that people refer to as destalinization. Destalinization. But you can't get the dream back. You can't just build some construct and then just say that this was all a fault of one person and that the system itself was wonderful and that he just completely perverted the cause of everything. Of course, that's what they said. But you can see from people's mind (17/96)
that people who've lived through that and even those who believed in the cause, if you will, suddenly discovering that it was all a lie. So that was a major gambit, I guess, by the Soviet government, but it basically led to eventual disaster. So sort of if this is a lie, what else ain't so? Correct. So what else ain't so? But in exchange for buying into the dream, if you will, Khrushchev promised that the current generation, this was like in 1960, which is what this moral code of the builder of communism, where that comes from. So basically promised everybody that they would live under communism within their lifetime. So by 1980 something, they were supposed to be communism. Now, first of all, what is communism? That's the other thing. Communism is essentially, as it applied to the economic system, it was a situation, it's universal basic income. From each according to his ability to each according to his contribution. In other words, the people were supposed to reach such high level (18/96)
of conscientiousness, I guess, and conscience and social awareness that they would contribute according to their ability. They would diligently work as hard as they can, doing whatever they can do. And in exchange for that, the society would provide them without regard to the value, monetary value of their contribution, with whatever they need. And they would be so conscientious that they would not take more than what they need. That's sort of a little bit like kibbutz, the Israeli version of that. Right. Do you think that that is sort of something that can work in a very small society where everyone knows each other and there is sort of social credit system that can keep people honest? Yes, it can work. It's like a cult can work for a small group of people who are convinced of some ideas. I'm not using it pejoratively. I'm just saying, that's how cults exist, right? People suddenly get a small group of people get convinced of some idea as if it's reality. And maybe for them, it is (19/96)
reality. And they live these tenets, if you will. And that's basically what it is. But this is absolutely cannot work for a society at large, has never worked and never will work because people are different and different people have different ideas. Some people always take advantage and some people don't. I mean, it's just, they tried, they gave it their best shot. So when people say that the Soviets, you know, we have an idea that communism or whatever, socialism or community property on all those ideas, universal basic income, that this can work, that the Soviet Union was different, they didn't try hard enough. I promise you, they tried hard enough with bayonets to support them. They tried. It doesn't work. It has never worked. It can never work. But it sounds good. I mean, it sounds, it sounds good now. And that's something I want to explore with you, which is, you know, to what degree the language of today sounds similar to some of what, you know, people were told either in the (20/96)
Soviet Union or in the United States, say in the 60s or 70s. But to bring it back, so you, you had heard things about the United States, I assume you were able to see some video footage here and there, solicit some broadcasts. But for the most part, you'd certainly never been there. You didn't know what you were going to encounter when you got there beyond some of the things you heard and read. But you decided to make the leap and go. What was that experience like for you and your family? So you asked me, I didn't, I didn't answer you fully. You asked me, how was that possible? So in the early 1970s, the Soviet Union started suffering from the wages, I guess, of its economic system in a big way. They had a failed crop in 1972 and they had to buy American grain. Some politicians in the U.S. were able to take advantage of that situation and pass something was called Jackson-Vanikomend to a trade bill with the Soviet Union that tied preferential treatment of tariffs on grain sold to the (21/96)
Soviet Union to Jewish immigration out of the Soviet and so because Jews were probably the most discriminated group there, not the most. I mean, there were other Tartars and whatever, but I guess they had the better representation international than some other groups that didn't have diaspora the way Jews had diaspora. And so they passed a law here that made it difficult for the Soviets to buy grain without relaxing the immigration policies somewhat, but the somewhat relaxation was very somewhat. So for instance, to leave the Soviet Union, you had to apply in order to apply, you had to probably quit your job, quit your college, lose your, I had to lose deferment from military service, because in college you're given whatever five years at five years there was college. So you don't have to go to the draft while you're in college, but as soon as you quit, if you have to apply, you quit, you're immediately eligible for the draft. So they went after me that way. You had to surrender your (22/96)
citizenship if allowed to leave. Now, so you had to do all these things, meaning leave your job, probably sell most of the things, because the other thing is you couldn't leave with more than $100 a person in a suitcase. So you knew that ahead of time. So you applied, and you knew that A, if they said yes, you'd give up your citizenship and you'd only keep $100 in a suitcase. So when we asked, we actually asked them, like, what do we do with the rest? And they said, well, you can give it to your friends or family or spend it or whatever. It's not our problem. These are the terms. Okay, if you don't like it, don't go. You are branded a trader to the motherland, because obviously if the United States is a dark force and we are the beacon of freedom, then if you're going to the dark force, then obviously you're the trader to the beacon of freedom for all progressive mankind. So it was a massive, I guess what I'm saying is it was a massive bet. It was a massive asymmetric bet with if you (23/96)
were not allowed, and there was absolutely no rhyme or reason as to why some people were allowed and other people were not allowed. Many were refused. If you were refused, you were screwed in the biggest way. Because you had already made clear that you wanted to go. Yes, you've exposed yourself as a trader to the cause. Right? And you don't have a job and now try to get a job after that if you're a trader. But if they let you go, they gave us two weeks. What was it like finding out the moment you found out that you had been given the go ahead that you could go? What was that like? Well, I remember that very well. We were invited for meeting at this police, whatever this visa office, I guess. And the full reception room, and you can see people go, people are called and they go into the door and some people are coming, smiling and some people are coming out crying. Oh my God. And so they call you in and there's a person sitting behind the table and just open the folder and says, your (24/96)
case has been reviewed. You're given permission here. In order to get your visa, you need to present the following things. You surrender your passports, surrender this, that and the other. And you have a visa that's valid for two weeks to exit the country. And what happens if we can't get out in two weeks? Well, maybe we can't extend it. I don't know. It's your problem. So my mother, of course, was hysterical and, you know, therapists coming home, you know, to come or down. And you can't take anything with you. And you can't sell everything before they tell you whether you can go because then you're sitting on the floor in an empty room because then you don't have anything. Right. So I mean, it was terrible. Wow. But I think we got lucky. We got a two week extension. So we took away 30 days to clear out. And so 30 days later, you had to liquidate it, everything you had to pay enormous exit taxes, you had to pay for visas for the renunciation of citizenship, like years of salary, I (25/96)
mean, years and years of it. You had to say goodbye to your friends. Everything. And of course, when you say goodbye to your friends and relatives, at the time, nobody knew that the Soviet Union was going to collapse. So this is 13 years before it did. And the travel abroad was extremely difficult and almost impossible. So it was like saying goodbye forever. Essentially, the party to say goodbye to people was awake because you had no idea that you'd ever see these people again, ever. Wow. And you're family, your best friends, your childhood friends, everybody. So you're leaving forever. That's it. That must have been such an unusual mix of both sadness, immense sadness and suffering, but also excitement. Elation. Right. Elation, especially for a 20 year old kid. The fact that you're at the right at the beginning of your life, your most vital years are ahead of you. Yeah. But think of my parents in their 40s and early 50s, you know, they're leaving careers. They're leaving. I mean, it's (26/96)
easy to say. Did they make that decision for you guys because of their kids? Was that the reason that they did that? Yeah, absolutely. They wouldn't have done it. Absolutely. We brought two grandmothers with us because we couldn't leave them behind because otherwise you'd never, my parents would have never seen their parents again. So that was the thought. So I thought that you, in my head, I had it that you guys moved to New York, but you guys moved to Baltimore, right? We did. Totally accidental. I mean, we didn't know anybody anywhere. Anybody there? No, we didn't know anybody anywhere. So we ended up there by a fluke and showed up, you know, knowing not a person with a suitcase and a hundred bucks. A stateless refugee on a refugee visa had no passport of any kind for seven years. Yeah. But I imagine that despite the difficulties, it must have been like the most exciting experience in the world for you. For me, but for my parents who did not speak English, who bewildering, terrible. (27/96)
I mean, really hard, really hard to learn the language, to get jobs, but they were both professionals. Fortunately, they both got jobs in their field, and my mother was an engineer at HVAC, and my father was a photographer, and he ended up working for the Metropolitan Museum of Art and the photo studio in his field. He was an art photographer. But that, I don't know whether it's luck or pluck or what, so it worked out. Yeah. But yeah, this was all complete chance in a sense like it was a total gamble that any of this would work. So I'm curious now, this is also very interesting for me to imagine what it's like to grow up in one world and visit or inhabit a completely different one. You know, I've seen extreme examples of this in the accounts of friars accompanying the conquistadores in Latin America, or for example, in the accounts of members of the Nixon Kissinger delegation to China in 1972, who described it as a totally alien world. Those are granted extreme examples, but still, in (28/96)
terms of the world we live in today, most of that world is accessible to us. And American consumer culture has pervaded most corners of the world, the exceptions like South Korea, I mean North Korea and maybe a few other pockets, maybe some, you know, pockets in the Amazon where there are aboriginals running about. What was it like for you to go from this one society that was very different and also had a completely different information landscape? And I suppose, set of models for understanding the world and then coming to this one, how did you adjust to this new reality? How prepared were you to encounter something totally different? And was there any sense of disillusionment or were you able to kind of process it in real time? It's not as alien as you're describing it. It's a different situation. St. Petersburg is a western city, but at least physically, if anybody has been there. The Soviet Empire has, despite its ideology, has retained all of the cultural treasures of the Russian (29/96)
Empire. So St. Petersburg had two Philharmonic orchestras, it had two ballet companies, two opera companies, Hermitage is one of the greatest museums in the world. So the treasures of the Western civilization, the cultural treasures of Western civilization, of course, Russian literature is an integral part of the Western civilization and the Western literature. And so in a social cultural sense, it was very different. In a big sea cultural sense, you know, New York is a cultural capital, say, of the United States and St. Petersburg was the cultural co-capital with Moscow of Russia. And so the same core sort of Western civilizational values were no different. But yes, socially and economically, it was a completely different system. But you asked me, you know, how Russians or Soviets thought of America actually at a human level, there was absolutely no enmity or against Americans. It was actually admiration. There was a magazine called America, America. In the Soviet Union, there was (30/96)
very difficult to get, but it was published by one of these propaganda organizations that presented America to the Russians. Of course, Russians have been enamored with American Hollywood and movies and all that, even then, even though they were very difficult to come by, but on a pirated basis, we listened to Beatles and, you know, whatever. Amazing. It was all not official. So for example, they would use X-ray film to cut bootleg records of Beatles. So you would listen to Beatles on somebody's chest X-ray, if you can imagine that. Wow. This was before the, you know, the tape recorders came around. So it wasn't like we were totally isolated. And because by that time, by the 70s, some people started, I guess what happened in the 80s to most people in the 70s, some people started realizing that what they were being told is completely non-commentary with the ideology or anything. Corruption, thievery, consumer goods and deficit, horrible infrastructure, bad health care. Yes, education (31/96)
system was decent, but, you know, highly ideologically directed, if you will. And so it wasn't as alien the world, maybe in the 50s and 60s it was, but the time the 70s came around, it was not as alien the world at all. But by the 80s, then the bloom was off the rose completely. And that's where, you know, perestroika started happening and that's where it collapsed, or whatever you want to call it, accelerated. Right. So how much of it was that corruption and things like that, that perestroika prompted the search for reform, the attempt to reform Soviet communism without dissolving it? It was, I hate to say that similar to what's going on in the United States, I mean, it became clear that the system, as it existed in real life as opposed to in ideological slogans, was not delivering for the majority of the population. It just wasn't delivering. And, you know, at some point the rubber meets the road and that's usually at the refrigerator where there's no food in it or not enough food in (32/96)
it, where people have difficulty making ends meet. And when enough people are in that position, I mean, that's, yeah, be it a French revolution or the Russian revolution or whatever revolution. I mean, that causes a disturbance in the society. You know, one of the interesting things that I've read from multiple scholars of the Soviet Union is how unimaginable the end, the collapse, whatever word you want to use, of the Soviet Union was. And at the same time, how inevitable it seems in retrospect and how people have the same people look at, talk about it today versus what they actually felt up until the moment of the collapse. I'm curious if that resonates, if that's your experience. And I wonder what your experience was like. I mean, in 1989, did you have any sense in your mind that at some point in your lifetime you would see the collapse of the Berlin Wall? And what was it like to actually see those images from the US? When we left the Soviet Union, the reason we left is because we (33/96)
felt that there was no future there, that the system was completely unsustainable. But thinking that is not the same as predicting a collapse. The fact that something is unsustainable and yet it is so entrenched that it's almost inconceivable that it will ever end. Not only was it entrenched, I mean, like I said, on the bayonets, you know, the KGB, the population control, the pervasive surveillance, all those types of things which we're now observing over and out parts here, they were very much a part of life at a much lower technological level. I mean, the KGB, I mean, they couldn't dream of the kinds of tools that are available today, but they did a pretty good job with the tools that they had at their disposal then. So it wasn't like these two ideas are incompatible. On the one hand, deciding this has no future, and I want to remove myself from this and build a future somewhere where there's a future. And at the same time thinking, this is going to collapse. So I went back to the (34/96)
Soviet Union for the first time after leaving in 1988. My wife is American and she'd never been there. And so I wanted to show her where I grew up. I mean, I was very worried about going back there. So we went back there during the time to coincide when Reagan was visiting Moscow. They had a summit with Gorbachev. And so I figured if I go there, I was not a citizen of Soviet Union, a Russia. I mean, they took away my passport. I was an American citizen by the time. Now when you left in 79, it was 79 that you left, right? 78. 78. Were you told that you would not be allowed to come back? I mean, what was the agreement there? Oh, absolutely. I mean, you were told when you crossed the border of the Soviet Union, your citizenship is null and void. And that's it. You're gone from here. But you weren't told that you couldn't visit. It was implicit. I mean, it was implicit. Oh, interesting. So what's interesting? Did something change that made you willing? Yes, absolutely. What changed was (35/96)
perestroika. All of a sudden there was liberalization, and it became suddenly possible that by that time I was an American citizen already. I was not a Russian citizen or Soviet citizen. And so my wife and I, we went and we got visas and we went there as tourists in 1988. And so I can tell you from that experience that it was much worse economically by that time. People were having a much harder time even than we were having in the 70s. But there was absolutely no concept. This is before the wall came down, the Berlin Wall. There was no idea on the part of us or anybody who we saw there, my high school friends or relatives that were still there, that anything like that was possible, that the collapse of the Soviet Union was possible was a preposterous idea. All you need to do to understand how preposterous an idea that was is to look up the opening stanza of the Soviet national anthem. Forever, unshakable, unbreakable, mighty, forever. That's it, forever. That's the opening line. The (36/96)
English translation is, United forever in friendship and labor, our mighty republics shall ever endure. The great Soviet Union shall live through the ages. It's fortress secure. I mean, that's the national anthem. I mean, that's the... Right. So what was it like for you to see, first of all, how did you first learn of it? I mean, apparently the president learned about it from CNN. Was that where you learned about it too? Of course. Of course. Everyone learned about it from CNN. But it was clear that things were changing even though nobody understood or appreciated the implications of the changes. I mean, it's like what Gorbachev was doing is he was trying to rearrange cards in the House of Cards. That's what he was trying to do. He was deck chairs in the Titanic. Yes, yes, deck chairs in the Titanic, but you know, the House of Cards, you can't rearrange cards in the House of Cards. What does that gain, Django or whatever, where you keep taking out? Yeah, exactly. Yeah. Yeah. Because (37/96)
you start pulling one string, you start pulling one, you don't know what it's attached to. It could bring the whole system down. That's what effectively happened. That's exactly what happened. And so it basically, you keep doing it until it collapses, but you can pull a few out before it collapses. Oh, it's still standing. Okay. So we can pull this support. Oh, but still standing. And then, of course, you don't know which one is the one that takes it down. So it's essentially what was going on in the Soviet Union. And it kept on going until it just fell apart. Yeah. So I'm curious here, two questions. One is the observation again that I made earlier, which is that in retrospect, it seemed inevitable, but at the time it seemed impossible. Do you think that's because even though we might, our brains might say, yes, this is unsustainable, we all talk about it, for example, in the current dynamic and financial markets. It's unsustainable. This isn't a sustainable equilibrium. And yet, the (38/96)
implications of it being unsustainable, we can't imagine them because they're so foreign to our experience. One, that's my first question. And then my second question, you can take this as you will, as you like, and when I can remind you again, my second question is, okay, now in retrospect, when we look at the USSR, what were the factors that ultimately led to its demise? So first of all, I absolutely agree with you in that everybody thought it was not everybody, but people who even those people who thought it was unsustainable did not think that it was conceivable that it would collapse. This is called normalcy bias. This is not nothing new. I mean, some people left Nazi Germany as soon as Hitler took power and other people stayed and paid the ultimate price. And the question you can ask now is what did you people not understand about what you heard him say? Or what did you not understand about the Nazi policies that made you think that you're going to be okay in that environment? (39/96)
How do you explain that? The boiling pot phenomenon. It's a boiling pot phenomenon. It's like, how can this happen? I mean, it can't happen to us. It can't happen here. We're civilized people. This can never happen. Also, the things to that point or the things that would have seemed insane, like I think about that today for where we are in 2021, I think about it, if you went back in time to 1991, you told people, can you imagine that in 10 years and 15 years, America will be less free than it is today, even though the Soviet Union has just collapsed, but people wouldn't completely find that implausible. The world, I mean, five years later, a few years later today, the way we live with the pandemic, totally foreign to the experience of a few years ago, but we quickly become acclimated to it. And we no longer look at the future and say, we might look at events in the future and say, that's outside of my experience, but it's no more of a step function than what we just went through. Look, (40/96)
I live in Deja Vu. My life is spent in Deja Vu. How do you mean? Everything I see just echoes to me how I grew up and what I saw happen afterwards. When something is not sustainable, it will not be sustained. That's a rational thing, but emotionally, it's impossible to imagine that and particularly to someone who grew up with a certain set of notions about one's country, one's values, one's government, one's financial system, one's economic system, to step back and to say what I was taught is completely different from what I'm observing and to have the intellectual, wherewithal, and courage to draw the line, intellectual line from what I'm observing versus what I'm told and what the implications of that either might be or are inevitably are. That requires some personal experience probably, and that requires some rigorous study of history and a sober mind. And even at that, at an emotional level, it's difficult to accept or imagine because the implications are pretty bad. But what I (41/96)
want to say about that, but unfortunately, a lot of people stop from thinking that way because they equate systemic crisis or change of a system with end of life in Armageddon. It's a fear of death, if you will, in a social form. So it's interesting, is that because when you're in the car and you keep raising the temperature, you keep lowering the temperature, there's a point at which it no longer gives the temperature, high or low. Because there's a threshold beyond which it's just unimaginable for us. It's too horrific, so I'm not willing to make preparations for it. Even though when you're encountering it, it isn't never as bad as you imagine it to be. It's survivable, it's livable. Absolutely. And you and I talked before this, we started this. Look, I mean, Soviet Union is gone, that way of life is gone. The old Russia is gone, 1917, it's gone. Russia is still there. Imperial Russia is gone, Soviet Empire is gone, Russian Empire is gone. Russia is still there, Ukraine is still (42/96)
there, people are having children, living standards there are better than- Chernobyl is still there. Chernobyl is still there. Hiroshima is still there. And Nagasaki is still there. Yes, through horrors and Dresden that get completely destroyed by the Allied bombing to the ground. Kurt Vonnegut wrote a book about it, Slaughterhouse 5. These places are there. So life is, unless human species manages to eliminate itself, life is everlasting. And so to think in the way that people are thinking is very dangerous in a sense. It's dangerous for their own well-being because they're dismissing realistic outcomes and actually probable outcomes that are not life-ending, they're life-changing, but they're not life-ending. And therefore, there are strategies and things that people can do, but they don't want to do it because it's like contemplating death, it's just too painful. And they don't want to contemplate that. And of course, people inside the financial system don't want to contemplate that (43/96)
because they're profiting from it every minute that it continues. So keep writing till, why should I stop making money when I can continue to make money? So there are perverse incentives for a lot of people. So back to that one question, what were the factors that made the collapse of the USSR possible that didn't make it predictable at the time? Well, it's so that we can look back at now and say, ah, those were the things. It's so clear to us now. It wasn't clear to us then, but it's clear to us now. What are those factors and what are those patterns and what do we see any of those today? What are some of the similar patterns that you see having lived in the United States since 1978 and seen the changes that have come about? I'm curious to know your impression. Well, I mean, fundamental systemic dysfunction is what led to the collapse of the Soviet Union. So on a purely economic level, it was a dysfunction. On a intellectual or ideological and political level, it was a complete (44/96)
divorce from ideology and reality. In other words, what the politicians were saying was going on and what was actually going on didn't have anything to do with each other. And I don't know if you're noticing in the United States. I'm noticing plenty of it in the United States because, you know, it's nice to talk about freedom and democracy and the equality and this and that and the other, but civil society and the rule of law, but when you look at the reality of what's going on, so what did down the Soviet Union? It was perverse incentives across the economic system. It was pervasive corruption. It was ideological corruption as well as factual, you know, just corruption, corruption, money, politicians taking money. And eventually, people just found that it wasn't what they thought it was. And when that became clear to everybody, it just collapsed of its own. It's like it changed. And again, when I say collapsed, it's not a collapse in a sense like the building collapsed. It's a sense (45/96)
of people woke up in the morning, they still had eggs for breakfast, but then the kids went to school. So the everyday life continued, but the savings were gone. You had to suddenly work three jobs to survive. And you know, there were... Right. So that's a really important question. What do we mean when we talk about collapse? So yes, there's the obvious tangible effect, which is that the economy takes a hit, your living standards drop, and we can talk about that. But there are other factors as well. Certainly in the Soviet Union, there was this disillusionment with the collapse of an ideology of a worldview, of a place in the world, of an identity. And I wonder, is it too much of a stretch to say that that's the most traumatic part, not necessarily, you know, your wages being cut in half or being cut by 90%. I guess, tell me, what is that experience like? And then do you see any signs of that happening here? And what does that look like? Because I can... At some point, I'd like to (46/96)
share my own personal experience of coming of age in this country, where it is and when it is that I began to see things change. But I'm curious by your impression. The fundamental difference between the Soviet Union and the United States is that the Soviet ideology encompassed both social and economic spheres. It was patently unworkable in the economic sense. I mean, the incentives were fundamentally perverse at an ideological level. In other words, it was an idea that sounded compelling, that in practice, actually could not work in the absence of a continuous compulsion of the population. Right. An overwhelming police state, an authoritarian system. Correct. Without an authoritarian police. Right. The situation in the United States is very different, in that sense. United States has an ideology and it has or had an economic system that went with that ideology that actually worked. Free enterprise capitalism. Free enterprise capitalism with all of its excesses, with all of its (47/96)
difficulties, with all of its warts, nevertheless managed to produce the largest spurt of economic growth and well-being for a massive number of people. In reality, this is not mythology. This is true, including poor people on a relative, yes, the inequality within the society is one thing, but the fact that most people in the United States have running water and indoor plumbing and refrigerator and basic standards may be taken for granted, but it shouldn't be taken for granted. I mean, that is the problem. There are many places in the world where that doesn't exist. So this system has produced tremendous results. So I see fundamental difference in that there was no place to go back to basics for the Soviet Union. You could go back to basics, to moral basics, like purity of thought and one for all and all for one and this idea of community, but it didn't economically work. I mean, that system economically could never work, and it didn't in the end. The United States has a situation (48/96)
where its ideology continues, but the reality does not comport with the ideology. So we talk about free market capitalism, but we don't have free market capitalism. So when people say there's a failure of capitalism, my answer is it's a failure of whatever we have, but it isn't what free market capitalism is. We don't have that. There's no concept in free market capitalism that failures of private businesses, entities are bailed out by the taxpayers or by the community. That's just not part of the system. So whatever system we have now is not the system that has succeeded and made the United States what it became. Can we go back into that system is a big discussion that I don't have a ready answer for and I don't think anybody does, but the principles of that system, which is free market capitalism and ability for the market to set the prices, to set the relationships, creating incentives for companies not to pillage and plunder their customers, as some of the financial institutions (49/96)
are doing, and some of the big tech is doing, but to actually provide goods and services that people want to buy and are happy to buy, and to compete in a free marketplace with other people who are willing to provide even better and cheaper goods and services. That may be an ideal. I'm not being idealistic. I'm just saying that there are core principles out there and a proven record of achievement, not universal, not for everybody with a lot of problems, but nevertheless, of legitimate achievement on the merits. So that gives me a lot more hope than let's say some situation like the Soviet collapse. So here's a question. As long as I can remember in terms of being politically aware, which I would say goes back to 2001 with the 9-11 attacks, the world that is presented to us through the media has always seemed at odds with reality. And I understood that as someone that was Greek and had exposure to alternative cultures and news ecosystems. And so when George Bush would talk about how (50/96)
they hate us because we're free, I knew that was bullshit. And I knew it was an overly simplistic explanation. And I could see how different the perception was of my friends in the United States and my friends in Greece. So I had that and I knew that there was a discrepancy. It does seem to me that that discrepancy, I don't know if it's gotten, yeah, sure, in many ways it's gotten bigger, the gap. But I think more importantly, more people see the gap today than saw it in 2000 or 2001. In other words, to what degree that gap has expanded, I don't know. But the most important thing is that more and more people are calling the bluff. And I'm curious if you agree with that and what you think, sort of when this began, because for me, it really began with 2001. 2001, 9-11, the invasion of Iraq, that and the 2008 crisis, of course, and the way in which the government resolved that crisis or sought to manage it and turned our system from a financial system to a refinancing system, those are (51/96)
the two major events that I think have led us to where we are today. I'm curious, how do you interpret that process? Like, what is it even possible? Oftentimes, I think we try to apply impossible, discrete timelines to things and it's never really like that. It's much more continuous. But I'm curious how you interpret it. First of all, I agree with you. I think that the gap was always there, but I do believe that the degree of the gap has increased dramatically and with it, the awareness has increased dramatically. So, I'd say 2001, I had a similar sort of epiphany, although I would say that the dot-com bust of 2000, being in the financial markets, and then the way that was handled by dropping interest rates, I wasn't as aware economically and politically before that, like for example, when they bailed out Chrysler, when they bailed out Conneney, Illinois, when they bailed out the Tequila Bonds. It didn't ring as much of a bell with me that something was fundamentally shifting. But (52/96)
after the 2000 crisis and then 2001, a Patriot Act, where I felt that America has taken a sharp turn into a different direction, where everything that I thought or took for granted in this new country for me, which is basically anything that's not expressly forbidden is allowed. Did you think of the Patriot Act then and the state response to 9-11? Did you view it even then as an overreaction? Absolutely. No, I thought this was the end of America. To me, that was the end of America that I knew. Because you had seen much worse. No, but when I saw this, I mean, I can't impart it to anybody who hasn't been there. Standing in the security line in the airport, if you want to know what it's like to be in the Soviet Union, you are in the Soviet Union. In that moment, you are in the Soviet Union. You're in a line waiting for something, and at the end of that line, a lot of bad things can happen to you. People don't think that way, but in reality that- I remember when people like Naomi Wolfe (53/96)
announced that she had been put on a blacklist, on a no fly list. Remember these lists? These were new to the American experience. Thousands of people ending up on these lists having no idea how they got on, but more importantly, having no idea how to get off. You think it's hard to contact Google? Imagine trying to contact the government and not being able to find anybody to explain to you how you got there. You're on it. You're on it for life. When I stand in that line, I'm not on that list, thank God, and I hope I won't be. But I feel it very much at a visceral level because I understand how these types of population control measures evolve in the hands of governments and bureaucrats. To me, it's not benign in any way, but to most people, it's just like Pastor Niemoller in Nazi Germany said when they first came for the Socialists, I didn't say anything because I wasn't a Socialist. Then they came for the Communists, whatever, and I wasn't a Communist. Then they came for the Jews, (54/96)
and I wasn't a Jew. So that's what happens. People on this list is not you, and therefore, you feel like it's not about you until it is about you. It's amazing how different America is today than what it was in the 90s when I was a kid. Completely. It felt like a way freer country. When I remember it now, I just remember what it was like. Forget just traveling. Traveling changed dramatically after 9-11 to some degree disproportionately because of the fact that 9-11 was an attack using airplanes. But the country is unrecognizable, and I often wonder if we were to be transported back in time 25 years. Would we be shocked? In other words, has it changed more than we even remember it? I mean, to me, there's no question about it. It's a completely different place with completely different rules. Again, I'm not expressing political views. I'm just stating observations. The fact that the people in academia are being quote-unquote canceled because of their crazy whatever their views are, that (55/96)
is so profoundly undemocratic and un-American. I remember how Nazis were allowed to march in Skokie, Illinois, despite the protests of Holocaust survivors, because it was decided at the time that the principle was more important than specific case. Yes, these people may be repugnant, but we have a law that allows people to say what they want to say no matter how repugnant it is to other people. That's what freedom of speech is. I mean, freedom of speech is not being able to say what everybody is comfortable listening to. In the Soviet Union, by that measure, there was complete freedom of speech. If you wanted to praise the government, you could do that as much as you wanted to. It just, as long as you didn't say anything against the system. What kind of freedom of speech is that? Yes, no, I am absolutely, I see that. I think it's completely incompatible with our constitution. It's completely incompatible with the entire idea of America, which is what made the idea so compelling and a (56/96)
true beacon for the world. That's the idea. Now, maybe that idea was never practiced because, of course, we had McCarthyism in the 1950s, but it's all a question of percentages. There's always excess, there's always BS, there's always stuff. Is it 10%? Is it 20% or is it 90%? Where is the prevailing side? Is it the way things are? Is it the way things are with some people, in some cases? So when it goes from a little bit to MO, Maudisaparanda, it becomes a different animal. And that's where I think there's a concept of bezel that John Keynard Galbraith has. Bezel basically is graft in the economy. It's a little more complicated than that, and we can talk about it. So his point was in defining that term, was to say that during times when money is easy in credit bubbles, there's tons of bezel. There's tons of graft because money is easy, people are trusting, everybody's making money. And when things go down, all of that gets wrung out. And then at the bottom of depression, there's very (57/96)
little bezel because it's very hard to get your hands on money. It's very hard to earn people's trust. It's very hard. Like two brothers, I've given that example before, just recently, two brothers in South Africa, 19 and 20, absconded with $3.6 billion worth of crypto essence. Like in what world, a 19-year-old and a 20-year-old would have an opportunity to abscond with $3.6 billion? I wonder if what's happening, this just kind of hit me a little bit now, I wonder if what's happening is that after the fall of the Soviet Union, after the end of the Cold War, the lack of a concrete enemy led American politicians and the system at large to sort of feed on itself, to become more corrupt in the absence of an existential threat. And that this is exactly what we've been living through and we're at the tail end of that. I don't have any question about it. And it's really accelerating. You agree with that? That's interesting. The competition, I mean, it's competition, survival of the fittest (58/96)
makes one athletic and nimble and you have to roll with the punches. That maybe creates accountability maybe also because it doesn't seem to be, what seems to be lacking today more than ever, there's been a systematic decline in accountability among the political class. And that, I think, explains some of the corruption that we see, specifically in markets. The insane level of absence from regulatory standpoint and the blossoming of so many outright frauds. Right? It's amazing. And where is the law enforcement and all that? But then look at the regulators. I mean, they're just all going between private equity firms and then the government and back and back and back. So there is no public, I mean, there are no really public servants at high level, career public service. I mean, the political appointees are not career public servants. Political appointees in all these positions are basically bankers or wealthy people who go in and out of government. And if they're not wealthy, a few (59/96)
years in government, and they become wealthy by going back into the private industry and advising it how to extract money from the government. I mean, that's basically what it becomes, a revolving door. It's a proverbial revolving door. And that is part of the systemic decay of standards, if you will. And because you're right, fighting against the Soviet Union, there was some pressure. Failure was a real failure. I mean, because somebody is going to eat your lunch. When nobody is going to eat your lunch, you're relaxed. Do you think that America, since the end of the Cold War, has been in a long interregnum? In other words, that we're moving from one regime, one form of political organization to another. And it doesn't have to be very discreet. And I don't want to fall back on caricatures, but for example, are we moving from a liberal, open democratic society to one that's going to be governed by some kind of authoritarian system? Or does this ship right itself? And we not return to (60/96)
what existed in the past, because you never, I've heard you quote Heraclitus, you never stepped in the same river twice. But to something that more closely resembles the system that's in line with our cultural foundations. I don't know. Nobody knows. So essentially, what I think is inevitable is a financial reorganization. Because that's, it's not an ideological thing. It's a practical thing. There's only so far you can carry the system that we have. And I think we've pretty much carried it as far as it goes. Is that right? Is that what you think? I mean, you're not one of those people that thinks that this can go on for another 10, 20 years. No, I don't. I think demographics embedded into this situation. Is that the primary driver in your view? Well, it's a combination of things. I mean, you have, it's certainly a catalyst. I mean, it's a catalyst that cannot be avoided. The population is aging, 75 million baby boomers are just naturally retiring. They're going to give up power (61/96)
because they're just getting old. This administration is probably the last baby boomer administration. I don't know. Maybe, maybe we've got one more round of Trump. I doubt, I don't know. But I think there's a generational change that's coming. I think that the promises, not I think, I believe that promises that have been made and commitments that have been made through its social security system and the Medicare and Medicaid system are not unfundable, unmeatable. They're just not. The United States has obligations with like that 7% of GDP or something like that. There's just no way to do this. Well, most of these obligations are owned by baby boomers. So, or is the default going to happen on their watch? Absolutely. So, they're going to have, at some point, they're going to have to be sacrificed effectively for the system to transition. Absolutely. Absolutely. And if they don't want to be sacrificed, they will be sacrificed by the next generation because it's unfunded system, right? (62/96)
So, it's pay as you go. So, it's the younger people that have to fulfill these obligations. And once baby boomers are no longer in control, why would the younger generation keep paying these people who left them with this situation? So, the pathway for you is still the political machinery. You think that ultimately it's going to be a situation? No. I don't know. What I'm saying is, it's, I don't know how it ends. Sure. I don't know how, I don't know when it ends. Right. What I'm saying is, you know, there's a concept is in life insurance, has unpredictable inevitability. Like when a life insurance is written, it is inevitable that there will be a claim if the policies is paid continuously, right? But it's unpredictable as to the timing and the reason for demise or why it happens or whatever. Right. But it's definitely, it's happening. It's a certain. So, I think that financially, every organization of our economic, financial and monetary affairs is a certainty, is an inevitability. We (63/96)
cannot continue to borrow money from or print money from nowhere and pay for everything because if this was the way of the world, then work is not necessary, value creation is not necessary. We could just print whatever we want and live with it and it would be wonderful. But that's not the way where the world works. We just, it's just not. So, therefore at some point we have to stop printing money out of nowhere and start earning it. So, I haven't really thought this out clearly, but there are three primary though, maybe four ways in which I could imagine that the system goes. One is political, like you described for example, Donald Trump in 2016, he was elected in 2016. If Donald Trump had been a competent wielder of power, we could have been in a much more dangerous situation. So, I think that the country was actually at a place where it may, I think we may be in a place where the country is prepared to elect an authoritarian leader, someone who's, who they're willing to give power (64/96)
to. I don't know that if someone were to basically say, you know, American people, I've sent the army into Washington to guard the Capitol building and guard our senators because I think blah, blah, blah. I'm actually not convinced that the electorate would rise up against that, that the people who elected, I think the people who elected whoever would say to do that would actually support it. Well, Hitler was elected and Putin is elected and he's being reelected. Now, he's not a Hitler by any means, but he's an authoritarian leader for sure. Sure. And so, like, I don't think we're far from that, right? So, that's one option. Another option is we get a socialist type candidate, a populist who just enacts insane spending programs. So, that's one way in which the system could sort of move to a different phase. Another one is financial, like we talked about just now, a bit, which is that the system itself could collapse the financial system. The dollar could rapidly devalue, etc., etc. A (65/96)
third is geopolitical. In other words, that rather than collapse from within the system that the United States supports, would collapse from without. And again, I'm using the word collapse and I really need to find a better word to use. Maybe, again, dissolve. Change, change. Dramatic change. A sort of rapid loss of confidence in the system. Yeah. And that's something that we're, again, we see evidence of that already. The international order is changing dramatically. Most of us, myself included, were shocked. Shocked, again, maybe not the right word because it wasn't unimaginable that the US would completely screw up the withdrawal from Afghanistan in such an unnecessary way. But we've seen this incompetence before. But nonetheless, it, again, it's another example, just like when Donald Trump and Erdogan had their little spat and he sent them some letter. It was a joke. It was ridiculous. And it was another example, another piece of evidence that the international order that's been (66/96)
held together by the United States since the end of the Cold War, but really since World War II is coming apart. So there's that. And then there's maybe the fourth one, which is much more difficult to describe and understand, but something that I think you spoke to a little bit here and that other many Sovietologists have spoken to, which is what goes on in the psyche of the body politic. Because I think that's something that we've, I mean, I've talked about that in terms of nihilism, specifically financial or market nihilism, but it's just nihilism more broadly, the devaluation of values, the glaring disconnect between what you've been told is true, what you believe to be true, and the actual evidence of your daily lived existence and what you see. I mean, 2008 for me, Simon was like the quintessential example of that, watching the government take over the controls, take over the treasury, and just completely bill itself out. And they couldn't even do themselves. It wasn't until a few (67/96)
years ago that they actually managed to put together some funding for 9-11 first responders to bring us back to 9-11. Look, everything you're describing is potentially on the table simultaneously or in some conjunction. It's very difficult to say what the catalyst is, but economic affairs are much more factual than political affairs. In politics and ideology, you can carry things for a long time, but what is their tangible connection to people's lives? Well, the tangible connection to people's lives is their refrigerator. And whether there's food in that refrigerator or not, that's the ultimate tangible connection. That's where the rubber meets the road. Can they retire, did therefore, a 1K suddenly become 101K? That's the connection. That's where the confidence comes from or lack thereof comes from for a lot of people. I mean, well, one could argue that we have a long way to go before people starve in the United States. There are all sorts of ways in which we've been able to forestall (68/96)
that. But you mentioned 401Ks. I mean, is that, again, because so much millions, tens of millions of Americans have their savings in the stock market, and the stock market's been held up for all this time. I mean, is that in your view one way in which the forces of populism could be unleashed? What is a confidence game? A confidence game is some sort of a usually financial arrangement that is based on confidence of the participants in the soundness of this arrangement, but is financially and economically unsound in reality. Right? Okay. So if we have a financial system and a monetary system and an economic system that is unsound fundamentally, but is sustained through confidence of the participants, then we are in a confidence game, like Bernie Madoff's confidence game. So Bernie Madoff's clients thought they were rich for a couple of decades because they got a statement that showed some numbers on it. Right? And they thought they were rich and they lived like they were rich. And then (69/96)
one day, it turned out they hadn't been rich in a very long time. They just thought they were rich. And so what I'm saying is that I believe that the economic system that we have and the financial system that we have are being held up by confidence and not by substance. That is not to say that everything is bad and everything is fake and nothing is real. But on a levered basis, it doesn't take a big percentage of quote unquote bezel to turn out to be not real for the entire thing to have to be recapitalized. That's just what leverage that's how it works. Right? So look at statistics. I mean, just look at what people are, how people in the financial markets are talking about things. They say that the net worth of Americans has never been higher. What does that mean? Well, that simply means that the markets have never been higher. Right? They say that the company's valuations are very high. What is valuation? Valuation is taking earnings and multiplying them by some number. What about (70/96)
the earnings themselves that they're being multiplied by some number? Where did they come from? Well, if the government is running trillions of dollars of deficit, what does that really mean? What it means is that the government is printing money that it is giving to people or to its own departments that are turning around and spending this money into the economy, which is turning up as revenues of these companies, which then get multiplied to show valuation. So do you see where the pyramid scheme comes in? Of course. And the deficit. So this is a circular thinking. This is a completely circular thinking. The markets are high. Yeah, the valuations are high, but the earnings are high. The earnings are high on the back of what? The earnings are high on the back of spending. What is being spent? Non-existent money is being spent, conjured out of nowhere. So the real danger here, what I see, the real danger and the real problem is the whole house of cards unravels in the sense that we find (71/96)
out that the government cannot keep printing this money without massive devaluation of currency, continuously. This is how hyperinflations occur. I'm not predicting it. I'm just saying that's the technology of a hyperinflation. Hyperinflation is not inflation. Hyperinflation is the loss of confidence in the currency. That's what happens. So this is a faith-based initiative, essentially, that's not based on substance. It's based on faith. And my point is that the baby boomers who are now retiring and who are transitioning from being savers to being dissavers, from contributing to the stock market every two weeks from their paychecks to taking out of the stock market every month to pay their bills, from buying houses to downsizing and selling houses. So this massive rabbit that's been traveling through this economic python is heading towards the exit. The poop shoot. And that is, it's inevitable. It's just inevitable. And then we're saying that the millennials are going to step in their (72/96)
place eventually at some point. But by any measure of wealth, accumulation, salaries and all that, they're not there yet. They're not ready to take that man. And this is the whole world has that problem. Yeah. So Simon, let's shift the conversation to what you do, how you occupy your time, because it speaks to, I think, a practical question of what do we do? I had a great episode how long ago, I can't quite remember, maybe nine months ago or a year ago, probably longer. Everything in the pandemic feels like a wormhole. But the guest was Margaret Heffernan. And she has a great line in her book. I can't remember now the name of the book, but it's something to the effect of you can't predict the future, but you can prepare. And I think that that's absolutely correct. I mean, I tried to do that a little bit here in this conversation, I suppose, though obviously we were talking about in terms of contingencies and possibilities that we didn't state it explicitly, but you can only prepare. (73/96)
You can't predict. You don't know what tomorrow's going to look like. And to that effect, you and I have talked about this before, the system, the dollar-based international financial system, within the rules of that system, the risk-free collateral has been US treasuries. Yes. But if you agree, as you and I do, that the system itself is unsustainable in its current manifestation, then in order to find the equivalent of a US Treasury security or the closest thing to it, you can't do it based on the rules of the system. You have to look outside of the system. So to that effect, I'm curious how you approach. First of all, is your concern finding a safe haven asset? How do you think about it? Do you think about, in terms of portfolio construction, some amount that you want to have in safety? What do you consider to be a safe asset? What do you look for? What attributes? And then to what degree do diversify into some kind of yield-generating asset? I'm curious how you think about it (74/96)
investing as an individual. Granted, giving the fact that I already understand how TBR works, the Bullion Reserve, and I want you to talk about that. Well, I'm not in the business of investing anymore. I used to be. That's the business I used to be in, but when I concluded or came to some of the conclusions that I shared with you today, just like I did in the Soviet Union, I said, well, it's not a game I want to keep playing, and I want to start building something else, somewhere else, as opposed to continuing to double down on what I believe is unsustainable and therefore will end at some point. And so I went looking for essentially substances or assets or ideas along the lines that you're talking about right now. So let's say if there is no US dollar, or if the US dollar is suspect or US dollar becomes, for whatever reason, undesirable or devalues, or the US treasuries are subject to restructuring or redenomination, or because of the currency value, their value declines, what is it (75/96)
that will be considered risk-free in that environment? Because we know from practice that there's a crisis. Demand for safety and for assets, a place to park purchasing power or to, you know, place purchasing power away from risk is overwhelming and compelling and massive. And in the last 40 years or 50 years, that was expressed through demand for US dollar and US treasuries. So if you, for example, pause it for a minute, that for a moment that's not the place to go, then the question is where is the place to go? So prior to the dollar taking that place, the place to go was gold. And I concluded based on my examination that that is still the place to go. People don't have to agree with me. They don't need to agree with me. Well, what is it about gold? Because this is such a difficult thing to analyze because it doesn't yield a cash flow. And the reason why it's, it commands such a high premium. So how do you assign value to it? How do you think about it? Why are you so confident that (76/96)
gold is a good bet as a safe haven asset in the type of environment that we're moving into? Well, I mean, it's not about gold. First of all, gold is something that emerged out of the free markets. Nobody appointed gold to be what it is for all the thousands of years that it was what it was. It is something that emerged from a free market, not only from a particular free market, from numerous free markets through time and space. The Chinese empire used gold, the Incas used gold, the Roman empire, the Egyptian empire and every empire. Okay. And these empires are separated by time, space, and many of them didn't, civilizations, many of them had no idea about each other. And so they all somehow converged to the same substance. And I think the point of that is that, or at least my analysis of that, is that gold as a commodity has some physical properties that no other commodity has. It's lasting, it's non-reactive, it's very rare, whatever. I mean, we can talk about that. That's all in the (77/96)
books. Anybody can look that up. The most important thing about gold, I think, in the financial sphere is gold doesn't have, it's not a human project. See, financial assets, all financial assets, and even digital assets, they're in somehow connected with human projects, meaning humans promise to do something, or they have incentives to do something, and they need to continue to do that something in order for this asset to be valuable. See, gold is a physical substance. It's a molecular structure. No human needs to do anything for it to be what it is. It's not connected to anyone or anything, meaning a coin, a gold coin, like let's say a Bitcoin. I mean, this is not a knock on Bitcoin or digital assets or anything. I'm just explaining what I'm trying to say. Distributed ledger technology, digital, cryptocurrencies, digital assets, there has to be networks, there has to be mining, there has to be transaction validation, there needs to be software and hardware, there need to be wallets, (78/96)
hard wallets and soft wallets. There needs to be an app store where those wallets can be updated and where there can be re-upped and so forth and so on. That is not to say that this is all disappearing tomorrow or anything, but this is all a human project. There are incentives that need to remain in place for the mining, for example, which is a transaction validation function, to be performing that function and for that function to continue to be worthwhile for the people to be performing it. It is assumed in the crypto community, for example, that this is forever so. We don't know whether it's forever so. It's only been around for 12 years. It's only been around for 10 years, right? Gold is a substance that doesn't have any effect. There is no network. There is no project. There is no cyber space. Nothing needs to be happening anywhere. People use it in caves and they can continue to use it. So when you ask me, what is safety? What is liquidity? The question is, what is liquidity? So (79/96)
the bottom line to your question is when people are looking for an impeachable liquid asset that has no counterparty, meaning it's not anybody's promise to keep doing something or do something or anything. What is it that's the most easily negotiable, universally globally recognized and negotiable asset other than the US dollar and US treasury? And I would submit to you that in practical reality today, it still remains gold. There is not a town in this world where pretty much any civilization exists where you cannot negotiate a piece of gold, be it in a jewelry store or at a pawn shop or at a market or somewhere where you can find a person who would say, I have no idea what this is. It's interesting. No, I completely agree with you. A lot of big corners will take issue with this, but they're not right. They're wrong. Well, it's reality. It's not my opinion. No, right. But I was specifically going to make a point, which is that big one is ultimately, so to speak to your point, gold is (80/96)
an asset that is not simultaneously someone else's liability. Yes. Big coiners will say that applies to Bitcoin as well. It does not because Bitcoin is a liability to the Bitcoin network. The Bitcoin network is more highly entropic than gold is. Yes, you have to pay storage costs for gold if you decide to custody it, but you don't need to custody gold and gold on its own doesn't require any energy in order to survive. Anything. Gold can be in your pocket or in your software. Right. Yes, you can deposit it with a depository with custodians, but listen, people have been depositing gold with custodians for millennia and it works. But okay, fine, but you don't have to do that. You don't have to do that. You have to do that with digital assets. Right. But I want to clarify something though to understand it because, again, these are difficult assets to think about or to value in sort of rational, intellectual terms. Ultimately, does your trust in gold as a safe haven asset ultimately rest (81/96)
upon the thousands of years of history of gold as something that people have valued? In other words, at the end of the day, we can try and develop frameworks for understanding why gold is valuable. But ultimately, this is one of those situations where people have found it valuable for thousands and thousands and thousands and thousands of years and the entire world is a market for it. It pervades the literature and the culture and that in periods of crisis, in periods of uncertainty, in periods of a confidence crisis, people search for a sure thing. And for you, time and again, gold has proven to be this thing even now in this much more technological world where people spend more and more time in the cloud, et cetera, et cetera. And tons of millennials refer to gold as not a barbarous relic, but rather a rock, just a rock, that this is ultimately that sort of the gravity of the value of this asset as it's been expressed for thousands of years will re-express itself whether you like it (82/96)
or not. So what you're saying, the real question you're asking, is it an accident or is it just a matter of tradition that gold is valued or used in a way that it's been valued and used? And what I try to allude to is that it is not a matter of tradition. It is a matter of rational practical choice made by multiple civilizations in various circumstances separated by time and place. It has certain chemical properties that make it superior to all other substances. It's a combination of its rarity. It's the fact that it's non-reactive. It's the fact that it's dense. It's a lot of physical properties that make it stand out, among other things. And it is no one's liability. So one king, so when you think in terms of bigger picture than an individual, why is Russia and China, why are Russia and China and Turkey and some other countries have central banks, have been heavy accumulators of gold? It's because gold is independent from the financial system and for sovereign to have reserves (83/96)
denominated in a currency that is dependent on other sovereigns, poses problems. Maybe Americans don't care or haven't cared to date that their safe havens, which is treasuries and dollars, have only value at the pleasure of the government of the United States because government in their personal experience has not overtly abrogated those obligations and promises. But in many other countries, it happened in their government and for sovereigns, the need for independence is palpable. So look at what the United States had done with the US dollar in the international arena. The United States has used the US dollar and its control over the global financial system as through sanctions as a political tool. So if you're Russian government or Chinese government, casting no dispersions on either, and by the way, no matter what we accuse them of having done, but what we think of their ideology, no one has ever said they're stupid. They're not. They're rational actors in their own interests, (84/96)
whether we like those interests or not, or understand why they think things the way they do. So why are they accumulating and using gold reserves as a tool to gain independence? Because the United States has used financial system as a pressure point against them. Well, why don't people with savings extend that idea to, well, the United States may use the dollar or the treasuries as a pressure point against people who have savings? Because maybe, like what's happening in China now, they're saying rich people need to share. Everybody, we need to share your wealth because there are a lot of poor people. Everybody needs to be good. So this billionaire thing, they said to each according to his needs. So the value of independence, the value of freedom, you and I just had a political discussion of freedom. Freedom is not important to most people until it palpably or lack of it, palpably affects them. They take it for granted. So people take safety in financial affairs, perhaps for granted. (85/96)
They take promises made to them for granted. Whereas in an environment where all bets are off, what is out there that is universal, valuable, negotiable? What is it? I mean, silver, yes, definitely silver, but silver is much less valuable than gold. You really physically need a major amount of silver even for a fairly small amount of money. It's very heavy. I mean, try to get $10,000, $20,000 worth of silver and try to carry it around. It's like 30, 40 pounds. You can't. And these days, it's not that much money anymore. So what else is there? Of course, it could be your business. It could be some property. It could be different things. Yeah. No, it's a really interesting thing for me. I guess the reason why I mentioned this point about the challenge of valuing it a number of times is that I own gold and I own a good amount of it. And while I can articulate to my satisfaction a reason for owning it, the way that I can articulate to my satisfaction a reason for why I did this or I (86/96)
believe that, it's a way of falling back on what I've known to be true my entire life and that in a world that feels so different than what it was when I was growing up and we've talked here about change, it's kind of the ultimate bet on meter version, I suppose. It's a bet that, yeah, things have changed a lot, but there are certain things that don't change that much. So in closing, Simon, I'd love for you to talk to me in my audience a little bit about what the Bullion Reserve is, what you do there, and why you created this business to begin with. Very simple. I mean, I felt that gold has been, well, first of all, I came to the conclusion that I felt gold would be a safe haven, as it has been, not because of the historical patterns, but because historical patterns are, people are rational, many generations of people have made rational choices about this, and they have concluded that this is a counterparty free neutral, independent item, which is feasible from a practical standpoint, (87/96)
which doesn't rely on anybody in which they can entrust with a placeholder for value. When you say it doesn't produce any income, so neither $200 bills produce any income unless they are deposited and you take a counterparty risk of it being paid back. And of course, $100 bill itself has counterparty risk in that the United States may demonetize it. So nobody can demonetize gold. You can say that gold is this or that, but there are 200 other countries where they may have a different opinion about that and billions of other people. So it's no single person or countries or a group of countries control. So when I came to that conclusion, then my question was, if the purpose of owning gold is to create a reserve asset, which is why central banks own gold, it's part of their currency reserves. And by the way, the thing about not predicting the future but being prepared for it. That's also very important by the way. I mean, that's a huge that's Pericles. This is from 700 BC. Yes. So this is (88/96)
2700 years ago. This man said it. It's universal wisdom, which again, in credit bubbles, it's not true because people feel like their sky is the limit and there is no reversal and every reversal will be fixed by grandpa or daddy or whoever, you know, the big guy. And therefore I can do silly things, but they'll be excused. They'll be covered. But in the world where sometimes paybacks a bitch, as they say, you have to have plan B essentially. So gold is unimpeachable store of value. That's a plan B. Well, then the question is, how do you own it in a form that doesn't compromise those properties, which you're seeking, which is lack of counterparty risk or minimizing counterparty risk accessible to market so that you can monetize it or mobilize it? Because if it's sitting in the basement, you know, buried under concrete, and then you're driven from your house and the basement is in one place and you're in a different place. I mean, that doesn't help very much. You know, it's not with you. (89/96)
So how do you store it? How do you manage it? How do you make sure it's compliant with all the laws? How do you make sure that you have access to liquidity? How make sure you have access to multiple sources of liquidity in different locations? And what if there's need to move it? And what if there's a need to do this or that or the other? It's like with any logistical challenges. I mean, how do intelligence agencies deal with that? Well, they have safe houses in different countries in different places with money placed there and with people on the ground who can host an agent and help them and so forth. They're framed with networks, you know, local networks, not electronic networks, human networks, you know, of relationships on the ground. So when I approached this subject, I thought in the same way, I said, okay, fine. So it's a physical item. How do you own a physical item in a way that maximizes its unique or specific properties that would become extremely valuable only in certain (90/96)
circumstances, potentially. Okay. And it's those circumstances when it becomes extremely valuable, when it would be the most difficult time to actually operate and navigate. So in other words, how do you have liquidity in an asset that's valuable, that has those particular qualities? How do you have access to liquidity? How do you make sure that you can mobilize the asset? Or how can you maximize your chances of success? So if you're designing a contingency plan, the idea is you don't know what's going to happen. Otherwise, it wouldn't be a contingency. It wouldn't be a surprise, right? So if you don't know what's going to happen, what are the elements of planning? Not a plan, because you can't have a firm plan, you don't know what's going to happen. So what are the elements of planning? What are the capabilities? What are the facilities? What are the relationships that you would want to call upon or may need to call upon in a difficult situation? It's not a mystery. I mean, there, (91/96)
it's, you know, if you sit and think about it for two minutes, you'll come up with all that. You need access to, you know, people in the supply chain, many multiple people, they need, those people need to be comfortable dealing with you. There needs to be trust. There needs to be a relationship. There needs to be some history. I mean, all those normal things, there's nothing difficult about. So what I realized is there were, there were not readily available solutions like that, that would be independent from the financial system, based on human relationships, as opposed to institutional relationships and no relationships, which is like apps and the digital framework, that would be not 100% mess up proof, but that would maximize your chances and options and ways of handling adversity under unpredictable circumstances. And so that's really what I do. I mean, I've created a basically a service. It's not a business. It's a professional service that essentially tries to put in place or has (92/96)
tried to put in place and put in place infrastructure and relationships and access to potentially necessary goods and services in different parts of the world in order to maximize chances of success in ability to monetize and mobilize this resource, even when it becomes necessary. That's as simple as I can express it. So if someone hears this and they want to learn more about it, Simon, how can they do that? Is there a website? Just go to the website, bullionreserve.com. And if they have any, if they have any questions, they can contact you or contact the company. Absolutely. Absolutely. All right. Well, look, Simon, this was great connecting with you. You know, you and I, like I said, the listeners at the top, it's, we almost didn't record this. I almost didn't hit the record button at the beginning because we've known each other for a long time. We're friends. I consider you a friend. And so I didn't hit the record button because I was just, I didn't... Or just chat. You were just (93/96)
chatting. But it's great to see you. I wish you the very best and thank you for taking the time to speak with me today. Thank you for having me. And thank you to everyone listening out there. You know, every so often, I make a point to remind you that if you haven't reviewed Hidden Forces on Apple Podcasts yet, even if it isn't the platform you usually use to listen on, that it would mean the world to me if you took just a few seconds of your time right now to rate the show. You don't even need to write a review. Just click on the hopefully five-star rating that you think we deserve for the work that we do every week. And I say we because this is a team effort. It isn't just my guests like Simon who take time out of their busy schedule to speak with me, but also my editor, my phenomenal, phenomenal editor and unsung heroes to Llanos who has been with me since day one. And our latest edition, Kate, who manages the Hidden Forces social media accounts, as well as many other people who (94/96)
help make this show possible with their contributions, either on the artwork, the website, the music track, the music track. Shout out to Sam Williams who has developed all our music, including the latest track that so many of you have emailed me about to say that you love it. All of these folks have a hand in making this show possible. So please, it would mean so much to me if you did that, if you took a moment to rate the show. And if you have a few extra minutes to spare to write a one, two, whatever sentences review of what you love about Hidden Forces, it makes an enormous difference to the podcast visibility. And it plays a huge role in attracting you guests. So with that, I hope you all have a great end of your week and see you all Monday. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode (95/96)
transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForcePod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (96/96)
The Hidden Forces podcast features long-form conversations broken into two parts, the second hour of which is made available to our premium subscribers, along with transcripts and notes to each conversation. For more information about how to access the episode over times, transcripts, and rundowns, head over to patreon.com. You can also sign up to our mailing list at hiddenforces.io, follow us on twitter, at hiddenforcespod, and leave us a review on Apple Podcasts. And with that, please enjoy this week's episode. What's up everybody? Before introducing today's episode, I'd like to take a moment to reflect on what has been an extraordinary year. I don't know if anyone else has this experience, but I struggle to remember what it was like to actually live a normal life. I haven't forgotten it, but I've lost that feeling of what it was like to go to the movies, to go to a bar, or to even strike up a conversation with a stranger. It's that quality of social dynamism and liveliness that (1/97)
started to fade. And boy, do I miss it. I think that if I were in a different place in my life, if I were alone, or if I didn't have such a fulfilling job, that I could have easily fallen into depression during this time. And I know that many of you are struggling with feelings of depression and anxiety right now. It is absolutely normal. I want you to know that this show and this community is about more than just sharing interesting philosophical ideas or heady intellectual topics. And while I do love reading some of your geekier emails, don't get me wrong, I love it. I also want you to know that I appreciate and read every single one of the more personal emails and messages that I get from those of you who find companionship in these podcasts and who are otherwise struggling or having a very difficult time with these uniquely isolating circumstances that we all find ourselves in today. I hope you continue to share your feelings and thoughts with me. I read them all, even if I can't (2/97)
respond to every single one of you. We all have ideas in our heads of what the holidays are supposed to be like. And this year, they're probably going to be the furthest thing from that. And that's okay. Life is full of surprises, ups and downs, some good, some bad. But the only thing that we can do is to keep moving forward. And that's what I intend to do with this show in the new year. So I want to wish all of you a happy end to your holiday season and a happy and hopefully much healthier 2021 for all of us. Now, turning to this week's episode, where you're about to hear is a conversation between me and the hosts of the Bankless Podcast, David Hoffman and Ryan Adams, who invited me on a couple of weeks ago to share my thoughts on where we find ourselves economically, politically, socioculturally, and of course, to talk about Bitcoin, Ethereum, and the larger explosion of interest that we've been witnessing in cryptocurrencies and decentralized finance. Since my episode with Roland (3/97)
Gray aired, we've seen further announcements about new regulatory proposals, including the new FinCEN Know Your Customer regs on self-hosted wallets and the huge securities fraud lawsuit filed by the SEC against Ripple. How that company was able to operate in the fashion that it has for all of these years without approaching the SEC is remarkable. But again, I do think that we are in a new pro-regulatory regime. And I think many of the players in FinTech are going to have to rethink their relationships to the government and to regulators in the years to come. As part of my effort to anticipate this transition, I've put together a couple of episodes in the new year that I haven't recorded yet, but which will deal directly with these issues. The first one should air next week, and that's going to be a more conceptual foundation-building episode dealing with some of what was discussed on the podcast that you're about to hear, namely this notion of a networked state or a digital state. (4/97)
David and Ryan seem to feel that code can supplant legal structures as an operating framework for society. And while I certainly agree that smart contracts can automate agreements, I don't believe that self-executing software can or should supplant our legal systems. I also think that it is naive and dangerous, quite frankly, to synonymize open-source software with liberal democracy. And you will notice that many of the folks pushing this idea in the public domain are very wealthy, powerful members of this new baronial elite with their network of thought leaders who all seem to share this perspective that governments are bankrupt, both politically and morally, and it's up to the entrepreneurs and technologists to build a better model for governance in the 21st century. This reminds me so much of the internationalist movement of the early 1900s. And I think this is going to become one of the main philosophical dividing lines separating these elites from the larger public, who is going (5/97)
to demand stricter and more pervasive regulations of these industries and their owners and operators. It's going to be very interesting to watch. And I am very much looking forward to thinking and speaking publicly about it, because I think many people are struggling to articulate what's happening, and I'm going to do my very best to try and make sense of all of it. So, with all of that out of the way, I want to encourage all of you to check out the Bankless Podcast at podcast.banklesshq.com. And in particular, an episode David and Ryan recently did with investor and thought leader Bellagy, who is very well known in the space and who I think expresses some of these views about the network state pretty articulately. So, that's a great episode to listen to if you want to get that perspective. They also recently had Rowan Gray on after he appeared on Hidden Forces, so make sure to check that episode out as well. All right, so without any further ado, please enjoy my conversation on the (6/97)
Bankless Podcast with hosts David Hoffman and Ryan Adams. Bankless Nation, we are so excited to introduce our next guest. Dimitri Kofinas is the host of the Hidden Forces Podcast. This is one of my favorite podcasts because it's a podcast that gives you an edge by teaching you not just what's going on, but how to think critically about the systems of power that structure our world. It's something we touch on in Bankless as well. Of course, Dimitri would describe himself as crypto curious, maybe crypto adjacent, but he really understands the nature of the industry while he's staying on the periphery. And we wanted to get his take as someone who is crypto curious, crypto adjacent, and who is synthesized and absorbed so much of the Hidden Forces that are going on in the world today. Dimitri, it's fantastic to have you. How are you doing? I'm great, guys. Thank you very much for having me on the podcast. Well, we are so excited. And this has been, I think, a really interesting year to be (7/97)
the host of a podcast like Hidden Forces, the type that you do. I'm going to start with this question. What's it been like to be a podcaster trying to find truth in the chaos of the year 2020? It has been very satisfying and exciting and fun, I must say. I think one of the great benefits of having a podcast like this is that when something strikes my curiosity, I get to, as a function of my job, investigate it and then bring on people who I would normally not have access to if I didn't have a podcast like this to speak to me to try to help me make sense of whatever it is that's creating confusion in me and in society. Yeah, absolutely. But has it been a hard of year to find truth? Have you found? Or have you been able to figure out the, find the signal and the noise here? So that's a very complicated, interesting question on many levels. I think we are struggling today to come to a social consensus view of what we even mean when we talk about truth. When I think about truth, I think on (8/97)
an ontological level, I don't think that any of us can ascertain what the truth is or what reality is at bottom, but we attempt to approximate it. We try to get close to it through things like empirical science or epistemology. And I think that these are part of the tools that I use to think critically about the systems of power that structure our world. And I do that starting with questioning assumptions. And those assumptions are what most people consider to be the truth, consensus thinking. So for me, it's actually been quite satisfying because when people's assumptions are suddenly being confronted as perhaps being wrong in such a jarring way, like we've been seeing in recent years, as we're going through this radical period of change, it really, I think, opens the door of a podcast like mine to step in and really help people think critically about those issues and those problems. Dmitri, the name of your podcast is Hidden Forces. And so I want to talk about what that means. The (9/97)
through line of your podcast seems to be surrounding so many different domains of knowledge, domains of information. What are the things that really grab your attention and that you fit into the through line of Hidden Forces? And why did you call it Hidden Forces in the first place? You know, I think I understood subconsciously why I did. And I began to articulate it early on, but I've gone through a long period with the podcast where I didn't have much time to think about all that. And I've gotten more clear on it recently. I think the idea of Hidden Forces, again, to go back to this idea that there are systems of power that create structure in our world. And that structure is oftentimes in the form of a narrative. There are things that we generally come to believe. And the reason why I think it's so important to challenge those narratives, and this is something I learned from investing, which is that in order to make money, it's not enough to just be right about the future. You also (10/97)
need to have a view that is different from the consensus view. Dmitry, I think the way Andreessen Horowitz describes this is you have to be contrarian, but right. Yeah, exactly. Well, Howard Marks says, who's also been on my podcast before, and I strongly recommend for your listeners to hear that episode. He has like, you know, all these little funny quips, and I think one of his quips is it's not enough to be a contrarian. You also have to be right. And it's true, but in order to be right, you have to be able to think critically. And that means knowing how to ask the right questions. It means knowing how to assess evidence. It means knowing how to evaluate arguments with the ultimate goal of coming to a conclusion and forming a judgment that you feel confident enough about that you can then rely on that judgment and that conclusion to make decisions and decisions that are materially important. Because oftentimes, your conclusions will be contradicted, or you will, if you purchase (11/97)
Apple at, you know, I don't know what it's trading at today, but you know, you purchase it at X and it falls 20%, that could shake you out of your position. Likewise, if you're on a panel or you're being interviewed and your views are challenged and you don't understand why you hold, why you believe what you believe, and you don't have conviction. And that's something else that Howard Marx talks about. It isn't just to be right. It isn't just to have a different view. You have to have conviction, because you'll get stopped out of your position. Literally and metaphorically, if you don't have conviction, and that's the epistemic component of hidden forces. It's, you know, not only what do I know, but how do I know what I know? How can I justify what I know to myself? Because what you'll often find is that people who hold beliefs and then have those beliefs challenged, yes, if you're investing in a market, you may very well and oftentimes will sell out of your position. But in the rest (12/97)
of the world, a bigger picture, what you find is that people will tend to become more wedded to their beliefs. They will clutch the cross. And the reason that people do that is because they can't bear the uncertainty. And that's because people need certainty. They need models and frameworks to structure reality, because reality is in its bare naked essence, chaotic. Or at least it appears chaotic to human beings. And we spent our entire lives doing that. And then, again, that brings us back to this point about power and structure, which is that we all need structure. We all have biases. We all have stereotypes. We all have frameworks and theories that we use to make sense of the world. But when you don't think critically, you're relying on other people's structures and other people's theories and frameworks and narratives to explain the world. And so you empower others at the expense of yourself. And that's where critical thinking is so important, because being able to think (13/97)
critically, and I think that's something that I try to do on Hidden Forces, and I think by extension, I try to help other people do, when you can think critically, you can come to your own determination. And that's empowering. And I think that is, for me, ultimately why these subjects and this approach is something that I've developed over the years, because at a young age, I found it, I'm a very competitive guy. I've competitive physically. I was a wrestler in high school. I did mixed martial arts in college and afterwards. And I loved competition. I love to know that I could hold my own. And early on in my life, I found that I had beliefs, but those beliefs were beliefs I couldn't justify. And I didn't like the experience of having my hat handed to me in an argument, because I didn't understand or didn't know why I believed what I believed. It's bad in an argument. It's even worse having your hat handed to you in a market when you've had on something and you're completely wrong. (14/97)
Yeah, for sure. It's an awful experience. And I think it really helps, even if you're wrong, and I've been wrong plenty, and I'll continue to be wrong plenty of times, understanding or having some idea why I was wrong and being able to make changes so that I can be a little better next time makes all the difference for me. And I think at a network level, that is what moves society forward. That's empiricism. That's progress. We have a lot of beliefs in the Bankless podcast and the Bankless program. And there's so much in there about thinking critically that I think a lot of our listeners can start to figure out why we wanted to get you onto the Bankless podcast in the first place. Because a lot of what crypto is in its current stage and form is belief about the future version of finance and the future version of economics. And I'm reminded of a podcast we did with Ben Hunt a long time ago where he talked about in his entire newsletter, Epsilon Theory, is based off of his theory of (15/97)
Epsilon where you have the alpha and the beta of markets. And that's just the raw facts, right? The raw fundamentals, the numbers on the spreadsheets, et cetera. But the Epsilon is the perception of the masses, right? The viewpoint of the people. And that can change. And that's one of the reasons, that's one of the things that we are seeing nowadays. At least that's from the perspective of Bankless and from to the outside world. We're seeing so much shift right now. And some of this has to do with crypto and some of it definitely does not. We're seeing shifts in perception as to central banks and their relationship with money. We're seeing shifts in perception in our trust or distrust in institutions. And there's just a seemingly large number of undercurrents that seem to be shifting the perceptions of everyone, right? And some of those shifts have to do with people like Paul Tudor Jones, reviewing and reorienting their perceptions about what Bitcoin is. Micro strategy is a big topic (16/97)
of conversation. And so, Dmitri, before we get into the topic of crypto and how things are shifting towards crypto, I kind of want to talk about what you see as shifting in the world. To me, Hidden Forces as a podcast has this stream of consciousness about it, right? Like it's a thought process. And your decisions to bring on a new guest or a new piece of content, to me, represents your belief that this is an important piece of subject matter because it represents a shift in people's mentality. What would you ascribe to be the big paradigm shifts of people's thoughts in 2020? Sure. So, by the way, you guys and your audience will be happy to know that I'm going to be bringing on two people who I think your audience will be very interested to hear from to speak directly about the Stable Act. And that's going to be, I think, a very exciting episode. I'm going to be recording that next week. But... Oh, Dmitri, do you have any teases on who the guests are? Oh, man. Well, I want to. Let's (17/97)
just say that the one person is, there's no one better that could speak about the Stable Act than one of the people that's going to be on the show. And the other person is someone whose business is very well known and is going to be deeply impacted by any kind of regulation of the space and has spoken very thoughtfully about it. So, it's kind of two countervailing opinions. And I'm very excited to do that. What was your question again, Ryan or David? Yeah, so there's just a fundamental... There seems to be many different shifts in how people believe the world to be in 2020. I feel like the legacy of 2020 is like the year that it all changed. But what changed? What are the big undercurrents of the world in 2020 from your perspective? Yeah, I mean, well, I'll just point out one that was recently on my radar and was on all of our radars, which is the 2020 election. And I actually brought on David Shore, who has been called Obama's Nate Silver. He was the guy that built his forecasting (18/97)
engine for the 2012 election, a brilliant kid. And we spent the balance of the two hours talking about this. And really, what did the 2016 and 2020 elections tell us about the electorate? Because there have been very... Again, to bring it back to the point about narratives and Ben Hunt's Epsilon, there is a conventional narrative that has been pushed primarily by leftist media outlets and the Democratic Party about why Donald Trump got elected. But I think for a lot of us that never really felt like it told the whole picture. And I think the election in 2020 kind of bore some of that evidence out. When you look at the fact that young African American men and Hispanics actually voted in greater numbers for Donald Trump in 2020 than they did in 2016, which really doesn't make sense on the face of it. Also, why were the polls so off? And a lot of these speak to what I think is an underlying demarcation, a bifurcation in the electorate separated by class. I think this is really the big (19/97)
story that has been missed because conventional explanations either rely on identity politics based on race, religion, sexuality, different markers of identity, or something that I've actually talked about quite a bit, which has been the wealth gap. But I think what's actually more interesting is something that David talks about and also one of my guests, Michael Lind, had talked about, and we talked about together, which is class. And I think that America is becoming a country that's increasingly breaking apart by class. There are the non-working class, lower educated, more highly mistrustful people living in the Midwest and other parts of the country. And then there are people like, let's say you and me or us who have the skills to be able to perform in a modern open economy. We tend to be perhaps more liberal and we live in coastal cities and we take in this sort of progressive, largely progressive popular culture. Crypto's are really interesting case because you've got these strong (20/97)
strains of libertarianism in Austrian economic thought. But I mean, I think that's really one interesting subject, which is how is our country dividing really? We keep saying in America's never been this divided, but what's dividing us really and what are the dividing lines and how can we wrap our arms around that and can come to an understanding of what that means in order to make more informed decisions for ourselves? And I think one area where that's relevant is, I mentioned it, the Stable Act. The Stable Act is, I think one of the reasons why it's being introduced today is because we're coming into an environment, into a decade where we can expect to see higher levels of progressive legislation and a greater desire to regulate the economy, to regulate society. And that, I think, stems from the failures of the last 30 to 40 years, some of which are market failures, many of which are the failures of government and the failure both to regulate and to regulate properly and over- (21/97)
regulate. So, Dmitri, what you're saying is one thing you've noticed. And by the way, we will get to the Stable Act for the Bangless audience. That is, by the way, some interesting, an interesting bill that was just put before Congress to regulate stablecoins. We want to get Dmitri's opinion on that. But while we're talking about these kind of larger trends, so I think what you're saying, Dmitri, is that we've got now two Americas and those two Americas are divided by class. But possibly that's a symptom of something else. So, you mentioned the wealth gap, so this massive wealth inequality that we haven't seen since when, the 1920s, 1930s. Is that a symptom of something else? I want to bring the topic of central banks in here. So, a lot of the crypto more consensus thought would be that part of the reason for this inequality gap has actually been the mundane printing that has gone on since before 2008, but certainly accelerated after 2008. And those closest to the money spicket, those (22/97)
with stocks and assets, those things inflated and just accelerated the wealth gap that was already in place, just kind of accelerated that trend into the future. What's your take on that thought? The idea of central banks, the idea of modern monetary policy that is continuing to print more money, does that have a role in the 2020 narrative in your mind? Yes, a great question. I think it absolutely does. The central banking story is a really interesting one because for the most part, when we look back at history, it's hard to point to one particular time or period or moment where everything changed. But I think that in the case of central banks, 2008 really was a watershed. It really was unprecedented in an age where everything seems to be unprecedented and that word is so often misused. In this case, it is in fact true. Ballot sheet expansion was more or less a very gradual process for the entire lifetime of the Fed for 100 years almost. But 2008, we saw a dramatic expansion of the (23/97)
balance sheet. I think we also understand why that happened. It wasn't just to arrest a deleveraging, a cataclysmic deflation that was going on in the economy that was driven by reckless decisions in the world's investment banks and large commercial banks and financial system. But it was also because our elite, our elite institutions and our elite individuals, politicians and policymakers, who revolve, use a revolving door between government and the private sector, made a very conscious decision to prioritize themselves and their own assets and their own families at our expense. I think you can think of the 2008 financial crisis as what began as a financial crisis, quickly became an economic crisis and has since become a political crisis. It's become a political crisis because of the choices made by policymakers to print their way out of the problem, to cover up the problem with more and more paper. In that sense, they have deferred it. Because what is a fiat-denominated currency other (24/97)
than a liability? A liability of who of the central bank. The central bank credits that fiat money to the banking system in order to deal with in the short term a problem of too much debt and too much leverage. As a result, when the chickens come home to roost, where are they going to roost? They're going to roost back at the issuing institution, which is who the central bank, because it is a liability to the central bank. That brings us back into a larger narrative that I think is foundational to crypto, which is that cryptocurrency solves the problem of trust in money. We've lost faith in our institutions of money. Do you buy, a banker might say, yeah, but Dimitri, we had no other choice here. Come on. This is really the only way out. Do you buy that argument? That's like saying, I had no other choice. I had to push her onto the train. I had to push her in front of the line because the line would have eaten me. I mean, I get why they would answer that way. I think also, this is where (25/97)
you get into really interesting research around behavioral psychology. They believe it. When Lloyd Blankfein says we're doing God's work, he believes it. He's not just saying that. There is probably some level of, but people go to great lengths to convince themselves of things. Someone who talks about this, and I think talked about it on my show as well, is the great short seller, Jim Chenos, who famously helped really bring down Enron. When you look at people that perpetuate giant frauds, they will oftentimes come to very complex rationales to explain why they're actually not bad people. Central banks as a religious institution is an interesting concept to think about. Money as a religion is an interesting concept to think about as well. We often in the crypto space think of money as a mean that's socially propagated contract between all of us where we agree certain things are money and other things are not, which is an interesting subject, I think. I've been reading a lot of Ray (26/97)
Dalio lately as well. You talked about central banks and bankers and the wealthy class choosing themselves over other members of society as part of this. Ray Dalio would probably argue, yeah, this is all part of the rise and decline cycle of a nation state, of an empire. Recently, he put out an article this week that said the US is at stage five. It was like, you know, how cancer progresses in stages like one through five, but we're at stage five. Reading Dalio these days, I don't know if you've done this much, Dmitri, but it's very sobering because he's looking through history and he's presenting evidence or reasons why the US is possibly in decline. This is just monetary reserve currency is the last thing to go. In the next stage is stage six, where he talks about revolution and civil war. I'm not sure that I'm ready to fully commit on Dalio's worldview or thesis. No, I'm to be fair. It's all probabilistic for him too. But what's your thought on this? Does all of this wealth gap (27/97)
inequality and kind of the divide that you're talking about certainly makes for a more volatile 2020s, but how does it shake out? I know you've been talking a lot about the future of the US and how other geopolitical powers play into that. Is this kind of an empire in decline in your mind? Is the nation state experiment not working out so well these days? Interesting question. Does Dalio say that the nation state is in decline? Is that his thesis? Not so much. That would be a bit more of a bankless philosophy. I just wanted to fact check you guys. He doesn't say that, but he would say. Yeah, right. Well, we connect the dots there to be fair. What Dalio would say is possibly the America is in decline. The Western empire, if you will, is kind of on the end cycle of its 300-year go of things. Yeah, I have probably a complicated series of answers there, not fully thought through. One is, I don't think that the nation state is in decline. If anything, this is going to sound controversial. I (28/97)
think that there's never been a more bullish time for the nation state. When is it really advantageous to have a government? I don't know if you guys are familiar with Thomas Hobbes. Most famously wrote Leviathan. You've spoken about it quite frequently on the podcast. Perfect. Thomas Hobbes was supposedly a very thin, frail guy. I think he wore glasses. He was scared. He was a guy that was very concerned about a world of violent anarchy, of war of all against all. For Thomas Hobbes, a strong national state, and this I think gets to another point, which is what has been the appeal of authoritarianism, a strong nation state is vital. It is more important than individual liberties, because individual liberties, you can only have them if you have a state. If you live in an anarchy, this is the, I'm really summarizing, kind of butchering up his thesis. I think that we're moving into a more chaotic world. In that type of a universe, a strong, competent national government, or the hope even, (29/97)
or the need for a strong national government supersedes any sort of lack of trust in its competence and its record. So despite the fact that elites and institutions have lost a lot of trust in recent decades, that doesn't negate the fact that we're heading into a period of time where we need them more than ever. So I think that, yeah, I would actually make the opposite point about nation states. There was one other point you made about- The US specifically, I'm curious. About the US, right. Is it declining relative to, well, the US has been declining, right? I think that part and parcel of this is the decline or the disaggregation of the American-led international order, American hegemony, American power and primacy, which was really the defining ethos of the rise of neoliberalism and American empire in the 1990s. That's when I grew up. I graduated high school in 2000. So I literally went through my entire childhood and early adolescence, living a completely different world. Granted, I (30/97)
did live through the Cold War as in the last, the first decade of my life, but I didn't fully remember it very well. I really started to become politically of age in the, maybe the George H. W. Bush administration. I had this vision, this memory of seeing a girl crying on Time Magazine, hugging her husband or boyfriend who was going off to fight in the Persian Gulf. But I was rudely awakened to what has now become the second half of my life in the 2001 terrorist attacks. The Bush administration attempted to resolve that problem to address it by what? By doubling down on American empire. That went terribly wrong. And we've been living, I think the two biggest events of the 20th century have been not so much the terrorist attacks, but rather our response to them. And that primarily means our misadventure in Iraq and all the blood and treasure that it's cost us. And the 2008 crisis and our response to it. And the 2008 crisis was in some ways a response to the 9-11 attacks and the Bush (31/97)
administration's war in Iraq, right? Because the Greenspan administration dropped rates in the face of the collapsing Nasdaq bubble and the subsequent terrorist attacks. I also wonder if our response to COVID in 2020 will be another one of those defining events. I guess that remains to be seen. No, that's a really interesting, so when you say our response to COVID, do you mean our monetary response? I mean all of it. Yeah. And I mean, it sort of gets into you another question about, that you made about strong national government and authoritarianism. I don't know, David, if you have a thought on that. Yeah. Dmitry, you talked about Thomas Hobbes' Leviathan. And we've used the Leviathan metaphor to ascribe meaning to what's going on in the world of crypto and specifically Ethereum, where Thomas Hobbes, the belief of Leviathan is that you need a strong centralized government in order to keep the body of a nation composed. And we extend that metaphor to Ethereum, where Ethereum is a (32/97)
protocol, but it operates as a strong, as in you can't do anything against the rules of Ethereum by nature. And it is the thing that keeps the community, economy, ecosystem of Ethereum composed. And in a world where we are losing trust in institutions, Ethereum offers, and all the protocols on Ethereum offers a place for that trust to migrate to, which is something fundamentally different about the 2020 financial crisis versus the 2008 financial crisis. Because in 2008, we didn't really have an opportunity to opt out. And you also talked about how you are particularly bullish on the power of the nation state. And specifically right now, as a time where the zeitgeist seems to be a pro-regulation, because it's we haven't had regulation in the last 30 years, not anything meaningful. And so now maybe you alluded to how now might be the time to introduce stronger regulation because we haven't been doing that. To me, and I'm pretty sure Ryan too, when we hear that, we hear more (33/97)
authoritarianism, because if we want to have more regulation, more control, it's not the right time to have more control when there is an option to exit out of a system. And that exiting means cryptocurrencies, right? Using different infrastructure, different institutions, institutions run and operated by code to opt out of perhaps an authoritarian government, a government that is very happy on the trigger of regulation. And the perception shifts, the fundamental shifts in people's outlook upon the world seems to resonate with this. At least maybe that's our bias here on the bankless program. But that's kind of like our underlying theses that we wanted to get your take on. Well, when you say opt out, what do you mean? So there's parallels to Ethereum and a nation state, right? They're not completely right, because roads are not going to be built by Ethereum and taxes aren't going to be collected by Ethereum. However, there's increasingly more and more places for you to primarily (34/97)
deposit your capital and wealth. And what a nation state is in its most essence form is a system of organizing and then also taxing wealth. A nation state is a property rights management system, in addition to many other things. And that's primarily the role of Bitcoin and Ethereum. These are property rights management systems. And so it's reducing the power or responsibility of the nation state. If people perceive that Ethereum is a better property rights management system than the nation state, people might opt into Ethereum because Ethereum doesn't over-regulate them. Ethereum doesn't peer into, like doesn't ask them to download a COVID contact tracing application on their phone. It doesn't ask them to do all of these things that they might not want to do. And to get even more concrete on that, things you can opt out of right now are obviously a nation state monetary policy. So you can buy Bitcoin and Ethereum rather than a very issuance happy system. You can buy Ethereum and stake (35/97)
it as a bond rather than T-Builds. You can use Ethereum as banking infrastructure rather than Wells Fargo and JP Morgan. You can register a capital pool on Ethereum and it's globally accessible and available and permissionless to anyone rather than registering a Delaware LLC. So it's not taking everything that the nation state does, but it is becoming an institution and unbundling possibly some of the services that the nation state provides. And by the way, maybe the nation state isn't the most efficient way to do these things. Nation states are notoriously expensive from a security and from a tax perspective. So the idea is that some of these things could be unbundled. But the alternative view, which the world seems to be moving in, is I think exactly, as you said, more authoritarian state-controlled governments. It's this crypto world view that offers kind of the alternative at least in our minds. What are your thoughts on that? Just in general, I'm super curious. Sure. I guess a few (36/97)
points. Number one, I think one of the most core characteristics of a nation state is its claim to the legal use of force. And that came to me when you, I think it was, I don't remember if it was Ryan or David, we're talking about property rights management because I think that what Ethereum does is not property rights management. I think it's property rights accounting and accounting in general. I think what's really unique and special about these open public ledgers is that they are sort of scribes of the historical record. And you can do a lot with that. That's extremely important. And that speaks to the point about trust. But ultimately, it's physical force, the ability to enforce physically, that is the basis of power. And even if the Ethereum ledger says that you own something, that doesn't prevent me from going and physically taking it from you in the world because we all live in the physical world. So I think that drawing too strong of an analogy between these communities like (37/97)
Ethereum and Bitcoin and nation states is fundamentally wrong. I want to get to your second point in a second, but just a quick thought on that. I think you're absolutely right that violence at its core is the thing that we gave up to governments. That's the Thomas Hobbes argument, essentially. It's like we give the Leviathan the power of violence, and therefore we are able to socially collaborate better and coordinate better as human individuals. But that doesn't have to be the case. So when we graduate above violence, there are things that societies put together like protocols, like laws, like the Constitution. So we're not cavemen running around, hitting each other and stealing our things, and we're not just war tribes, essentially. We have protocols and structures that define how we do commerce, that define what our unit of money is. And crypto's answer to that might be a little bit, well, in the crypto world, code is law. So we do have a law system and a set of protocols. That (38/97)
means we don't have to resort to violence. And there's this defensive aspect of cryptography that we've talked about before, which gives asymmetric power to the defender. So if I have private keys, and you don't know I have a set of private keys, so assume that privacy is in the mix here, Dmitri, then there's no way for you to crack my cryptography and steal that from me. So what I would say is that those laws are backed up by the use of force. Not on Ethereum. Right, but Ethereum exists within a legal framework. So whatever money you have on the Ethereum ledger is in a practical sense, a claim on assets in the real world. So the claim, the ownership of property on Ethereum doesn't always have claims in real world assets. And some of the most valuable assets on Ethereum are specifically not found in the real world, notably Ether itself, the native currency of Ethereum. Right, but what I'm saying is that the only reason that those assets have value is because you live in a physical (39/97)
world with physical things and physical needs and physical governments that can physically take those things or physically protect them. So one of those things, the ledger, exists within a physical world and governments which have physical force have primacy over those assets. And the reason that we, the argument, and I understand that there are anarchic philosophies, anarchism is a philosophy of organization, I think anarchism, I think works at small scale. I don't know, I don't see how it could work at a large scale. It hasn't worked historically. But the reason that we empower governments and we give them the legitimacy to use force is in order to protect, among other things, life and property and liberty. So I don't believe that you can have a world, and this actually gets to a fundamental philosophical question, which is can you have a world that exists solely off of math, off of a cryptographic ledger and smart contract enforcement? And I don't think that you can, because that (40/97)
doesn't stop anyone from coming to your house and killing you or taking your house from you and squatting in it. No smart contract is going to prevent that. Right, yes. And so there is inevitably, and this is one of the main reasons why we wanted to get you on the podcast, because Ryan and Arya are inherently bullish on the concept of a math driven world. But just to your point, a math driven world doesn't employ a police force. It doesn't employ an army that protects from other nation states. However, there does seem to be a balance that could be stricken where, you know, in theory, a nation state could do whatever they want, right, because they have a monopoly on violence. However, we've seen nation states, you know, overreach against the will of the people. And that is inherently destabilizing to a nation state. And I would say especially a nation state like America, where we are founded on principles of freedom and self sovereignty. The freedom and self sovereignty of being able to (41/97)
transact on a permissionless ledger is seemingly completely aligned with the values of what makes an American, right? And one of the, and it seems to be that America slowly over time, not to the whole world, but to select parts seems to be kind of exporting that values, the values of freedom and self sovereignty. And so what Ryan and I think really protect property rights management on Ethereum is the desire and will of the people, which seem to be shifting away from offering legitimacy to our legacy institutions, because we don't trust these things anymore, especially after, you know, the nation states failed us during COVID, especially, and then began to perhaps also fail us by, you know, printing a bunch of money to benefit a few people rather than the many. And so people, what the thesis is, is people are removing their, removing legitimacy from the nation state and offering it to trustless institutions on Ethereum. And a nation state can only go so far against the will of the (42/97)
people that it has domain over before they start to resist and fight back. And I think that the resistance of the people, because the people inherently are- I don't know how much the people in North Korea are resisting. You know what I mean? Like I think that that's also, there are a lot of assumptions there baked in there that I would question, you know? And also, I think we have a lot further to fall than a lot of those other countries. And you can stay in an authoritarian, you know, totalitarian regime for quite a long time before you eventually rebel. If you ever rebel at all, you know, that's one of the interesting things about looking at history. It's an incomplete data set, you know? So there are a lot of assumptions baked in there that I'm not fully on board with, you know? I think these systems, these platforms, these ledgers, these networks can be important and have been important contributors. I think Bitcoin is a classic example. Bitcoin, more than any other protocol, (43/97)
decentralized protocol, has had a meaningful impact on society insofar as it is, it has presented a huge challenge to fiat currencies, not so much materially, but ideologically, in the same way that gold plays a role. And it's really caused a lot of people to begin to question the viability of fiat money. At the same time, there are strong forces that compel societies to organize around fiat money because it empowers the government. And there are periods in time where people want and demand stronger government. And I think we are heading into one of those periods of time. And it's not the first time that we've been in this in the United States, that we've gone through a period like this. These are cyclical processes. And so I don't think that my hope for cryptocurrency and for platforms like Ethereum and Bitcoin is that they can survive, that they can survive the regulation, that they can work constructively with regulators who will regulate them to formulate regulations that don't (44/97)
cripple the industry, that allow the industry to innovate and create value and solve problems without getting overburdened. That's my hope. But I don't see it as a kind of thing where we're going to escape into Ethereum and that we're going to live on the cloud or on the decentralized cloud. I don't think that's realistic. And I think interestingly enough, when I listen to a lot of people in the community talk about this, I think that view is partly informed by what feels like a paradigm shifting moment. I think a lot of people see how digitized the society has become. They look at the advancements made in virtual reality, in gaming, and now with the pandemic and this sort of remote work situation. And I think they overextrapolate and think that that somehow then means that we really don't need to live in a physical world. The contours of the state are not just less relevant but irrelevant. And I think that's fundamentally incorrect, is my view. So, Dimitri, is that what you think (45/97)
accounts for the major rise of Bitcoin and other cryptocurrencies in terms of market cap? It's kind of this store of value, gold alternative type of thesis. Is that what you're attributed to? Yeah, I think that Bitcoin has found a really good niche as a, quote, digital gold. And that's partly, I think, as a result of the failure to live up to its original vision, which was as a senseless peer-to-peer money. Because that really was an amazing story and was very compelling to people like me. And that is one of the things that first got me attracted to crypto courage in the first place. It was the hope that really this was a way to opt out, that we would be able to opt out of fiat money. It's obviously proven much more complicated than that. And I know that there are a layer or two solutions that are being implemented or being developed. But to my knowledge, those are still a ways away and it's not clear that they'll ever be really viable in so far as sustaining the kind of security (46/97)
promises that Bitcoin initially promised while at the same time enabling the kind of speed and processing capability that you would need in order to operate at scale. But I think the digital gold narrative is a powerful one. But the thing with digital gold is like gold, for example, is a Ponzi scheme. It's a pyramid scheme. Largely, not entirely, because there are fundamental uses for gold. It can be used in electronics. It's used as jewelry, which is not really a Ponzi scheme. There's, I think, underlying attraction to that. But fundamentally, for the most part, most of gold's value is Ponzi value. It's based on a conviction that what I buy it at, the price I buy it at, will be lower than what I can sell it to you for. That it's going to keep going up over time and that's why I buy it. Otherwise, people wouldn't buy gold. And Bitcoin, people buy Bitcoin for the same reason, primarily. Most people buy Bitcoin because they have an expectation or hope that its value will continue to (47/97)
rise. And what's interesting about the Bitcoin community, and I'm not talking about traders and sharks that come in and out that trade on volume and buy and sell, and I think it's got a strong to a point that either you or Ryan or David made earlier about religion, it's got a strong religious fervor. And one of the important sort of doctrinal forces in Bitcoin is the notion that you should hodl and you hold on, hold on until the rapture, until the apocalypse, until you're brought to heaven, you're given your 40 virgins. And I think that is, again, also, for me, that's not a particularly compelling vision. And I don't know how sustainable it is. So, I guess, I don't know if I'm really answering the question. I might be meandering now, but it's kind of a way of me saying that I think for Bitcoin to graduate, it's got to become more than just this, for lack of a better word, pyramid scheme. And I don't know how you guys feel about that. I have a couple of comments there. So, one is, I (48/97)
think that's a super interesting way of characterizing it. Your comment about this peer-to-peer cash thing being the original vision for Bitcoin, like I completely agree, right? But we also think on Banklist that that vision in the wider crypto is not dead. In fact, it can live in places like Ethereum where you have Layer 2 and you have the ability to create stable coins and this sort of thing, and you have scalability of kind of the base layer infrastructure. But maybe we can get back to that. I'd love to go into more detail on your description of Bitcoin as a Ponzi scheme and as gold as a Ponzi scheme. I'm going to get so in trouble for saying. No, actually, so would you be surprised to know? So would you be surprised to know that I and I don't want to speak for David, but I probably agree with you. I might change the word Ponzi scheme to Ponzi game, which is kind of what it is, maybe a pyramid game type of mechanism. But I guess my counter question to you, Dimitri, is like, isn't (49/97)
that what money is in general? Peter Teal calls money the bubble that never pops. What is money? You've all, Harari in his book, Sapiens, calls money a shared myth. That's what it is. It's a shared meme that we all... Totally. What do we want? What do we need as money? Well, I want to have the money that you think is money and that the rest of the world thinks is money. And there are some monies that are in different stages of development and growth. There are monies that are new and have small networks and not everyone trusts. And so if you choose to buy those monies, you're kind of speculating that that money will be thought of as money by the rest of the world. Maybe that's a bit more what Bitcoin is. And then when that happens at the nation state level, with something like gold, you get things called the gold standard in the 1800s, where nation states were playing the Ponzi game, if you will, of saying like, well, England has just switched to the gold standard. So we better do it. (50/97)
We don't want to be like China and the last one's left on the silver standard, do we? So that's why the more fundamental question is, well, when you think about it more deeply, Dmitri, isn't money just a Ponzi game? And importantly, the distinction between scheme and game. Scheme alludes to somebody who's going to pull the rug. Whereas game is something that everyone chooses to opt into and to play more or less implicitly or perhaps explicitly, understanding that this is a game to be played. And when everyone plays the game, well, that's just money. It no longer becomes a game. It graduates. So I have a lot of interesting thoughts about this, where to start. So I've heard this discussed often in crypto. It's a really fascinating approach to trying to bootstrap money, which is basically saying, hey, look, money is just a myth. The dollar is just a myth. We just generally believe in it. It's a consensus narrative. I would argue that that's not entirely correct, because I think fiat money (51/97)
is not entirely a myth. It is actually the power of the state to enforce it as money, which makes it money. And then I think that there are myths on top of it that give it value, or give it much more value than that. But let's talk about money as a sort of communal, non-enforced consensus. Yes, it is mythology. And I think what I see in the crypto community, which is interesting, is this kind of wink-nod thing, like, hey, we all know this is bullshit, but my bullshit is better than your bullshit. And so we're all just going to pump our bullshit here. And then eventually, because we're so religiously fervent, we're such devotees that we're going to convert more and more people into our faith. And once we get enough people, then you're going to get the FOMO. I don't want to be left out the gates of heaven. I don't want to be on scorched earth. And this is very much the ideology. What fascinates me about crypto, among other things, that Bitcoin actually specifically, is the extent to (52/97)
which this is true. I noticed recently that Saifah Dean, I didn't know this. He was a carnivore, I didn't know what that was either, actually, to be honest. But I saw that he had, apparently, someone who was a follower of his had adopted a carnivore diet, and he developed some sort of bowel disorder, which was a result of the fact that he was not getting enough fiber, which is like like you shouldn't be just eating meat. Maybe some people with extremely short intestines, but for the most part, human beings need to eat, you know, we're omnivores anyway. And so, you know, he tweeted at Saifah Dean and Saifah Dean was like, no, you idiot, basically, you're not doing it right. You're not eating enough meat. You weren't, you know, he found some way in which this person was not dedicated enough to this discipline. And what's interesting to me is that this carnivore diet that I discovered was actually something that was spreading generally in crypto. And I think that, you know, it might just (53/97)
be sort of coincidental, but I do think that there is a strong adherence. The culture adheres to very basic ideologies. I saw this in the case of a prominent podcaster who, when he first came into Bitcoin, sort of adopted Austrian economics and tried to figure out how to make Austrian economic theory work with his conception of the world, and he was having difficulty doing that. And the reason he was having difficulty doing that is because Austrian economics is not a sufficient explanation for the world and for economics, which is, again, this is the point about critical thinking. But I think that what you are seeing overall in Bitcoin in order to boot strap this mythology is you're seeing a strong adherence to ideology that feels very religious. And that's the overall mechanism in the community to get the value to a place in the event that it's just digital gold and the event that we can't really create sufficiently robust layer two solutions to offset the need for, you know, fiat (54/97)
money and if fiat governments can actually enforce the value of their currencies to get the value to a place where it can actually be, it can graduate from being a game to being the real thing. Well, my first question on that is, is it working? I mean, we have public to our Jones, right? Yeah, yeah. We have publicly traded companies adding to their balance sheet. We have the block, the BlackRock CEO, eight trillion, in terms of assets under management, say there might be something to this. Larry Fink, Larry Fink. So guys, this is actually the more interesting part of the discussion. I did an interview, I mentioned I had Jim Chenos on my show not long ago, and when we headed into the overtime, someone texted me a tweet that shared a tweet by Ray Dalio, and it was something like, I think I might have missed something about Bitcoin. I laughed so hard when I read that, the Jim Chenos. Did you read all the replies of all the people in crypto saying, here's what you missed? Sure, sure, sure, (55/97)
sure. Let me bring it up for you, Ray. And by the way, come on my podcast so we can talk about it. Yeah, sure, man. Well, Paul Tudor Jones, an interesting character, a really smart guy, open-minded guy. I think it would be interesting to see if Stanley Drucken-Miller gets converted. Those two guys are very close. Ray Dalio is much more of an institutionalist than those two guys. I think, yeah, so to get to the larger point, I think it's fascinating to see this. This is where we go back to the question about, I said at the very top of the show, when I had Howard Mokson, he said, it's not enough just to be contrairred, you also have to be right, and you also have to have conviction. And I think that what you see in these cases for someone like Ray Dalio tweeting, I might have missed something, is my convictions are shaking, and as the price goes higher, they shake more. It's like that scene, I'm a huge nerd. I used to watch among so many nerdy sci-fi things. I used to watch Star Trek. (56/97)
And in Star Trek 6, when Sulu, Commander Sulu was now captain, and he actually was captain of the Excelsior. I think the Excelsior was the name of the ship. I think it was the Excelsior, and he was flying into assist Captain Kirk, who was fighting the Klingons, and the ship was just rattling, and it was rattling, and it was about to come apart. And I think that's what it feels like for people who lack conviction or whose conviction begins to get challenged, because all of our convictions become challenged as the price moves against us. And I think that that's what Bitcoin has that's extremely powerful, besides its community, which is ultimately, and the platform, the network, and the math behind it, and the cryptography, is also the price. As much as I hate the casino culture, vibe, that grows around Bitcoin as the price escalates, I cannot deny that the single most important thing for driving adoption and for making it really graduate is the price. The higher it goes, and eventually, (57/97)
if it could just reach escape velocity in that price and convert enough people, then the people that are making the laws are going to regulate it in a way that's beneficial to holders of crypto. So the pyramid game works. So I'll just say this one more thing. This is a thing that makes Bitcoin unique, theoretically, if it succeeds. It is the first attempt to institutionalize a Ponzi scheme. It is the first time in which the Ponzi scheme doesn't end, and it just becomes the new de facto reality, the new de facto standard. This is the explicit strategy that many of the deepest Bitcoin extremists verbalize. They understand that number go up is Bitcoin's best marketing tool, and that also, Bitcoiners can be anyone, and that can include people in government, because there is an incentive to hop on the ship and then to regulate Bitcoin into existence, into Bitcoin as an infrastructure stitched into the world, because they are bag holders that are incentivized to also contribute to the Ponzi. (58/97)
Here's the thing. If that is Bitcoin's best, if price go up, it's best marketing feature. You know what its second best is to me, Demetra? I'd like your thought on this, because this comes full circle to our conversation about central banks and authoritarian governments. The second best is when a friend of mine receives a check from the government for a few thousand dollars, that's helicopter dropped to him, essentially. Unconditional. He says, wait a second, where does money really come from? I thought this stuff was scarce. You mean they could just print money at any point in time? Of course, crypto has a meme for this, money printer go burr. Money works if people, fiat money in particular, works when people don't think about it too hard. But people are thinking about it now. Yeah, when you're airdropping thousands of dollars to them, when you have modern monetary theory, that's crypto's second best tool. Well, here's my question to you guys. When did both of you first come to this (59/97)
realization, and your mythology around fiat currency broke? It's a long, long process, I would say. There's never any one particular aha moment. I got into crypto in the middle of 2017, and my learning about crypto hasn't stopped. So I can't actually pin it down. But I would say sometime between 2017 and 2019, my ideas have largely formulated around this thesis. It also starts, I think for a lot of people, start for me this way is, oh, it's worth a shot. It's like, probabilistically, will this thing become global money? What's the probability of that? And what's the price right now? And what's the total market cap if it succeeds? Maybe a lesser version of that is, what's the total potential market cap of the gold market or the nation's, is it worth a bet? That's where a lot of people start, I think, Dimitri. And that's kind of where I started with things. I think that, yeah, actually moving us away. I'm taking over the interview. I don't want to do that. We love this conversation. I (60/97)
don't want to do that. I'm moving us away now, if that's all right, from the initial question, which is, when did you disabuse yourself of this mythology, to the earlier observation about China using Bitcoin or other countries using Bitcoin, and how that relates possibly to gold? I think that's where Bitcoin's opportunity to actually become digital gold is, because it's not enough simply to go up, if there's a consensus among global governments, and this is why Bitcoin actually can do better, even though I said I'm bullish on governments in this world, which I am, I think also the same type of a world, the multipolar world, is actually bullish for an independent monetary standard. Totally agree. So you get it. No one nation has the ability to impose that standard or the network effect to impose that standard. And there are political incentives and rationales by competing nations to adopt an independent standard. Because with adopting an independent standard, what you also do is you get (61/97)
an influx of capital. So if the United States decides to ban Bitcoin within its borders, and a lot of people own a lot of Bitcoin, they may decide, you know what, forget it, I'm just going to move to China. I don't care if it's not, it doesn't have all the bells and whistles, but I'll just, I'd rather be in China and I could be rich because I've got all my capital on the blockchain. I don't have any of it here. So I think that's also a plus for Bitcoin and for Ethereum, perhaps. Yeah, one way we've used to describe that concept is basically the world, in a world of multiple sovereign powers, it has to embrace the most credibly neutral monetary policies and monetary tools and even blockchain tools. And by credibly neutral, it just means the ones that none of the their competing rival nation states can actually control. So it's kind of the reason why we're very bullish on governance light type of protocols, where you can't really turn the dials and no one has complete control over it. (62/97)
It's kind of like TCPIP, right? That's the underlying protocol of the internet. And everybody uses it. And they use it because the US doesn't have control over it, China doesn't have control over it. It's just a dumb communication protocol. That's kind of what we need for monetary standards. And even financial standards like Ethereum is something that is outside of the nation state apparatus, can't be controlled by a single nation state. But Ryan, you will agree that despite those standards, China has been able to exert its influence and exert complete control over the internet within its physical dominion. Totally agree. Yep. Not complete control. Well, so there is a different, I think you'd agree with this, David. There's a Chinese internet. There's a Western internet. There's like multiple internet. But David, if they want to turn China into North Korea, they can do it. They're allowing enough internet to suit their interests. If they want it to ban it entirely, they could do it (63/97)
because it comes with costs doing that. And the interesting thing about that though is what's the check on China for Western democracies? It's to promote a more free internet. That's kind of the way you can challenge the authoritarian vision of the internet. At least I hope that's going to be the case or else we have multiple competing authoritarian governments and not a lot of freedom of the people. Well, I would say what I would actually say is I kind of flip that on its head. I don't think, because the way you phrase that presumes that the goal, a non-authoritarian government's goal is to thwart an authoritarian government. But I actually think that the goal is simply to defeat the other government regardless of its ideology. And so I think, unfortunately, I think the opposite is true. The more totalitarian governments exist, the fewer rights that individuals have in different parts of the world, the less incentive the United States and Western liberal democracies have to uphold (64/97)
their previous standard of liberty. It becomes a race to the bottom. And we've already seen that. We've seen that here in the US. So is that where the US is headed in your mind? I think, yeah. So that's like one of my primary fears. This is the double-edged sword of government. I've gone through multiple stages of personal development. When I was younger, during the Bush years, I really adopted a strong progressive view of the world and a progressive understanding of why we had financial crises, why we were developing large gaps in our levels of wealth inequality, et cetera, et cetera. And I pointed to deregulation and the whole period of the late 70s or 80s, 90s. But then the financial crisis happened and I was like, wait, no, never mind. I had it backwards. It's these guys that are the problem. They're stealing all our money. And our currencies are pure shit. And I adopted a lot of these other alternative ideologies. I've come to a much more middle of the road approach. I think that (65/97)
you have to look at these things with nuance. And so there's a double-edged sword with government. We need the government to impose, for example, I believe strongly in this, environmental regulations. Of course, they can go way overboard and often do or impose the wrong types of regulations. But I think we want to have national parks. We want to be able to protect the sea, the air, because these are places where companies and firms externalize costs because they don't have a price in the marketplace. But at the same time, governments can and do often act in very aggressive, dangerous ways. And Edward Snowden and Glenn Greenwald are well aware of that. So I do worry about that, guys. And I think that as we disassociate more and more from the physical world, that also I feel like becomes even more dangerous because in some ways, we enter this dreamscape metaverse. And in that world, I think people can quickly find themselves enslaved without knowing it. Yeah, there's no bill of rights (66/97)
yet for the metaverses there. No. And the tools that operate in this world are very good at their coercive tools. They guide us and steer us and prod us in directions outside of our conscious awareness. I mean, that's how these tech platforms operate. That's how Facebook makes its money. And they're becoming better and better at that. And I do really worry about how our democracy can survive our systems of government, which depend on and assume human agency. How can they survive in such a world? And the answer is they cannot survive in such a world. And so in order for us to survive and for them to survive, before we get to that full expression or to the critical threshold, we need people to use, among other things, regulation to rein in, in this specific example, these tech companies and their use of these business models in order to protect the viability of the systems of government that can check their power in the first place. And I know that that can be a controversial opinion to (67/97)
take in the crypto community because so many people really are wedded to very narrow models of explaining the world, and they're not prepared to leave those models because it's scary to them. And that's exactly why we wanted to get you on to this podcast to have that conversation. Because in Bankless, we beat the drum on a very few number of very specific theses. And getting somebody's perspective from the outside is really, really important to check ourselves. We want somebody to come check ourselves. And you've definitely done that on the podcast thus far. And I want to get that conversation continued into the world of DeFi. You had Vance Spencer from Framework on the Hidden Forces podcast. And it was one of my favorite podcast episodes that you did. And it was insanely well researched. And I kind of want to ask about the feedback that you got from your audience about that episode. If there was anything there that was surprising to you or or just the overall the nature of the (68/97)
response from that podcast. And then also want to turn to what your take is on DeFi. Like what is the value proposition of DeFi? What does DeFi mean to you? And how do you kind of fit it as a model into your head? Yeah, I think that there was a positive response among, there was no negative response. There was a positive response, I think among people who primarily weren't familiar or weren't particularly, they might have been familiar. I mean, in a lot of cases, people that own Ethereum and might own some of these different ERC-20 tokens, like SNX, for example, they don't actually understand the underlying technology or they understand the business models or how they work. So I think in those cases, they were very happy and excited that I covered it. You know, when I wrote my, the intro that I did for that show was not my first intro. My first intro was actually pretty negative. But I felt like after I wrote it, I was like, well, this is kind of shitty. It doesn't, because I felt like (69/97)
it didn't accurately represent my respect for, you know, what they were trying to do and by kind of focusing on everything I thought that was kind of incomplete and half-baked about it. And in that sense, I thought maybe it's a little too cynical too. I often try and check my cynicism. I think that there's promise in all of this stuff, but I think that it's the hype it wakes, exceeds the promise. And I think that DeFi is, you know, a perfect example of that. I think that it's primarily used for gambling. I think SNX is a great example of that. It's a derivatives platform. And the advantage is that you can gamble unencumbered by regulation and you can innovate unencumbered by regulation. But what is it used for? Primarily, it's used for gambling. And there are huge risks embedded in that. When I look at what's going on in DeFi, I feel like people are just recreating the traditional financial system with all the same problems. I don't actually see something... The innovation that happens (70/97)
in DeFi is all user-based. It's all about like the consumer experience. That's what the people mean when they talk about innovation in DeFi. I don't see innovation in terms of making a more robust, safer financial system that can help expand. I mean, is the issue even that we don't have... I'm often confused about this because, you know, even if they could expand credit, is that the problem that we're dealing with right now, that we don't have enough credit? I mean, again, I think Bitcoin solves a, or potentially solves a real problem in the immediate term, despite its shortcomings as a peer-to-peer currency, in that it has been a good store of value. And in the world we're living in today, people need a place to store their money because winter is coming. And so I don't mean to like shit on DeFi. And that was what I felt I was kind of doing in my initial intro to it. But I do think that it's got a long ways to go before it can prove its value. And I think a lot of the rhetoric and (71/97)
high-minded rhetoric around it doesn't meet the litmus test for the bullshit indicator. I have a few thoughts on that, Demetri. So like, one, I think you've got a really interesting and good take in many ways on DeFi as it is today. One thought I had is when you're describing kind of the speculation, I don't think David or I would deny that there is rampant speculation in DeFi. There absolutely is. And there's always been rampant speculation and even something like Bitcoin and Ether, of course. The nature of the industry. It's the nature of the industry, but not just the industry of all industries as they grow up. I mean, this was the nature of the 1990s Internet. This is the nature of settling and going out west on the frontier. Why did people move from the Eastern elite coast? Because people without a lot of opportunity on the East Coast and they wanted to go find gold. So they set off on the Oregon Trail West. It's the nature of railroad. Carleta Perez is an economist who kind of (72/97)
talks about this is when new industries are getting born, there's this period of rampant speculation. Everybody outside of the industry, it gives many people a bad taste in their mouth as it's being developed because they look at it and they see all this speculation, they don't see the real promise. But through a series of boom, bust cycles that promise is slowly realized and the economy is built up. And there are some interesting things that you can do right now that aren't speculative in nature in DeFi that you couldn't do previously. So I think of an Ethereum address, for instance, it's like a bank account that no one can shut down. So how do you get a bank account in the U.S.? Or how do you get a bank account if you are in a country like Argentina or Venezuela? There's a massive amount of unbanked people. Well, if you can just have an internet connection and create an ETH address, well, now you have a bank account that's plugged into this global financial system, which is the (73/97)
Ethereum ledger, essentially. You can do all sorts of things. You can trade stablecoins, for instance. You can move money from one place to another. If you don't have access to a good money source, you can trade from different assets. You can get exposure to the S&P 500 if you want. You can start to program against the system without asking anyone's permission. So it becomes a sort of internet of money where it's completely permissionless and open and available to the world, especially a world that doesn't have a strong, robust banking system. So it remains to be seen. I think it's a little early, and I bet you would take that view too, that it's a little early in DeFi's cycle, but that maybe the speculation that we see that's kind of rampant now that turns some folks off, that's not going to be the final state. In the end, the internet produced a lot of value for the world, but there was a period of time where it was just like, oh my god, this is what Yahoo stock is, really? Just (74/97)
banner ads and very little revenue and being propelled by these bubble companies. Looks like a scam, right? What's your take on that? Yeah. So first of all, I mean, I generally agree with your framing of the boom bus cycle, of the business cycle, but I would take issue with your interpretation of the internet and the railroads as being analogous to what we're seeing today in DeFi, because the primary use case of the railroads was not trading railroad stock, and the primary use case of the internet was certainly not trading internet stocks. Now, there were underlying businesses that were creating real value first that people were experiencing before they began to become excited about the value of the companies that provided the services. Remember those industries were explicitly a recreation of money and value, which is what sets this industry apart and perhaps why there's so much outstrized speculation. Yes, that is a very good point, but I guess two observations. Ethereum has (75/97)
graduated beyond being money. It's supposed to be a smart contract platform engine, a touring complete global computer. And I think a lot of that rhetoric, again, does not match up to what the use cases are, which is they are highly speculative, and it's not clear to me how all the money that's pouring into DeFi is going to, maybe it's because I'm not plugged in enough, and that's perfectly possible, because although I do deep dives when I have guys like Vance and Michael on, or when I have Vitalicon, I spend most of my time on the periphery, and I'll circle in, I'll dive in, I'll come back out. So maybe that's why I'm not really seeing the roadmap. And because I'm also focused, and I went through a long period of fiery baptism of trying to really understand the limitations of Ethereum, the limitations of Bitcoin. But I would also kind of ask a larger question, and this is where I've, I think, become somewhat disenchanted with the crypto ecosystem, which is that I initially came into (76/97)
it because I had this sort of starry-eyed view of it, and I was, I'm a bit of a romantic in general, and I was drawn in by these sort of romantic visions and ideas, and I adopted a lot of them early on. But what I would ask is, what is the problem that cryptocurrencies, that DeFi, that Bitcoin, fundamentally as an ecosystem, what are the fundamental problems, or the fundamental problem that they seek to solve, and what are the fundamental problems that society faces? Because I don't know that those two things actually coincide. I do think that Bitcoin's initial observation that we need to have a form of money that is independent of governments, or that isn't co-opted by governments who have the ability to use it towards their own ends is important. But that's just become everything, and that's just not enough for me. Right. It wasn't enough for me either, but like, how I would answer what problem does this solve in general crypto, it's disintermediating banks, basically. It's a self- (77/97)
sovereign. So if Bitcoin is a self-sovereign store value, Ether is an Ethereum is a self-sovereign store value plus banking system, plus money system. But we know that that's not true, because as we know now, these systems are going to require multiple layer solutions in order to operate. So what are you doing if not creating an entirely new financial system that looks just like the old one? What's the difference between DeFi at scale and the modern banking system, other than one settles on Ethereum and the other settles using a system of clearing houses operated and controlled by a central bank? So, and the through line here is what in one of the first conversations that we had is that there's this paradigm shift in people's perceptions in the world, right? We are distrusting institutions. We are distrusting our banks like the central bank has lost its closed, the emperor no longer wears clothes. We distrust our government. And with the fundamental problem for me that DeFi and (78/97)
Ethereum and Bitcoin that they all provide for the world is a new place to deposit your trust. And so there is trust that is lost in the legacy world. And now it doesn't know where to go. But Bitcoin and Ethereum and all these DeFi protocols, while they may seem like speculative toys now, every single DeFi protocol that we've interviewed on the Bankless Podcast and even the ones that we haven't, the common problem that they're always trying to get right with their protocol is the removal of trust. And while we call Bitcoin and Ethereum as like these property rights management systems or these ledgers, what they really are are trustless institutions. They are trust coordination layers in a world where we are losing our trust in our previous institutions because of the generalized mismanagement by messy humans. We are gaining trust in these protocols that operate by code. And to me, that is the fundamental truth of what this industry is solving is the trust issue, which is an issue as (79/97)
old as humanity itself. And that's why I think there's so much speculation and gambling going on is because while I don't think a lot of the people participating in these markets explicitly understand this to be like a trust revolution, people still know. People still know about the potential upside of a new money like Bitcoin or a new property rights management system, trustless institution like Ethereum. And Dmitri, if all of that sounds a bit too abstract for you, right? Here's a few things that could be interesting. One is I would encourage you, at some point, maybe you get some holiday time or something, go download a mobile app called Argent, which is basically a Venmo type of experience on a decentralized finance protocols where there's no intermediary involved. That's one thing you could do. And another DM me and I'll send you some dyes so you can play with it. Okay. Well, there you go, David. If you send me money, I'll do it. I'll send you money. I'll send you money. I'll say (80/97)
if you don't mind magical internet money, we call it money. I don't know. But the second thing I think would really pique your interest is if at some point you get an opportunity to talk to Hayden Adams, no relation to Ryan John Adams myself. But he helped develop a protocol on Ethereum called Uniswap. And the reason I think that Uniswap was interesting is because in 18 months, you know, like, you know, the Coinbase story, obviously, a large crypto bank developed on top of Ether and Bitcoin allows people to speculate, right? It allows people to trade, right? Uniswap was built on $120,000, I think even less than that, on a grant by one developer, his first development project. He coded a automated market maker, embedded in code, put it in, put it on Ethereum. And recently, it started doing more volume than Coinbase. So a team of like now it's more than one developer, it's like 10 developers, just outcompeted and a thousand plus person institutional company, just with code on Ethereum. (81/97)
So like, there is also a massive efficiency gain story that we, I think we'll see coming to the table in crypto and Ethereum, it's just encapsulated in that way, what all it does is match buyers and sellers in a liquidity pool through an algorithm. And it turns out that's more efficient than, you know, the 12 stories of JP Morgan building or even a Coinbase. That's kind of the power of DeFi to me. So those two things are some things to make it maybe more concrete for you as you continue the exploration of this space. No, and I'm familiar with Uniswap. I studied it a bit in preparation for my conversation with Manson Michael. And I do think that decentralized exchanges are one of a number of promising use cases. Like again, I don't mean to suggest that there isn't promise here. And I don't mean to suggest that crypto is not an important evolution in the progression of the internet. And hopefully a much bigger evolution than I even think at this very moment. Because as I said, I've gone (82/97)
through different stages of sort of thinking about how far this can go and how big the promise is. But I do think again, my point simply is to say that what I often find when I dig into a lot of these projects is that the hype is vastly exceeds the underlying reality. And that's been the case the entire time. Could you can be convinced that that's actually a feature, not a bug? You know, that kind of opens up another can of worms, which is that if it's a feature, then again, it brings us back to it being a Ponzi scheme. David, we almost had him. Look, Dmitry, David's going to send you money. So if nothing else, it'll be useful to get money from your podcast or friends. I'm very happy to do it under the guise that it is for the purposes of learning as opposed to you paying me for coming on your podcast, which is... Of course. Of course. You know, a funny story I'll tell you guys real quick. I had a guest who came on the podcast, Tom Burgess, and he's a journalist for the FT, or he was a (83/97)
journalist for the FT. He may still be, but he's written two different books, the most recent one of which was called Cliptopia, and it was about the world of dirty money. And at the very end, he said, you know, I won't tell your listeners that you promised to pay me a very large sum for appearing on your podcast. And we both laughed. And then I got a very long email from a listener who was very disappointed to hear that I pay my guests. Oh no. I was like, wait, I was like, you have to be kidding. Was this not not the most obvious thing in the world that this was a joke? Well, I mean, there's 10,000 listeners. A few people are going to miss the joke. Just to be clear, like, you know, we're joking here. Absolutely. All right, Dmitri, one more subject we want to cover, which is your take on the stable act itself. So maybe for folks that don't know, would you be able to summarize that and then give us your thoughts? Sure. So I did read through it. It's highly legalistic. I'm not a lawyer. (84/97)
I hate contracts. They drive me nuts. So I did pull out some interesting, you know, observations. But I think that the one that stuck out the most was actually not necessarily even in the agreement explicitly so much as it was. What's something that one of the authors of the bill said on Twitter, which was that at the end of the day, note operators are responsible for what transactions get processed on the network. And I thought that was very interesting. And I thought it was actually also accurate in the sense that if the government does want to regulate at all costs, let's say, Ethereum or Bitcoin, legally, they can make the argument, and they can make the argument to hold responsible the node operators in the same way that Napster held the government or whoever it was that was, I guess it would be the government, held responsible the computers that were doing the file sharing of music on Napster and the selective prosecution that came along with that. I thought that was one of the (85/97)
really interesting kind of points, but I can't claim to be an expert on the wording of the regulation. But as I said, I am, as a result of that, this is how my process works, as a result of my piqued curiosity, I have brought on, invited on just the person to speak with me for two hours on this, and I look forward to doing that next week. Yeah, and I think folks should tune into that. It's super interesting. I guess, you know, maybe I don't want to speak for the crypto community, but the take from most in the crypto community is this is a really ill-conceived bill that is not actually even achieving its stated purpose. And I think part of the stated purpose, of course, of this bill, and by the way, it's just a draft bill. So, you know, the chances of this actually making it through and kind of becoming law, maybe your guess could comment on that when you have them on, Dmitri, but they seem kind of small to me. But the purported purpose is to, is consumer protection, basically, and (86/97)
specifically low income folks, modern income folks, people who are possibly minorities. I think this has been part of the argument. Very interesting because this group of people has had trouble facing discrimination with the banking apparatus in the US. But as far as, like, we are aware, most people who use stablecoins, to be honest, Dmitri, are crypto geeks like us, you know? They're not the... Yeah, I also don't think that, like, quote, low income folks, whatever they mean by that, because, you know, there's a lot of, like, verbiage that's super popular within democratic circles. And I know this is being put forward by a strongly progressive democratic congresswoman or senator. I don't think this is the primary concern of low income folks. So, I think, you know, I'll keep an open mind. And this isn't even the primary point of the discussion that I'm going to have. But, you know, I wouldn't ascribe too much value to the claims that this is why this regulation is passed. So, then the (87/97)
question the crypto community is asking, so if not that, then why? Like, so why? Is it because lawmakers aren't quite understanding, like, this technology? Is it because they're trying to get ahead of something? Is it because there's some... Like, because part of the bill, as I understand it, is that anyone who issues a stablecoin, be that a DeFi protocol, or be that a group like Coinbase or, you know, center consortium that has USDC, they have to become a bank. They have to have a bank charter in which to do that, which, again, weird because the stated purpose is to get members of the vulnerable population in America outside of the yoke of banks, weird to make any stablecoin issuers be a bank. But that aside, what do you think is the purpose of this thing? Well, I really don't... I mean, I have to be honest, I'd be purely speculating. I don't know what the purpose is, and that's a great question. It's when I want to ask my guest, but I wouldn't go so far as to say that the authors of (88/97)
this bill don't understand crypto. I actually think that Rohan Gray, for instance, seems to be quite knowledgeable, actually. You know, I've read some of his thoughts. He's also a strong advocate of MMT, which is a school of thought that I've investigated. I've put some level of attention to over the years, and I've struggled to really find any... I mean, I think it has an interesting descriptive component to it, but as a prescriptive ideology, I think it's deeply flawed and highly political. But in that sense, what is economics? It's a political science. It's not a physical science. So there are political objectives, you know. And I think this bill is probably part of a larger ideological effort to put strict regulations around money and finance. I don't think it's just about crypto. This bill may just be about crypto, but I think that the people working on it and the people introducing it are interested in much larger, much broader financial regulations, and this is just the tip of (89/97)
the iceberg. It draws out maybe this sort of the question we could kind of end with here, is do you think that crypto and the nation state are on some sort of inevitable collision course? Interesting. Crypto and the nation state. I would say, yeah, maybe to a degree, yes. I think also crypto and people, the masses are on a collision course, guys. You know, the gold standard was deeply unpopular in the late 1800s. It was not something that the mass of people wanted. They saw particularly those who owed money, debt holders. Of course, people who owed money also primarily farmers in the Midwest. Exactly. But ultimately, what gold really was was an expression of power vested in the hands of the people who owned it and the people who trafficked in it. And I do think that as crypto becomes bigger, the value of the currency becomes greater, the price increases, and more and more of the world's value accrues to the public ledgers like Ethereum and Bitcoin, the more ire discontent and will (90/97)
arise from the masses of people who simply don't own any of it. And I think also the difficulty of governments to operate the types of programs that they will need to operate in order to assuage the voters who are pissed off at them primarily, will compel them to regulate it. And I think this is the kind of interesting nexus and complicated stew that ultimately independent crypto organizations and think tanks will have to navigate. And I think to the extent to which the Bitcoin and the Ethereum community and other cryptocurrencies will be able to be successful in this environment will depend on the richness and competence of their intellectual communities and the ways in which they can organize to lobby against this type of regulation. And I think there are a lot of really brilliant people in Bitcoin and in Ethereum. I actually think, again, this is just my perspective from where I stand, I think there are distinctly two different cultures in Bitcoin and Ethereum. I think that Ethereum (91/97)
has much more of a builder mentality. It certainly is not as ideologically right wing as Bitcoin. Certainly. And I don't think it's as philosophical as Bitcoin. And I think the Bitcoin community has a stronger strain of cultural philosophers. And I think that actually bodes well for the entire crypto industry because I think a lot of those people are best positioned to try and make the case. But I think, of course, there will be people from all different walks of life who will get involved. I think that's the best hope for the industry to be able to mount an offensive, to be able to work constructively with regulators because absent that, the industry is going to have the shit regulator out of it and it could regulate out of existence. Dmitri, it's been a fantastic time having you on the Bankless Podcast. And we really value your very secular and unbiased opinions about the space. We think about a lot of the same things. And yet we think about them differently. And getting that diverse (92/97)
perspective onto the Bankless Pod is exactly what we wanted to get done today in this episode. And I think we did just that. So thank you for your time. And also, I'm just a longtime fan of the Hidden Forces Podcast. It is in my regular rotation. So I can't recommend it enough to the listeners of Bankless who want to listen to similar content that we talk about here on the Bankless Pod, but maybe from an outside of crypto perspective, yet that is still talking about some of the very similar narratives and powers that are shaking the world around. It's one of my favorite podcasts. So Dmitri, thank you for just your overall, your contributions to the world of information about finance and markets and the world. And also, thank you for coming and giving us some of your time here on the Bankless Pod. Thank you, David. I really appreciate that. It makes me happy to hear that. I always love to hear from people like you. It's great when listeners have podcasts, but I love hearing from fans (93/97)
and listeners of the show. It makes me so happy. I love to know that it's having an impact on people's lives and feeding their curiosity. So thank you. And thank you for having me on the program. I had a great time. Absolutely. Guys, I anticipate that Dmitri will have some crypto folks while he tracks this hidden force that is cryptocurrency on his podcast in the future. So make sure you subscribe. That would be action number one. And Dmitri, what's the best way for folks to subscribe to Hidden Forces? Yes. So you can listen to the regular podcast just like every other podcast through any of the major podcast platforms. But in addition to that, we offer a premium subscription service that includes what I call over times, where we keep the conversation going for up to another hour. And those are oftentimes the best part of the conversation. You also get access to the transcript of each episode, as well as to my rundowns, which are these elaborate show documents that I put together ahead (94/97)
of each and every episode full of notes, images, charts, they're basically my brain on a page. And you can find all of that at patreon.com. slash hidden forces. And you can also subscribe to our mailing list at hiddenforces.io. And you can also write us a review on Apple podcasts. I love reading positive reviews, only positive reviews. I don't want to read negative reviews. So if you have a negative review, do not write one. But if you have a positive one, yes, go to Apple podcasts and write a review of Hidden Forces. Yeah, absolutely, guys. Encourage you to do those things. And of course, Dmitri is going to have some stable act type of episodes coming up. So stay tuned for those. Number three, we should ask for the same thing. Look, if you just want to support Bankless, you know what to do. Go on Apple iTunes, give us a five star reviews. I think Dmitri said it best. Don't write anything negative. We're just like the positive ones. We're gonna add that to our pitch for now on to (95/97)
Dmitri. Thank you so much for joining us. As always, risks and disclaimers. None of this was financial advice. Crypto is risky. So is Ether. So is Bitcoin. So is DeFi. You could lose what you put in. But we're headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the Bankless journey. Thanks a lot. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at (96/97)
hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (97/97)
What's up everybody? This conversation you're about to hear was recorded last Friday, April 17th, and released on the premium subscriber feed last Monday. And I'm releasing it now for regular listeners of the podcast. I'm going to take lessons from how I did this episode and try to apply them to all of the stuff that I put out. Because I really did like the tone and looseness of the conversation. And I think that's because I wasn't going off some rigid rundown or template. It's the Grant Williams approach. So it worked. I took a lesson out of Grant's playbook. And by the way, shout out to Grant, who is back on the podcast Airways with his new podcast, eponymously named the Grant Williams podcast, rocketing up the charts on Apple Podcast with its gorgeous jacket art. Tomorrow, as usual, there's going to be another weekly episode released. We're back on a regular schedule until further notice. I know I released a bunch of extra episodes last month when markets were going haywire. But (1/97)
for now, we're back on schedule. So enjoy and please, if you're a fan of the show and you have not reviewed us yet on Apple Podcast, please take a moment to do that now. I know I've said this many times, it's part of the pre-roll, but it really does help other people find the show. And you can do it straight from your phone as you're listening to the podcast. I'm not normally an advocate of multitasking. I think we could all benefit from a little more focus. But in this case, you're doing me and other potential listeners a great service. So please, if you haven't done it yet, there's never going to be a better time than right now. And with that, please enjoy this special release of my premium episode with Castle Island Ventures partner, Nick Carter. What's up, everybody? What you're about to hear is an experiment in conversation, something I didn't prepare for that I recorded with Nick Carter on Friday, April 17th. Nick is a partner at Castle Island Ventures, a Cambridge, (2/97)
Massachusetts-based venture fund focused on seed stage investments in public blockchain startups. He's also the co-founder and chairman of Coinmetrics, a blockchain analytics company. And he's a regular columnist at CoinDesk, where he writes thoughtfully about the political economy and issues concerning Bitcoin and the cryptocurrency market. Nick's been on the show before. He was my guest on episode 97. He's thoughtful. He's interesting to talk to. And I like him. So he was one of a few people that I felt comfortable bringing on to shoot the shit about the world, about markets, Bitcoin, whatever. I've wanted to do more episodes like this, especially lately, since so many people are cooped up in their homes. But it's also because it's a lot of work for me to produce a regular episode. So much goes into it. So I like the idea of doing more casual type stuff, where I bring on one or more guests and we talk about whatever's topical or just riff on stuff that's in the news or on our minds. (3/97)
This fits that description. Neither of us prepped for this conversation. I literally emailed Nick earlier in the day and proposed that we do something. And later that afternoon, we hopped on a call and we did it. And it turned out to be a great conversation. I mean, it's, you'll notice we're more relaxed. It's more conversational. And we cover so many interesting topics. I'm really happy with how it turned out. And I'm really happy with how the subscription model has turned out. Just today, we surpassed a thousand premium subscribers. And I cannot tell you guys how happy I am that we stuck to this model. The last 15 days alone, we've added over 150 new subs, which means that not only have all of you continued to support the production of this podcast during what has been an enormously difficult period, but that even more people are signing up and they are doing it in record numbers. So that says to me that we are doing something right. If you like what you're about to hear, then I want (4/97)
to hear from you. I want you to tweet at me, comment on the Patreon post, write a podcast review. However, you want to express your feelings and thoughts about the program and this model of relying on each and every one of us to fund the continued evolution of this podcast. I encourage you to share the episode and to encourage others to subscribe to the premium content. This is the model for an audience like ours. And the more people who subscribe, the more resources I have to take this podcast to the next level. And with that, please enjoy this experiment in conversation with my guest, Nick Carter. Nick Carter, welcome to the inaugural episode of the overtime feed. All right, happy to be here. And thanks for inviting me back on. Yeah. I mean, I make it sound like it's some official feed, but well, I mean, it is the overtime feed, but I tried the last few days. And it's not the first time I've tried doing this to just sit in front of the microphone and talk and kind of give my thoughts (5/97)
about what I think's been going on or what I think is interesting. And I can talk for a while, but I can never, I never know how to end it. I never know how to stop. And at the end, I was like, yeah, maybe I just need to invite some people on who I think are interesting or have interesting views and we can just talk instead. Well, here I am. And, you know, I have opinions. Where are you at, man? You're in Boston, right? No, I left Boston. I fled. Yeah. So I live in downtown Boston. I, you know, I kind of figured Boston would be the epicenter of a lot of this stuff. And it sort of has been because of the college students. Yeah. They had this big biotech conference, which would cause a bit of a crisis. And I just didn't want to be in a densely packed urban area. So I'm in, in the suburbs of DC right now, which is much more pleasant. All right. That's, that's where you're from, Virginia, right? Or something like that. Well, it's, yeah, where I'm from is complicated. But yeah, this is (6/97)
where I've spent most of my life. Right. You, because if our memory serves, you did your bachelor's degree in Edinburgh. Masters, yeah. Masters degree. My undergrad was just up the road at St Andrews in Scotland. And one of the degrees was in philosophy and the other one was in foreign affairs. So undergrad was joint philosophy and IR. And then master's was in finance. Oh, that's interesting. So what was it exactly in finance? I, because I don't remember this. It was like a very quantitative course. It was called MSC finance. So involved lots of data. That was actually when I got the idea to start coin metrics. So that's where coin metrics began. So remind our listeners a little bit because people, even though this is a bit of a conversation, just so listeners that are coming. First of all, when was it when you were on originally on Hidden Forces? Would have been summer of last year, maybe. Was it? Was it that? Let's see here. Looks about right. I don't know if I remember correctly. (7/97)
Yeah, sounds about right. Yeah. So that was mostly about Bitcoin. You had a Pura Shard on the show before. I did. Who's blocked me on Twitter months ago. That's a shame. I'll never block you. Don't worry. I know. I know. I told him I don't negotiate with terrorists. No, I don't know if he blocked me after I said that or if he'd already blocked me and someone asked me what happened and I said I don't negotiate with terrorists. But no, I know. I know. It's fine. It's weird because he was on the show and there's no good reason to block me other than, I mean, I'm not even an anti Bitcoin person. Yeah. I mean, you always struck me as pretty crypto proximate. You know. Crypto proximate. I'm not sympathetic to the objectives. So. Listen, man, I mean, speaking frankly, I just like talking to people who have interesting things to say and I mean, in terms of like ideologically speaking, I used to be an ideological person. I think ideologies are ways of being intellectually lazy and there was a (8/97)
time when I was, I think intellectually lazy. But you know, I think the reality is that there's no condition in which I relying on a template is the ideal way to go through life. I do think that, right, you know, again, if like, if that's what you've got, that's what you've got. And then there are some templates that are better than others, but you know, at some point you got to break with that and you have to start introducing new stuff in. But yeah, you were a phenomenal guest unsurprisingly. I knew you were going to be. Yeah. No, I mean, you're going to be great. Hey, you were smacking between Raul Paul, who's always popular anywhere he goes. He's like one of those guys that just blows up your feed and David Webb, which is also a great episode. So and you were, yeah, surrounded by a bunch of, well, we were on a roll at that time. Yeah. So yeah, that was a great episode. I mean, I so much enjoyed talking with you. And so tell our audience a little bit about who you are just to give (9/97)
them a refresher. Yeah. So the episode was good because you know, I tried to make the case for Bitcoin or the existence of Bitcoin without being too dogmatic about it, you know, so I find myself fighting with the Bitcoiners a lot, even though I consider myself one. But yeah, more generally, you know, professionally, I'm a VC. So I work for a venture fund. We do early stage startup investments for the most part within the crypto industry, although that means we're investing in equity, not in tokens. I generally take a really dim view of investing in tokens, especially the you know, the more speculative stuff, which some of which resembles unregistered securities. I'm also the co-founder of a blockchain analytics startup called Coin Metrics, which just raises series A. And the objective there is to demystify the usage of blockchains so that normal folks could get a better understanding of what's going on on them. And I think of it a little bit like taking satellite pictures of Walmart (10/97)
parking lots so that you can infer information about the economy. You know, that's the thing I really like about public blockchains is that they are pretty transparent. And if you do a little bit of work, you can figure out what the key features of them are. You can find that macroeconomic data, although we're still in the discovery phase. So that's what I spend most of my time doing. And I also write about, for the most part, you know, the political economy of blockchains, people describe them as these totally amoral, you know, these automatons which just take inputs and produce outputs in a really, you know, mechanistic way. And that's true to a degree. That's certainly part of the teleology of public blockchains like Bitcoin. That's what they're meant to do. But they don't always do that. There is a degree of subjectivity and human oversight and governance. And I'm pretty interested in that because folks in the crypto industry have a habit of trying to hide the fact that there is (11/97)
human discretion in these systems because they really want to draw a strong contrast with these existing financial system. And I'm interested in the truth as opposed to taking a side, even though I am on one side, clearly. So I try and do a little bit to expose the fact that, yes, there is human discretion. They're not fully decentralized. I'm sympathetic to some of those skeptical schools of thought. So what's it been like to be in the Bitcoin community these days? Like how have people in crypto, Bitcoin, I don't know how much they differentiate amongst themselves. I've kind of, I mean, the Bitcoin community has become a more prominent community in the media. Like for example, Bitcoin podcasts have become the dominant form of podcasts and like a lot of the crypto stuff that was there early on in like 2017 when I sort of got into the space, a lot of those are just really dropped off the map. It's quite remarkable. One in particular I'm thinking of that was like very, very popular. I (12/97)
don't hear much about it anymore. So I don't know how those two communities mix, but how has that overall community dealt with or interpreted what's been going on in the broader economy these days? Well, the probably number one thing that's happened is this feature of Bitcoin that was the case historically is not the case today and it's caused a lot of anxiety and gnashing of teeth and that's, I'm referring to the correlation between Bitcoin and traditional financial assets. So from 2010 when Bitcoin first got a market price to January 2020, Bitcoin was completely uncorrelated from virtually any financial asset you can think of in terms of its return profile. And its correlation with the S&P 500 never entered any meaningful positive zone. And that was touted as a really great attribute to have. It's like, oh, maybe this thing is a really powerful portfolio diversifier. However, in mid-March when there was this rush to liquidity, there was this really sudden sell-off in financial (13/97)
assets, Bitcoin and crypto as a whole was not exempt from that and sold off really, really rapidly at the same time. And those correlations rose to levels they'd never been before and stayed there. So Bitcoin has kind of moved in lockstep with the S&P 500 for the last couple of months, which is really shocking actually. And it has defanged one of the bullish narratives for Bitcoin, which is that it's a really excellent portfolio diversifier. Maybe it's even a safe haven. So that is not the case. And there's some consternation over that. I did feel that it was a bit of a poison chalice or it was a risky narrative to spin because you can't stop an asset becoming more correlated, especially as it becomes more financialized, which it has been. So to some degree, it was to be expected that the correlations would rise over time. But yeah, so one of Bitcoin's key narratives has been dented really thoroughly. So even though Bitcoin is right now, we're like pretty ardent that there's like some (14/97)
extreme monetary mischief going on, you know, out there in the hands of central banks. Bitcoin itself has had a bit of a narrative setback for sure. And I would say that's actually caused a lot of people that might otherwise have had a position to reconsider it. So it's being pulled in two directions right now. So the Bitcoin community is heavily influenced by the Austrian school. There are people like you who are more nuanced, but I think this has probably played a role in a lot of the confusion in the community, it seems to me, around what you call monetary mischief, i.e., for shorthand, the printing of money or the expansion of the Fed balance sheet and the creation of federal reserve liabilities and the expansion of the monetary base and the lack of immediate inflation. Where is the community in terms of its intellectual development when it comes to economics? Yeah, as you say, it's heavily Austrian in nature and monetarist, you know. So inflation is everywhere and always a (15/97)
monetary phenomenon, right? Uh-huh. And there is certainly a bit of confusion as to why apparently there has been no inflation in response to this extreme monetary issuance. But of course, you know, the denominator is changing as well. There has been a deflationary shock and also there has been a rush for dollars globally as most debts are dollar denominated. So it's not that eminently surprising that there hasn't been inflation because I guess the deflationary impulse, you know, very much outweighs the issuance. There's definitely a feeling that inflation may yet recur if we enter a political regime where entitlements grow and barriers to that spending disappear over time. You know, maybe the economy recovers, but the extremely high rate of spending stays high. That would be the circumstance that I think where it is plausible that we could get a reprise of inflation. But yeah, the fact that we haven't had any has also definitely been a source of certainly confusion or sort of (16/97)
amazement in the Bitcoin community. You know, to be fair, I don't think there's any one school of thought that really does a perfectly good job of explaining where we are from a monetary perspective right now. It seems like the MMT school maybe has the upper hand. Sictoral balance, view of money. Yeah, there's no apparent consensus right now over what's going to happen. You can be fully monetized the debt. Yeah, that's a bizarre. I mean, I actually literally tweeted out today. See if I can find exactly what it was. I was reading through the Financial Times. I contacted you this morning sometime to see if you wanted to come on and you said sure. And then I was like, let me take a cursory look at the news headlines and see if there's anything interesting out there. And there was an article by the Financial Times highlighting, it was an interview or some sort of feature of Stephanie Kelton, who is kind of the face of modern monetary theory, who is out with a new book. It's coming out (17/97)
sometime, I think this summer. Good timing. Yeah, maybe. I mean, I think it would have done well if it came out last year also. I don't know, what do you think would be a good time for MMT? Because that is an interesting question. What sort of external environment would be most habitable for MMT? But I tweeted out, I read it and I tweeted out, let's all get prefrontal lobotomies. And I can't say that it was a well thought out thing. But what I think I meant was just basically like, when I read MMT, like there are parts that make sense and then there are other parts that make zero sense. Like the example being replacing open market operations and reverse repos with the IRS and taxes. So, IE, if you want to reduce the money supply, just raise taxes as opposed to conduct monetary policy. It's like obsessive compulsive, kind of hyper focused and missing the bigger picture. That's how I interpret MMT. But I'm curious when you think would be a good time for MMT because it seems, for me, MMT (18/97)
is a political thing, first of all. It's really not an attempt to understand the economy. Well, I think it's misunderstood. I'm not an MMT fan by any means. I think there's a descriptive element and then the prescriptive element. Yeah. And the descriptive element actually find to be somewhat compelling. It's certainly a curious inversion of many concepts that I thought were true and that I learned in my undergrad, you know, economics classes. The fact that it's loans that create deposits in banks, for instance, and that taxes are a tool to check inflation. It's very interesting to me and it seems to me like we're in this curious half measure world right now where we've gone from a world of ostensive fiscal restraint and a monetary authority that was unwilling to fully monetize the debt. And now we're in this in-between space where in reaction to this staggering crisis and a leader who is politically not too beholden to the old school of conservatism and two parties that aren't really (19/97)
interested in fiscal conservatism. We've entered this MMT proximate regime. We're not fully there yet. You know, the Fed isn't directly financing the economy. You know, there's still this notion of federal debt and so on. And there's still a theory about being repaid at some point. But if you look at the Bank of England, for instance, England is financing their expenditures with monetary issuance now. Obviously, you know, Japan has been doing somewhat related experiment for a long time. It does seem to me that we might as well just go to the logical conclusion here because I don't think there's a way back realistically. I don't think we're ever going to have a politician able to reimpose fiscal conservatism. It seems like a quaint idea. And now we have a lot of pundits wondering, well, if this was possible, if we could have untethered issuance like this without apparent inflationary effects, why weren't we doing it before? Like what social programs went unfinanced because we had this (20/97)
excessive conservatism? That seems to me to be the current orthodox view. So I have a lot of thoughts about that. I completely agree that there is a prescriptive component of MMT and there is a descriptive. And the descriptive component is, I think, great. And then it offers a much better view of how a monetary system operates than Austrian theory does because Austrian theory is so much based on a gold-backed monetary system, which is not what we have today. So I think in that sense, I agree. I don't agree though with the idea that taxes can be a viable mechanism by which to reduce inflation. That seems, you know, just asinine. It's like you're going from like airplane to going by camel. Like, you know, I mean, how does that work as a better way to do it? Right? I mean, it's already imperfect. Inflation is a nonlinear phenomenon, which actually gets me to point number two, but it's a nonlinear phenomenon. So by the time you see it, the genie is already out of the bottle, you know, (21/97)
potentially. So it's bad enough, the mechanisms that you would use today to try to kind of stop inflation on our heels, but the idea that you're going to raise taxes and taxes are also so political. That's another aspect as well, which is MMT doesn't seem to take into account. Or maybe they do. I don't know. There's only so much of it I can take, but the freedom of action changes when you cohabitate Treasury and the Fed, or if people think have the impression that you can, that your scale of action is much different. If people think that you can do more, they'll expect for you to do more. And I think that kind of makes it harder for you to curb inflation if you're going to hurt people. Yeah. But inflation is nonlinear. That's the other thing. And you don't see it until you see it. And then once you see it, then you're in a whole new paradigm. You know, then you're in 1970s. Yeah. Yeah. And then it's like it's too late almost. Yeah. And that's probably my critique of MMT, which I didn't (22/97)
mention before, is I believe that there's political constraints to it, like very real political constraints. And if you normalize the notion of monetary issuance as a way to finance the economy, then people are probably going to rebel a little bit at the notion of taxes, because they might at that point, and you see it in the crypto community for sure, people will say, well, why do we have taxes if you can just pay the budget by printing dollars? And it seems like such a strange, like juvenile objection, but I think it's true. You still have to maintain a sense of authority and order to the system. And if you become completely untethered, then it sort of falls apart. And as you say, the other thing is if you open up the Overton window or like the design space of the government as this ultimate tinkerer, which is omniscient and omnipotent and can finance virtually anything, you're always going to get a demand to finance endless entitlements, spending, stimulus, infrastructure, or (23/97)
whatever, even when it's not strictly warranted. And so I think you just enter this terminal cycle of massive expenditure. And I'd say we're in it in terms of you look at the size of the government spending relative to GDP. It seems to be growing virtually every year. And you depart from having a genuine capitalist economy. And you have something that looks more socialist, not to say that pejoratively, but just the scope of government expenditure and its influence on the economy grows, which I think has this zombifying effect on society, which is really my issue with bailouts, is that effectively you have the government determining what the allocative outcomes are and not the free market. Yeah, I'm kind of thing that I focused on of all the things that you said was this. I tend to describe what our economy is. I guess it depends on how we define terms. Like, is a capitalist economy a economy that has to be strictly free market in every single way? Well, then of course we're not a (24/97)
capitalist economy. Is a socialist economy an economy that's socialistic in every single way? I.e. because the Soviet Union wasn't really communist, it was socialist. I mean, the way I learned what communism is in a strict economic sense, it wasn't communism, it was socialism. It was the state owning the means of production. And there were capitalist elements too. Like you had entrepreneurial black market capitalism, right? Sure, sure, sure. I mean, again, yeah. So there were elements of capitalism within the society, but the structure of the official structure of the economy was socialistic. The pockets of capitalism were the exception to the rule. They sort of manifested as a result of imperfections in the application of the model. But like, what we have today, it keeps moving in a direction of, again, I don't think it would be even be correct. This is one of those things where we're needing new word to describe what we're seeing because what we've been seeing, and it's something (25/97)
that I've been talking about recently more and more. The first time I've talked about it, but it's been coming back to me because we're in another one of these cycles. The last time we were in one of these cycles was 2008, where there are these, I think you've been writing about this as well. You have these bailouts of the largest corporations, of the preferred interests in the society. And we've had these cycles now a number of times. And I'm curious to hear what your take is on this. I think that what we're really seeing at a top level is that we've seen an accumulation of wealth in a denser proportion of the population, a smaller number of people accumulating more and more of the wealth due to many reasons, regulatory, taxes, technology, globalization. There are lots of factors. And monetary policy has played a role, but it's one of those interesting things where it's also, is it the dog wagging the tail or is it the tail wagging the dog? Because the growth of the wealth gap and the (26/97)
accumulation of wealth in smaller and smaller hands, the only way that that can happen and has happened is through debt finance. The only way that you can manage that is by the expansion of private sector debt. The expansion of private sector debt can only go on for so long without having to lower interest rates because the burden of the debt becomes onerous. And so in order to make it carryable, you've got to lower interest rates. And the lowering of interest rates and the expansion of debt causes asset prices to rise. It's upward pressure on asset prices. And eventually it becomes harder and harder for people on the sort of outskirts of the wealthy or the savings class, right? If we think about this as sort of the debtors and savers, the savings class, the people on the outside begin to be unable to hold on. It's almost like the centrifuge is flying around and they're getting flung off and they're getting flung off into the side of the debtors. And eventually all of these people, the (27/97)
only way that they're able to actually save anything is by putting it to the stock market, which is exactly what's happened. So increasingly the vast majority of society has to move into the stock market if they can put their money anywhere, if they have any savings. And so now you turn savers into speculators and all of these speculators that are invested in the stock market. And the stock market has gone from being a financial utility to what Ben Hunt calls a political utility to now being a political liability. And every time the stock market goes down, it is a fucking crisis because if the stock market collapses, people's entire life savings are wiped out because that's where people save their money now. And on top of that, there are a lot of other factors because the entire economy has not become conditioned on the idea that stocks always go up. And the authorities are invested in this process. But I don't know, that's my general sort of point of where we're going. So you get to (28/97)
this point where the government effectively has to own the entire market because if the market collapses or asset prices drop, that sort of collapses an increasingly core assumption of market participants, which is that the markets will not go down and that the authorities will not allow them to go down. So allowing them to go down would wreck the economy. And I couldn't agree more. This is why I'm so glad you had Mike Greenon who explained the particular mechanisms through which the stock market became a savings device and how Congress encouraged that to occur with specific regulation. I learned a lot in that episode. I mean, I'd had an intuition that from the 80s, I would say onwards, America got progressively more financialized, but it was really eye-opening to see how specifically employers were encouraged to funnel their employees into 401Ks and treat the stock market like a savings device. I think the outcome of all this is that you have managers, directors of public (29/97)
corporations, the largest corporations, can hold the economy hostage in a sense. They can really, they're in a very strong negotiating position relative to policymakers here. They know that pensions need, they have a required rate of return of 6% to 8%. They know that American savers own 401Ks. They don't own CDs or cash. They've been forced through the shadow inflation, in my opinion, far and excessive CPI. They've been forced to hold financial assets, as you say, to become speculators. Then on top of that, you have this cult of passive investing, thanks to this really warped version of what Bogle was preaching, where people looked at historical models of stock return from the 1880s to present and decided that there was premium of equities was 5%, plus inflation. We had this guaranteed return of 7% real, 9% nominal over the last 100 years, and that you were guaranteed to achieve this return regardless of your starting position, as long as you held equities for long enough. I just (30/97)
think that's totally nonsense. I think we're going to find out over the next decade as we have this unwinding of leverage that that's not true. Your starting position matters. The valuations matter. When you buy a security, you're buying a claim on cash flows and the amount of cash flows that you're purchasing per unit of price, I guess, that actually matters. You can't just blindly pile into the asset. As Mike Green said, since we have this rotation into public equity, it structurally became a bigger part of the American saver of their portfolio. It also just returns and it encouraged people to pursue this strategy. You have the parabola gets steeper and steeper as people reevaluate their expectations based on the prior performance. That's where we are today. His insights on passive, for me, they've moved the needle more than anything else that I've learned in the last so many years. I compare them to reading Shoshana Zuboff spoke on surveillance capitalism and having her on the show (31/97)
in terms of what that did for me as far as data privacy and surveillance and differentiating between technology and the logic, the economic logic that animates the technology. It did the equivalent of that, but for finance. I think logic attracts the position itself to capitalize also on a meltup, which may well come prior to any meltdown. It's against about this idea of flows. The flows are dominating increasingly the price movements and that nothing else matters. What simply matters is, do I have cash? If so, then buy. Yeah. I think we might be in the midst of a meltup right now. Obviously, you contrast the performance of financial assets with the apparent reality and there's a huge contrast. Some people are outraged by this. They say, how dare the stock market go up? But to me, it's just a sign of the time. If we're reflating this bubble, probably we have some ways to go, but I'm still of the school of thought, especially in my discipline where your entry price really matters. We (32/97)
can't afford the venture math doesn't work. If you're overpaying, you just fundamentally can't achieve the IRR that LPs expect if you're massively overpaying. From our point of view, we're very sensitive to valuations. Sorry about that. That's my dog. All right. We're very sensitive to pricing. I think public equity investors should be as well, but you really rarely hear people talk about PE ratios anymore. It's a much more automatic thing. As you say, I got my paycheck, so I'm going to put it into the stock market. What do you think the interesting story is? What do you think people will be talking about in the fall? I think it'll still be the lingering effects of the virus. I doubt it's going to be a short-term snap back to normalcy. It's an important, obviously a great point that you're making because there's a huge chunk of the economy that needs to things to be normal in order to function, and not just the airlines. I use Greece as a classic example because they've done a (33/97)
phenomenal job of containing the spread, which is essential for Greece, not only because it has an impaired hospital system as a legacy of its recent prolonged crisis, but also because it's a tourist economy that depends on people not being afraid to go there because they're going to catch coronavirus. I think 25% of Greece's economy is tourism. That's enormous, but the problem is if people aren't going anywhere, then there's no tourism economy. How long can Greece as a country, as a sort of paradigmatic example, exist without going into economic collapse and political chaos in this environment? Yeah, it's not a good thing to be that exposed to tourism, obviously, when a tale event like this comes around. I am optimistic that our technological tools will give us some solutions here, whether it's an effective treatment, a vaccine faster than we expected, extremely accurate sensing, warning, maybe more sophistication in the tracing. I'm partial to biology, Srinivasan school of thought, (34/97)
that we're going to get red zones and green zones. We'll get areas where policymakers are fundamentally better or more prepared to take extreme measures to stamp out incidents of the virus locally. To preserve that advantage, they'll want to close their local borders or keep them extremely regimented. I think it'll happen on a state-by-state basis, probably in the US, maybe even city-by-city basis. Definitely going to happen on a country-by-country basis. Unfortunately, I think travel is going to be very much impaired for the foreseeable future. There's definitely even a more extreme version of that take where we look back on the period 1990 to 2020 and think that was a historical aberration in terms of being able to travel in a truly unencumbered way globally, because the Soviet Union prevented free travel. China was closed for a long time. Maybe that was the last time we had truly globalized travel. That's such an interesting point, because I thought about it from the economic point (35/97)
of view that airfare became very cheap over a prolonged period of time. This crisis might potentially put a cap on that, but you're making another really great point, which is the opening up of the Soviet Union, especially the Soviet Union. People could travel to China in the 80s. They probably needed some special visas or something. People could also travel to the Soviet Union, though. I think it was harder to go to the Soviet Union than it was to go to China, correct? China was only meaningfully opened in 71, right? Oh, yeah. If I'm getting that right. Then the Soviet Union was much later in 89. Obviously, there was a lot of chaos. You probably didn't want to be in the form of Soviet Union for a while there. Yeah, I'm sure you were a bit broader. Probably at least until 92. I actually wrote my undergrad thesis on the Nagorno-Karabakh conflict between Armenia and Azerbaijan. That was a really bloody conflict that actually helped catalyze the collapse of the Soviet Union. People don't (36/97)
know that really. That was one of the first nationalist movements and that kicked off all these other local nationalist movements in those Soviet nations, I guess. And the Caucasus and the Balkans? Yeah, and Georgia had their kind of irredentist movement. The Baltics were early. Then you had Central Asia. You had Ukraine. It was like this cascade. The final stages of the Soviet Union are so interesting. Nobody really expected it to collapse. The US policy, the diplomacy, the elite in the US, they didn't really have this expectation. And then in the 90s, it was like the decade of jubilation because the US became this unipolar hegemon. But it wasn't like they could really take the credit for the collapse of the Soviet Union. In a sense, they were taken by surprise as well. Yeah. I mean, Bush famously learned about it on CNN. I had a professor who told us a story about how he was in Berlin right before the fall of the wall and he was having a conversation with a East German and he had (37/97)
said, all you Americans, it's fine. The wall will be here forever. And within a few months, it was down. Yeah, people don't appreciate how rapidly fragile systems can fail. I don't think it's likely to happen, but we're seeing states reasserting themselves relative to the federal government. That's happening right now as we speak. And I think it's entirely possible that maybe the Chinese regime isn't as... They don't have such an iron grip on power that we think they do. There certainly are regional tensions, especially between the core and the periphery in China. The world is looking now like it's becoming a multipolar balance of power once again, but it's an eminently plausible to me that we have a new spate of vulcanization and the virus is obviously a very potent catalyst for that in terms of being an accelerant for the localization of the world. Supply chains, absolutely too. Supply chains, yeah, of course. I mean, Europe is the one place where it seems most likely to happen. Of (38/97)
course, it could happen in China. If it happened in China, it would be like an atom bomb going off. The level of tectonic resistance there or pressure buckling is so much greater or maybe in the Middle East between Saudi Arabia and Iran. But Europe is... On the one hand, it's interesting because I wouldn't describe it as fragile. You could easily describe it as fragile, but there are a lot of strong bonds between the nations in Europe that make it difficult to break this apart. I mean, Macron, the big article on the FT today I haven't written for me now was, Macron warns of EU unraveling unless it embraces financial solidarity. Obviously, the French citizens don't want to fund the budgets of Southern European states, although France's finances aren't as great as Germany's or some of the other nations in Europe. You know, I think there is a deep historical commitment to the European project. And I wonder if the Europeans can find a way to hold some semblance of the project together for (39/97)
diplomatic and defense geopolitical reasons and maybe unbuckle some of the monetary components that make it so difficult, make it so unworkable. You know? I mean, I don't know. Yeah. Tough one. There's this, obviously, this very popular theory that financial interconnectedness brings political stability, which is going to be tested now. Yeah. One of the most popular empirical theories from international relations is this democratic peace theory, which has the implicit component of free markets, institutional interrelationships. Yeah, democracy's never going to war. And there's the humorous corollary, which is no two countries with the McDonald's have ever been to war with each other. And then you look at the fact that the UK's biggest trade partner before World War I was Germany, and you think, well, it's still possible. And you look at the incredible interconnectedness between the US and China, and you see that relationship unraveling. Yeah. 100%. So the thing about democracy's never (40/97)
going to war, first of all, democracy's themselves, the greatest democracy in the country, the United States has been bombing and going to war with countries for nonstop. So I understand that the theory compares- With other democracies, though, yeah. Right. I understand that the theory compares democracy to democracies, but that doesn't make any sense. I mean, I think what's happening there is democracy has become very popular recently, or maybe it's waning in popularity now, but it had a 100-year bull market. And that coincided with Pax Americana, where America was the sole Hegemon or shared power with the Soviet Union, which that was a stable arrangement. So there just fundamentally wasn't a lot of interstate warfare. There was a lot of intrastate warfare, that's for sure, which that model doesn't really capture. So it might just be, like Taleb would say, you just don't have enough data to come to that conclusion and something like war is fat-tailed. So- Yeah. And the other point you (41/97)
made about the economic interdependencies being, how did you say it? How did you express that? That it is believed to be an inhibitor for conflict, I guess. Yeah. I mean, that was Norman Angel's theory, the Great Illusion before World War I. That didn't work out. But also like it's been, the economic interdependence has been at the core of European expansion and integration. That was one of the principal assumptions underlying EMU's capacity to expand successfully, which was that economic crises would be causes for further integration. And we're seeing that those were assumption dependent and under certain assumptions that worked. So dude, the other thing that we forget about, I'm sure you've contemplated, is that the institutions that we live with today, institutions are created during periods of different psychosocial awakenings. And the European Union is very much a bull market project. Certainly EMU. EMU was a bull market baby. And the latest phases of EU expansion came during (42/97)
either the full flown bull market. I mean, I think the Treaty of Nice was 1999, was it? And then the last treaty was before the 2008 crisis, the Lisbon Treaty. What do you think of that? I think institutions get created or entrenched when there is some power shift and the dominant power now has the bargaining power and the ability to endorse and guarantee an institutional arrangement, which is certainly the case with all the Bretton Woods organizations post-World War II. And the US is very much pulling back from those obligations that is unambiguous. And not only that, they are almost rejecting some of those institutions, which aren't useful to them because their stature within them has been reduced. The WHO is a great example. The US is by far the largest supporter financially of the WHO. And yet it seems to have been captured or infiltrated. I don't know the right word exactly by Chinese interests. Look at the popular discourses it relates to the UN. Americans for the most part hate (43/97)
that they have financial obligations to these entities, which they feel are not yielding them meaningful benefits. And it may be the case that these aren't providing the returns in terms of soft power that America expects. And I think this next decade is going to bring us the decline of importance in these Bretton Woods organizations. That much is very clear to me, both through their own defanging, through the US pulling back, and through potentially China creating viable alternatives. Well, you saw that China expelled the New York Times reporters, I think the Washington Post, a bunch of major... That's one more escalation. Or one more... The Cold War was all about building avenues of conversation or a contact or discussion to be able to reach the other side. What we're doing is we're stripping those away one by one. It's quite concerning, dude. It's very dramatic. It also means that we have no ability to fact check their numbers on the virus, for instance. I think the next hammer to (44/97)
fall is capital markets relationships between the US and China being severed. What does that mean for you? We have a mostly US LP base, so it doesn't affect us per se, but it seems to be coming. I think it will occur, actually. And I'm not sure the US is ready because the US investors have always had this view that they can profit from Chinese growth. For the most part, that's been wrong. They've been exploited in a number of ways. These companies treated American capital markets like piggy banks. They broke into an arcade and just stole all the toys instead of playing the game you were meant to. It's highly exploitative. We see endless accounting frauds. You see really weak governance. And it's like there's a new high-profile accounting fraud every week now, luck and coffee just being the most recent one. Is there ticker L and K or something? Yeah, something like that. That was a super high growth, really exciting Chinese company. It's like the Starbucks of China. It turns out that (45/97)
hundreds of millions of revenue was just fabricated. The other thing we see is converse when Chinese investors take meaningful shares in American companies. They use that for political leverage. We've seen a ton of controversy over that in the last six months, which maybe people have forgotten a little bit. But large American media tech companies being co-opted or being muzzled or being censored due to the existence of Chinese folks maybe covertly doing the bidding of the CCP, but definitely exporting CCP kind of values, which had a really disastrous collision with the US. I think ultimately there will be a political demand to sever capital markets relationships between these two countries. And US investors are going to have to just come to terms with the fact that no, they can't participate in Chinese growth. They can't profit from it. That was always an impossible dream. It was never going to be allowed. I think it's going to be obviously really disruptive when it does occur. (46/97)
There'll be a lot of gnashing of teeth, a lot of really upset investors. We talked for listeners who are interested. We talked about this, both aspects of these stories with a number of guests, but specifically I'm thinking of Kyle Bass. I remember what episode that was. I'm trying to find it right now. The other one was with Anne Stevenson Yang, who's come on twice. That's kind of the China hustle or these companies that have used US capital markets to take out enormous amounts of money and who will, many of them will default on those loans. Of course, China also owns a huge amount of US debt and they could begin to sell that. Public debt. Yeah, there's certainly the currency competition element here, although I think the dollar is just so fundamentally dominant globally that there's no risk currently to the internationalization of the renminbi or something. Yeah, for sure. It's funny how that was like a big story in 2008, 2009, 2007. Peter Schiff is a good example of someone who (47/97)
talked, I don't know about internationalization of the renminbi, but he's actually a good example of this point about not to call out Peter, but he's a very strict Austrian and he's had a very US-centric focus on the value of the dollar and just looking at it as a one-to-one equation. Like you mentioned, Milton Friedman's quote inflation is anywhere and always a monetary phenomenon and except it's not one, two, there are other people's monetary policy matters also. And it's just monetary policy. It's also the credibility of financial markets, the breadth, depth, and regulatory framework of those markets. The outstanding liabilities denominated in the currency, which is being printed, all of those factors matter. Yeah, and if there's anything we've learned is that the one universally safe asset in the eyes of investors is the dollar or treasuries. And there's plenty of countries that would love for there to be an alternative to SWIFT or to the kind of New York-centric correspondent (48/97)
banking system and to those US-administered financial rails, especially because they politicized them like crazy. They use them for partisan or political objectives, military objectives even, but there just really is no alternative. So difficult to bootstrap an alternative because money is the ultimate network effect. So I don't foresee that changing anytime soon. And you're right. I mean, people talk about inflation, US individuals having to bear the cost of inflation, but it's this rapacious foreign demand for dollars, which means that in theory, we can have really extreme levels of issuance and our debt can still be considered attractive. I believe that there are limits to that. Might even be reaching those limits soon. You know, there's actually an intersection with crypto here. Something people haven't really noticed is tokenized dollars that circulate on public blockchains, kind of public blockchain infrastructure for the most part, Ethereum. Those have swelled in size from about (49/97)
$4 billion at the start of the year to $8.5 billion. So increasingly crypto is a rails to give people access to tokenized dollar IOUs, which they can hold outside the banking system. So you even see it in the crypto industry, this insatiable demand for dollars, in particular unencumbered, kind of offshore crypto euro dollars. Yeah, that basically the stable coins are kind of an intermediary for getting access to dollars. They're treated like dollars. I've even seen capital markets transactions settling in stable coins on the weekend. You can settle an M&A transaction on the weekend now. So what's going on in that market? What are the prospects for some of those coins? Well, you know, the coins like Bitcoin and Ethereum, they're going to follow their own cycle. You're throwing Bitcoin in there as well because Bitcoin is also used as an intermediary. Yeah, so Bitcoin is both a bridge currency because there's exchanges worldwide, right? So there's remittances that occur through the medium (50/97)
of Bitcoin, but they settle on Bitcoin, but they're fiat to fiat remittances, which is interesting. And then both Bitcoin and Ethereum, those networks are used to settle fiat tokens, which move on those rails on top of them. For the most part, they happen on Ethereum. And the biggest one is called Tether, which has kind of got a questionable track record in terms of being fully reserved. So unlike banks, these stable coins are meant to be fully collateralized. So it's like full reserve banking. In some cases, they're not, which causes a lot of gnashing of teeth and upset individuals. But it's definitely an underappreciated feature of the crypto industry, and it's probably the number one phenomenon in terms of the way it's going to be disruptive. What it means is for the first time, really, you can get access to a digital form of physical banknote offshore, overseas, just through having a smartphone, just by holding a private public key pair. And without interfacing with any financial (51/97)
institution, you can buy these things on the open market, and there are crypto exchanges in virtually every country. So what it means is if you would normally have to save in your local inflationary currency, you can now get access to what is relatively speaking a hard currency in the dollar, and you can save it outside of your bank, so it's very hard for the government to seize or interfere with. So my guess is this is going to accelerate this process of dollarization in the developing world, especially if you have sovereign defaults. We're seeing dollarization in Venezuela right now. It wasn't happening for a long time, and then they had a power cut in Caracas, and the only thing that people had to transact with was dollar bills because you don't really transact in Bolivars because inflation outpaced their ability to print new denominations. So people used digital banking rails exclusively, and then there was a big power cut in Caracas, which was typically insulated from power cuts, (52/97)
and people switched to using their stashes of physical dollars, which they had laying around. And that was the catalyst for it becoming decriminalized to use dollars, and that's what really kicked off the latest bit of dollarization. So it's happening right now. Let me ask you something else, Nick. This is a random pivot, but I started listening to a podcast recently that I hadn't heard before. I was familiar with the host. It's Eric Weinstein's podcast, The Portal. Are you familiar with it? Yeah, of course. Have you been listening to it? I listened to one with Peter Thiel. That was great. Yeah. That was amazing. It was a good one. I think that was the first episode. It was the first episode. Have you heard anything else from his podcast? No, because I find it to be a bit long-winded. Yeah. Well, it's... He is very, very, very smart. I mean, he is very intellectual. I'm always wary of this kind of general larger idea of a counterweight intellectual class. It's almost like there's one (53/97)
that's being replaced by another, but it really is very good. One of the things that he talks about in that episode with Peter Thiel, and he talks about it in another one, so there's a reason I'm bringing it up, is it talks about this idea of embedded growth obligations. I'd never heard this before, but it reminded me of a conversation that I had with Jeffrey West, and that was episode 19. Jeffrey West was the founder of the high-energy physics group at Los Alamos, and our conversation had to do with comparing scaling dynamics and limitations in socioeconomic versus physical systems. The one system scales quadratically, the other system scales allometrically. I don't know that one. Allometric scaling is this type of scaling that you see in economies of scale. When you add the incremental car to the production line, your costs don't go up linearly, they go up sub-linearly. Your costs decline per unit, and it's a measure of efficiency. One example of that in the physical world is that an (54/97)
elephant is a much more efficient accumulation of cells than is a muskrat or a fly. That's also why elephants have much slower metabolisms than say mice. Whereas socioeconomic systems scale exponentially. So to bring it back, this thing of embedded growth obligations, because what Weinstein talks about when he mentions this is that our societies are structured with an expectation of a growth rate that depends on conditions which are no longer in place or no longer hold. So our expectations for growth are out of line with what our economies can provide. This is similar to what we talked about in that episode with Jeffrey West, which is that we have socioeconomic systems that demand X amount of growth that need it to go back to my conversation with Mike Green. We have underlying economy that can only provide so much, and ecosystems that can only provide so much over X amount of time. There's this fundamental incongruity. I feel like anyone who's remotely thought about these things, and I (55/97)
see it expressed in a lot of these Netflix documentaries, which is why I feel like this virus feels like we're living through bird box or something. Not anymore, now it's become normal. Now it's normal for me to get the boxes from the delivery and then wipe them down and do that whole thing. But it feels like all of us know that there's something ... I'm curious what you think of this, but it feels like there's something fundamentally broken in the way in which we prioritize goods, labor, capital, and resources in our economy. Yeah. I fully agree. I think probably first encountered this concept on your podcast or it became clear to me. Just the very fact of pensions, they have a literal embedded growth obligation that's encoded into their mandate. That's people's savings. When it becomes clear and they're not going to meet that, that means a meaningful fraction of the population, their long-term prospects in terms of retirement have been cut in half or whatever it is. That's obviously (56/97)
part of the cult of passive investment, this Ponzi-like view that the stock market can just naturally provide a return. Then if you go back to first principles, you try and decompose that return into its constituent parts, it comes from population growth and productivity growth. We're looking into the face of declining population potentially or we need to have really high rates of immigration, for instance, to keep it up. It doesn't look like productivity is growing all that fast. You wonder where the return on capital comes from. Increasingly, in the last couple of decades, it's just come from financial engineering instead of fundamental actual growth. You look at asset prices today, you try and rent an apartment or buy a house in an attractive urban area. It seems totally inaccessible to people starting their careers. I think it causes this widespread sense of hopelessness. I think people feel it intuitively, even though maybe they haven't intellectually grasped it yet, this fact (57/97)
that we're staring at this prolonged phase of potentially degrowth and we're not equipped to deal with that. I think this is why we have these really progressive movements demanding more and more entitlements from the government because people feel that they won't be able to procure them for themselves through their careers. They're asking the government to provide all of these things which previously they would potentially have been able to acquire on their own. I do fundamentally believe that we're looking at a couple of decades of just fundamentally shrinkage in terms of our aggregate output. I don't know if America is actually capable of dealing with that massive political unrest. Japan went through it and Japan is very... Still going through it. We might look at Japan and say, wow, what they pulled off is actually amazing relative to what could have happened. Maybe they did it in the most elegant way possible, even though Japan, from an economic perspective, looks catastrophic, (58/97)
relatively speaking. Maybe they did it in just about the best way. I don't know if I'm as optimistic for the Japanification of the US. I know it's a different country, but there are a lot of weird social practices there that seem to have evolved during the last few decades. I wonder how much all these weird sexual practices, not the panty-smelling stuff. I don't know if you're familiar with that. There's a whole thing there. No, I mean the disinterest of younger generations in sex, although that tells to the case of South Korea. But that's got to be related. If you biologically perceive that your prospects are less, you're going to have a less desire to procreate. I don't know which way the causality goes per se. People say people with the worst prospects just structurally try not to have children or it's this lack of children which causes society to have worse prospects in the aggregate. Who knows? Maybe they're jointly determined. But I certainly buy that that demographic transition (59/97)
is probably maybe in part due to the fact that they're staring at this prolonged phase of degrowth. Maybe it's a positive feedback loop. You can certainly see why there's this huge emphasis on immigration in the US, not to get into a hot button topic, but it's because growth must be sustained at all costs. That is another really interesting topic because it's another example where there's a huge camp of ideologues on the left who have approached this issue assuming that anyone who's against immigration or wants to put curbs on immigration must be coming at it from a bigoted point of view. I'm hoping and it seems to me that many of these categorical impulses have subsided and maybe in some cases sort of temporarily sought refuge in the last few years because they were really getting out of control and it wasn't doing us much good, but we still have an extremely polarized society and our media organizations are out of control. When I say media, I'm always talking about like the TV (60/97)
stations. They're out of control, man. They're just a fucking joke. I haven't watched TV seriously. I don't think I've ever consciously chosen to tune into TV news. It's just such an alien concept to me. It's just so poisonous. It started with Fox News and it's just become everything. Now it's become CNN, it's become SMSNBC and they've all taken the same tact. I want to ask you one more question because again, this is a new podcast for me. I had a conversation with Eric Weinstein a few days ago and he recommended a certain number of episodes to listen to and I basically binged listening to them. I thought about afterwards what the interesting points that he talked about were because it felt like there were a lot of intersections with hidden forces. There was one other one that I thought a bit about and I think it's an interesting one to bring up because when I look at the Bitcoin crypto community, it's almost like a mirror to myself 10 years ago. I would never have called myself (61/97)
libertarian but I really came to default, sympathize with or identify with a lot of libertarian or anarchic principles because I had just understandably lost faith in the government. My experience with the government, my entire adult life has been killing people and taking my money. In the years since, especially with this show, I've come to appreciate or take the view that there is a role, an important role for government and one of those places where I feel that's the case is in the sciences. I did two episodes that stand to mind for me or that come to mind that deal with this. I'm bringing this up because this is something that Eric talks about in a sense. Him and Peter Teal talk about this. They talk about how something went wrong between 1968 and 1973 between the moon landings and the oil embargo. You know what happened, bang in the middle. Right, I do. For sure. But see, that's also another interesting point because again, the libertarians, libertarian people, gold bugs, (62/97)
bitcoiners and artists, I think they ascribe a tremendous amount of responsibility to the monetary story. I think it's important and I used to ascribe a lot of value to that too. But again, I think it's more complicated. But yes, 71 and 73, he closed the gold window. Have you seen that video on YouTube, Nick? We're going to find it right now where Nixon closes the gold window and there's a guy talking over and guy laughing or talking over. There's a guy talking over. Have you seen that video? I haven't. I haven't. Oh man, I wish I could find it without. Don't never forget that it was meant to be a temporary suspension. I know exactly. It was while he was stopping the speculators. Yeah, of course. It's funny because I put this in here. I don't want to start playing videos without it actually. But there's this funny video where he's speaking and there's a guy, he's like, those damn speculators. Then Nixon's like, he keeps talking. He's like, wait, what? Wait, what? He's getting screwed? (63/97)
It's funny because a video just came up underneath that of one of my old guests on Capitol account. It's actually an episode from his called Doug Casey on Christ's Investing Political Risk and Benign Anarchy. But I did an episode with Bill Janeway on the innovation economy and I did one other one with Safi Bacall. And also another one actually with Jimmy Sony where we talked about Claude Shannon and inevitably, it was actually the history of information theory and a sort of bio of Claude Shannon. And that of course gets into conversations about Bell Labs and then of our Bush and the war effort. And a lot of good came out of US government investments. And I really have bought into Bill Janeway's thesis around government playing an essential role in the early stages of the innovation cycle where risk is fraught and where the private sector is understandably unwilling to invest because a properly functioning private sector wants to invest efficiently. And so they're really great at (64/97)
extracting value from a foundational technology. But it's not clear to me that the private sector can do a better job. Just a total private sector as we conceptualize it can do a better job creating foundational technologies like the internet protocols, for example. Can do a better job than a society which coordinates public funds towards that purpose so that you could have wasteful spending because that's what science is. What do you think of that? Yeah, I buy the theory. I think you need a patron of some sort that is willing to fund R&D for the sake of it as opposed to R&D which is meant to be productized within a meaningful period of time. Whether it's the government, it's the patron or like a Rockefeller or Carnegie type. For instance, we have a microcosm of this situation in Bitcoin because people are always wondering how we're going to pay the core developers that build the system, that do the research, work on interesting dimensions in cryptography. And lots of people say, well, (65/97)
there's a failure to tragedy the commons because this is infrastructure that benefits everyone and yet there's no obvious entity which can fund it. So then you'd say, okay, well then that's a little microcosm for the regular old economy. But then in Bitcoin, you do have patrons. You have entities that just are irrationally committed to the security and the longevity of the protocol which fund this open source work. So you have patrons in that space. And whether it's the government that's the patron more generally or you have a environment which lends itself to patronage. So I would say to some degree that's what Silicon Valley is. I think Silicon Valley, I don't think it's purely capitalistic. I think there is a degree of wasteful expenditure in a good way in that you have all sorts of interesting experiments which get funded just because there's so much capital in that environment. There's so many rich, former entrepreneurs which are willing to be angel investors and so on. I think (66/97)
that's part of the reason some of these experiments happen. You just have such a high frequency of collisions and so much capital and founders floating around. That's why there really are network effects for these capital centers. But yeah, I mean, that's definitely a critique that folks like Teal have of the VC model that we don't have fundamental breakthroughs. Bakewaters or Austrians would ascribe it to monetary policy. That sounds wacky, but that's certainly held up as the reason that we all have a short time prep phones now. I don't know if you can strictly speaking plan to have a highly innovative society. It seems like the conditions just have to be right. It's not like, for instance, Israel decided to be super accomplished in cybersecurity and defense technology. I think they developed those competency out of necessity because there is constantly a threat of war. They had to pull themselves up by their bootstraps and build an advanced society just to survive. Totally. Yeah, it (67/97)
might be the case that the last truly good and beautiful military plane in the US, in my opinion, was the SR-71 Blackbird. Are we going to get something? Would that be built today? Of course not. Because partially that was built just for the sheer amazement of a vehicle that could go Mach 3 and outrun a service to air missile just to display dominance of the Soviet Union. So it could fly over the Soviet Union with complete impunity. Would we do something like that today? Of course not. We would have an appropriations committee and say, what's our ROI on this? Amazing. I think we would develop anything like that today, unfortunately. What an amazing... Everything is... Yeah, I read this book Skunk Works recently, which is about the development of that plane. Why does that word sound familiar? The book Skunk Works was the name... Skunk Works was the name? Yeah, but so that was the name of the lab, the secret lab at Lockheed Martin. And then that became a general word, meaning a secret (68/97)
R&D lab. Wow. So that was the book Skunk Works 759 five-star reviews. Yeah, highly... Wow. Yeah, add mine into the mix. It's really great. Wow. That looks amazing. We don't have Skunk Works's anymore. That was division of Lockheed that got like carte blanche to develop stealth technology, planes like the SR-71, which required a whole bunch of new techniques because it was built out of titanium alloys, which nobody knew how to build things with, needed new advancements and engines. It was just impossible. They built it with slide rules. They didn't even really have computers at that time. So this plane was used to not just... Well, I don't know that it was used over Cuba to take those spy satellites, but no, because that would have been... It was. It was developed after... Well, it was developed after the Cuban Missile Crisis, wasn't it? No, it overfitted. Wasn't it developed in the late 60s? It was developed, I believe... No, 1964. You know what you're right. It was before it was first (69/97)
flight. I'm looking right now. It was the U-2 spy plan, which got those photos in Cuba. That's right. Yeah. So the U-2 had its strategy was just to fly super high and avoid the surface to air missiles and avoid big fighters. And then the SR-71 strategy was to be able to outrun everything else in the sky. Freaking amazing. So if you shot a missile at this thing, it would just accelerate and that's it. Amazing. How quickly, because they did obviously reconnaissance over the USSR. So where would it leave from? And could it do a full flight without mid-air refueling or did it need mid-air refueling? No, it was very expensive. It did need mid-air refueling. So they would use it over Korea or China and they would have two refuelings on one flight. They might take off from the Philippines, refuel right away after takeoff and then do a sortie. Wow, man. It was an amazing time in aviation. It really was. And we don't have anything like that. The pilots, like the U-2 pilots, they had to use (70/97)
sextants to navigate. So stars to navigate their planes because they couldn't have radio because the Soviets would have intercepted that. So they'd do these like nine to 12 hour journeys solo over the Soviet Union taking pictures, flying at 80,000 feet, navigating by the stars. And they'd be out of gas when they got out of the Soviet Union. They'd landed some remote airfield in Iraq or Kazakhstan or something. And if they were off by a couple of degrees, they would crash land in Pakistan or something. It was just an amazing time. God. Even by today's standards, the Blackbird looks futuristic. I'm just staring at its gorgeous engines. It's a wonder. It really is a marvel. And there's one at the Advarhazi Air and Space Museum in Rustin, Virginia, where I go as often as I can. And it's just the most beautiful plane from the front. The profile is amazing. And you know who put an end to the program was Dick Cheney in the 90s. He said it wasn't worth it and we could just rely on satellites. (71/97)
I was right. Probably. It's a shame because it's just an object of wonder. But this is a really ... So I thought about this after I ... Because I really liked that episode with Peter Thiel and Eric Weinstein. I was really taken in by it. And I thought about when he said that, when he made the point about something between 1968 or 69 and 73, I thought about Space Odyssey 2001. And 2001 Space Odyssey, I think was 1968, right? Space Odyssey. That sounds right. 2001. I mean, that is one of my favorite, if not my favorite movie ever made. Have you seen the movie? Of course, yeah. Yeah, I don't know how you feel about it. It's beautiful. Yeah, dude, incredible. And this was made at the very end of that period. And what was the expectation that by 2001 we would have commercial flights to the moon? Yeah. Right? And it was really beautifully done. And it's understandable that we had this idea. And to the point that Janeway's made before, and Weinstein said something analogous, which was that if (72/97)
you walk into a modern room today and you take out all the screens, it's hard to tell whether you're here or in 1973. What are the major breakthroughs? What are the major advances? And it makes you wonder, if we were able to come together as a ... And this is the argument, this is an example of why the sort of mindless economic orthodoxy arguments for globalization, they're like lobotomized arguments. They don't take in the whole panoply because they don't consider that there are larger things at stake. So, it's much harder to advance sort of society-wide agendas that aren't purely economically driven if you have an international conglomerate sort of society. As opposed to having nationalistic societies with much more tightly knitted social fabrics, you can come to greater social consensus. It's why the Danes were able to create such a well-working welfare state until the 70s or whatever. Yeah. So, imagine what we would be able to create, wherever we'd be able to go if we could (73/97)
mobilize national resources towards some non-efficient end because we thought about the long term. Do we want to? I mean, the Bostrom and the Future of Humanity Institute. Yeah. I think asteroids are one of their top existential risks. Asteroid impacts. Is it worth it? It seems to me maybe it is to devote resources to ... That's a global problem. But there are things that I think certainly rich people on the planet would be willing to invest in, right? Yeah. And symbolically, I think it matters as well. Sure, man. 100%. To have this feeling of progress, whereas right now we effectively have a feeling of regression. And if you don't have these totems- Which stagnation? Yeah. If you're a significance in your achievement, I think it's easy to become disillusioned as a society. And what we've seen over the last three, four decades is it's much more convenient to pay McKinsey to tell you to outsource your supply chain than it is to invest in R&D or local staff or local factories. And now we (74/97)
have this super fragile, very homogenized, global world which can't tolerate any shocks whatsoever and where we haven't had any fundamental investment in R&D. So this is one reason ... I'm not to bring it back to crypto, but this is one reason I'm attracted to Bitcoin is because it's this highly collaborative, very opinionated edifice which probably shouldn't exist, probably should have failed a number of times over. And the fact that it's open source and voluntary and it brings a lot of people together in pursuit of a single objective, it reminds me of those great projects of your pyramids and all these other really difficult edifices that were constructed for the sake of it almost. And it gives you something to look forward to and it restores a small sense of wonder to the world. I think we need a lot more of that if we're going to be able to get through this next phase. Amen. Let me ask you something, in closing, because you just really got my heart, set my heart aflutter with this (75/97)
Skunkworks book and this conversation, man. A book I've mentioned a few times on the show is Gene Kranz's Failure is Not an Option. I went through this phase where Gene Kranz was the head of mission control during a number of mercury missions and all the way to Apollo 13 famously. He was played by Ed Harris in Apollo 13. Amazing book. Also, I went through this phase where I read a lot of these books from that era. I also read this book that I really loved by Roger Mudd. Roger Mudd is no longer alive. He was in the running to take over the CBS Evening News Desk after Cronkite. He lost it to Rather and then he transferred over and I think he was at NBC and he headed the NBC Evening News for a period of time. And I heard that as an audiobook and also read it, but I heard as an audiobook. He has this gruff news voice. And it started with his time working at like a Dallas newspaper in the 50s, I think, or 40, 50s. And the news people back then were all blue collar. I also read Barbara (76/97)
Walters' memoir. Amazing. And I kind of sometimes, I worry about this thing where we look back at the past and we eulogize it and that can't be right. Right? There's nothing much wrong with that period. And we also, the thing we don't think about as the terror of living in an age of uncertainty around nuclear warfare, the immense levels of segregation and racism in all of the country, but the segregation particularly in the Jim Crow South. There are lots of things that were really bad about the country. But I think it's interesting and I don't know what it is if it's just because now we got through it and we know we did all these things back then. It feels like it's more than that, right? It feels like America was really great. And people I know that lived that are old enough to remember the time, both Americans and people in Europe. Europeans used to love Americans. They used to love Americans. They wanted to be like America. If you look at old Greek movies, they used to do the (77/97)
American accent. They would do the American accent. They would try to say words like Americans or America was the great country. And that's what we can't take as the humiliation if not living up to that track record. Is that what it is? Do you think? Is that what we're dealing with? I mean, look at the British spirit as well. They went from having the largest empire the world has ever seen to shrinking back to being one relatively small island with a few tiny protectorates. And that's totally reflected in the British spirit as a Brit, someone who's lived in Britain. That's totally part of the British esteem. And I would forecast that Americans are going to go through the exact same transformation. It's totally humiliating to be a former empire. Totally. And we're at that crossroads right now. But we haven't reached that point yet though. No, we're still the global superpower. Right. That's increasingly being questioned. And literally it's changing on a monthly basis now. Alliances are (78/97)
being renegotiated. China's asserting themselves. Our institutional grip is declining. The Soviets went through something like that, very traumatic. But do you think that we're ... Something I mentioned in an episode, and it wasn't just with them, but I titled it Market Nihilism, the episode I did with where I had Grant Williams and Ben Hunt together. And I don't know, man, I can't shake this feeling that there's an increase in nihilism. Maybe it's because I feel it in myself a little bit too. And you know where I feel it also, Nick? I feel it with this virus. There's like a part of me that's kind of like, just burn it all down. I get that feeling sometimes. Do you ever get that feeling? Of course. If you're a young male in the year 2020, that's probably your default feeling. So interesting. Yeah. You're a young male in the society and decline, I think, where your best prospects come if there's collapse. They've been word for it. It's a collapseitarian, right? That's so interesting. (79/97)
Why do you think that zombie movies were so prevalent in pop culture? That's the thing you had to look forward to as a shake-up in hierarchies. You know, the ... I have a friend who is younger than you. I'm 38. You're 28? Yeah, they're abouts. He is like, I think 25. And he's very kind of curious kid. And he sends me all sorts of interesting items or memes or trending topics or perspectives that come from his community of young men or boys that inhabit a lot of the online forums on Reddit or Twitter or wherever. And it is really fascinating, man. I mean, the classic example is like the okay boomer or the boomer meme. But you know, I think for people like my parents' generation, they have no clue about this. They don't understand how serious it is, how serious it's gotten, right? The inequity. Because they're boomers. They're the beneficiaries of this currently stratified society, which is people may not be looking at those charts of the Jenny coefficient and which demographic cohort (80/97)
holds which financial assets, but they feel it. And secretly they yearn for a collapse, which is why the reflation of the bubble is making people so angry, myself included, because it is robbing society of a chance to reset. And if we don't get it now, we're going to get a jubilee or something politically shake up. I think there's basically a law here where society doesn't let that stratification be remediated in some way or another. That's the stuff the revolutions are made of. Dude, it's so true. I don't know what form it will take if it will work. But I mean, Bitcoin is an indictment of the modern financial system and the failure of government. When I say Bitcoin, let me rephrase that. The force behind Bitcoin, the incredible force behind the Bitcoin project, the determination by so many people to circumvent the modern financial system that is supported by the United States government, by governments all over the world, and which is a public-private partnership between the (81/97)
government and the key financial intermediaries and institutions. This is exactly what it is. It is there to serve. It's a protest. Exactly. It's a nonviolent protest. That's precisely what it is. It's a political project. It's technological, but it's mostly political. So give me some books. Before we end this conversation, give me some books that you like. You just recommended a fantastic one that I'm going to order. Is this author still alive? This guy, Ben Rich, looks like he's been dead for years. He looks like he wrote this in 1984. He looks like he wrote this one. Yeah. He was the second guy that ran the scump works behind Kelly Johnson. Dude, this guy's alive. He's still alive. He was born in 1925. He's still alive. Yeah, it was a great book. Wow. Highly recommended. Man, these guys, bro, like my grandfather, man, who fought in World War II. Let me see. What else am I reading right now? I have a personal interest in the Caucasus and the Georgia, Armenia, and Azerbaijan. So this (82/97)
is great history of the Caucasus that I'm reading by Thomas DeWall. Not that that's of general interest. That's interesting. Thomas DeWall. How do you spell his last name? DeWall, D-E-S-P-A-S-W-A-A-L. W-A-A-A-L. And it's the most fascinating part of ... Black Garden. Yeah, that's right. Black Garden is Nagorno-Karabakh. Also, the Caucasus. The little translation. The Caucasus is an introduction. Have you read Mark Mazower? I know, have I? He wrote an introduction to the Balkans. He's a Balkan historian. He's written Salonika, City of Ghosts, which was a history of the ... In part, the Jewish exodus from the Saloniki, which was a Greek cosmopolitan city during World War II because of the Nazi invasion. That's interesting. Yeah. I mean, the conflict between Armenia and Azerbaijan is one of the things that brought down the Soviet Union. That's me. These were nationalist enclaves, which had been dormant since effectively Stalin actually redistricted them. And you had this simmering (83/97)
resentment, which grew and grew, but it couldn't express itself as illegal to protest. And then in 1989, people got mad enough. They actually started doing pogroms and killing each other in large numbers. And this simmering nationalistic sentiment exploded, started a civil war, and that catalyzed every other little ethnic unit in the Soviet Union to say, well, if they can do it, we can do it too. It's a great case study in how systems look stable, but they're becoming increasingly unstable over time. That's fascinating, man. What are the books you recommend? I like to write a lot, as you know, and I'm reading this great book about writing by one of my favorite writers, Murakami. How do you spell that? It's spelled the way it sounds. Murakami, the K. So, Haruki Murakami, yeah. He's a fiction author. The Wyandup Bird Chronicle. Yeah, the Wyandup Bird. Yeah, that's one of his books. So, the one I'm reading is ostensibly a book about running, but it's really about writing. So, it's about (84/97)
how the rigor of being a runner, a serious runner, enabled him to become a much better writer. What I talk about when I talk about running. Yeah, so it's a really great book both about writing and about running, both of which I do. So, it's perfect. And he lived in Cambridge, where I'm based most of the time. So. Cambridge, Massachusetts. Yeah. Yeah. Dude, give me one more. Give me one more book. This is great. Let me see. What else do I have on my bookshelf right now? This is so different than what I've been reading lately. Although the book on the caucuses would be something that I used to read a lot of history and I loved it, but it's so hard to do anything other than read stuff that's relevant to the shows these days. Yeah. I mean, I don't know if your listener base would like this recommendation, but I would just finish rereading Bronze Age Mindset, which is a really popular book these days on probably on the right, I would say. Really? What is this? Bronze Age Mindset by Bronze (85/97)
Age Pervert? Yeah, it's by Bronze Age Pervert. The book right after it is The Pussy by Delicious Tacos. Also great book. Also great book. So, Bronze Age Mindset is basically written in this strange patois, like this sling and the author is pseudonymous, obviously. It's just about philosophy and life and it's basically an indictment of modern culture, modern life. So, you might say it's neo-reactionary, but it's just a kind of a rambling book, but also weirdly very compelling. It says this, so interesting. The Atlantic name this author has possibly Steve Bannon's contact in the White House. Yeah, I think that was a joke, but yeah, it's all related. It's a pretty interesting entertaining read. When I was getting inspired recently, I was, because I've been going a little crazy here. I don't know who you're cooped up with, but I'm cooped up with a lot of people. My girlfriend, my sister, her boyfriend, my parents, but it's fine. When I say cooped up, we're all in the same house and it's (86/97)
actually nice. We're in a super rural area and I went for a drive and I was feeling kind of ambitious and I had some space, which rarely happens. I was like, I really want to spend more time studying the progressive period, really the beginning of the progressive era with what was going on in the Midwestern farm regions and then all the way through until the coming of FDR. There doesn't seem like there are that many books. There were less than I thought, but I downloaded this one and I didn't get to read much more than a few hours worth of it, but it was Richard Hofstetter's The Age of Reform, which is a history of the progressive movement. But that's the fascinating, because I think it's relevant to kind of where we are today. That's where we're going. That's what Chamath said. He said that in his note. Chamath is the guy that social capital. Yeah, he wrote the best investor letter. He says, we're in the Gilded Age. We're in the Robber Baron Age and we're going to move into the (87/97)
Progressive Age now and it's not going to be a peaceful transition, but that's where we're going. And I totally buy that. Yes, unless, what if we could have moved into the Progressive Era in Germany? Dude, what I'm talking about, obviously the rise of Hitler's Germany. Yeah, well, maybe we're in the Weimar Republic in the early stages now. Yeah, because that was also to go back to Weinstein. Probably the most interesting thing from that conversation was Weinstein and Teal talking about the history of the Jews in Germany and what was lost with the exodus or extermination of millions of Jewish citizens from Germany. Some of the most intellectually vibrant, culturally and artistically gifted members of the community. And he had this great scene that Weinstein talks about where he's in a restaurant in Germany in like the 80s or the 90s or something and he couldn't talk about it. And he couldn't communicate with the staff and then he wanted a fork and he threw out the Yiddish word for fork (88/97)
and the waiter brought him a fork. And he's like, it was this weird moment of kind of like feeling like, yeah, this is where somehow belong here, but not really. And something I never thought about, right? Which is like, what Germany could have been, right? If it hadn't gone insane. Not just Germany, Poland, virtually all of their Jewish population was eradicated. Yeah, yeah, and Austria. I mean, but I just mean Germany and Austria because it was the sort of the epicenter of intellectual thought. If you wanted to be a great philosopher in the early 1900s or an intellectual, you had to speak German. I mean, it's similar in some ways to China's cultural revolution. What could China have been if they didn't purge their entire intellectual class? Jesus, man. You know, you think about the setback that is for a society, your entire urban elite intellectual and academic class all purged in the space of a few years. Man, unreal. Yeah, I hope we don't have one here, you know, but there's (89/97)
certainly plenty of anti-intellectualism to go around. There is though. I don't know. There are people that try to compare us to Nazi Germany because they see Trump as Hitler, which I think is totally unjustified and almost hilarious. We also don't have the ability to mobilize on a mass scale. That's just not in the DNA of the country. America is more individualist by degree. So it resists large scale political movements. That's so interesting. No, it's totally. It would soon a fragment, you know, then enter one of these political manias. Now, totally. And if anything, it's got quite the opposite problem. It's not blaming. It has no clear enemy other than the actual dominant majority, which is the white man. That's been the sort of the major narrative, identity narrative of focus. I have no idea how this came out for listeners, but it was interesting talking to you, man. Yeah, thanks for having me back on. Yeah, dude. This is great. Yeah, it was fun talking. I'm envious of your reading (90/97)
list, Nick. I was getting to the end of my teller there. I was running out of books on my nightstand. I didn't bring that many books with me from Boston. Well, I mean, like, you know, the cool thing is that you're in a space. When I say a space, I mean headspace, where you have a lot of space to write and reflect. You have one focus. And when I say one focus, I mean, you know, you're focused on crypto economics, but it's all part of, you know, some kind of working through ideas. As opposed to me where there was a time where I was in that space, but now I just kind of every week I have to focus on someone else's ideas. Right. And it doesn't give me the time. And that's valuable, but at some point I've got to stop that because I miss... Yeah, because you can't go deep in anything specifically. Yeah. Yeah. Or I can't go deep in a way that feels authentic. Like, I can try to go as deep as I can for the benefit of others and for my own learning. But I can never integrate that back into the (91/97)
larger whole and come up with something, you know, unique insight that's mine, you know? You know, I was just thinking about this because people keep pushing me to write a book, but I actually also feel the same thing because, you know, my obligation is to like the daily needs of our startups and our portfolio. I think it might be those like public equity investors that have a lot of time to reflect on history. Maybe everyone thinks everyone... You mean the macro guys? Yeah, yeah, because you read their notes, it's always about history. I'm always so envious of them. Because they're always trying to figure out what the world is going to look like. Yeah. That's how they are. Where we are in history, like, you know, you read the Howard Marks stuff, it's all historical references. Totally. But maybe that's like just this universal feeling that everybody else has more time than you. No, no, no, I think it's true. I mean, because I used to have so much more time. My life used to be (92/97)
structured in a very different way. But that's fine. I mean, like, I'm happy with what my life is now. Like, I like getting to do this. You know, I wanted this. You know, I constructed my life this way. It's a great privilege to get a chance to talk to folks like you or all sorts of other people that come on the show and to be exposed to your different perspectives, you know, which is why, you know, to go back to something we talked about at the beginning, you know, I genuinely... Like, the thing for me that matters is having open, honest conversations from a place of good faith. And because there's so much to gain for me. And I think for listeners, dude, like I told you, by the time this episode airs or this, you know, overtime thing goes out, we'll have and we're at 995 paid subscribers right now. So it might be a thousand. You know, it's working. You know, the experiment is working. People really want it. And even, you know, like everyone does sponsors, but, you know, I haven't gone (93/97)
that route. And I've been so inspired by the willingness and even enthusiasm of everyday people to literally buy into this model, you know? Yeah. It's very unique. Yeah, you could have, you know, landed some extremely fat sponsorship deals, but this way is much more independent. It's much better. Yeah. I don't want to have to do that. I don't understand why some people do it. I see some people who I know have a lot of money and they still do sponsors. And I almost think, I don't know why they do it. I think it's just mechanical for some people. They just do it because it's mechanical because there's got to be, like, you know, no, a lot of people don't need to make that extra money. And it also like cheapens the content because then you just have to produce output, you know, and you're not doing it for the sake of the interview itself. You're doing it to fill a slot. Yeah. Yeah. The worst is when they're doing it, they're interrupting, like if we're talking and all of a sudden it's (94/97)
like, I gave me the, like Castro oil, you know? But like, you know, the last thing I wanted to do is put someone else's words in my mouth. Yeah. You know? But I understand that, you know, I totally get that everyone's got different needs and I get it. And I think there are ways to do it that, you know, aren't bad, you know? Like the classic example, like audible.com, audible, audio that speaks to you wherever you are and just go right back, you know? Or I mean, if I had an audible as a sponsor and it was right at the top of the show, it's not a big deal. But I'd really rather not, you know? They're one of the few sponsors where I actually went out and bought the product after, you know, they sponsored some YouTube videos that I was watching. So I guess it's working. Totally. Actually, there was only one sponsor that I had considered having on as a sponsor, I think. Yeah. Because I also thought about Masterclass, but I was like, yeah. It was the great courses because I really liked the (95/97)
great courses, but my proposal to them, they wanted to do a strict kind of regular sponsorship model. Right. And then they said, look, I have listened to so many of your lectures. Let me bring on some of the authors that I really like and let me do a full episode with them. And, you know, we can give a percentage off to anyone who buys that lecture and you can give me a piece of that, you know? Yeah. And I'll be an enthusiastic supporter because I like the product, but, you know, and I get it, they have their own things. Anyway, Nick, we've recorded for almost two hours. So thanks, man. It was great having you on. I'll send this to my editor who is going to, he doesn't have much else to do right now because he's cooped up at home. Yeah. So I'll probably be happy to work through this. Well, thank you for... And we'll get it out as soon as possible. Thanks for having me on again. It's a pleasure. Hopefully we can do it again sometime. Yeah, man. It's great having you on. Okay. Peace. (96/97)
Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. This episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (97/97)
This is the full transcription of podcast 'Hidden Forces'.
Jim Rickards Can Complexity Science, Bayesian Inference Theory, and History Help Predict the Next Financial Crisis #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to another episode of Hidden Forces with me, Dmitri Kofinas. Today I have New York Times bestselling author Jim Rickards on the program. His books include The Death of Money, Currency Wars, The New Case for Gold, and The Road to Ruin. He is the editor of the Strategic Intelligence Newsletter and a member of the advisory board of the Center for Financial Economics at Johns Hopkins. He's an advisor to the Department of Defense and the US intelligence community on international economics and financial threats and served as a facilitator of the first ever financial war games conducted by the Pentagon. In this episode, we cover financial history stretching back to some of the earliest economic philosophers and we explore the deregulation of the financial system from Bretton Woods through the financial panics in Asia in the late 1990s and the financial crisis of 2008. We also address one of the greatest weaknesses of modern economics, namely the desperate need (1/98)
for better modeling and what complexity theory, Bayesian analysis, and behavioral psychology can tell us about our world. We end with projections about the future and why Jim believes the next crisis is bigger, runs deeper, and is much closer than most of us might imagine. Here's our conversation. Jim Rickards, thank you so much for being in studio with us. It's great to be here, Dmitri. It's very exciting. So I realized when I was preparing for this interview today that I have not interviewed you myself before. You were not on my radio program ever, correct? Right. It was on your TV program quite a bit. You were the producer and on air, but usually my interviews were with Lauren. Lauren, exactly. So that's the first time you interviewed me. Yeah. I had intended to look into my email. I didn't look, but I think I reached out to you in October or something like that when I was building my show list. So you were one of the early guests, I think in November, and you had come on and we (2/98)
were talking about currency wars, which was your first book. And now I've got your fourth book in front of me, and I told you I wanted to wait until I do this until we were talking. Look at how I annotated the shit out of you. That is the real deal, Dmitri. You've got more than the real deal, man. Stickies, liner notes. Is that Cyprus 2012-2013, Bailin versus Bailout, FSB, Brisbane, G20. You did a deep dive. It's funny, when you do interviews, I've done quite a few interviews about the book. You can tell within 30 seconds if the person has read the book or not. And I don't, people are busy and I don't expect every anchor to be able to read some. Oh, man, I read it. I read it. Look at this. Look at this. You've got a crazy thing. You've got your own equations. You don't even need mine. That's cool. I loved it. I loved it. I loved it. Well, you know, we're in sync. I mean, we're in sync with a lot of stuff. There's a lot of stuff in here that we're in sync with, and it's interesting (3/98)
because I've had a couple of other guests on the program who, one in particular, I'm thinking of who I just interviewed right before you, and he, there's a community of people, and this guy's a theologian philosopher, but there's a community of people that understand the market, understand the finance, understand the economy in a way that is similar. And it has, if anything, it's contingent on not having learned conventional economics because we're going to get into that because I'm with you all the way on your modeling. I consider having a PhD in economics from a major university. An intellectual disability. You ought to get like your own parking space for that. But it really, it stands in the way of understanding how the economy actually works. You go back to the 19th century and the 18th century and look at the classical economists, people who really figured it out. You know, Adam Smith, even before that, David Hume, John Stuart Mill, David Ricardo, they did not have PhDs in (4/98)
economics. They didn't even, it wasn't even called economics. It was called political economy if it was even taught. But they were lawyers, they were journalists, they were philosophers, they were mathematicians, they were people who had good intellectual skills and analytic skills, but also had a lot of common sense. And they had a very good read on the economy. Not sure if things move on and I'm all for models. I'm for models that work. I'm not in favor of models that don't work. But even as late as the 1930s, 1940s, we had people like Joseph Schumpeter who had a very good understanding of business cycles, but that all got lost. It all went off the rails. I think right in 1947 when Paul Samuelson invented neokinzenism, I like to say, I love John Maynard Keynes, but I don't like Keynesians. I think Keynes himself was a pragmatist and was interested in what worked, not in dogma, but all the things done in his name, if he were alive today, he'd be spinning in his grave. That's typical (5/98)
though, the people that come, the eons, the ones that attach to a particular person, they then develop philosophies around them, use their statuaries, credibility. So listen, okay, I'm trying to think how, or I did think I should have thought, how I want to do... Okay, so this is how we're going to start. I've been out of the loop. I brought myself a little bit back into the loop. I stay in touch with what's happening in the world, but this is something where I want to recap because I've been looking at the conversations that the media are having and what I'm seeing is pretty much the same. And I looked at total debt, the best figures I could find from the BIS, debt to GDP numbers, total debt numbers. All those things are in worse condition there than we were before. Consolidation in the financial system, worse. Complexity in the financial system, worse. And the central banks still being at very low, near zero interest rates, and also being the only game in town. That still being the (6/98)
meme, mimetic structure of conversation in the financial press remains the central banks. I guess, bring us up to speed on where we are. And also, if you want, why don't we talk about also how we got here because I read your book and it sounds to me like you really start the clock around the disintegration of Bretton Woods. That's how I think of it at least. But why don't you just kind of... Let's go. Why don't you just take us by the hand here? Well, I love economic history in addition to doing up to date 21st century economic analysis. I find history is a big input. And you can pick your points. You can look at 1914, which was the end of the classic gold standard. You could look at 1944, creation of Bretton Woods. You can look at 1971, 73 period, pretty much the end of Bretton Woods, the King-dollar period. You can... In my new book, The Road to Rowan, I actually have... I talk about history and I just quote a bit of history in my first book, Currency Wars, but I actually have a (7/98)
sequence of financial collapses, a sequence of three starting in 1998. That was the Russia, Asia, long-term capital management crisis. I look at 1998, I then come forward 10 years to 2008. Talk about that. And then I come forward 10 years again to 2018. Now, 2018 is obviously a literary device. I'm not saying that on January 1st, 2018, the world is coming to an end. I'm not saying that. The only thing is that that 10-year tempo is a realistic way to think about the periodicity of financial crisis, but I also make the point that the next crisis is coming. It'll be worse than 2008. It could happen tomorrow. I'm not saying it's going to happen tomorrow. What I'm saying is it could happen tomorrow. And if it's something you're concerned about, and investors, and anyone with any wealth to protect or any citizen should be concerned about it, what are you waiting for? You need to start thinking about it and preparing for it now. So whether it's 2018, 2019, or tomorrow morning, it could be any (8/98)
of the above. It doesn't matter. What matters is it's coming. It's going to be worse. The reaction function is going to be different, and that's what I talk about in the book. So, yeah, any of those are useful starting points. They all mean there's totally different things. All right, let's start with the Asian financial crisis and Russia, the Russian crisis and LTCM. And then we'll get into your predictions about 2018 because I want to talk about some of the models that you use to make your projections. Sure. Well, 1998, just for the listeners to recap a little bit, first of all, that crisis came to a head in September of 1998, but it started in June 1997. And that's a very important point because when it starts, you don't know where it's going. Now, complexity theorists would say, I have a pretty good idea where it's going because of the scale of the system, because of the interconnectedness. Once that first domino falls, it's easy to predict all the other dominoes are going to fall. (9/98)
You don't need a crystal ball or a time machine. You just have to understand the dynamics of the system, the array of actors or agents in the system to make some very good forecasts. But most people are not doing that. So in June 1997, the central bank of Thailand depagued the Thai bot from the dollar. So they had to peg to the dollar, and people looked at that and said, well, I can borrow dollars and invest in Thailand and get a higher return. It's a carry trade. Carry trade. And what do you worry about in a carry trade? Well, you worry about short-term rates in the short position going up. So short-term US dollar rates. So that was not a concern at the time. And you also worry about the exchange rate. But here you had the central bank of Thailand saying it's pegged, and you can always get your money out at a fixed rate. So people were doing golf courses and hotels and resorts and other kinds of investment, et cetera, in Thailand like crazy. And then all of a sudden, people started to (10/98)
get their money out. The reserve position drained. Central bank blew a whistle. Time out and broke the peg. And the panic that ensued in Thailand was a direct result of the fear of the initial boom as a result of the stability that was created by the peg and the environment and the overinvestment in Thailand caused a lot of anxiety around malinvestment and potential losses. Correct. There was a loss of confidence there. People wanted their money out. And now the point is, that was a crisis in Thailand. And maybe if you were an investor in Thailand, you got your money locked in or the value of your golf resort went down, et cetera. But nobody at the time thought that this would get to the point where global markets were hours away from a complete shutdown. And that's where we were on September 29, 1998. Now the reason I know that is history. But I was the lead general counsel for long-term capital management. That was the hedge fund that got caught up in it the following year. I (11/98)
negotiated that bailout. I was in the room with the officials in the Federal Reserve and the Treasury and other government agencies, as well as the heads of the 14 biggest banks on Wall Street and a whole thundering herd of lawyers when we did that bailout. So I know how bad it was. But no one thought that at the time in June 1997. So what happened after that? It then spread to Indonesia. People said, well, if Thailand's a problem, maybe Indonesia's a problem. Get my money out there. Malaysia, South Korea. So it began to do, this is what they call contagion or spillovers. Domino's falling, if you want to think of it that way. It began to spread throughout Asia. And the old expression in the time of Vesas, when there's blood in the streets, well, sadly, tragically, there was literally blood in the streets. People were killed in demonstrations in Indonesia and Korea. So Korea, it led to the collapse of the Soharto government in Indonesia, which had been there for decades. But then by (12/98)
December, it seemed to calm down a little bit. We went into the winter and it almost looked like it was over. And I was, my colleagues at Long Trump Capital were saying, is this a good time to invest in Indonesia because things have kind of fallen off the cliff. But by April of 1998, so now we're almost a year from the original devaluation, it started to reemerge again. And then it reemerged with a vengeance in Russia in August 1998. Russia defaulted on their internal debt, their external debt and devalued the currency. And the IMF, once, they're just a huge shock. And then that caused liquidity crisis to spread widen, spreads widen. And the IMF and people in the international monetary system were looking at the sequence, again, and now it's the dominoes. So they said Thailand, Indonesia, Malaysia was in it, Korea, Russia, and they thought Brazil was going to be next. Brazil looked like the next domino to fall. And the IMF started to build a firewall around Brazil, get ready for an (13/98)
emergency, liquidity, rejection, et cetera, conditionality and all that. But up popped long-term capital. Nobody thought a hedge fund, they were looking at a row of country dominoes. Nobody thought that there was a hedge fund domino in there where there was. And then that became the eye of the storm. By September 1998, we were looking at, and that was bailed out by Wall Street. Although I should put the word bail out in quotation marks, Wall Street didn't bail out long-term capital. They bailed out themselves. What they did is they came up with about $4 billion all cash. They bought the balance sheet, from then on they owned it, and then they didn't orderly unwind instead of a disorderly unwind. And they actually made, they got all their money back with a slave profit. The losses were on the prior investors, including the partners at LTCM, which is appropriate. They ran the fund. They should have suffered the losses. That was actually a fair result. But Wall Street wasn't doing anybody (14/98)
any favors. They were bailing themselves out. But that deal went through. It closed and life went on. In fact, after that, the Fed cut interest rates twice. The stock market rallied late 1998, 1999. That was the dot-com boom, if you will call it. There was no economic recession. And that was right after a Greenspan had had to walk back as a rational, exuberant, exuberant comment. Well, he made that in 1996, and then by 1998 it was kind of like, well, whatever, and it's going to do what it's going to do. That is an interesting sidelight, by the way, to meet you, because it has to do with the Fed's reaction function to bubbles. That was actually the origin of the Fed saying, we're not in the business of popping bubbles. We're in the business of cleaning up after the bubbles pop. And Greenspan did that in 2000. The dot-com bubble did pop in 2000. The NASDAQ fell 80%. And other markets fell by comparable amounts, not quite 80%. But then Greenspan cut interest rates in the early 2000s, kept (15/98)
rates low, too low for too long, really set us up for the next crisis, but that was yet to come. But he sort of validated the theory that the Fed didn't have to pop bubbles. They could clean them up after the fact. I talk about that in my book as well, that the theory is flawed, because it has to do with the difference between leverage bubbles and unleverage bubbles. The stock market boom in 2000, the dot-com bubble, was not leveraged. Then we might have had a little margin of money in there, but basically it was equity and it was not a lot of leverage. 2008, on the other hand, was leveraged 20 to one or more. And when you pop that bubble, you get a very different result than when you pop an equity bubble, because there's not enough money to go around. There's not enough equity to pay off all the creditors, and you get a liquidity crisis in the global panic, which is what we saw. But coming back to 1998, so that deal went through. The world did not come crashing down, but it almost (16/98)
did. We were just hours away from closing every stock and buy market in the world. Can you explain to our listeners a little bit, so for people to understand that, and two points, I actually want to say something. LTCM was using a Gaussian distribution in their model for trading, which is an important point that will circle back around when we speak about predictive modeling. Gaussian distributions are normal distributions. The idea that if you have a certain number of events that are out of the norm, you can keep betting that you're going to get back into the average. And they were doubling down, tripling down that things were going to recur. It's a bell curve. It's mean reverting. It's called a Gaussian distribution, or a normal distribution. It's got a couple different names, but that's exactly right. And the problem with that, first of all, it's not true. It's empirically not true. We don't have to debate it. If you look at it. It's true in the case of people's height, in the case (17/98)
of heights of people, but not in the case of market prices. There are some things that are normally distributed, height, weight, IQ. They are a bunch of things that accord coin tosses. You start tossing coins and getting heads or tails. And you don't know what the next one's going to be, but if you do it a thousand times, you're going to come really close to 500 heads and 500 tails. It might be 498 heads and 502 tails, but it's going to be somewhere around there. That's normally distributed. You're getting to something important with that example, because each previous coin toss does not affect the future coin toss unless you're saying there's something I have to reexamine my model, which is the Bayesian theory. Well, correct. Bayes is a tool to do predictive analytics when you don't have a lot of information, but it's not really tied to normal distribution per se. It's a tool. But going to your point, and this is attributed to Markov, that when you have something, a draw of cards out (18/98)
of a deck or a spin of a roulette wheel or a coin toss or a roll of the dice subject to however many faces or combinations are in a pair of dice or heads and tails on a pair of coins or whatever the combinations are on roulette, the next turn of the wheel, the next roll of the dice is not predictable, but over a long enough sample, you can be highly certain that you're going to get a certain distribution. If you're in markets, you can bet and lose, double your bet, lose again, double your bet again, lose again, double your bet, and then win. You're going to win eventually if you have a normal distribution subject to two conditions. Number one, you better not run out of capital. That's what happened to long-term capital management. The fact is the trades that long-term capital management lost money on, those trades ended up making money. In fact, there was always a high probability that they would, but it doesn't mean you can't lose all your money in the meantime. You can lose all your (19/98)
money waiting to make the money. That's all that happened as the Wall Street stepped into the shoes of long-term capital investors and they did in fact make the money about a year later. You could see that coming, but you didn't know when. So the first condition is you need very deep pockets and then you need to be able to keep playing the game. And that's what happened to the Hunt Brothers in 1980, the regulators, the Commodity Futures Trading Commission, the exchange is called a timeout. It said, game over. Well, if the game is over when you're down and you don't get to make the next bet, that's another way to lose. You can be right, but you have to be solvent. Right. So those are the problems with, it's called a martingale by the way. That's the name for doubling down, doubling down, doubling down. Eventually you will win subject to those conditions which we mentioned, which is it's not game over and you have enough money. But that's not even how markets work. In other words, if (20/98)
market, but the problem is, A, people think markets do work that way. That normal distribution is the basis for Wall Street risk management to this day. Value at risk is, which is the main tool, that's the main tool, is based on that. Which is what's still being used to measure bank capital. Correct. Well, what they do is they look at your balance sheet and then they say, they stress test it and say, what's the worst that could happen? And with a certain probability and if that is highly remote and you have enough capital to get through it, then you're good to go. That's completely flawed. The people doing those tests, misapprehend the statistical properties of risk. They actually don't know the worst that could happen. The worst that can happen, complexity theorists would say, tell me the scale of the system. And I will tell you that the worst that could happen is an exponential function of scale. That, by the way, is not just a theory. That's actually, there's a lot of math and a lot (21/98)
of empirics to back that up. Dmitry, when you look at the time series of prices, what's more empirical than saying, give me a ticker, whether it's second by second, minute by minute, hour by hour, pick your periodicity, tell me how prices move, graph it out. What is the shape of that curve without what's called a degree distribution? Well, I'm sorry, it's not a belcher. It just isn't. This whole, everything about risk management, everything about banking regulation, everything about trading is based on a false premise. It is a curve. There is a degree distribution, but it's something called a power curve. And the debate between a power curve and a bell curve is not some dry academic debate about the shapes of two curves, because those curves represent completely different dynamics. The curves are just representations of a degree distribution. It's the degree distribution that is the underlying risk in the system, and those dynamics are completely different. It should come as no (22/98)
surprise that central banks blunder time and time again. Yeah. I mean, you're really nailing something, which is that on a fundamental basis, the models and the methodologies that have been developed for in the economics profession and in financial markets simply don't match up with reality. And of course, what is a model? A model is an approximation of reality. They are not near approximations of reality. And with respect to what you were saying, they're effectively talking about these extreme fat tail events. So the reason that we consider them fat tails is because we're thinking about normal distributions, which is what they are not functioning within. The other thing I wanted to say when we were talking about the Gaussian model is about, how could an event like long-term capital management, a $3 billion fund, something like that, how is that going to collapse global markets? And what that brings us back to is a fundamental fact, which was the issue with Lehman, which is that (23/98)
financial markets function on a matter of confidence. And fundamentally, that is what allows markets to function because they're leveraged. No one has... We're not functioning off of a capital that is there, that is available to be pulled at any moment. And that's what a classic bank run is. But today we're talking about, I mean, the runs that we've experienced don't happen at retail banking. They happen in investment bank. They happen in derivatives markets. Right. Well, the thing with long-term capital, you mentioned, I mean, the total losses there were just under $4 billion. It was about $3.6 billion. And that's the amount that Wall Street put in to prop up the balance sheet. But that wasn't the issue. The issue wasn't, gee, would Wall Street lose $3.6 billion? That firm was on balance sheet. So on balance sheet was leveraged $20 to $1 at the beginning of the crisis. Now, toward the end of the crisis, it was leveraged $100 to $1. You hear that number a lot. But the reason it went to (24/98)
$100 to $1 was not because we were adding positions. It was because the capital was shrinking. You were dividing the denominator or the fraction was shrinking. So of course, you're going to get a higher leverage ratio. So it started out at $20 to $1 on balance sheet at the end when the bailout was closing. It was closer to $100 to $1. But that doesn't tell the whole story because the off balance sheet was $1.3 trillion. So imagine $1.3 trillion of derivatives poised on a $3 billion sliver of capital. Now you get the idea. Now we're talking $300 to $1 or more. So that was really the problem. And just to give a very simple example, long-term capital was very well known for trading, fixed income, derivatives, arbitrage. You have arbitraging, government bond markets against futures, government bond markets against options. They had a lot of counter parties in these derivative positions that they were using to net their risk. Correct. About 70 major counter parties, probably most of the the (25/98)
trades were concentrated in about 40 names. But these were all the biggest banks in the world. But just so the idea that LTCM was big in fixed income and fixed income derivatives and arbitrage, everybody knew that. But what they didn't know was that long-term capital was the biggest risk arbitrageor in the world. Risk arbitrage is betting on stock takeovers. So Company A is going to buy Company B for a certain dollar amount per share. And that's announced. And it's called risk arbitrage. You look at that and say, well, okay, Company B is that stock's below the takeover price. So if I buy that, if I short Company A, I go long Company B, I own the spread. I wait for the takeover to go through the price it converges. I unwind. I make a profit. You know, if it happens, of course, nothing's risk-free. But the idea is I'm taking a little bit of risk to make a lot of profit in that deal. What's the risk? Well, the risk is that the deal doesn't go through. The risk is the deal busts. And (26/98)
instead of converging, those prices move back in opposite directions. And the target company stock collapses and you lose my sets of risk. And smart people have developed models and ways of thinking about companies and talking to management and doing a lot of fundamental bottom-up research to figure out that risk. Long-term capital didn't do that. They did a couple of things. They just kept betting. And they said, look, we know a certain percentage of these trades are going to bust. But if we do enough of them in enough size and do it persistently, we will, in fact, make money because on average, you do. So that was kind of going back to what we said earlier about average distribution. Average sample size. And the Martin Gale. But the other thing we did, we'd never owned a share of stock. We did it in derivative form. We had a, what's called a total return equity basket with Bear Stearns, which was our prime broker. So we would literally just call up and say, we were in every big risk (27/98)
arbitrage deal of the day. You go back to the late 1998, what were the big deals? WorldCom, MCI, Citigroup, Travelers, Lockheed, Boeing. These were the big deals of the time. We were in every single one up to 4.9% because beyond that, you had to make a public disclosure. And we didn't want to do that. So we kept ourselves at 4.9%. But these were giant deals. And we did all in derivative form. So we would just call Bear Stearns and say, hey, put a million shares of Lockheed short and the basket. Boom, there it is. Well, Bear Stearns was doing that trade with us in derivative form. They would have to go out into the market and buy the Lockheed. And that was that they were short to us in the basket. They'd have to go along the actual shares and then they would have a hedge position. They would make a profit. Well, picture that setup. Now imagine LTCM disappears. We filed for bankruptcy in the Cayman Islands. Boom, we're gone. All of a sudden, Bear Stearns is long billions of dollars of (28/98)
Lockheed stock that they got to dump. And that was the problem. All the Wall Street counterparties would have had to dump all the stock that they owned because they thought they had a hedge position because long-term capital, they were short to long-term capital. Well, try dumping $15 billion worth of stock. That's what we had, $15 billion. And I'll never forget Peter Fisher, who was head of open market operations at the Federal Reserve Bank of New York at the time. Bill McDonough was the president, but he sent Peter Fisher up and Gary Gensler, who was assistant secretary of the Treasury at the time, came up to visit us in Greenwich at Long-Term Capital Management. This was before it was really big in the headlines. We actually called them and said, Houston, we have a problem. We didn't expect a bailout. We didn't ask for a bailout. We were kind of incredulous. Like, well, why should you bail out a hedge fund? We thought we were just being good corporate citizens. Like, there's a (29/98)
problem here. You're the regulators. You ought to know what it is. So they came up. It was on a Sunday and Gary Gensler, Peter Fisher, Peter's assistant, Dino Koss, John Meriwether and I sat down in a room for five hours. And we just turned pages. We had pronounced and we just went through position by position by position. At the end of it, Peter's face was white and he looked at us and he said, we knew you guys would take down the bond market, but we didn't know you would take down the stock market, too. They had no idea about the 15 billion of equity position. So it would have shut every market in the world if the bailout didn't go through. That's how close we came. So we survived that. Life went on. Stock market reached new highs and you had the dot-com collapse. Then, so come forward to 2007. Actually, earlier in 2005, 2006, I could see the same thing happening again. I was giving lectures. My books were not at the time, but I was a regular finance lecturer at the Kellogg School at (30/98)
Northwestern. I gave a lecture at the Applied Physics Laboratory, actually, because a lot of the models I use are from physics. Salamos. That came later. This was actually the Applied Physics Laboratory down in Laurel, Maryland. But I was out there warning. Now, I didn't say, gee, it's going to be mortgages. It's going to be the spring of 2007. I wasn't that specific, but I didn't have to be. I could see the instability in the system. I could see a greater collapse was coming. I was warning about that based on system dynamics. You didn't have to hang it. Could have been mortgages. Could have been something else. It didn't matter is that the system was unstable. That's what I was saying, having lived through it the first time and having done quite a bit of research in complexity theory, physics, graph theory, network theory, applied mathematics, Bayesian statistics, et cetera. In the meantime, I kind of mastered all that to the point where I could understand capital markets differently (31/98)
than everyone had done before long-term capital. So what should have happened after long-term capital? When you say, when you look at what went wrong, what should you have done? Well, you should have banned derivatives. Most derivatives, not 100%. Maybe the old style, Chicago futures, heavily margined. Watts very carefully, well-risked. Maybe they're okay. Let's actually, for those listeners who are not fully familiar with this, when you say banned derivatives or put regulations around derivatives, what you're essentially saying is derivatives are good so long as, and what is the derivative? A derivative is essentially a bet. It's a bet. It's a bet. It's a bet on an underlying asset that you don't have to own. Correct. It would be like, if you and I went to the racetrack and there were real horses and a real betting window and we put up real money and we made a bet, okay, people understand that. But what if we were in some bar 5000 miles away and I just said, hey, Dmitri, let's make a (32/98)
side bet. We're not going to go to the racetrack, the paramutual window. We're just going to make a bet. And then I take your bet and sell it to somebody else and she sells it to somebody else and so on. So you can see that there's a lot of bets out of one race and nobody put up any money after the first one. We got a lot of debts to settle if anything unexpected happens in that bet. Well, that's all derivatives are. They're side bets on a market. So we kind of understand stock markets and bond markets. These are just side bets. But the problem is you can't see them. They're non-transparent and there's no limit on the leverage. And they're over the counter. And they're over the counter by and large. And that's what causes the instability. And just to now remember in 2007, by the way, interesting because I talked about the 98 crisis then my next crisis I talk about in the road to ruin is 2008. But very similarly to 1998, which really started in 1997, the 2008 crisis started in 2007. Now (33/98)
everyone remembers September 15th, that was the day Lehman Brothers filed for bankruptcy. So everyone looks at that says that was ground zero in the crisis. But that actually started in the spring of 2007 over a year before when the first signal, I mean some insiders saw this, people like Kyle Bass and others, anyone saw the movie The Big Short knows that there were people who were onto this. But as far as the general public or average investors are concerned, the first clue was on the spring of 2007 HSBC. And because the public company announced that its earnings, they lowered their earnings expectations and they specifically said, we're losing some money and mortgages here. What an amazing time. Well, that was an alarm. And then at the end of July, there were two Bear Stearns hedge funds that actually went out of business. There wasn't Bear Stearns itself. That happened in March 2008, but these two funds went out of business. Then Sock, Jens, Societation, et al. Suspended money (34/98)
market redemptions. That was a shot across the bow. And then of course, we had the famous rant with Jim Cramer and Aaron Burnett on CNBC. Cramer was screaming, they know nothing, they know nothing. And he was right. It was absolutely right. The Fed was completely clueless. Well, that's when it started. But think about the fact that you had some signals in the spring and summer of 2007. Then you had some real stress. And then by September of 2007, member Hank Paulson, Secretary of the Treasury came up with the Super Civ, you know, Civ SIV, a special investment vehicle. These were these off balance sheet structures that Citibank and others that come up with for their credit card receivables to keep them off the balance sheet of the bank. And they were funded with commercial paper. Commercial paper started drying up. It looked like they were going to implode. And Paulson had a roll up strategy. He said, let's take all the civs, you know, you're all in trouble and roll them up and do what (35/98)
I call the Super Civ. And we'll wrap some kind of guarantee around it and make that problem go away. And then what happened? But the other thing they did. It's so difficult remembering all this stuff. It's painful, isn't it? It's painful. It's painful. We've got any, please continue. Because one of the things I want to get to before we're done with this interview is I want to ask what your perception is about where we are today in terms of that type of complexity. But that's why, thanks to Dimitri. But that's why the history is so important. Because if you had learned the lessons in 1998, which we didn't, but if you had learned those lessons, we never would have had 2008. But the problem with 2008 is we didn't learn any lessons either. Where things are just as bad. And we'll come to that. Why this next collapse is going to be worse than the next, than the last one. But so December 2008. So now, sorry, 2007, this is still 2007, Hank Paulson gets on the phone and calls all the major (36/98)
sovereign wealth funds. Adia, Abu Dhabi Investment Authority, Temasek, and Singapore, Kuwait Investment Authority, Prince Al-Wid, all the big money in the world. And says, you got to, the US banking system's on sale. And you got to bail it out and you can get some great bargains here. So remember Abu Dhabi bought just under 10% of Citigroup and they did it with an option structure. And they announced it was $35 a share. Citigroup had been 50 by the way, close to 50. They said it was $35 a share, but they had a bunch of bells and whistles and high dividends and options in there. If you adjust it for all that, it was closer to $24 a share. They're still overpaying for it. Well, we went to two. Eight months later, it was $2 a share. But my point is by December, we were feeling good. It was like, hey, crisis is over. Sovereign wealth funds bailed out the banks. They look like Warren Buffett buying Solomon Brothers in 1991. And it was all good. What wasn't all good. It was exactly like that (37/98)
hiatus member in 1997, 1998. It looked like it calmed down by the winter, but by the spring, it came back again. March 2008, Bear Stearns goes out. June, July 2008, Fannie and Freddie go out. Then of course, September, Lehman. I remember talking about this in the book in August. What a time. Yeah. What a time. But I was sitting there watching this like, I've seen this movie. I had lived through it with Long Term Capital. I know that the scale of the system is so big that these are slow motion crises. It's not like two cars hitting each other. It ends up that way, but it's like, actually, imagine two cars hitting each other, but you're watching it in slow motion. And you're like, whoa, those cars are going to hit each other. Oh my God. They're heading right for each other. This is going to be really bad. That's how I felt in late 2007, 2008 watching this. But just to illustrate that point, so it's August 2008. We're in the middle of the presidential election campaign. And it's McCain (38/98)
versus Obama, Obama's first term. And I was on the economic advisory board for the McCain campaign. So briefly, it was a very short service. So I get invited onto the call. So John Taylor and Marty Felstein, all these big names, they're all on the call and I'm on the call and I'm listening. And these guys are high-fiving because it was right after the Fannie, Freddie bailout and Congress passed legislation to solve the Fannie, Freddie. And they're high-fiving like, thank goodness the crisis is over. Now we can talk about Iraq because McCain really wanted to run on the Iraq war, being a war hero, war veteran, all that. I said, now we can talk about Iraq. We don't have to talk about this financial crisis because it's over. And I said, just by the time I waited and then time came, I said, hi, Jim Rickerson. I said, this crisis is not over. I said, you are not going to make it to election day without major financial crisis. This is just Domino's following the last dominant. So here's what (39/98)
you do. Write the speech right now because you won't have time when this happens. Give it four points. It doesn't even matter what they are. You always have four points because it sounds good. I said, when the crisis hits, put the candidate on the steps of the treasure with a microphone and say, my fellow Americans, we're in a crisis. Here's my four point plan to deal with the crisis. I said, people will be so reassured, you'll be elected president. Well, here's what happened. I got people who said, who's this nut? I got left off the call. I was not invited back. And then of course a month later, that's exactly what happened. We had the Lehman Brothers crisis. And if you recall what happened then, McCain ran around like a chicken with his head cut off. No, he ran back to Washington. He suspended his campaign. And then he barged his way into the Roosevelt room, wanted to meet with the president. Well, Bush, 43, he couldn't very well meet with McCain without meeting with Obama. He was a (40/98)
Republican, of course, but he had to be balanced. So he invites McCain and Obama into the Roosevelt room and for this economic summit or whatever it was. Well, Obama didn't actually know any more than McCain, but Obama was smart enough to keep his mouth shut and just look very cool. McCain looked scary. Obama looked cool. If you look, that's when the polls reversed. McCain was leading the polls up until Lehman weekend. It flipped. Go to a real clear politics poll of polls for that data is available for September 1998. And you'll see, sorry, September 2008, you'll see that the polls reversed that weekend. So it pretty much cost McCain the presidency that he was not prepared. McCain campaign has always contended that indeed. Yeah. It wasn't Sarah Pell. Sarah Pell was a sideshow. It was the crisis that took him out, but he was warned. And so then, of course, we go through the 2000. And I want one more footnote on 2008 to meet you because I know you want to talk about the next crisis and (41/98)
so do I. No, this is great though. I do want to go through this because this is important. So when the crisis started in 2007, even into 2008, even when it got bad with Bear Stearns and Marsh 2008, it was looking a little bit hairy, you had really smart people. And I would say like Ben Stein, who is the economist and lawyer, market commentator, but others that, and they said something along the following lines. There were $1 trillion of subprime and alt-A mortgages. I mean, everyone knew that the problem was in mortgages and housing values were going down. And that was the number. There were approximately $1 trillion of subprime, what's called alt-A. Alt-A are kind of funky, not very good mortgages, just not as bad as subprime. So $1 trillion was the number. Historically, default rates, even in a bad recession, seldom got above 5%. Usually 2%, 3%, 4%, 5% was really extreme. So what Ben Stein and others said, okay, let's get crazy. Let's assume 20% defaults. Nobody thought it would be (42/98)
that bad. Let's assume 20% defaults. They said, they did the math, they said, okay, you got a trillion of mortgages. Let's assume 20% defaults, which was crazy. That's $200 billion of losses, which in real terms was not larger than the losses of the SNL crisis in the 1980s. They didn't take into account the derivatives market. That's exactly right. In the 80s, we survived that. They said, 200 billion is a lot of money, but we'll survive. What they didn't know is that there were $6 trillion in derivatives. And you take a 20% hickey on $6 trillion. Now you're talking $1.2 trillion of losses. That's enough to wipe out a lot of banks, which is exactly what happened. So it was the non-transparency, the opaqueness, the blindness of what could happen in derivatives market that caused people to be too confident about what was going on in mortgages. And the over-the-counter derivatives market was estimated at roughly $700 trillion at that time. That's about right. It's getting close to a (43/98)
quadrillion. It's actually, interestingly, it's actually starting to come down a little bit. There are other problems, but some of these, I mean, when I say now, it's very recent on the last couple of years or so, according to the BIS. But you have the time, approximate number was about $700 trillion, which is not that far from one quadrillion. All right. So 2008 happened. We had the government fiscal bailout, which was the Hank Paulson Bazooka. We had the massive liquidity, not just the Federal Reserve, but across the world, central banks. The EU, ECB had the LTROs. They'd had their equivalent of quantitative easing. We had QE1, QE2, Operation Twist, QE3. Was Twist 3, anyway? Well, we had plenty. So we've passed all these sort of years, right? Twist was throwing a bone to a hungry dog. When QE2 was over, the market looked at the pens and said, what else you got for us? And they weren't ready to do QE3. They said, well, here's Operation Twist. I keep you guys happy. But that was a (44/98)
little bone between QE2 and QE3. Actually, Twist seemed like it would do more harm than good in retrospect. Even at the time, it seems to me. Yeah. Well, it's all harmful. Yeah, it's all harmful, but it's like particularly stupid because it made it so difficult to even more difficult to unwind it if you're going to be going to suppress the long end of the curve. All right. So not to get, not to recount all those inter-years, but all right. So tell us now sort of, let's continue. Why don't you just keep going with where you work? Well, as I said, we didn't learn any lessons after 1998. In fact, we doubled down. I mean, they repealed Glass. 1999, they repealed Glass-Stigl. That was one of the, Glass-Stigl had worked almost flawlessly for 80 years from 1933 or 34 to 1999. Glass-Stigl separation of commercial from, I mean, retail banking from investment banks. Correct. I said 80 years. It was about 65 years. But you go back to the 1920s. What was going on in the 1920s? Well, commercial (45/98)
banks were originating garbage loans, securitizing them and selling them to their customers. So in 1929, a stock market crash, a lot of retail lost a lot of money. We went to the Great Depression and Congress had hearings. And they looked at this and said, oh, you guys originated garbage loans and sold them to your customers. You can't do that anymore. They passed Glass-Stigl. And Glass-Stigl said, from now on, you can take deposits and make loans, and that's a commercial bank where you can underwrite in self-securities. That's an investment bank, but you cannot do both. There's an inherent conflict of interest. You cannot do both. Well, that worked extremely well for about 65 years. Why the Congress in 1999 thought they were smarter than the Congress in 1933, I'll never know, except that the Congress in 1999 was a lot more corrupt. You had sort of the devil's bargain. You had Phil Graham, Senator on the Republican side, and Bill Clinton, President on the Democratic side. You also had (46/98)
Robert Rubin, former Goldman and Citigroup chairman. Sure. I think he might have moved on by 1999. I think Larry Summers was Secretary of the Treasury. Was he? Maybe a talent of Rubin's role as Secretary of the Treasury. Rubin was certainly a player. You're absolutely right. But the point is they repealed it. So what happened next? Banks originated garbage, loan securitized them, sold them to their customers. And it was an exact replay of the 1920s. Why should we be surprised that 10 years later you blew up the system again? It had already happened, and they fixed it, and then they unfixed it, and it happened again. What kind of learning is that? And this is the problem with public policy. It's short-term. It's corrupt. It's a matter of prevailing self-interest and special interests. No one's looking after the taxpayer or the everyday citizen or everyday investor. Well, that's why I personally focus so much on Bretton Woods, because that was sort of the architecture, the global (47/98)
financial architecture. And once that big piece of it was taken out, once we went off the, essentially, not the gold standard, but not the classical gold standard, but effective. Right. Once we went off of that, it changed the game for everything. And that's when the calls for deregulation began. Then late 70s, all through 80s and 90s, we had a lot of financial deregulation. In my opinion, studying the history, I think what should have happened was deregulation followed by re-regulation. I mean, a rethinking of the system. If you're going to go off of Bretton Woods, you have to accommodate for this new reality. Right. And then, of course, when Bretton Woods failed, and it was in state, everyone goes back to August 15, 1971, which is the night that Richard Nixon said that we are, he actually used the word temporary, that video. Shut the gold window. YouTube, you can find it, but he said, we are temporarily suspending the conversion of dollars into gold by our foreign trading partners. (48/98)
And actually there were- Prevent it to protect us from American people from the speculators. Well, right, exactly. He used the word speculators. They spent the weekend at Camp David, and there were about five people who were very close to the president who were there. I've actually spoken personally to two of them, Kenneth Dam, who was a lawyer in the White House at the time, but later Deputy Secretary of the Treasury, and Paul Volcker, of course, who at the time was Deputy Secretary of Treasury for International, later Chairman of the Federal Reserve. So the others were, you know, Zarathar Burns. Burns was there. Chairman of the Fed, John Connolly, Secretary of the Treasury, and the president. So I spoke to kind of two of the five people in the room, and they, not surprisingly, they told me that they all thought this was temporary. They thought it was a timeout. There was a run on the bank, except the bank is Fort Knox. The French. So there was the French, yeah, the French, but the (49/98)
Swiss and the Spanish were right behind them. The only people who were playing ball with this were the Japanese and the Germans. Always. Because, well, they needed the nuclear umbrella. They were relying on military protection, so they played ball because they were dependent on us militarily. And then the Brits didn't mess up the system because they had a worse problem than we did. There were a lot of sterling claims out there that couldn't be converted to gold. But, yeah, the French, the Spanish, the Italians, to some extent, the Swiss, it was just a run on the bank, except the bank was Fort Knox. The gold was flying off the shelves. In 1950, the United States had 20,000 tons of gold. By 1970, we had 9,000 tons of gold. And we said, where did that 11,000 tons go? Well, it went to our trading partners. But the pace was accelerating. We would have been out of gold within a year or two at the most. And Nixon knew that. But what he thought they were doing was shutting the window (50/98)
temporarily, exactly like a circle breaker on the stock exchange. Capital control. Right. Then we would have another Bretton Woods type of meeting, which they actually did at the Smithsonian in December 1971. We would devalue the dollar against gold, which they did. They said, let's make it, at the time, $42 an ounce. And then we'll reopen the window at the new value. Well, the problem is they never reopened. They did everything I said, but they never reopened the window because countries went to floating exchange rates under the, obviously, malign, and this guy had influenced Milton Friedman, who thought that was a good idea. He was a proponent of it. Turns out, not such a good idea. But we've been essentially unanchored ever since. And we've had one crisis after another ever since, whether it's the 87, stock market went down 22% in one day on October 19, 1987. From today's levels, Dmitri, that would be the equivalent of 5,000 points on the Dow Jones in one day. Not 500. If the stock (51/98)
market went down 500 points, it's all you'd hear about. Imagine 5,000 points in one day. That equivalent percentage terms is what happened on October 19, 1987. That's really the kind of, to me, that's the beginning point of the modern age of complexity. It's always been complex, but actually going into critical state dynamics. You said at the beginning of our discussion, things are more complex. The way I would think about it is that the whole system's always complex, but it's more critical. As critical as a technical term, it describes the situation in complexity when you're ready to detonate an atomic bomb. You're at the threshold. You're at the critical threshold where things are going to blow up. For example, let's say I've got a 35-pound block of uranium-235 in its shape like a cube, and it's sitting in front of me. Well, it's complex. I mean, it's radioactive. There's stuff going on. Neutrons are firing off and releasing electrons and it's creating energy. But it's radioactive. (52/98)
It's complex, but it's not in the critical state. Now, I take the 35 pounds. It's in a stable dynamic state. Dynamic stability? You'd call it? It's, I would say it's non-critical. Non-critical. I would say it's complex and dynamic, but not critical. I'm being technical only because I don't speak of these things in generic terms. I like to use the actual physics scientific terms that apply. That's why you'll never hear me unless someone brings it up. I never use the phrase black swan. Because black swan is one of those things where it's kind of content free. And it seems to have met him, read his book, a great book. I think he did a really, really good job of demolishing the bell curve, which we talked about. But then he kind of threw up his hands and said, statistics don't work. You can't model it. It's not normally distributed. I'm a philosopher. That's sort of the distinction between chaos and complexity. Well, it's really the distinction between demolishing a paradigm, but not (53/98)
building a new one. I would say Taleb did a very good job of discrediting the old paradigm. But he didn't replace it with anything. He just said, you kind of can't model this. Just get long volatility and wait for the end of the world. So that's fine. It's not his job to save the world. But I was never satisfied with that. I felt, well, okay, I agree 100% that the old paradigm of normal distribution is wrong. I mean, it's empirically wrong. But I wanted to figure out what worked, what would work. And I found it in physics. I just had to, I didn't invent the science of complexity. It was invented in 1960. But all I had to do was take the math and theory and import it into capital markets and to get very good results. Because it's apparent, readily apparent, the many who ask the question that capital markets are complex systems. And so you can use complexity science to understand them. But coming back to this issue of the critical state. So I've got my 35 pound block of uranium. It's (54/98)
radioactive. It's complex. It's dynamic, but it's not critical. Now I take it and I shape one part of it. I engineer it into something about the size of a grapefruit. And I take the rest, I engineer it into something that looks kind of like a baseball bat. And I take the grapefruit and the baseball bat and I put them in a tube and I fire it together with high explosives and boom. Now I've got an explosion. I can kill 300,000 people. That's an atomic bomb. Now the point is, it's the same 35 pounds of uranium. It's the same 35 pounds of uranium. But by engineering it, you cause it to go into the critical state. So when I look at capital markets, the scale of the system, the amount of derivatives, the quadrillion dollars we talked about earlier, that's the uranium. But then the question I ask myself is, are we bending it, shaping it, or is it bending and shaping itself? Because there is this concept of self-organized criticality, which is you do it yourself, to the point where we're about (55/98)
to collapse. And sadly, the answer is yes. And it doesn't have to be that complex because you brought up the, it doesn't have to be that ornate because you brought up LTCM as an example or Lehman or whatever. You have these critical points where a small change creates a nonlinear result. You can have a completely critical event in the market. All right, so that's where we are today. Why don't we talk about that, talk about Ice IX, Global Balans, sort of everything that you project in your book about where we're headed. Great. Well, we went through the last- We did a deep dive. Did a deep dive on 1998 and 2008. So let's talk about 2018. Let's do it. With a warning that it could be tomorrow. And that's the point I make. So we didn't learn lessons in 1998. We got 2008. We did not learn lessons in 2008. So we're going to have another crisis. We have not done what we need to do. We are, I mentioned, banning most derivatives. That would be a good start. Breaking up the big banks. J.P. (56/98)
Morgan, today, when I started banking, it, five of the biggest banks in the world are today, J.P. Morgan. It was the old J.P. Morgan, Chase Manhattan, Chemical Bank, Manufacturers Hanover. These are all, suddenly, an ancient history lesson. But these were all big banks in the 70s and early 80s. And they've all been rolled into one bank. And many, many more, by the way. There were a lot of small banks. There was National City, which was also a bigger bank then. But then rolled into- Yeah, it merged with First National Bank and became First National City Bank. And then it became City Bank. And yeah, so these big banks are bigger than they were in 2008. So what did we hear about in 2008? Too big to fail, too big to fail. Well, all the banks that were too big to fail are bigger. They're more concentrated. Those five biggest banks have a larger percentage of the total banking assets. They're more interconnected. The derivatives books are bigger. And so, well, so what? Who cares? I mean, is (57/98)
it in consolidation, a merger? Except it goes exactly against the premise of Dodd-Frank, which was to create a financial institution that could be more easily wound down. Well, that will not survive the next crisis. The thing about Dodd-Frank is everyone said, and I know Senator Dodd and Eddie Silverman, who is his chief establishment, I know people actually put this together. And they said, we have ended too big to fail because we have this resolution authority and living wills and all that. And my answer is you haven't ended too big to fail. You have institutionalized too big to fail. You have made too big to fail a way of life because you've given yourself the false assurance that you can deal with it. And based on that false assurance, you've allowed the big banks to get bigger. You know what, there's an old saying. There are a couple of different versions of it. One of Napoleon's generals said, no plan of battle survives the first shot or the first contact with the enemy. I think (58/98)
the boxer, Mike Tyson, said it. He said, no boxing plan survives the first punch in the face. In other words, you can make all your living wills and all your resolution plans and all that. But I promise you, they will not survive a crisis because in a crisis, people do crazy things. I mean, look, and I'm not going to mention names, but I've seen people, you know, had nervous breakdowns passed out, carried out on stretchers. I can't say no when I die. Well, people did die actually in Asia, but people break down. I mean, the thing about extreme stress, don't forget the human aspect of it. It's like Shakespeare. It can either bring out the best in you or it can bring out the worst in you. So you get all, you get frauds. You get people not answering the phones. You get people closing, locking the door. Trimming out the window. I say, oh, wait a second. The plan says you're supposed to do an orderly liquidation. You're supposed to send this money over. And it's like, sorry, nobody home. (59/98)
That's the reality they're going to face. They're just kidding themselves. And it's an excuse to make the big banks bigger and rich. It's why Jamie Dimon's a billionaire, but everyone else is at risk. So the people sort of in the know, the people in the financial institutions at the top, you know, people in government, certain corners of the world understand essentially that the system is in a critical state. Correct. And here's what's different. So I talked about these three crises, 98, 2008 and 2018. The next one, just in 1998, Wall Street bailed out a hedge fund. In 2008, the central banks bailed out Wall Street. In 2018, who's going to bail out the central banks? In other words, each crisis gets bigger than the one before. Each bailout gets bigger than the one before. We are now at the point where the scale of the collapse will exceed the capacity of the central banks to deal with it. Just, I mean, just to kind of illustrate, I don't like to make claims without, you know, kind of (60/98)
backing up the data. What did the Federal Reserve do to save the world in 2008? Well, we know they printed almost $4 trillion of new money that before the crisis, the Federal Reserve balance sheet was a better... Under a trillion. It was $800 billion, that's right. And today it's over $4 trillion. So they've almost, they have quadrupled the size of their balance sheet. Well, we know they did that, but they did so much more. They guaranteed every money market fund in America. They guaranteed every bank deposit in America, regardless of size. There was a $250,000 FDIC insurance limit. The Fed said, forget it, whatever you got, $1 million done, guaranteed. Money market funds, the Fed had no obligation to bail out, done, guaranteed. They did $10 trillion of swaps with the European Central Bank. And what was going on there? Well, the European banks themselves had been issuing dollar-denominated commercial paper, and that was being bought by money market funds to get a little higher yield. (61/98)
Well, when the run on the money market funds, U.S. investors said, I want my money back. They started pulling their money out of the money market funds. The money market funds had to sell the commercial paper or not roll it over. Well, all of a sudden, the European banks couldn't roll over their commercial paper liabilities because the money market funds didn't want it. They started to go and sell them, but here's the problem. That was dollar-denominated. They turned to their central bank and said, bail us out. Well, the European central bank can print euros, but it can't print dollars. Where was it going to get the dollars to provide the dollar liquidity because they had dollar liabilities? Well, the answer is the Fed was air printed up $10 trillion. The European central bank printed up $10 trillion of euros, and they swapped. And the Fed got the euros, and the European central bank got the dollars, and then they could use that to bail out their banks. There was tremendous at the (62/98)
time, and this is where a lot of the people that were expecting inflation got it wrong, there was tremendous upward pressure on the dollar because of those counterparty liabilities. In the interest of time, I don't want to divert you because I really want to get to this. You laid out this aspect very methodically about how you are modeling the future based on everything we just discussed, what your projections are, what do you think? Right. Well, my point is the Fed took their balance sheet, maybe $100 billion to $4 trillion. And they took interest rates to zero. If in the meantime, they had normalized interest rates, so they were 2.5% today, and they had normalized the balance sheet, so it was back down to $800 billion today sitting here in 2017. I would have said, nice job, guys. You bailed out the world, you saved the world, and you normalized your balance sheet. That didn't happen. They didn't normalize. The balance sheet is still over $4 trillion. Interest rates are still close to (63/98)
zero. So whatever they did with respect to 2008, they haven't got back to normal. So what are they going to do when the next crisis hits? Are they going to take the balance sheet to $8 trillion? $12 trillion? Now, there are modern monetary theorists, people like Stephanie Kelton. They're crazy. The MMTers, I mean, as a working theory, it's one thing as a theory to understand financial markets, but the practical sort of suggestions that MMTers give, I've never been on board with. Well, yeah, I wouldn't say they're crazy. I would just say. I would say I disagree. Yeah, I don't mean they're crazy. I mean, the ideas are nuts for me. I've met me too. I mean, I've met a lot of them, and they're very nice people. Professor Kelton is very perfectly pleasant. I had Kelton on a old show. Richard Duncan and their bunch. Richard's awesome. They're all nice people, but wonderful guy. I completely disagree. The idea that you can just go to $8 trillion, $12 trillion, at infinite end, there's no limit (64/98)
is not true for two reasons. Number one, there'll be political resistance. I mean, there's already, I mean, right now today with the Republican Congress and the Republican and the White House are the first time in a long time. They're talking about audit the Fed, abolish the Fed. I don't think it's going to happen, but there's talk about that. But the idea that the Fed could just double down and go to $8 trillion, I think is nonsense. Number two, apart from the political resistance, there's an invisible confidence boundary. It kind of gets back to my uranium example. There's a point of which people just wake up and say, you know what? I'm out of here. This thing is on fire. I'm running out, and a lot of people are right behind me. I don't trust it anymore. You can't tell me that you can print out an infinitum and that that's not going to destroy the dollar. So I'm getting out of dollars. What does the collapse of the dollar mean? It means that people don't want dollars. You might get (65/98)
them because somebody owes you a paycheck or you're a writer, you get a royalty, dividends, whatever. You might get dollars, but you don't want them. You immediately dump them for land, fine art, gold, silver, water, natural resources, Bitcoin, something else. So I don't recommend Bitcoin, but yeah, a lot of people are going into it, but something else other than dollars. That's what I mean by the collapse of the dollar, which almost happened by the way in 1977. People don't remember, but back in 1977, the dollar was so unwanted that the treasury issued bonds, treasury bonds, denominated in Swiss francs. They were called the Carter bonds, but nobody wanted to. For Carter, man. For Jimmy Carter. The treasury borrowed money in Swiss, they were US Treasury Securities in Swiss francs. People say, I'll take the Swiss franc. I don't know what it's going to be worth in dollars, but I don't care because I have more confidence in francs than dollars. So that's how bad it was. It'll get that bad (66/98)
again. But my point is, we are now at the point where the next crisis will be exponentially larger than the last. And that's what complexity theory teaches us that the worst thing that can happen in a complex system is not a linear function of scale. It's an exponential function of scale. And all that means is that if you triple the system, you don't triple the risk. You increase it by 10, 100. Some factor, it's theoretical. You have to actually compute the factor, but it's a large multiple of the actual scale of the system. Well, if they barely hung on the last time, if they don't have the capacity to double down again, and if the next crisis is going to be worse for the reason I just mentioned, what are they going to do? Well, they're going to do two things that are different. And this is, even people who think maybe there's a crisis coming or maybe the system is unstable, which it is, even if you get that far. And most people aren't there. But if you do, people don't can't take the (67/98)
next step, which is to correctly assess the reaction function. So first of all, the liquidity is not going to come from the central bank because banks, because they're tapped to everything I said about the Fed. Everyone else is worse. The People's Bank of China printed more money than the Fed. The People's Bank of China and China's liability situation is off the charts. I can be a pretty severe critic of what's going on in the US, but China's worse. Cedar, European Central Bank, Bank of England, Bank of Japan, they're all in the same boat. So they're tapped out. They can't... So where's the liquidity going to come from? Well, there's only one clean balance sheet left in the world. And that's the International Monetary Fund, the IMF. Right now, by the way, the Fed is leveraged about $110 to one, a little bit higher, $110 to one, $110 of liabilities for every dollar of capital. And on a mark-to-market basis, they are occasionally insolvent. You have to update the math all the time (68/98)
because obviously, right now with the yields higher, they could be... Well, they certainly aren't much closer to insolvency, if not actually insolvent. And I've had this discussion with members of the board of governors who said, so what? Why do central banks have to be solvent? Right. That's the MMT argument also. That's an illusion. I agree with that. So the central banks from insolvent were close to it. They're tapped out. They're leveraged $113 to one or more, but the IMF has only leveraged $3 to one. So they have scope. They have capacity to expand their balance sheet, and they can. They work like a central bank and they can print money. A lot of people don't know that. Their form of money is called the special drawing writer, the SDR for short. You say SDR to most people. They think it's strawberry daiquiri on the rocks, but it's the special drawing. Is that an acronym for strawberry daiquiri? Well, maybe there's now, but the point being... And it's not complicated. I mean, (69/98)
international monetary economists, the relatively few who actually understand what we're talking about right now, Dmitri, can't explain this in many cases, but it's actually quite simple. The Fed has a printing press. They can print dollars. The European Central Bank has a printing press. They can print euros. The IMF has a printing press. They can print SDRs and hand them out. The only difference is they hand them out to countries, not to individuals. So you and I will not have SDRs in our pockets. It's not what we call in Philadelphia walking around money, but it'll go to countries and then can be swapped for other forms of currencies used to pay bills, highly inflationary. It's just money coming out of thin air. And that's where the liquidity will come from. It can't come from anywhere else. It's not coming from Mars. It's not coming from the dark side of the moon. There's only one clean balance. She's the IMF. But here's my point. That will not be instantaneous. By the way, a lot (70/98)
of people don't know that the SDRs, when did they invent those? They actually invented it in 1969. Been around for a long time. The last time they were issued was August 2009 in the last crisis. I read that in your book and I remembered it very well. And I also remember a speech that John Lipsky gave at the CFR, the deputy IMF. And I remember Geithner going to Copenhagen and the global warming. So I remember all of that. I remember my intent was up big time. I mean, the stuff that you write about in this book, I corroborated it based on my own memory. But go ahead. I interrupted you there. The point is that the crisis reached a absolute fever pitch. Again, we said September 15, 2008. That was when Lehman filed for bankruptcy. But the IMF issued the SDRs in August and September 2009. In other words, it took them 11 months to get those SDRs out the door. Not exactly a fire brigade that shows up at the fire in two seconds. That's because it's a multi-lateral institution. They got an (71/98)
executive committee. They got to talk about it. They got to take a vote, et cetera. Even if you did it on a crash basis, you turned to Christine Lagarde, who's the head of the IMF, and said, you know, Madam Lagarde, the world is burning down. We need the fire truck now. We can't wait nine months. It's got to take them at least three months. I just can't picture the IMF getting trillions of SDRs out the door in less than three months. So what are we going to do in the three or four or five months between the crisis and the SDRs when the central banks can't save us and there's no money? What they're going to do is lock down the system. They're going to say you can't have your money. So in 1998, the whole world went with their money back. The Fed printed it and handed it out. 2008, the world went with their money back. They printed it and handed it out. In 2018, if not sooner, the world's going to want their money back. Once again, they're not going to get it. They're going to shut down (72/98)
the system. They're going to close banks, close exchanges, close money market funds. And you know, I say things like that. People roll their eyes going, you're crazy. You know, we're talking about... It's Cyprus. It's all, well, it's Cyprus. It's Greece. It's India. It's Venezuela. It's happening all over the world. And it's what's called a bail-in. You're exactly right. But all the laws have been changed since 2008. So relatively few people know this. But you know, the problem in 2008 started... Well, started with mortgages, but then when the liquidity crisis hit, the ground zero was the money market funds. That's what caused Bernanke and Paulson to walk over to the White House and say, Mr. President, you gotta fix this. But at the time, you could call your money market fund, sell your units, get the money wired to your bank account, access it the next day. Money market funds legally did not have the capacity to suspend redemptions. Now, hedge funds have always had that. I've read (73/98)
hundreds of hedge fund offering documents. I've never seen one that didn't have a suspension clause. But by law, you couldn't do it in money market funds. That changed. It changed last year. And now, money market funds legally can suspend redemptions. You can call them up and your broker will say, sorry, house closed. You can't get your money. We'll get back to you. They're not stealing your money. They're just telling you you can't have it. They'll close the bank, so reprogram the ATMs, and ATM will give you, say, $300 a day for gas and groceries. You have that right now in Greece. Right. And say, well, what do you need more than $300 for? We'll get back to you. And so forth. And then the problem, I call this ICE 9 to tribute to Kurt Vonnegut, who wrote a great novel, short novel. Everyone should read it. It's hilarious, among other things. In the early 60s, called Katz Kradle. And Katz Kradle was written around the time of the Cuban missile crisis. And a lot of people were concerned (74/98)
about, you know, Doomsday and the end of the world and Doomsday machines and all that. And so his metaphor, he had a mad scientist named Hanukkah, who invented a molecule, polymorph of the water molecule called ICE 9. And it resembled H2O in every respect, except for two. It had a boiling point of 114 degrees Fahrenheit, which meant that it was frozen at room temperature. And the other characteristic was if a molecule of ICE 9 came in contact with a molecule of water, the water turned to ICE 9. So he created this thing. He put in these little vials and gave it to us three kids. And then the plot of the thing is, what are the kids doing with the vials? And, but if you opened it and poured the ice nine into water, that water would freeze in a stream, a lake, an estuary, the ocean, the whole planet would freeze and all earth on life would die. That was the Doomsday machine. So I take that metaphor, ICE 9, well, that was his novel, and I use it as a metaphor to describe the financial (75/98)
system. So what's going to happen when they shut down money market funds? Or everyone's going to go to the bank? Well, you're going to have to shut down the banks, then they'll sell their stocks, we're going to have to shut down the stock exchange and so forth. In other words, the minute you shut down any part of the financial system in a financial crisis, the pressure immediately moves to a different part. And then you have to shut that down too. So sequentially, it's exactly like ice nine molecules turning water into more ice nine, and the entire system will freeze. So that's, that's the reaction function. People are not ready for that. They're not prepared for that. Of course, one way to prepare is get out of the digital system and get some physical gold, physical silver, land, fine art, things that they can't freeze, they can't hack, they can't erase, that will retain value. That's one solution. And, you know, and get ready for this. And then, you know, sure, the IMF will be (76/98)
deliberating and getting ready to print a bunch of SDRs, but you won't be able to get your money in the meantime. How do you see that resolving? Because the biggest problem, it's very, relatively speaking, it's much easier to freeze a financial system than it is to unfreeze it. Correct. Well, a couple of things. Number one, you won't be able to unfreeze it until you're printing the SDRs. And we're talking trillions of SDRs, because that's what it will take. But that's going to require, you know, a vote of the executive committee of the IMF, and you're going to negative the governance of the IMF. What's, how does the IMF work? Well, for big things, and this would, you know, an issuance of trillions of dollars, trillions of SDRs or trillions equivalent of SDRs. By the way, for those who may not know, right now, an SDR is worth about a dollar 40. It fluctuates, but right now, one SDR is worth a dollar 40. So 10 trillion SDRs would be 14 trillion dollars equivalent. Something on that order (77/98)
magnitude is what they're going to need to do. But for big things, you need an 85% vote. What that means is that if you control 16%, you can block it. You can't make something happen, but you can prevent something from happening. Guess who is the only country in the world with 16%? The United States. So the United States, by itself, can block any IMF action just by voting no, and that means all the other members together cannot get to 85%. Well, something very interesting is happening this year. The IMF operates on what they call quotas or voice, but just votes, you know, what's your percentage vote? And they reset it every five years based on relative shares of the global economy. Well, this is one of those years. 2017 is a synchronial reset year in terms of IMF voice. And the BRICS are looking at this and saying we don't have our fair share. The BRICS combined are about 22% of global GDP, but they only have about, well, right now it's 14.8% of the vote. So they're saying, hey, we got (78/98)
14.8%, but we're actually 22% of global GDP. We need more votes. The IMF agreed at the annual meeting last fall, the IMF, and before that at the G20 meeting, G20 is really the de facto board of directors of the IMF, the G20 meeting in Hangzhou, China on September 4th, and then followed up at the IMF annual meeting in October, agreed. I said, yeah, BRICS, you're right. You need to get a larger voice. Well, they're not going to get 22%, but even if they got 2%, that would tip them over from 14.9 to more than 16, which means that if the BRICS hang together and they're pretty cohesive and pretty well organized, they have veto power too. So what that means is that when you have to go for a vote to issue the SDRs to save the world, the BRICS are going to be able to sit there and we say no unless you give us what we want. Which is? What do they want? Well, they want the end of the dollar as a global reserve currency. So from then forward, it doesn't mean dollars disappear. What it does mean (79/98)
is that from then forward, the SDR is the benchmark global reserve currency. Oil gets priced in SDRs. Major financial institutions report their finances in SDRs. The IMF has done their balance sheet in SDRs since the SDR was invented. Certain countries are switching to SDRs, getting away from dollars. I ran actually recently announced that they're going to start accounting for things in SDRs. So this is already happening, but this will bring it all to a head. So the sequence will be financial collapse worse than anything we've seen before, incapacity of the central banks to deal with it, a bailout coming from the IMF, but three, four, five months away. And in the meantime, ice nine locked down. You can't get your money. This is plain as can be. You can absolutely see it coming. Timing is like an earthquake. You know, you study the San Andreas Fault, you know, there's going to be a huge earthquake. You know, it's a center for earthquakes. Do you know exactly when? No, you don't, but (80/98)
you're probably smart enough not to build your house on the San Andreas Fault. And that's what I tell investors. I don't, yeah, it's funny, sometimes the feedback I get from investors, they're like, yeah, Jim, I hear you. You know, I agree with all this. I get it. But call me three o'clock the day before it happens and I'll sell my stocks and buy some gold and it'll be all good. And I say, I'm not going to know. I'm not going to know. I mean, I might see it coming, the indications and warnings might, my Geiger counter might start to, you know, a click a little louder. So I think I will see it evolving. I already see it now, but do I know the exact hour and day? No, I don't. But what I say to investors is, well, if you agree it's coming, what are you waiting for? Get ready now. You're talking about a solution that's coming from a very centrally organized model, which is a very industrial type of system of organization politically and economically, a legacy of the industrial economy. (81/98)
Today we have a much more decentralized economy. And I wonder, especially given the fact that here, you're on the one hand, you have, which is very much, these are the forces of globalization. This is the globalism. And yet we have politics in Europe and the United States, which are populist, which are inward turning, which are moving away from these types of the type of consensus that's required for the type of solution you're describing. So my question is, do you foresee this solution being implementable, either in a sufficient time scale where it doesn't cause massive dislocations that are problematic, significantly problematic, or that it's even implementable at all? Well, it's a really good question, Dimitri. Let me approach it from kind of opposite ends of the spectrum. The first thing you said is that these forces of anti-globalization, nationalism, populism seem to be pulling away from what is, in my view, at least an overly centralized system. Now, it is true that more (82/98)
centralization might facilitate decision making, but it also makes the problem worse and knows it is the problem. And my analogy here is the Fed, they're always, I talked to a lot of members of the Fed, they're always patting themselves on the back about saving the world after 2008. I was like, yeah, but you lit the fire. You're like a fire department. You're an arsonist with a fire truck. You light the fire and then you show up in your fire truck and you want pats on the back for being first responders. I was like, what about the fact that you're the arsonist? And so the centralization that you talked about is actually the problem. And so I couldn't agree more. So decentralization is the answer. Again, very simple. I use metaphors, but it's important for the listeners to understand that the metaphors are not just metaphors. They are, it's the same mathematics, the same complex dynamic systems. And I would look at the avalanches. I call the snowflake in the avalanche. So you're in the (83/98)
mountains, it's snowing day after day, the snow is piling up, it's windswept. An expert can look at that and say, you know what? That's snowpack is completely unstable. It's going to come down. It's going to kill any skiers under it. It's going to bury a village. And sadly, we've had fatalities in buried villages, you know, just in the last couple of years, these things do happen in the real world. You can see it's going to happen, but you don't know when. And then one snowflake comes along and it disturbs a few others, lands the wrong way, creates a shoot, creates a slide, creates momentum. All of a sudden the whole thing rips loose and the avalanche comes down and buries the village below. First of all, who do you blame? Do you blame the snowflake or do you blame the instability of the system? I would say look at the system because You're the villagers. Well, they're the victims. So they're the taxpayers and the investors. But I would say if it wasn't one snowflake, it would have (84/98)
been another. If it wasn't today, it'll be tomorrow. So don't blame the snowflake, blame the instability of the system as a whole. But in the real world, what do ski resorts do about this? Well, you go up to Aspen Highlands at, you know, seven o'clock in the morning and the ski patrol was up on the ridgeline and the Y-ball setting off dynamite and shooting off cannons. And of course they do this all over the world. What are they doing? They're descaling the system. They're causing, they're causing little avalanches so you don't get the big out of control. Like controlled porc fires. That's the, exactly. That's the equivalent of breaking up JP Morgan. Breaking up JP Morgan into five banks or 10 banks preferably so that if any one of them fails, it's like, hey, too bad for the stockholders, but you know, you're not taking down the system. That would be an example of setting off dynamite charges to cause a small avalanche so you don't have the big out of control one. We're not doing that. (85/98)
And in fact, we're doing the opposite. We're just, we got snow, we got snow blowers building up more snow. That also relies on, I'm sorry to interrupt that, that also relies on, I mean, what you're describing of course is a solution to us, to centralization being caused by, I mean being, a solution to centralization being proposed by a central sort of system. Do you have any faith in the innovations happening in financial technologies, distributed, non-linear, peer-to-peer technologies in finance that can do a sort of end run around this if not in the United States and maybe in certain developing countries that have less centrally organized governments that are more disorganized? Not really. I mean, in theory, a very widely distributed financial system where we didn't have big banks, we just had a bunch of websites and crowd sourcing and I could put loans on display and people who were interested in investing them could fund that and the borrow where we get the money. I mean, that's, (86/98)
you know, lending, you know, lending, lending club and so-fie and there are a bunch of others like that. I was, first of all, they're tiny compared to the financial market, so good technology, they've got these sky-high stock models, fine for them, but they're really small and what they're discovering in that model is what bankers have known for 500 years, which is you have to do your credit homework. As you can, there are two solutions to credit risk. One is do it well. So I started my career at Citibank, we went through, I walked in the door with a law degree and I got a second law degree while I was there, but I had to take credit training just like every other junior officer at Citibank. We had credit in our DNA, it got drilled into us. That went away probably about the late 80s, 90s. The reason was securitization. If I make a five-year loan and I can wrap it in a security and sell it to some sucker, why do I care if it goes bad? I just want to get it out the door. So (87/98)
securitization was the end of credit. When I was a banker, you put a loan on the books, you had to keep it there. In those days, people didn't change jobs every six months. You thought you were going to be around when the loan paid off and if it didn't, that was going to affect your career. We took it pretty seriously, but that's all gone. That's ancient history. So the credit culture is gone, but the other solution is whether I want to mention which is do it well or do securitization, get it off your books, hand the hot potato off to the next guy. What these peer-to-peer lenders are discovering is they didn't do a lot of credit risk. They just put term sheets out there and let investors, crowdfunding, and if I had a little more sophisticated than that, but those defaults are starting to pick up. They're starting to see losses come through and those business models are being called into question. There's no escaping the credit risk. You can hand it off to the next guy, but someone's (88/98)
going to take the loss and they're small. So for all those reasons, but even if you gave it, even if you extrapolate it, they said, hey, come on, Jim, it starts out small, but look at Amazon and look at Google and maybe it started out small and now they're big. And isn't that a solution? My answer is we're not going to get there. If that evolution took 10, we're not going to make it 10 years. If it took them 10 years to be a significant, decentralized, theoretically more stable arm of the financial system, we don't have that much time. All right. So we're going to wrap this up, but let me ask you one last question. Do you think, given the policies of this administration, the rhetoric of this administration, do you expect that we might finally get the long-awaited inflation that central banks have wanted? Is that something that you think we're going to see with the Trump administration? I think we will. And here's why. You go back to, well, in 2008, it's a good place to start with all (89/98)
that with QE1, QE2, QE3, trillions of dollars of money printing. We talked about all that. And a lot of people, particularly the Austrian economists and a lot of observers, we're going to get the inflation. Here comes the inflation. They're printing all this money. Money printing equals inflation. And the answer is no, it doesn't. You need two things to get inflation. To me, it's like a ham and cheese sandwich. You can't make it with the ham. You need the ham and the cheese. Money printing is part of it. Yes, the money printing does have inflationary potential. But the other part is velocity. That's the turnover of money. It's like, you can print all the money in the world, but it's just sitting there in the banks, which it is, and not being loaned, not being borrowed, not being spent, not turning over. You don't have the velocity of money you need to actually cause the inflation. So you need the ham and the cheese. You need the money printing and the velocity. We have the money (90/98)
printing big time. Velocity is plunging. That's the fiscal spend side. Well, it's not, it's the turnover. So, for example, let's say I, you know, we're in New York. Let's say I take a taxi home and I tip the taxi driver and the taxi driver goes to a gas station and buys some gas. And the gas lean a station owner takes the money out of the till and buys a... Ignacio knows all about that from Buenos Aires because they were sitting with the radios in the cafes, right? Yeah. And you, you know, the gas station guy buys a nice present for his wife. Well, in that example, my dollar has velocity of three, right? We had a taxi tip, a gasoline tank and some flowers for the wife. So we had velocity of three. What if I stay home and watch TV? My money has velocity of zero because I'm not spending it. So I like to remind people, oh, well, if I'd print a $4 trillion, that's true, but 4 trillion times zero is zero. In other words, if you don't have velocity, you don't have an economy. Guess what's (91/98)
happening to velocity? It's plunging. Has been since 1998, interestingly, same year as the long-term capital management crisis. It was not a specific function of the 2008 crisis. It's been plunging since 1998. So you can understand monetary policy for the last 10 years as a desperate struggle between increasing money supply and decreasing velocity. So you're multiplying a larger number by a smaller number and getting the same result. And that's why the economy has been so punked. That's why the GDP growth isn't what it should be, even in nominal terms. You're loading the slingshot. Go ahead. We're loading the slingshot. Having said that, what will it take to change? Because velocity is psychological. So freaking scary, Jim. I got to say something, man. I got to say something. Honestly, I haven't spoken to anyone about this in so long. I hope our audience is able to appreciate what we're describing here, which is a system that, as we said, is complex. It has many moving parts, and you (92/98)
have authorities and expectations about authority trying to push on one part of the system and literally it's like throwing all your weight into a punch and missing, and then you're flying out of the arena. I mean, we're so unprepared for those nonlinear effects of our actions. Anyway, continue. Well, I agree with that completely. But my point is, we're not guessing. You can see it coming. We have the equations and the metrics and the experience and the history and the psychology that actually figured this out. It's just that the people in charge are not doing it that way. They're using these obsolete equilibrium models and value at risk, which are just wrong. But coming back to this psychological change, so I'll wrap up here because I know we have to finish up to misery. Right now, as we speak, President Trump owns the Federal Reserve, owns it. He is looking at the greatest transformation of the Federal Reserve, at least since 1952, which was the end of the Treasury Accord of (93/98)
financial repression, and maybe going all the way back to 1913 when Woodrow Wilson signed the Federal Reserve Act and got to pick the original governors. Right now today, there are three vacancies, two empty seats, and one dantorilogist, who's resigning in the effect of April. So call that three. So there are three empty seats right there. There's actually one Republican on the board right now, Jay Powell. You don't hear much about Jay Powell. That's because he's outnumbered by the Democrats. But you stick three Republicans on the board. All of a sudden, Jay is going to have some friends to play with in the sandbox. You're going to have four Republicans. There are only seven seats on the board. So you're going to have a majority of four Republicans by the spring, and it gets worse for the doves, or at least for those who think they're in charge, because Janet Yellen's term is up January 28th. Now, Trump's already said, he's not at the end of January. Trump's already said he's not going (94/98)
to be a pointer. I think we can take him in his word. Well, if her term is up at the end of January, which it is, he's got to announce the new chairman by December at the latest because you got to go through a confirmation process and hearings and all that. He might announce it even sooner. The minute he announces it, she's the lame duck. It's like pulling the rug off of him under. So there's five, like three vacancies. Jay's already a Republican, and Yellen says there's five. Stan Fisher's term is up in June 2018, which is only 14 months away, or so. So the point is, you're going to get six, and there are only seven seats. Poor little brainer is like, she's going to think she showed up at the wrong boardroom. So the point being, Trump is going to get three, four, five, six out of seven seats very, very quickly, three of them immediately. And so the board's going to do whatever Trump wants. So as an analyst, all you have to do is ask yourself, what does Trump want? Well, you already (95/98)
told us. He wants a cheaper dollar. He thinks the Chinese and the Germans and the Japanese are manipulating the current. This is currency wars, by the way. Not my first book. He's accused them all of currency manipulation to weaken their currencies. So he wants a cheap dollar. And Steve Mnunchin, who just got, who is the new Treasury Secretary, said the same thing. Well, if you want a cheap dollar, you're not going to raise rates. That makes the dollar stronger. So I would expect these appointments to be dovish. It doesn't mean they're going to cut rates tomorrow, but they're going to be nowhere to raise them. I think finally, you'll see the change in psychology. The message will sink and people go, hey, President Trump means business. He controls the board. We're going to get a weaker dollar. That's inflationary. I'm out of here. Get me some gold. Get me some silver, et cetera. Then we'll see the psychology change. And the thing about change psychology, it's really, really, really (96/98)
hard to change it. But once you do, it's equally hard to change it back. And so now inflation won't go from 1.5% to 3%. It'll go to 9%. It will be back to the 70s. So back to the future. Same exact issue about lowering the slingshot. So pretty much the only thing then that would throw a wrench in that model is extraneous factors that can affect the longevity of the administration, stuff like the recent sort of fights between the Trump administration and the intelligence community. But we'll see. Jim, thank you so much for coming on. I didn't know how I wanted to structure this because every time in the past when you've been on my show, we've always talked about current events. I really wanted to do a big breakdown. But I hope to have you on again before too long. And I want to try and do it at a time when it's most sort of relevant to the time period. But man, thank you so much. Thank you so much. It's great seeing you. Thank you. And that was my conversation with Jim Rickards. I want (97/98)
to thank Jim for being on the program. Today's episode was produced by me and edited by Connor Lynch. Sound engineering was Ignacio Lecumberri. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation on Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (98/98)
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. What you're about to hear is the third episode in a podcast series hosted by me and my co-host, Grant Williams, titled The Hundred Year Pivot. In it, we speak with some of the smartest and most plugged in people we know to help position ourselves, our organizations, our families, and our portfolios for the once-in-a-century economic, political, and geopolitical reordering that we believe is currently underway. In today's conversation, Grant and I speak with economic historian, author of the Solid Ground Newsletter, and keeper of the Library of Mistakes, Russell Napier, about the end of the economic, monetary, and global trading and security order that has been the biggest driver of global growth for the last 30 (1/99)
years. The consequences of the changes we discuss for economic and national security, social cohesion, investment, and wealth preservation are nothing short of tectonic. Among other things, we discuss the Trump administration's economic and trade strategy, efforts to isolate China, the creation of new monetary systems and the search for new safe assets, the realignment of global power, the escalating risk of war with China, and how investors can seek to anticipate and position themselves for the accelerating repatriation of capital flows, the onset of capital controls, and a prolonged, potentially multi-decade period of financial repression where wealth preservation will take precedence over making money and chasing outsized financial returns. If you want early access to the episodes in this series, go to hiddenforces.io slash subscribe and join our premium feed so you can listen to these conversations when they first publish using your favorite podcast app just like you're listening (2/99)
to this episode right now. And with that, please enjoy this incredibly timely and important conversation with our guest, Russell Napier. Welcome, everybody, to the third episode of the 100-year pivot. Joining me for another fascinating conversation, my good friend and co-host, Demetri Kofinas. Demetri, how are you, my friend? I'm doing great, Grant. How are you doing? I'm doing just dandy. You know, when we started this, you and I, we were just kind of kicking around this idea. And there were two people who just jumped to the top of the list of places to start with this because I think it was, as we said in the initial introduction podcast that we did about this, they were the two that kind of kickstarted us down two slightly different roads but on this journey individually and they've kind of brought us back together. Neil Howe, obviously, we've spoken to already and the second of those two is our mutual friend, Russell Napier, who's about to be joining us. This is another (3/99)
conversation I'm really excited for to come at it from this slightly different lens. Yeah, no, I'm super stoked, man. We actually batted some additional names around for people that we think would be great to have on the podcast and on this series and I'm so stoked by the list. Yeah, yeah. I mean, we've got some commitments already and it's going to be terrific. It's going to be epic. It's going to be epic. I think so. It's going to be so, so great. I think so. And I'm curious, you know, I don't know about you but the response I've had in my inbox from my subscribers has been one of, it feels like genuine excitement. People are like, I'm so glad you're doing this, you two together. This is going to be great. I love where you're taking it and I'm curious to see where it goes and it does seem to be some real excitement about this. Same thing happened to me but you know, it's funny because I feel the same kind of excitement that they feel. It feels like a, I don't know, this is not the (4/99)
best analogy but like it feels like the playoff series is like the playoffs are coming and you know, I have something really to look forward to and this is just something so different than what I've been doing for the last seven or eight years with the show. It creates a new dynamic that's very exciting. Like I said to you, there are people that I put on our list of people to speak to that I've spoken to, I've loved speaking with, whose work has been really influential to me and who I haven't had any desire to speak with again. Yeah. Because I'm like, all right, we pretty much said everything and now it changes everything. And having you on this journey, it's just exciting. I'm super stoked just like the audience. Well, listen, we're super stoked today for a reason because we've got to, as I say, I meet your friend Russell Napier join us. You know, with Russell, this whole idea of financial oppression and national capitalism, it's been so interesting to watch it kind of slow burn into (5/99)
people's psyche and recognize it. And there's a lot of people that I've come across who have been talking about it. And then when you say, you know, that's exactly what Russell Napier has been talking about for a couple of years now. Like, wait, what? I need to read that stuff. And then their eyes open and they're like, oh man, I'm not alone. And it's this feeling, you know, that you and I had when we did our original podcast that kind of was the genesis of this. That feeling of unease and searching for either kindred spirits or advice or confirmation or challenges or whatever it may be. There's so much going on and we're just searching for some way through it, which as I said, I'm excited to do. And who better to help us on that journey than Russell? Yeah, Russell had the most complete framework. I've been saying this for some time. The most complete framework that I felt was the most compelling to explain the changes that were underway. And I think the first big confirmation (6/99)
signpost, in my opinion, was the recent move in the Euro Dollar exchange rate. And I remember being at a conference with Russell not long before that happened, right before it happened. And he was just giving his usual speech, sort of his worldview, his framework. And what's most amazing about it is, I think, just how on point it has been, which makes him such a great guest to bring on early on in this series that we're doing. Well, the talk of the which, I see him. He's just popped in. So why don't we bring him into the conversation? Russell, mate, great to see you. Thank you so much for doing this with us. We're both incredibly excited to talk to you. Thanks Grant. The world is changing. There's never been a better time to have a chat about why it's changing and how it's changing. Amen. I mean, you know, Dmitry and I have talked about this in previous episodes of this podcast, how your framework of national capitalism and financial repression has been a great sounding board for us. (7/99)
It's played out remarkably similarly to how you said it would for a few years now. And as this world gets crazier and more stuff happens, as I was saying to you off mic, you know, for me, it's been a great place to go back to, to anchor myself in terms of, OK, how does this deviate from or adhere to what Russell said, just so I know where we are in the process? A great place to start would be to kind of give us the bare bones of that, flesh out your overall thesis. And I think it'll resonate with people. And then we can maybe Dmitry and I can cover a little wonder with you on little side routes from it. Yeah, I think it's helpful in any situation to try and split the disease from the symptom. And I think what's happening at the minute is there's a lot of symptom about and people are getting carried away with the symptom. You know, it's like coming out in spots. That's ever happened to you as a teenager. Otherwise, they don't come out on a straight line. It's very difficult. So let's (8/99)
try and get to what the disease is before we discuss perhaps some of the symptoms. So it's the global imbalances. And actually, everybody knows what they are. It's just that they can't see that these symptoms are related to it. So let's run through a series of those global imbalances. Total non-financial debt to GDP in the developed world is the highest level ever recorded in human history. That's a hell of an imbalance. So there's number one. Number two, we have wealth inequality, particularly in the developed world. Well, sorry, it's more politically acute in the developed world. Everybody knows about that one as well. We also have trade imbalances, which tend to be getting a lot of the headlines today, but people forget that a trade imbalance in our world of the free movement of capital is also a capital imbalance because all trade balances have to be financed one way or the other. And at the core of all that, I believe we have China. Now, before anybody gets too excited, I'm not (9/99)
accusing China of any grand designs here. It's just been a product of that exchange rate they chose many years ago. And it has driven these imbalances. And those imbalances now have to be unwind. And that's the disease. It's how we unwind those imbalances. Now, we have a politician who's keen to unwind them in Donald Trump. He claims that the thing he's most concerned about is the impact on blue-collar America from those imbalances. And that has shown up in the trade account, but presumably in the wealth distribution as well. But we see it everywhere else that these imbalances have to be unwind. So now we are trying to work out how they're unwind, what the consequences are for asset prices. And I think if we stick with the unwinding of that, and some of that may well feed into generational changes as well, then we're roughly on the right track for wealth preservation. And maybe we can tell the difference between the symptom and the disease. Yeah, it's fascinating to me because this, (10/99)
for a while now, and I think you were probably one of the earliest people that put little pebbles in the back of my empty head rattling around thinking about this. This idea of, let's call it redistribution, not in the communist way, but this idea of getting a leveling of so many things has, to me, been the ultimate place where this has to go. There has to be a squaring of account. There has to be a more equal balance. It's never going to be fair because the world just isn't fair, but there has to be some attempt to redistribute this wealth and redistribute all those things you talked about. And I guess for me, the issue that has been in my mind as I think about this has been, is there a way to do that without pain, which I quickly came to the conclusion there wasn't? And if you want to disavow me, I'd love to hear it. And then it's the question of, what's the least painful way to it? And that's where I kind of get stuck because the pain is going to be severe. It's going to be the kind (11/99)
of pain that we haven't witnessed in a generation and a half. And so, first of all, am I right in thinking about it that way? And if so, how do you think about the best way, the most efficient way, and the least painful way to redistribute that and make sure that pain goes in the least painful way possible? In terms of all those rebalancing, and I think this is something we have to come back to around the deal just with at the minute, the greatest pain that could affect all of us, our children and our grandchildren, is conflict with China. So the one that we have to hope and pray that is avoided is that one. Now, let's talk about the more mundane pain, which is economic pain. I'm going to push back just a little bit, Grant. It depends what perspective you look at. Now, my career, your career, Dmitri, we look at the focus of people who have savings. That's what we do. And for those people, pain is the right word because we've done this before. Well, let's take the war out. So we did it (12/99)
from 1945, really up until the 1970s. And if one was an owner of savers, the pain didn't start in the 1970s. It started a long time before that. One thinks in particular of the owners of British government bonds and just how much money they lost in real terms in the 50s and the 60s. However, the 50s and the 60s was not a bad time to be a blue-collar worker. It was a relatively good time to be a blue-collar worker. Now, a lot of that was based in America on consumerism in Europe, on rebuilding Europe. The French, by the way, call that the tront glorieus, the 30 glorieus years. Well, it wasn't 30 glorieus years if you were an owner of capital. Your bond, particularly the French bond values, were destroyed in the three to four years after World War II. But you didn't make any money lending money to the government. And corporates were pretty well controlled and constrained in terms of profitability with various regulations. So that's obviously a financial repression, but it's really, (13/99)
really important to point out that for much of blue-collar people living under a financial repression without savings, it wasn't that bad. And for younger people, it wasn't that bad because by definition they tend not to have a lot of savings. So yeah, it depends where you start in this. I really like a wonderful interview with Evelyn Waugh, which I came across on the BBC iPlayer. He was one of the richest men in England before the Second World War because he was incredibly successful. Author interviewed, I think in the early 1960s, he was asked what happened to all the wealth because he was pleading poverty, whether that was true or not, I don't know. And he was said, no matter in this country, he referred to the United Kingdom, no matter in this country has made any money honestly since the end of the war. And in a financial repression, it's regulatory arbitrage. That's what we call it in our business, regulatory arbitrage. It's a euphemism for something else. But the whole, his (14/99)
whole point was that if you were just a standard saver buying standard savings products, then you absolutely felt pain. And if you made money in that world, you were, you had a different skill set. I won't go through some of the British archetypes of that era because most people who are not British won't understand the concept of the spiv and other things. But you know, it's a different way to make money, but it's very difficult if what you do is buy portfolio assets and hope that that's going to pay for your retirement. So, paying indeed for the saver, I'm more hopeful that it's not paying for the worker, if you like. If it's paying for both grant, then it's a different type of pain. I think it's a social fracture. Right. And I think there is potentially a way that this isn't a social fracture, but I can't work out the way where this is positive for savers. So I have a question, Russell. One of the things that you've been very good at is pointing out how what you call the non-system, (15/99)
which was the system that emerged organically from the de facto end of Bretton Woods in the early 1970s, is coming to an end. And I'm curious, one, to ask you whether or not you feel like the events of the last maybe three months or so confirm that hypothesis on your part. And the second question is, to what degree does policy making actually matter here? Because it does feel, and this is a thing that's also useful about Neil House framework, it does feel that some of this is just almost inevitable, the forces are secular. And so one of the questions that I have been wrestling with, and I know that a lot of our listeners have been wrestling with as well, is not only does the strategy matter, what is the strategy, and is there such a thing as the optimal strategy, or is most of this just going to be the forces that are secular that are driving it? Yeah, I think it's a great question. And I think at any time in history, you look back and you say a politician taking policy decisions. It's (16/99)
rare that any historian concludes that that happened in isolation, that it wasn't the product of other great forces. In other words, it was a symptom and not the cause. I think that's exactly what we'll do with the Trump administration. We won't look back and say Trump caused any of this. We'll say that other things caused Trump. So in some ways, the other things are driving policy. It's not policy driving these other things. And one of the mistakes I think we can make as investors is to assume that the politicians are making the decisions rather than being driven to those decisions by circumstances. So I think that's absolutely right, which is why when we began the conversation, I began with the imbalances. As long as we keep coming back to the imbalances, it may be even possible to predict the Trump administration, because ultimately, that's what's going to drive them through this. Just in terms of what it is and why it's ending, I think it's really been the decision by China in 94 (17/99)
to link its currency to the dollar and then a basket, which was followed by many other emerging markets who really had no option by 1998, but to do the same thing. That created a massive flow of newly created bank reserves in the emerging markets, in particular China. It created a flow of purchasing of debt securities of the developed world, which pushed those to unrealistic levels relative to growth of the economy, widened the gap between the discount rate and the growth rate. Consequences, well, leverage went up because it makes a lot of sense to borrow money when the discount rate is disconnected from the growth rate. Asset prices go up for the same reason. And in China in particular, a lot of that excess money creation, which in any normal economy would have ended up in consumption, transmitted through the banking system, gets into investment instead and turns up as even more higher exports at lower prices and even bigger and bigger and bigger imbalances. That's the non-system, (18/99)
Dmitri. The reason I had to run through that is if you attack trade very clearly, you're attacking that system. That's exactly what you're doing. You're trying to end those imbalances. I think it's always difficult to work out exactly what's happening in the Trump administration, but I don't think they fully thought through the consequences for capital. The Secretary of the Treasury is a smart man. He probably did. I'm not sure everybody did. But the idea that trade wars aren't capital wars is the problem. Yes, the system's breaking down, but Grant and I have been at the sharp end of this for a long time. Capital moves a hell of a lot quicker than trade. That's what a Trump has done. He started those hairs running. If the capital runs, yes, it affects the occurrenter count eventually. It makes it adjust. But those hairs are running. I guess one of the key questions is, could they be stopped? Can they be stopped? Or is this running now and it can't be stopped? So yes, it's coming to an (19/99)
end. Yes, the Trump administration is speeding it up, but perhaps not in ways it fully understands because it'll happen quicker through capital than trade. So Russell, I feel like the narrative for what we've seen the last few months with a movement of capital out of US capital markets and into Europe, as has been reflected in the Euro-US dollar exchange rate, has largely focused on anticipated fiscal spending out of European capital, especially out of Germany associated with the Bundestag's recent vote to amend the constitutional debt break and the European Commission's own language on accommodating increased defense expenditures within the stability and growth pact. It hasn't necessarily been government-driven efforts to repatriate capital in order to shore up domestic currency exchange rates and depressed bond yields that you've talked quite a bit about. How and when do you see this next phase of forced repatriation happening? Yes, I do agree with that. At this stage, it hasn't been (20/99)
compelled. The repatriation of capital has not been compelled. It's been through free choice for one reason and that's the reason that you mentioned, which is a massive change in Germany, which really will change the future of Europe in good ways and bad ways. We can come back to that. I think a second one, Dmitri, is the Trump administration's policy, which is to say, I am a bad partner. I am an uncertain partner. I am an unreliable partner. That is my opening negotiating position. When you do that, you tend to lose capital. It's not just been about Germany. It's been about the withdrawal of capital and the initial data seems to suggest that the Japanese have been particularly big sellers. It's not just about uncertainty breaking out in Europe in regards to property rights and other rights in America. It's happening in other places. I think those two things are underway. The interesting thing about this is that on the whole, bond yields in Europe have tended to come down in response (21/99)
to this. The need, Dmitri, for a compelled capital repatriation, if you like, is particularly acute if these bond yields go up. That's not been the first impact. I'm not saying it isn't going to be an impact. I think it is going to be an impact. The first impact is for those bond yields to come down. The need for French government, German government to get really upset and say, my goodness, we've got to do something about the bond market is not currently there. It will be there, but it's not currently there. I think that's the sequence that we've gone through. I would say a large part of this capital repatriation at the minute has been the great success the Trump administration has had in frightening away capital. Rather than the lure of the great German economic boom to come, the German government's just downgraded its own economic forecast despite its change in fiscal policy. Absolutely both of those. But let's not underestimate the power of Donald J. Trump in frightening capital (22/99)
from his shores. Russell, I'm glad you bring this up because this has been one of the most notable features of the last month or so, amidst all the tariff turmoil. Again, you're coming back to being a practitioner at this for a long time. It's very hard to remember any instances where we had dollar down, stocks down, bonds down, US treasury bonds down, and I'll throw gold up significantly into that mix. I think when we talk about this framework of yours of financial oppression and national capitalism, that's a sea change in how the world is organized and the means by which the kind of riverbanks of capital are altered and manipulated to try and make sure it flows to the places it needs to go according to those who are trying to steer it. And that, to me, these little things represent big, big, big changes. The first big change for me was what we saw happening in gold before all this happened. We saw something happening in gold which suggested that things had changed and this moving (23/99)
gold was not speculative. It wasn't the normal stuff we see in the gold market. This was a steady accumulation of gold. Since 2013, I think net foreign official holdings of treasuries have actually gone sideways or declined slightly over the last 10 years, which is surprising. But we've seen also a massive increase in holdings in the Cayman Islands. And it looks for all the world as there's been a move to put official holdings in places where they could be much more easily sold without scaring the horses. And so if we think about these really big changes happening, I'm curious as to your thoughts about what surprising alignment in capital flight in the month of April is telling you about where we are in this process. Yeah. So as you say, these relationships are breaking down between lots of financial assets. I think that what that tells you very simply is we're in a period of structural change, hardly a surprise. So I'm not sure why everyone's so shocked that suddenly these (24/99)
relationships break down. And on top of that, there's a bigger structural change. Is that for the first time in my lifetime, people are questioning property rights in America. You probably know, I run this little, I'm involved in a little festival in Wales called The Weekend of Mistakes. And it's for members of the public. And we talked about this. And the first question from the floor, from a pensioner, a well-informed pensioner, I should say. I don't think this guy had been a coal minor grant, but a well-informed pensioner is, will my property be safe in America? Yeah. Now, in my lifetime, I'm not really aware that we've ever had to ask that question before. And that a even well-informed pensioner in Wales is asking that question, tells you something about why these relationships may be breaking down. Because we've lived in a world where we constantly talk about return on capital, and suddenly people were talking about return of capital. Now, that I'm not that concerned about (25/99)
property rights in America. I think the constitution will hold. It's been a fairly firm constitution. FDR did certain things that were probably anti-the constitution. They didn't actually survive. So I'm positive that property rights survive in America, but those questions will continue to be asked. And a level of the issue of property rights is the free movement of capital, which is something else which is now being asked. And as more and more of those questions get asked, and they are the right questions in whatever form they're going to be, all of these relationships begin to break down. And it's not the first time. You know, we have been here before. I mean, I'm thinking of the late 1960s. Imagine having a 60-40 equity bond portfolio in 1968. And it had done beautifully all the way from... Well, not beautifully, but it had done... American one anyway had done okay from the end of World War II. And then all the relationships started breaking down. It was a why are all the (26/99)
relationships breaking down? Well, the global monetary system was breaking down. All the imbalances up until that point, as kind of forecast by Robert Triffin, were all beginning to break down. And none of it should be a surprise. So I don't think any of this should be a surprise. Of course, the real problem is that when old relationships break down, it's incredibly difficult to work out what the new relationships will be. And I think the real problem here is that we have lots of machines managing money. And those machines are using the relationships over the last 30 to 40 years, which is that old system. So you get really, really high volatility. If you've programmed machines to trade off 40 years of data on the belief that that's the long term, well, it wasn't the long term. It was one form of monetary system that comes to an end. And they kind of do come to an end every 30 or 40 years. And I'm saying, you know, we've already said, you know, we lost the Bretton Woods 71. Do you know (27/99)
what the system from 71 to 95 has called? It had lots of names, the snake, the Smithsonian, all sorts of things. But we've had one since 1994 now, and it's breaking down. So that's why all those relationships break down. That's why I think a sort of guiding star through this is to always come back to what are the imbalances? And if 10 years from now they have been unwound, what should I own to preserve the purchasing power of my savings through the unwinding rather than get too caught up in the volatility? So Russell, I think one of the ... And I don't know if it's a trap. I don't know if it's actually correct or not. So let me just put that out there. But I think that one of the traps that we can easily fall into is thinking about the global currency that's most commonly used for invoicing and transacting, which is the dollar, as also the primary reserve asset. And I wonder, is it possible, and that maybe this moving gold is also partly to reflect this, is it possible that given the (28/99)
fact that there is no clear alternative to the dollar for the time being, that it remains the primary currency for invoicing and transacting globally as the primary unit of account, but that what we're seeing with gold is a reflection of the loss of faith in US bonds and perhaps even a bit of a loss of faith in US capital markets, and that the world is searching for some kind of reserve asset to diversify out of while continuing to use the dollar for trade, and that this is the sort of dynamic that we're going to be existing in for the foreseeable future until some sort of competitor or perhaps even an international standard brought about by new international institutions or a new consensus around existing ones' forms. So we have to, I think, say, will there be one system going forward or will there be two? It's the first call. My view is there's two. Not everybody agrees with that. Some people think that America and China can come to a settlement. I think there's two. If there's two, (29/99)
the other one I think is going to have to use quite a bit of gold to build credibility. The RMB has been open as a reserve currency, I think, since 2014, certainly for quite a long time. Its accumulation has been very limited. To your point, Demetri, it's been used for trade, but it doesn't seem to have been used as a reserve asset. In fact, not actually used widely for private sector assets either. So if China is going to have its own system, and I don't think there's much point in wasting time now discussing who else might be in it, I think gold's going to form a part of that. So one of the reasons I suspect that gold is doing well is that somebody, whether it's China or others, are preparing for that. In terms of the dollar, one might argue that in a world ex-China, what a word ex-China means is a Cold War with China, a la or Cold War with Russia and the one we ran with Russia before, the dollar would become even more of a reserve currency. This is not to say that gold is negative. (30/99)
I think the private sector in particular would be very interested in accumulating gold, but I don't know if to what extent Scott Besant runs through all of these scenarios, but in a world ex-China, what could it be apart from? The dollar, and the dollar gets shored up. I am sitting in my study looking at my walls here at the decline of Sterling by Catherine Schenck, and I think it's a must read for anybody. It's not everybody's cup of tea, because it's, my wife would say, dense. I like dense, but anyway, our problems with being the reserve currency as well, it's not all an exorbitant privilege in this world of capital repatriation. It became a bit of a burden for the United Kingdom to be the legacy reserve currency. At the end of the war, it was actually bigger than the United States dollar. Maybe we could talk about that as well, but I would say bottom line in terms of that experience for the United Kingdom is that we couldn't allow capital flow out of the country. I think if I was (31/99)
trying to design or imagine how a new system ex-China would be designed, it would not be with the free flow of capital, even if it's anchored on America and the dollar. In terms of where the dollar is in this system, to me, that's important. I think it's not going away. I think it could become more important as we split into two, but I also think perhaps more important for people who listen to this is it's not very clear to me that the free movement of capital within the new system would be allowed as to a stronger word, but not as free as it has been here to for. The dollar stays part of that system, but it's a very different system as the Bretton Woods system was, where the dollar was absolutely king, but actually capital did not move that freely across border. Russell, you mentioned that this is something very interesting. People normally go back to, when they talk about the dollar's primacy, they go back to Bretton Woods and they talk about how post-World War II the dollar was the (32/99)
reserve currency, but the point you make there is absolutely correct about sterling steel being bigger. It really wasn't until, I guess, Suez that the British pound actually met its autoloog, if I'm mixing my metaphors, terribly here. But perhaps you could just give people a little understanding of that path, because I think it's an important one for people to get that you can still have some sort of primacy, but be chipped away and chipped away and chipped away and suddenly find yourself at the point where you're on bended knee and at the whim of another power. Yeah, I'm glad you mentioned, Suez. A lot of people listening to this won't know what the earth we're talking about, but it was a British military venture in Egypt. And the crucial thing there is what America did. America was against this and said specifically to the British, if you go ahead with this, if you continue this, we will sell our sterling reserve assets. Now, there may be other reasons why the British withdrew from (33/99)
that venture, but that was certainly part of it. That, I think, is what we call geo-economics, a threat on reserves. So that threat alone was enough to change the trajectory of British politics. And actually, the British Empire, if you like, I mean, America was against the British Empire. Seems like a pretty wise position with the benefit of hindsight to be against the Empire. But anyway, so that was that. More generally, over the period, the peculiar issue with British reserves is they're mainly held by Britain's former colonies, who had provided ample resources, particularly in forms of commodities during World War II, and a mass of British sterling balances over that period, and then had to be restricted in liquidating those. I think, I mean, certainly Nigeria was a big holder, India was a big holder. It's not the states that you necessarily think that are holders of reserves today. That was just a product of a colony and empire in World War II. And gradually and slowly, they had to (34/99)
negotiate the removal of the reserves. So you can imagine if governments had to negotiate the removal of sterling balances, the private sector had no hope in hell of getting its private balances out. You just couldn't cope with it. And sterling had various devaluations in the late 40s and the late 60s. And of course, they were all blamed upon those famous men who live in Zurich called the Gnomes of Zurich, who was a famous phrase of Harold Wilson. I think Harold Wilson, maybe not. Anyway, that it was the Gnomes of Zurich who were responsible for all these terrible, terrible things. The Gnomes of Zurich, we don't exist today, because we can all move capital freely. So we don't need the Gnomes. And that went on and on. And just to finish on where it kind of finished. And I read that, I mean, I went and I looked at the front page of the Financial Times the day, the UK stock market bottoms, which I think is January 1974. And the headline was, stock market collapses as Nigeria removes final (35/99)
sterling balances. So if you like that retreat, actually fit in relatively nicely with a long-term difficult period for equities. And equities were very, very cheap at the end of World War II. And they did okay for a period. But that was a horrible period of withdrawal of sterling balances. So there's a legacy if you get it. And you just can't let it all go at once. And where we began this conversation is the need of other countries to get that money back now. And how you go about coping with that, and my issue is ultimately, can America allow it to flow freely out? So Russell, I want to bring it back to this conversation about capital controls. And maybe the word order of operations is not quite right. It sounds a bit too mechanistic for what we're describing here. But what are the things that in your view need to happen or are likely to happen before we see capital controls put into place in the United States? Okay. Well, there's some trigger events. And then there's things that (36/99)
happen, which are capital controls, which we don't recognize as capital controls. The obvious trigger, the clear trigger, is a jump in Treasury yields. We're already in a situation where the interest expense of the American government is very high. So it's interesting. That's now called the Liz Trust Moment. That's what it's known as across the planet. So a Liz Trust Moment could indeed do something about that. I would point out that the first port of call is not to stop foreigners selling your bonds. It's to force your locals to buy them. Forcing foreigners not to sell is exceptionally draconian, exceedingly dangerous, and really does undermine the reserve currency status of your dollar. So you see, I link forcing locals to buy your own bonds as a capital control, because invariably what you're asking them to sell is their overseas assets. Now, that's not traditionally called a capital control, which is, you know, for those of us of a certain age, remember it was, you know, a complete (37/99)
ban on movement of capital cross-border. So it would be a rise in bond yields that make it difficult for the government to finance. Clearly, the private sector pays a premium to the government. So if it triggered a private sector debt crisis, because interest rates were rising so highly, then you go to forcing your savings institution to buy, which is effectively a repatriation of capital. And only after all of that, if it's not working, would you then go for the nuclear option, which is to try and restrict foreigners of removing capital from your economy. Now, this is a really interesting point, because there are then two sets of economies in the world, those running large net international investment positions, surpluses and those running deficits. And those running surpluses, and the two that obviously jump off the page, the big ones are Germany and Japan, would not be in a particularly bad situation if they were doing this. But those running particularly large deficits in America, (38/99)
everybody thinks America is the biggest in the world, it is the biggest in the world in numbers, but as a percentage of GDP, actually France is probably just as bad as the United States of America. So you then begin to divide the world up in terms of, if you like, the old form definition of capital controls, who'd have to get to that horrible form first when you stop foreigners taking money out? I think maybe it's France ahead of United States of America, but it wouldn't necessarily be Germany or it wouldn't necessarily be Japan. And foreigners actually have fairly low weightings and portfolio assets in both of those countries. So just one question here, a quick question then, Grant, please feel free to jump in. How do investors and businesses approach managing their cash balances and inventory management in this kind of a world that we're describing? Yeah, it's a great question. And it's all part of de-globalization, isn't it? Because you feel, indeed, to have cash balances in the (39/99)
currency where you're going to spend. And certainly as an investor, I don't feel that at all. Just as well, all my assets would have been in the UK stock market for the last 30 years, if I had, which wouldn't have been a great place to be. So as an investor, I don't feel that. So as a business, I might want to have more domestic cash just in case. And that's part of de-globalization. And in inventory, whether it's the productive capacity or the actual inventory itself, I might want to have that slightly closer to home than I would have had before. So these are questions we've all been asking about trade, but you're asking the right questions. What does it mean practically in terms of cash management? What does it mean in terms of capital flows? And those things happen much more quickly. And I suspect that actually that's already happening. I think perhaps over the last couple of months, one of the things we've witnessed is businesses taking these preemptive actions just in case, (40/99)
because there's no premium. You're not getting a big premium. When you raise the question of return of capital rather than return on capital, you need a hell of a big premium to stop you from doing something. There isn't much of a premium between the various interest rates. So perhaps we're already seeing a retreat of cash for a more mundane purpose. I look at it from an investment perspective, but you've quite rightly raised the issue of cash flow, cash balances, inventories, and maybe that's underway as well. That's what de-globalization is. We seem to think it's about trade, but it has to be about capital and cash. To make you just building on that, it's interesting. I had done a dinner last night with a fascinating guy who wears two hats. He's a hedge fund manager, but he also has a business, a manufacturing business. To hear him talking about the issues he's seeing just with the tariffs and supply chain blockages and the immediate impact that this is having on his business, it's a (41/99)
small technology, but manufacturing technology-based startup. He was apoplectic about this. Another gentleman at the table who does a lot of work in Germany had been in Germany talking to a business, a group of business leaders in Germany. He had with him American financier who may end up with a political role. He said that the Germans were, there was white heat coming out of the Germans, that what they termed economic vandalism of the Trump administration. Dmitri's question is such a great one because the world that we inhabit, when these things happen, we're spending our time thinking about what ought we to do about this? What's going to happen? What should we do? Businesses are thinking about, okay, what do I have to do now? And they're two very, very different courses of action. We can have this moment of inertia where we think, well, maybe we'll just let this play out a bit longer. We've seen yield spike and we saw there was an immediate reaction when the 10-year spiked. So maybe (42/99)
that's what we need to look out for. The businesses from the ground up, they don't have that luxury. They're having to make changes to how they operate right here, right now. So when you think about those two very different forms of impetus to do something, how do you think that might resolve itself? Because it feels to me like it's going to have to come from the bottom up. It's going to have to come from that necessity and those actions that are taken out of need rather than kind of sitting there cross-legged, gazing into the sky wondering what we think might happen and positioning for it. Absolutely. If my negotiating position to the two of you is I am an unreliable partner who cannot be trusted, but I come back to do a deal and say, no, I can be trusted. It doesn't matter. Yeah, you're right. This is the problem. Once you say this uncertainty and you've described it very well about white heat and fuming, the idea that that goes away in 12 months because actually there aren't any (43/99)
tariffs and that's a possibility that there aren't any tariffs or they're exceptionally low. It isn't possible. It isn't going to go away. So that realignment of business, of supply chains, of inventory, of cash balances is permanent, is going to be with us for a long, long time to come. Because those businessmen you spoke to can't, having faced this cliff edge of risk, they aren't going to come back in a year and say, let's face it all over again. And don't worry, it's all going to be fine. And who knows, the next president could be even more dramatic anyway. So profound long-term implications. It is worth saying that when America says it wants a smaller current deficit, it is saying it wants less capital. The two things, in a flexible exchange rate, the two things are mirror images of each other. So it's actually demanding less capital. That is what America is saying. They're saying, stop putting so much money into America. That's what you're saying if you're going to run that (44/99)
position. So our interest is where is it going? That's our interest in the rebalancing. Where is it going? I mean, some guesses at that in terms of Germany and Japan. But what we're doing in this interview is raising the parallel issue, which is not just about financial capital for investment, it's more operational capital as well. And we used to call it French shoring. Janet Yellen used to call it French shoring. And now people think America doesn't have any friends. But it's still, I don't know what we're going to call it now, if we can't call it French shoring. Let's just call it reshoring. So I mean, this is accelerating. I've been writing a lot about people reducing their China risk. And now if you're European, you want to reduce your China risk and your American risk. My goodness, that's reshoring in space. The whole concept that some people seem to believe that because America is an unreliable ally, that China has become a reliable ally. I don't think that meets much of a test (45/99)
here. So Merz, for instance, the new chancellor of Germany, who was very pro-American anti-China, now finds themselves very anti-China and being forced to be somewhat anti-American, that accelerates reshoring, that accelerates the return of capital to home base, whether for operational reasons or for savings reasons. I have a few just thoughts I want to throw out here. Just one at the top is that we're having this conversation discussing, I think, largely so far, the secular forces. And my question is going to end up really focused on the policy questions and policy changes that we earlier identified as not necessarily being the most important things, at least not for the long-term Russell. But I think there's an important question there to ask. But I just want to say, things can change very quickly. And the world changed quite a bit after Russia's invasion of Ukraine in 2022. And I'd love to maybe get your opinion, Russell, on how investors should even factor that into their equation. (46/99)
But my specific question is about the discrepancy that we see in this administration, just like we saw in the previous Trump administration, between the president's official policy statements or whatever you want to call them, whenever he's talking to the media or tweeting. And then what his advisors, like Scott Besant, come out and say. And it was interesting because Scott recently gave a talk where he said that America going it alone does not mean America not cooperating with its allies. And it also requires mutual respect and some other things like that. I remember watching that and being like, wow, that is so far from what the president is saying. And the question is, I think for investors, one of the central questions is, who do I listen to? Do I listen to the president or do I listen to his advisors? Who's actually running the show here? This is about China. So what Scott Besant is saying, and what is becoming evident, I think, more by the day, is that I think it was a wrong (47/99)
policy, but still it's a policy, which was to shock the allies, to persuade them to do a deal on China. I've heard that circulating. I mean, what's the sort of, is there any basis to it? What is the basis to that argument in your view? Well, actually, Scott himself has made quite a few comments along those lines that this is really about the grand imbalance is really in China. There are other. I can't remember that comment the day that Trump said he was going to lift some of these tariffs. Everything went up. And Scott Besant came out and said, we always said this to our allies. It depended how you responded to these things. And China put their tariffs up for the people who didn't. It was to try and shake the allies into a belief that they have to be more aggressive on China. So I think if we go forward a few years, that's where we'll see. So you should listen, I think, to all of them because which one is a friend of China? Wow. Are we going to amend? Are we going to name somebody (48/99)
within the administration who's pushing back on the let's alienate China thing? Because I don't hear that one. People say they've got a hundred and fifty, you know, a thousand different views. Well, the one I haven't heard yet is, you know, well, you curiously hear Donald Trump saying we can do a deal with China. But the terms and conditions on which Donald Trump wants to do a deal with China are effectively China containment. Let's be brutally honest about it. And China's not going to agree to that. And we can get into the details of the exchange rate policy, which I think is particularly problematic between the two nations. Rachel Reeves, the chancellor of the Exchequer of the United Kingdom, is in America at the minute and made a lovely comment yesterday that it was clearly and obvious that there was a gross imbalance in trade in the world and it was with China. And the United Kingdom would be happy to work with you. And this is what you got to do. You rock up in DC, you proclaim (49/99)
that China is the root cause of all this. And there's, I mean, there is some grounds for that. I'm not saying it's fabricated. And that's what I see in Scott Pesant. But I don't see anybody who's going to push back against that. And Marco Rubio, of course, is exceptionally anti-Chinese. And I think it's Navarro, isn't it, as well, who's very anti-Chinese. So to look through the administration, it's always possible to sit down and forecast 30 things the administration's going to do. Ultimately, as a historian, you say there's only a couple that actually matter. In my opinion, all that matters about this Trump administration is where they will be, where America's relationship will be with China in four years when it's over, and where they will force the rest of the world to be by the time the Trump administration has gone. And if we focus on that in the Trump administration, I think the rest, you can't call it noise, it's important that it creates volatility. But it's all about China. (50/99)
Does that mean that China is still, quote, not investable? In my opinion, it's not investable that the prospects of a fully blown Cold War with China are Cold War with Russia, because it's technically a Cold War, because we're not, we're providing ornaments, but not troops. That is where we were probably going to end up with China. And I hope that it isn't going to happen, but the prospects off it remain high. And this administration is pushing that, I think, aggressively. You probably are people listening, this may have heard that the Enola guy left from a small island all those years ago, that was a huge air, floating aircraft carrier, not floating, but anchored aircraft carrier, thankfully, it was just reopened. The Indo-Pac American defense is moving closer to China. This is about China. The Ukraine is about getting American troops and armaments somewhere else, and it's getting them to China. Now, we can all hope that somehow that is all done in a peaceful fashion. But you can't (51/99)
ignore that it's happening, and it is happening, and it's happening pretty quickly. So that is, I think, where we're going to end up. That, to me, makes them uninvestable, because you could end up like Shberbank. So Shberbank trades in Russia, has a value. It's very difficult to turn that into dollars that you might want to spend in your retirement. That is likely where we end up with China. And it can happen by accident. The Gulf of Tonkin incident was, at least it started as an accident, which is a North Vietnamese torpedo boat faring on some American naval vessels. It can start by accident. Two great tectonic ship plates are shifting, and you don't know when and where. My great concern here is all my clients, my professional investors, all know exactly when and where these plates are going to shift. They all know it's going to be Taiwan, and they all know it's not going to be for five years. And that is silly. It really is quite dangerously silly to say that you understand that. It (52/99)
could happen tomorrow morning. So I think Chinese assets remain uninvestable. I really hope I'm wrong about that, but that's everything I see in the Trump administration has one word running through it, and that one word is China. Russell, don't worry. If it does happen tomorrow morning, we'll edit this bit out. Don't worry. We'll have time to do that. So don't fret. But let's stick on China, because as you said at the very beginning of the show, your big fear was that. The thing that could do the most damage was a conflict with China. And also, you highlighted there that Chinese exchange rate policy is also an important financial component to this. So piece those together for us and help us understand and help the listeners understand the problems with China's foreign exchange rate policy. Perhaps the weaknesses and the potential threats it can, the weaknesses it has and the threats it can point in our direction, and then talk about why that conflict with China is the thing that (53/99)
scares you the most. Yeah. So the interesting thing about the Chinese exchange rate policy is it's now very negative for China. And for many, many years, it was actually very positive for China. So people may wonder, why would any country pursue a policy which is so negative for it? I also wonder that. We'll speculate on that in a minute. When you link your currency to somebody else's, you lose control of your domestic monetary policy. Now we have to pause a little bit, because it's not quite true in China because it has capital controls. But you give away a significant flexibility to control the price interest rates and the quantity of money in your own economy. And these are really very, very crucial things for anybody to control, whether they control about independence, central bank or the government. They're really very fundamental. And China has given that away. And what therefore does determine the price and quantity of money is the size of its external surplus, which is not just (54/99)
a trade surplus, but also a capital surplus or a trade deficit or a capital deficit. And to me, it's insane that the world's second biggest economy run by a man who likes to control things has given up control of the thing that really matters. And therefore it seems to be unsustainable. And in holding onto it, he's driven China's total non-financial debt to GDP ratio to 192% of GDP. America is about 150. We go back 15 years, China was half the level of America. So we really not see anything like this for any major economy in human history, debt to GDP to go up that quickly needs to do something about it. We all know how to do anything about it. I mean, you can phone up Tim Geithner, Tim can help him. You print money, you printed a lot of money, but you can't do that with the exchange rate policy. So I think he's going to have to do something about that. I would devalue initially because you be obviously wanting to create a lot more ren them be. That's the whole point and how you go (55/99)
about inflating away your debts. That would look like a grand gross deflation shock. But I think we probably know now that tariffs fall pretty closely behind that when Xi Jinping has to get into that world. And then we get into these really interesting questions about how do you reconstruct one global monetary system after that? Of course, my conclusion is you can't. You'd have to construct two global monetary systems after that. So that's why that exchange rate is so important. And also grant it kind of forces people to take sides. So if I was running Malaysia and the ren them be devalues, it's very tempting for me to devalue the ring it. But the Americans will be very keen for me not to devalue the ring it. And they'll promise me in return great access to American markets, which is I really think what Scott Besant is up to. I think people have got this wrong. I think that's what he's trying to do here. And therefore, if you follow the Chinese currency down, you may be saying, (56/99)
actually, we're in the Chinese block. When I do this talk in Asia, I get a lot of pushback from people who say, I've got a very Anglo-Saxon view on the world. And I think that's an acceptable criticism of it. But my view is that most people choose not to be in the Chinese block. Now, I think if you if you're sitting in Singapore or something, you may come to a different conclusion. But my opinion is most people choose not to be in the Chinese block, whether they're Vietnam, Malaysia, Thailand, Philippines, Taiwan, South Korea, Japan, they choose not to join the Chinese block. So I think you should really get somebody on the discuss Asia. There's a different opinion on who's happy to be in the Chinese block rather than have some, I'm not an Anglo-Saxon as you know, Grant, I'm a Kelt fully signed up. But pride Kelt, well, Anglo-Saxon characteristics, that's put it that way. So yeah, so that's what that movement and the currency means, I think it's very difficult to sit on the fence after (57/99)
that currency moves. You took the words out of my mouth, Russell. My next question was literally going to be after grants about what this means for some of those largest economies and countries that kind of sit somewhere in the middle or in the case of Russia have leaned much more heavily towards China as a result of the fallout with the United States. But I'm going to throw Russia in there too. The countries I'm thinking about are Russia, India, Saudi Arabia, Turkey, and Brazil. Is there a path in which these countries can or some of these countries can kind of walk in between these two currency systems or do they have to choose concretely? And if they do, do you have a view on where they fall? So we have had a non-aligned movement before. This is exactly what happened in the last Cold War. And it wasn't very successful for those who tried it. I think of Indonesia. I lived in Asia. For those of people who know the history of Indonesia and have watched that incredible movie, The Year (58/99)
of Living Dangerously, you know, with the benefit of hindsight. And even at the time, it was quite clear that the CIA toppled the government of Sikarno and replaced them with General Saharto. American intervention in Latin America during the Cold War for people who tried to be independent was not very successful. India perhaps did it, but with dire economic consequences, maybe of their own choice in terms of the sort of nearer approach to economic management. But for those who tried to dance the line, it wasn't very successful. So I'm not saying that they wouldn't try. And it looks like India is trying. I think many people think India is trying. And they've got very, very, very strong cards to play. So why wouldn't they play them? But ultimately, I don't think they go into the, they can stay non-aligned for a very long period of time, despite being a much bigger and much more powerful economy than they ever were from the 50s, 60s and 70s. I think it's exceptionally difficult. So maybe (59/99)
they'll try, but I actually think everybody will ultimately have to choose a side. Brazil really doesn't have an option. I mean, because it's so far away from China. I mean, it's just, you know, there's a seventh fleet to contend with if you want to keep trading with China. So I don't think it's an option. Well, Australia would be an interesting one. Yeah, that's much more of an interesting question. Australia is absolutely fascinating because when the Australians come in to see Scott Besant, just imagine what that conversation is going to be like. He's going to say, stop selling them iron ore. They're saying, you know, every single aircraft carrier that they have is made from Australian iron ore. And we're now sending our ships to defend you from China. And as you know, the Chinese did a stupid thing by putting those ships off the coast of Sydney. Yeah. And he's saying, look, we're going to defend you, but you've got to stop selling them, all the stuff they're making armaments with. (60/99)
Now, we know, granted, you know, there's been a 30-year economic expansion in Australia based upon selling commodities to China. Yeah. And that's the discussion. Yeah. I mean, for Australia, it's really, really, really difficult because to say we're not going to sell it to China, if that's what the Americans ask for, is huge economic ramifications. Now, obviously, Mr. Besant will promise lots of business for America, but still. So Australia is the one, and the Americans are building an air force base in Northern Australia. So the commitments that we're all talking about, isn't it terrible how the Americans are reducing their commitment to defending Asia or to defending Europe, but they are massively ramping up their defenses of... So if they're demanding more of Europe to defend itself, what are they going to demand of their partners in Asia for the higher levels of defense that are coming? And I think you're absolutely right to focus on Australia because that's the most dramatic one (61/99)
of all. But if you see yourself as defended by America and Japan more than any other country in Asia sees itself as defended, maybe Australia comes second. This is why they're in the Quad. The Quad is India, Japan, Australia, and United States of America. The Quad, it's defense-packed in Asia, gives you some idea of who really, really, really realizes that without America, they're a big trouble. Now, what is America going to demand from Japan? What is it going to demand from Australia? And if it goes in with that really hard demand on Australia, I'm really, really scared at that stage because this is where we were in the 30s. We tried to cut Japan off under the League of Nations. This was something short of war. It was supposed to be a good thing, but it forced the hand of Japan to do something pretty barbaric in that stage. So if the Americans force Australia down this path, the prospect that Xi Jinping has to do something slightly more offensive, it gets very, very high indeed. I (62/99)
mean, this makes me think of the Biden administration's policy on export controls. I mean, one of the criticisms is that they weren't tight enough. And the reason when you asked officials in the Biden team why they weren't tight enough is they were worried about escalation. And is this, I mean, I don't know if it's an appropriate question to ask in the sense that I don't know if anyone of us can ask it, but I'm curious, Russell, whether you think walking tight ropes like this is even possible? No, I think the easier answer to that is the risks of accidents go up, as you say. It's above our pay grade. But what we do know is the risk of accidents go up. And as an investor, that increases your risk premium without us having to try and second guess what actually is going to happen. We're just going to say that the risks are up. And part of that risk is Chinese assets become uninvestable. That's part of the risk that if we just make a mistake in this path. So we're going into a high risk (63/99)
strategy where the consequences of mistakes are truly dire. Just one more thing I wanted to throw out here, because I kept thinking as we were talking about this, we were talking about some of these countries like Russia, India, Saudi Arabia, Turkey, Brazil. And what we're really talking about is a reorganization of the global order. We've talked about it in monetary terms, but it also obviously matters in terms of security. And I think what is most underappreciated about American power is American soft power and the credibility, yes, of the American security umbrella and the ability for the U.S. to protect allies, but also the competency and credibility of American leadership in being able to actually lead a new kind of order. And I wonder, I guess the question that I keep asking myself is, does this administration have the ability to do that? Where do we kind of look for information to give us a sense of who's leading that effort, how it's coming together, because what the (64/99)
administration has been very good at is smashing the current order and kind of getting people off their asses. But where do we look for to get a sense of the direction of travel and what that order is going to look like and if the U.S. actually has the credibility and trust to lead it? So I think in any era where you smash things up, it's incredibly difficult to put something new back together again. So even if you pick the 10 greatest statesmen in the history of the United States of America, I think this would be a challenge. It's not as if the Trump administration is uniquely unequipped. I think anybody's uniquely unequipped for this because this isn't real estate. This isn't the art of the deal. There are far too many moving parts here. Some of it's about pride. Some of it's about subjective issues. So I think rather than getting into sort of criticizing individual members of the Trump administration, we could say it doesn't really matter who'd be running America now. It'd be (65/99)
incredibly difficult and a great structural change of this magnitude to try and manage this given the surprising bits of the machine that will be breaking down somewhere else. So you have to keep coming back to what does this mean for investor and it means very high risk even if somewhere a wonderful policy wanders into the White House and suddenly gets authority. I'd still be incredibly nervous that that wonderful policy won't is capable of managing this transmission in a way that's good for savers. Now, maybe they could do a better job at managing it for what's good for our children and grandchildren in terms of military conflict. That's what we would all hope. But in terms of savers, it's just difficult to imagine a somebody who comes along with this wonderful ability to control things. I think investors are putting a lot of faith in Scott Besson to be that guy in the room. He's a smart guy, but is really anybody that smart? Well, that's smart and that capable of steering Trump (66/99)
where he needs to go. That seems to be an intriguing thing about how smart he is. Not just Trump, G. We know less about G, but he may be subject to some of the same right euphemism. Let's call them fragilities, same fragilities as the American president. And if you've got those two facing off, they may be not, maybe they're both geniuses, I don't know. But when you get two characters and then you throw Putin in the middle, you know, this we deal in a word of reason. And there's more than reason going on here. There's vanity, there's pride, there's a lot of other things, and it's not just Trump. It also seems that the Chinese care more than maybe we appreciate about how they're seen and being respected. We've seen examples for example, when I think it was the GM of the Houston Rockets, is an example I've used before, was traveling through China. And when he was in Hong Kong, he made comments about the protests. And this stirred up quite a hornet's nest in Beijing. And this has been a (67/99)
consistent MO. And you can't imagine someone that stirs the pot more than Trump. So again, there, I wonder, he's great at one thing, which is, you know, stirring the pot and changing the dynamic and breaking an unworkable system. But I worry about who's going to be there to pick up the pieces. Yeah, there are too many moving parts. This is not Mano and Mano the way he thinks it is. And we've just seen capital moving that probably he didn't expect. Nobody is that smart, too. This is a 3D chessboard. And the presidents be playing checkers. Russell, let me come back if I can. We've touched on NATO a little earlier on, and America's changed there. And in thinking about investor flows and the point you made about repatriation of capital, it's difficult to argue the logic behind America's change of heart around NATO. You know, the piece I read the other day that said, you know, why should 300 Americans pay to defend 500 million Europeans from 10 million Russians? Which is a fair question. (68/99)
And I think that if you strip out the Trump factor, and you picture a room full of serious people sitting down having a discussion, there is a very easy discussion to be had here that, look, you guys need to start paying your way. And Europe has been able to channel those funds that they've saved from spinning on their own defense into, as I was discussing at dinner last night, you know, free university and universal health care, and all these great things that Europe has that America doesn't. And so you can make a very, very cogent case as to why this is actually the right course of action. Once that happens, however, we're now at the point of a national security imperative. And these countries have to find this money. So when we get to work out how that's going to happen, we get to this capital repatriation, we've already seen some of the larger European, particularly Scandinavian pension funds talk about how they're going to reallocate assets away from the US. I haven't said where, (69/99)
but one can assume that it's going to come home. Japan has, I think, long been looking for an excuse from the government side to pull a few of the big pension funds into the room and say, hey, lads, you know, we need a bit of help back here. We have everything in place here for capital to flow, not just in dribs and drabs, but with an imperative back to Europe, back to Japan. And not only is there the imperative for it to do that now, you're doing it at a point in time where America has never been really so overvalued so consistently against all these markets. Everything has been put in place by this NATO move and some of the other dominos at the top and afterwards to completely realign and reshape capital flows. And I'm not sure that people perhaps recognise just how seismic this potential change we're going through really could be. I'd love to get your thoughts on all that and feel free to push back and call me all the names under the sun. Yeah, so I agree with that. And it'll last (70/99)
15 to 20 years. That's the bit that people don't get. So, you know, we can have that. I mean, that conversation is all over the front page of the papers and, you know, when does it stop? Which week does it stop? When do we get back into the S&P 500? That's the story. Where are the Japanese coming back? But the forces that we've discussed in this so far, I think make it absolutely clear that this is underway for year after year after year after year. And that's what we have to get our heads around as investors. And that's where we started the call. There are imbalances. Those imbalances will not exist in 10 years or 15 years. The question is, how they're unwind? That's how you begin to benefit from them. So, the capital flow has to return. I thought the Asia comment on NATO was really interesting. Prior to the election of Donald Trump, NATO was run by a man called Jens Stoltenberg. And Stoltenberg said, we NATO now have a role to play in the Pacific. It's called the North Atlantic (71/99)
Treaty Organization. But anyway, they have a role to play in the Pacific. So, the head of the organization clearly under great pressure from America already from the Biden administration was already shifting its focus to the Pacific. Now, what does this look like if you're a J? It's very easy for us to keep going on about Trump. But if you're a J, this looks awful. You've got the world aligning to continue. And it wasn't Trump who started this. It was Obama who started the pivot to Asia. Politicians are wonderful at one thing and perhaps only one thing, which is coming up with wonderful names for certain policies, which are not necessarily wonderful. The pivot to Asia in China was China containment, full stop. So, there's a lot to blame Xi Jinping for. I'm no fan of Xi Jinping. But what did you think he was going to do the day you said you were going to pivot to Asia? What did you think he was going to do? So, this NATO thing was already underway. And if NATO was going to have a (72/99)
Pacific focus, it was clearly going to have less of a North Atlantic Treaty focus. So, these things are going to go on for a long time. And the only way out of it is some amazing deal, geopolitical deal really, about who controls the seas around Japan, South Korea, Taiwan, the Philippines and Vietnam. Now, if you think we have an American president prepared to concede all of those things to China, then perhaps there's a deal to be done. My view is that this president can't do it. The next president can't do it. And the president after that can't do it. And that is why this is going to go on for a very long period of time. And once again, people read about this in the papers every day, but then don't ask the obvious question, what does that mean for capital flows? And that's the question we're asking. And it means repatriation of capital flows. And there's some real flashpoints down there. And the biggest flashpoint to me is not Taiwan is Vietnam, which is being put in a shockingly bad (73/99)
position by China's intervention in Cambodia, China's movements around the South China Sea and creation of New Islands down there. And Vietnam could easily, easily purchase American armaments in some size. And he's gone 800-mile border with China. That is the Cuban Missile Crisis. Now, most people tell me the Vietnamese are very clever people. I mean, if anybody needs to play one side against the other and not come down on one side or the other, it's the Vietnamese, but Xi could be forcing them. And that is the Cuban Missile Crisis for China, if American armaments start pouring back into Vietnam. And capital is moving. I mean, people, oh, I've only owned the Magnificent Seven. Well, actually, if only you'd owned Mitsubishi Heavy Industries in Rhinematelle. And that was to do with these great geopolitical shifts. And they're just beginning. That's, keep coming back to the same point. This is just starting. How important is the resolution and the terms of the resolution of the Ukraine (74/99)
war, the Russia-Ukraine war, for bringing more clarity to the subjects that we're talking about today and to maybe stabilizing some of the security dynamics? Yeah, there's a famous quote from President Nixon. Do you remember he said, we're all Keynesians now? Well, we're all geopoliticians now. And that's kind of one of my points, Dmitry, about a slight plug from my course here. Nobody in our industry is in any way qualified for any of this. Because I came in 30 years ago when this was a fairly amateurish industry. And I mean that, frankly, just being deregulated, we'd be buying here. And anybody could get in. Grant and I got in. So anybody could clearly have got in. But subsequent to that, they recruited MBAs and they recruited people with degrees in finance. And they didn't teach any of this stuff in Business Girl. They didn't teach it on the syllabus. So it's a good point, not to turn me into a geopolitical analyst because I'm not. But I am a historian. Historians maybe have (75/99)
something to say about this, even if that's not, it may not be as good as a geopolitician, but it's certainly better than an MBA. Let's put it that way. So I'm afraid that I think the industry is unqualified for this, which is why there's kind of a scramble on now for expertise. So that was a slight aside from the actual question. Settlement of the Ukraine war is not, in my opinion, that important, which is a sound strange. America's shifting to China anyway, full stop. And obviously that shift can probably be a bit quicker if they can reduce their commitments to armaments, going to the Ukraine. But it's happening anyway. It's not going to stop war in the Ukraine, peace in the Ukraine, sorry, in Ukraine. Don't make any difference to the pivot to China, the pivot to Asia. It's going to keep going regardless of where that goes. So there are other reasons why it's important, but keep coming back to the same point. The thing about the Trump administration is China and the Ukraine policy is (76/99)
entirely based around getting something going with China. Now, ideally, you know, people talk about reverse Nixon. I think that's fanciful. I suspect even the Trump administration thinks it's fanciful. It's just more pragmatic than that. Let's kind of shore up what we would have to call in this context the Western Front while we go onto the Eastern Front. And that doesn't change whether there's peace in Ukraine, peace in Ukraine or not peace in Ukraine. I want to hand it over to Grant, if he has any other questions. I just want to mention the course that you were talking about the Russell is the Practical History of Financial Markets course, which is available both online and also in person in Scotland, in Edinburgh, where the Library of Mistakes is. Yeah. And actually coming up in London a couple of weeks, if anybody's interested, just go to Library of Mistakes. You'll find details. We have a handful of places left. It's interesting. We're not full. I would have thought we'd have been (77/99)
full to meet. I thought everybody would be looking at a little bit of financial history, but we are nearly full. Well, hopefully this helps. I know that I was speaking with someone actually two days ago who either bought a ticket already or was going to buy it and was asking whether they should take the online course as well in preparation for it. I said, you can never be too prepared. You can never be too prepared. Grant, why don't you go ahead if you get it. And you can never get too much Russell Napier. Well, listen, Russell, just before we close, perhaps you can just maybe sum up and for the people listening that are trying to navigate their way through this from an investment standpoint, whether they're looking off to their own money and worried about that or their professionals in the industry, if you could just give us a sense of just how to think about this. Are there any tips for how to read the news or how to think about the way these shifts are happening or even just get (78/99)
your mind better set to understand the magnitude of what we're talking about? I think you've done a brilliant job of helping people understand that this is a lot bigger than buying the dip and the volatility we've seen is a microcosm of the long tail volatility we're going to see. Yeah. So don't trade. So you probably know, Grant, I wouldn't give you that advice last year, the year before and the year before that, but it's particularly appropriate when volatility is high that you don't trade, particularly appropriate when we are appeared as structural change and the volatility on the way to the structural change is very difficult to predict. So you really shouldn't be trying to trade this. It's going to be very, very difficult. I think maybe we've learned that over the last two months. The longer term lessons on unwinding the balances are actually fairly straightforward if you've got the guts to do it and then the guts to stick with it. So I would say that preserving wealth now is not (79/99)
about intelligence, it's about courage. And it's the courage to do the following things. If we're going to inflate away our debts, which as we discussed is probably the only political way that isn't incredibly dangerous, don't own bonds full stop. There are some wonderful charts. I'm looking at another book in my library here, which is the History of Interest Rates. And we can look at those all the way back to Genoa for, if you like, bond yields. And they tend to go in 30 to 40 year bear markets and bull markets. And ours began in 2020, 2021. So don't own bonds and you'll be tempted along the way to trade them and own them. And if you're a very smart trader, maybe you should do that. But if you're not a professional trader, you should not try to trade bonds and therefore you shouldn't own them. You see that alone is radical. It's radical. I mean, it's a radical, radical statement. And without mentioning any names, I go to see professional investors who run multi-asset portfolios and (80/99)
say, well, we can't do that. And I say, well, why can't you do that? Well, all our competitors have got 40. So we can't go to zero. So people listening to this will be running their own money. They can make up their own minds. But I think that's a radical thing to do. Another radical thing to do is to try and have your money in a place that isn't going to impose capital controls. So I invest all over the world. I'm particularly invest quite a lot of money in the United Kingdom at the minute, which I think is very cheap and has got lots of things going in its favor, which is very non-consensus opinion. But they happen, those investments happen to be held through Singapore. And if I was concerned that I'd got all that wrong at the press of a button, the cash balances on seal rest in Singapore, which is a country that's highly unlikely to restrict capital outflow because they're battling capital inflow. And there may be a few other places like that. So you have to think about these things (81/99)
that we maybe didn't think before. You might say, well, it'd be terrible if I had all my money in Singapore and I want to retire in America. Well, no, because the American government will always welcome your capital back in. That's not the issue here. So you want to think about that. In the world of capital repatriation, we have to work out one of the two assets in the world, most likely to be liquidated in a capital repatriation, and they're really, really easy, they're the S&P 500 in surgeries. It's really very simple. If you look at any global portfolio in the world really these days, certainly anything in the develop world, anything where there's no restriction, existing restriction on capital controls. So you have to be very concerned about those assets, which is not the same thing as saying you can't buy equities in America, it's just saying you have to be concerned about those assets. Something else, I run the Library of Bistics here in Edinburgh. We had Sir John Kay speak last (82/99)
night on his new book, just looking at the largest companies in the S&P 500. You really don't find a 30-year period where the guys at the end of the 30 years are the same five largest companies that they were at the beginning of the 30 years. That's one of the beauties of America. Actually, we could maybe call that a form of creative destruction, but the likelihood that these guys are going to dominate the next 30 years is really quite unlikely. Although it's absolutely consensus thought that they must do that, it's never actually been accurate, it's never been true. So you've got to be particularly cautious of buying the winners of the old regime. The winners of the new regime are more likely to fall into what we call the value bucket, and it's more likely to fall into investment, fixed asset investment in the developed world and people who compete with China. Now here's the problem. If I was running your portfolio grant, like you meant to say, well, grant, we get no bonds, we got 75% (83/99)
in value stocks, 25% in gold, and you'd say that is the riskiest, most radical approach I have ever heard of, but you'd only say that in comparison to the competitors. I do not believe either of those asset classes is risky. I think you'd be hard pushed to call them risky, but in the context of the current thought and the last 30 years relationships, they're called risky. And at a time of great point I've made to Dmitri before, at a point of great structural change, you don't need to own risky assets. You just need to own risky quantities. And that I think is how we begin to navigate our way through this. Finding active managers who can do that for you as we've discussed previously, Dmitri, is not easy because active managers have one way or another got caught up in momentum. That's the other thing. One of the things we look at in the course is momentum in the stock market actually works. It does work, but it's not going to work in a period of structural change. So to survive, I think, (84/99)
for the last at least 15 years in fund management, you have, most people have got a little bit of momentum in there. And this is not a period to be with guys who are doing the momentum thing. So you need to get to the value thing. And there are active managers out there who can do that. And I think they're licking their lips. I should say that, you know, I know a friend in New York and he only buys American stocks. He's got incredibly cheap stocks in his portfolio. You know, as you know, Grant, Dmitri, their reasons why stocks can be cheap, but they look like reasonable companies. They're just companies that nobody cares about. They tend to be quite small. They tend to be quite illiquid. Something that most people listening to this will know is that most institutional investors, you can't really buy anything under a, I don't know what is it, 50 billion. And there are lots of great companies trading under 50 billion that don't have market cap of 50 billion, that don't really have (85/99)
institutions on the registered equity extent. And therefore, have not seen their valuations distorted. So great opportunities. You know, it's funny, Russell. I don't remember who I was speaking with about this, but we were talking about how if an active manager went to his risk department and said, I want to buy these stocks and these particular quantities, and that was basically replicating the S&P, they tell them you can't do it. It's too risky. And I think, you know, no, it's such an interesting, it's just a great point about quantities. I also want to mention your courses come up a few times. I just wanted to mention as someone I've taken the course, and I actually spoke with someone else recently, not the person I mentioned earlier, who said they had just finished taking it and how transformative it was. So I can't recommend that enough for people listening. Yeah, we'll put all the details of that in the transcript and stuff. You know, Russell, what you said there, this mindset (86/99)
shift, for the last 20 years, people have been talking about which stocks should I buy. And it seems to me that the shift here, if you want to really boil it down based on the timelines we're talking here, it's really not a question of which stock should I buy anymore, it's which companies do I want to own. You know, then thinking like you want to own a ship and something because you're not renting it, you're not going to buy this thing and then flip it for a higher price, you need to put your money in places where you can own things. So it's a really great point. In my first book, there was great statistics for the NYSE on the number of shares, but also the number of shares that turn over in a year. So you can therefore divide one by the other and you can work out at any given point in history, until recently the average holding period of an investor. And in the 50s and 60s, it was eight years. I mean, it was eight years. There were no futures markets to confuse that. It was genuinely (87/99)
eight years. And of course, there were people who made a lot of money in that period of time by just buying and holding good companies in eight years. So looking at a world probably of significant less liquidity, maybe not back to that. But we've got to remember there was a time when that was a normal holding period and what we've seen recently is abnormal. That chart's really fascinating because it includes 1929 in it. And I can't remember. I mean, that sort of liquidity short-term holding period. I mean, I think it was the 1970s before we got back to where we were in 1929. But in 1929, it seemed perfectly normal. And then it was abnormal for decades. Does that also mean that we could see more companies being at the issue dividends? Yeah, absolutely. We have an interesting chat on that for people who want to go on to live in the state's website. We've got a guy called Dan Paris on there talking about dividends and a different way of rewarding investors. It's a great point to me (88/99)
because quite a large percentage of return in that period afterward would also have come from dividends rather than capital depreciation. It's difficult, Grand Point did I, that if we look at US equity valuations, and I think the one that I use anyway as a cyclically adjusted PA is very, very high. It was very high in 1966 as well, not as high as it is today, but very high. And then produced really dire returns after that. But if you'd gone and bought sort of value slash dividend pairs, amazingly, you owned that huge bear market from 66 to 1982, you actually made a positive real return. Because you weren't taking the valuation risk and the dividend was always there to some extent bail you out. And that was calculated on reinvested dividends. So even in a grossly overvalued equity market, as America was in 66, equities were the answer, bizarrely, just not the ones that were in the index. And I think the beautiful thing today is if you look outside America, there are a lot of, even on (89/99)
the index, aggregate level, there's a lot of stock markets that look considerably cheaper than the United States of America. I'll make a bet with you here and hopefully I'll be around to pick up on this eight years from now. We'll get back together and we'll be talking about British exceptionalism. How can I, Dmitri, you'll have to take the other side of that, but I can't do it, obviously. Well, I look forward to that and I think we'll have to record that one in celebration in London. But the point is there's always an exceptionalism somewhere. Somewhere. And it's always bogus. So well, certainly the Japanese one was bogus. The East Asian one was bogus. There was an Irish exceptionalism which turned out to be just as bogus. There was a Greek exceptionalism, Dmitri, as you'll remember as well. There'll be another exceptionalism somewhere. We just kind of work out where the ingredients come together for people to delude themselves that there's another exceptionalism. I'm going to bet on (90/99)
the United Kingdom. Maybe it's grace to me, Dmitri, being through hell and back again, but let's try and work out where the exceptionalism is going to be in 10 years from now and invest in that. I'll go for the UK. If you gentlemen have any submissions, please feel free to make a bid. Yeah, I'm officially timestamping. I'm off those mugger hats to come out, Russell. Well, certainly I've got a mugger hat already. So... Well, listen, Russell, this has been absolutely terrific. We're so grateful to you for doing this and we're grateful to you for the kind of help you've given us in the years leading up to this conversation and giving us the grounding you've given us to help us think about it. Where would you like people... We can send them to libraryofmistakes.com, but is there anywhere else you'd like us to point people to when we sort the transcript out and stuff like that? I'd just say libraryofmistakes.com. Go to the tab that says Lecturers and keep scrolling down. Sometimes people (91/99)
don't and it's just full of lectures on financial history and things I think can be helpful and they can choose from all of that. And if they want to be entertained, I would strongly recommend they go to see my friend Dr. Paul Cosmetatos speaking on the Leith Whiskey Bubble of 1890. Yes, you can have a bubble in absolutely anything if you're so minded. And in Leith, by the way, is the port of Edinburgh. And there was a whiskey bubble there and just to wet people's appetite. It includes core to the whole story are talking parrots. Also, I want to say I'm an enthusiastic subscriber and receiver of... Subscriber to and receiver of the Solid Ground newsletter, which I really love, Russell. It's such a wonderful newsletter. I get excited whenever it comes in. My inbox and it forms a core part of my regular research. And I also want to recommend people check out the libraryofmistakes podcast where they can hear your conversations with experts and people that some of whom they've heard on the (92/99)
show, some of whom were new to me when I heard them. Yeah, we try to do financial history, but we try to do financial history that is germane and pertinent to where we are today and for the future. So it's a slightly different focus, but it is the past as guide to the future. And if that isn't the guide to the future, what is? Yeah, and it's getting more germane by the day the way things are going. So, Russell, more power to you, my friend. Thank you so much for doing this. We will edit this and get it out and share it with the world because the world needs to hear it. So thanks again for giving up the time. Thank you. Exceptional. Thanks so much, Russell. Thank you. Boy, boy, mate. How much fun was that? That was a lot of fun, man. I enjoyed it. It really was. It's funny. Russell said something to us off mic when we finished callings as we were saying goodbye that he said, oh, was this the same stuff we've talked about before? And A, I don't think it was at all. And there was plenty (93/99)
of stuff in there that I haven't spoken to Russell about and I've not heard him talk about. But B, it hits differently now. And I think there's an importance to revisiting these ideas now that people have maybe got rattling around in the back of their heads from conversations they've heard from Russell over the years. There's bits of the puzzle flapping around. But now you can't help but be more focused on it and have applications for what he's saying in the real world that will change the way you look at it. So the way I would agree and the way I would describe what you just said is that we're now living in the world that Russell has been describing for years. Exactly right. Couldn't have put it better myself and in fact, didn't just approve it. But yeah, I mean, that's it, right? It's funny when you go back and you look at some of this stuff and it's funny, I went back and looked at a presentation I gave in 2018 about gold. And someone posted it on Twitter again, what are we, what? (94/99)
Yeah, seven years later and said, you know, this holds up pretty well. And I was, I've been thinking about updating this presentation for a while now. I thought, oh, yeah, I should really do something about that and update it. So I went back and watched it again. And I wouldn't have to change your word of it, you know, from where we are now. And that's very interesting because it was a big theme about gold and the gold standard and what will happen in the world and might push you towards gold being re-monetized. It's fascinating how these cycles turn and where we find ourselves. Yeah, and why it's important to have a view for the long term, you know, and not unless like Russell said, some people are gifted traders. And if that's your thing, if that's your skill, then, you know, make sure you know that that's your skill and best of luck to you. But for most of us, it's to our benefit to try and understand the long term secular forces that are driving outcomes in the world and politics (95/99)
and in markets. Absolutely. And if you believe you're a good trader and you're actually not, you're going to find out very, very quickly because what happens next is not going to be like the by the dip environment we've seen for so long in which through no fault their own, many people have kind of earned their trading chops in very different markets to the ones we're going to see now. And I think, you know, also Russell made that point when he talked about how their periods that bond markets go and they're in bull markets and bear markets. And that's true for all markets. And it's really important to understand that because it's much harder to make money in a bear market than it is to make money in a bull market, unless you're a great trader. Well, and this is the component I think a lot of people don't perhaps understand. People think about making money in all types of market in a bear market, you just try not to lose it. That's the mindset. And that's the kind of shift you have to (96/99)
make. If you're in a real bear market, your mindset is don't lose it. It's hang on to it. It's not, how do I take less risk to make more money? I think Richard Russell did a part of it. Richard Russell said, you know, in a bear market, everybody loses, whoever loses the least is the winner. And that's really the mindset. Right. And I think, you know, and not to keep going on and on here, I'll let you end it here, Grant. But I think you and I've talked about this. I've certainly talked about it with Russell and other people, which is that, you know, investors have gotten very accustomed to post 2008 and especially post 2020 with COVID to buying the dip. And in this concept that markets mean revert and markets quote only go up. And that is going to, I think, be a very difficult framework to disabuse themselves of. And it's going to cost people a lot if they don't have a different framework like the one we're describing and talking about today. Absolutely. Absolutely. Well, my friend, (97/99)
listen, we're two episodes in and so far, this has been a blast. We'll see where we go next. You and I both got our little hit list. We won't tease the names in case we can't get a good list though. It's a great list. Listen, thanks to Russell Napier for joining us. He was magnificent. And please do visit libraryofmistakes.com, watch the videos, take the course, listen to Russell whenever you get the chance, because he's a sage, sage voice in a world full of chaos. And God knows we need as many of those we can get. Amen. All right, my friend, we'll listen. We'll do this again soon. In the meantime, for everybody listening, thank you so much for joining us. If you want to follow either of us on Twitter, Dmitri, where can they find you? At Coffinas with a K, K, O, F is in Frank, I, N, A, S, at Coffinas. And also the Hidden Forces pod. Let's make sure they know where to find that. The Hidden Force pod is at hiddenforces.io. HiddenForces.io. And you can follow me at ttmygh on Twitter and (98/99)
What's up everybody? My name is Demetrius Cofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. What you're about to hear is the fourth episode in a podcast series hosted by me and my co-host, Grant Williams, titled The Hundred Year Pivot. In it, we speak with some of the smartest and most plugged in people we know to help position ourselves, our organizations, our families, and our portfolios for the once in a century economic, political, and geopolitical reordering that we believe is currently underway. In today's conversation, Grant and I speak with political economist Pippa Malmgren about the wide range of socio-political, economic, and technological challenges facing societies today. We discuss the ongoing narrative collapse that stems from a loss of faith and trust in our political leaders and (1/99)
institutions, the informational overwhelm and confusion that accompanies technological modernity, the lack of credible voices in media, and the decline of journalistic ethics, and how all of this has led to ever more conspiratorial thinking and the adoption and popularization of alternative narratives and theories of reality, some of which have improved our understanding of the world, while most have left us more confused and less well-equipped to find common ground in pursuit of the public interest. The episodes in this series are published a week ahead of time on both Hidden Forces and Grant Williams' podcast Subscriber Only Feeds. If you want early access to these conversations, go to hiddenforces.io slash subscribe and join our premium feed so you can listen to this episode and other subscriber only content on your mobile device using your favorite podcast app just like you're listening to this episode right now. And with that, please enjoy this thought-provoking and wide-ranging (2/99)
exploration of some of the most important themes and questions facing society today with our guest, Pippa Malingrad. Welcome everybody to another episode in the 100-year pivot. Joining me, as always, on this crazy journey that we've started out on my co-host and good friend, Dmitri Kofinas. Dmitri, how are you my friend? I'm very good, Grant. I enjoy this new style. I think I've said this once before, but this is something that's new for me, kind of coming in largely unprepared for a conversation, then maybe sort of reading a few things and kind of just thinking about it. And I really have enjoyed it. It's in and of itself, it's been a challenge and a personal growth experience for me. Well, you know, it's been interesting for me because you form such brilliant questions and I watch you. It's actually kind of cool to watch them happening in real time. You know, as we're talking a Neil and we're talking a Russell. And no doubt, again, when we talk to our next guest in a minute, I watch (3/99)
you wrestle with these ideas and form questions out. I mean, it's actually a really cool thing. You know, when we first started Real Vision, the very first series of interviews we did was something called V questions. And the V was like for Roman numeral five. And the idea was really simple. I sat on a chair and I had five questions, four market-related questions and one personal question. And the guests came in and it was just them on a chair, black background, one light on them, kind of like a spotlight thing. And I said to them before, I said, right, I'm going to read these five questions to you one at a time. And then I'm not going to say anything else. And I want you to react, think about and respond to each of those questions, be as expansive as you want. If it's a dumb question, tell me to move on. But I'm not going to clarify the question. I'm not going to engage you through a tour. So you just go. And the first one of those we did just we were just trying to try our ideas was (4/99)
with my good mate Dylan Grice. And he came in and he sat on this chair. And I asked him these five questions, there were four of them about where the yen was going and where the dollar might be going on the S&P or whatever it was, four market-related questions. And just watching him hear it, think about it, react to it and then compose an answer. There was something magical in it, you know, and we watched this first one back. And I got hairs in the back of my neck. I was like, man, this is really cool to be able to see the process. And I'm living that again with you as we've talked to Neil and Russell. It's been really fun to watch you do that. Yeah, you know, I really enjoy it. I get very, I get very excited exploring intellectual ideas and the process of clarifying a problem and understanding it better. And maybe another way of thinking of it is like moving the three dimensional object in space and seeing it from different perspectives excites me. You know, like I am sort of in that (5/99)
sense. And I also, I don't know if you do this at all, but I have like a list of interviewers that I think are like the greatest of all time, you know, like who I sort of put at certain levels. And I don't know, did you ever watch Bravo TV? Did you guys have that? I mean, I have seen it at times, but it wasn't something I actively watched. Yeah, there was someone named James Lipton who hosted a program there called Inside the Actors Studio, who I think is the greatest biographical interviewer of all time. But there were also folks like Brian Lamb, who founded C-SPAN and hosted Washington Journal and other programs on that network. Bill Moyers, who hosted multiple shows on PBS. And now you have someone like Peter Robinson over at the Hoover Institute who hosts Uncommon Knowledge and who does, I think, just an exceptional job interviewing. And I feel like you and I are in the category of people who love what we do, which obviously makes us very fun for us and hopefully for the audience. (6/99)
Well, and that curiosity is the most important thing, right? If you're not curious about this stuff, then the interview will be terrible. It just will be, because that it's that curiosity that takes you to these questions that you would never have thought of without listening to what the guest has said the first time. And then suddenly, it's that natural curiosity. So actually, that's really interesting. Let's explore that. And boy, do we have a lot to explore this morning with one of my favorite people in the world, Dr. Pippa Melanchron. She's just magnificent. Yeah, I feel like this is an opportunity. This episode is an opportunity to explore some topics that not I think I know we have both explored on our show. And we've both explored, I don't know if it's sort of like I've hesitated, for example, like UAP stuff, which is stuff that Pippa has written quite a bit about and talked about. It isn't that I've hesitated exactly. It's that I haven't quite know, it's outside of the (7/99)
framework, you know, and I feel like this is an opportunity to explore some topics like that with Pippa. Yeah, I mean, Pippa is someone. And if I could wish one thing for everybody, listen to this, is that they'd all at some point get the chance to meet Pippa and actually just sit down and have a conversation with her because she is the most fascinating person. She's a polymath. She's interested in everything. She's curious about everything. She asks everybody, she can find questions. And it's just such a rollercoaster having a conversation with her, but you always walk away just edified and energized and confused and it's just magical as I'm sure we're about to find out. Yeah, and I was just saying, it's also a practice in keeping an open mind. I really encourage listeners to use this particular episode as an opportunity to sit with maybe even intellectual discomfort at certain ideas or concepts and allow those to kind of flow through them and experience that process of exposure and (8/99)
confrontation, intellectual confrontation and what sort of derives from that from them because I think it can be really enriching. Yeah, that is such a great point. I mean, of all I guess so far, this is the right time to make that point because questions and challenges everything. And it may trigger some people, some of the things she says, but the beautiful thing is when you talk to Pippa, she's questioning it herself and she has this ability to put herself on both sides of every argument and make the argument. And that's the skill that we could all do well to kind of foster. So what do you say? We welcome Pippa and have the conversation. Let's do it. Pippa, my darling, how are you? It's so good to see you. I am so delighted to see you. How are you sweetheart? I'm doing great. And I hadn't realized that you and Demetri haven't actually met. You've exchanged emails, but you haven't actually met. So let me make the formal introduction. Pippa Melancholy and Demetri Cofinas and vice (9/99)
versa. My pleasure. I'm so delighted to meet you. I'm looking forward to this, Pippa. Me too. Demetri and I have just kind of, what we've done essentially is we just each grabbed a shopping bag full of groceries and stepped out of the door and just kind of decided we're going to go for a wander. And we know where we're going to go and what we're going to do. But all the things that we've been thinking about and talking about, they're just really big picture stuff. And we've had conversations with Neil Howe and Russell Napier to start this little journey of ours off, because they were two of the guys that kind of formulated the ideas in the head. But you have always been to me, someone who really thinks about the really big pictures. And every time I see you present, it drives me mad because I walk away thinking, now I've got this to think about. I didn't have that to worry about before I got in there. So in trying to figure out where we go with this, with this particular conversation, (10/99)
I'd love to just get an idea from you, because you've just moved back to the US after what, 20 plus years in the UK? Honestly, it's more like 40. Is it 40? Yeah, because I went when I was like 22. And then I only came back to take the job in the White House. And then I went back to England again. So I'm very Anglo. And we love you for it. You are welcome in England anytime. So let's just get a sense from you as someone who is American to a core but has lived overseas for such a long time and has been part of the US political discussion. Back when you were in the White House, you've just come back to the country. Give us a sense of your feelings both in leaving the UK and the situation there as you observed it from overseas. And now getting back into the middle of it because you're right there in Washington, DC. Just give us a sense of how it feels to you now you're back. Yeah, no, thank you. And just for a little bit more background, I grew up in a family where my dad served Kennedy (11/99)
and Johnson on the Democrat side and then Nixon and Ford on the Republican side. So I grew up in a very bipartisan Washington where the chairman of the Democratic Party, Bob Strauss and the chairman of the Republican Party, Howard Baker, were best friends and played poker illegally every Friday night. And deals got sorted out because they were all very, they had personal relationships. I think this is a critical component of understanding what's happened just as a, I'm going to start with a kind of detail that's really interesting. So why is nobody friends anymore? It's partly because Washington was the center of the money tap that got turned on, particularly after the financial crisis. But it has been really since the Second World War, an ever increasing flow of money, which meant inflation really got a foothold here. So property prices kept going up and up and up and up. And basically all these elected officials could no longer afford to have their families in Washington. So they (12/99)
sent them back to wherever their home state is. And what that meant is their children were no longer going to the same parties together because that's where the congressman senators, the journalists, like everybody in politics would get to know each other was because the kids were friends and the kids were in the same sports teams. And it created rapport and connection. Today, nobody's kids are in school together. And so there's no point of emotional connection. Plus we have these freedom of information act laws, sunshine laws that say if you're going to talk about an official issue with someone involved in that issue, you must have a lawyer present the minute three people are involved in the conversation who is recording what happened. So there's no way to have any private conversations about how are we going to cut a deal here. So I'd add to that as well. One further thing is cameras. When cameras were introduced into Congress, and I don't remember the year C-SPAN started, but that (13/99)
felt like a moment of wonderful transparency. But actually what it's done is turned the Congress into a theater where no one can say anything that is off the party line because it's recorded and all the donors are going to hear it. So suddenly everyone becomes much more glued to the official position of wherever they are on the spectrum and there's less and less flexibility. So against that backdrop of those things, now we have a really hostile environment. So as an example, my dad who recently passed away as you know, I took him to the doctor. The nurse walks in and says, I need to know which way you vote before I'm going to treat you. And we're like, she's kidding, right? And she's clearly not kidding. And my dad who's quick off the mark tries to challenge, he's a bit of a ladies man. He tries to charm her. Totally doesn't work. She wants to know. So he correctly intuits that she is a Democrat. And so he says, well, I worked for presidents, Kennedy and Johnson. She says, oh, fine, we (14/99)
can proceed. And you're like, you couldn't even raise the point that, babe, this is not appropriate for a nurse because there is no more sense of that. People are so angry and so polarized. They're either like hardcore Trumpers or they're hardcore anti-Trumpers. And it's for me, moving back to the US, it's been hard because it's almost impossible to have a conversation with anybody. They're so locked into their preexisting position and no facts, no arguments, no subtlety will shift anyone anywhere. So it's a weird situation. And finally, I'll say, I've been writing about this, describing the situation we have as an American glass most. And we'll get into the whole Trump story. But part of what Trump is doing is exactly like what happened in the Soviet Union when Gorbachev introduced this unveiling of truths. And it was deeply uncomfortable at that time. And of course, it led to the fall of the Soviet Union. But the intelligentsia in the Soviet Union at that time, the apparatchiks, they (15/99)
were very similar to what you hear in the US today, which is there's no problem. I don't know what you're talking about that we have to fix this. I was just with a bunch of Democrats last week at a speech and they're like, there's no problem with the budget, we just have to keep growing. That'll be fine. And you're like, we're spending more on interest payments than the entire defense budget. Plus we got holes galore all over the place. And they're like, no, no, no, no, no, we just are totally fine. We just need to grow. No need for reform or change. So it's at that level, you can't even pierce the veil of, do we have a problem? Yeah, we don't have a problem. Okay, then there's no conversation to be had. So that's a big overview of some of the things that I'm finding. That's a great place to start. There's so many ways we could go. It's interesting that the Democrats are now the pro-growth party. Right? That's a change. I mean, is there a problem? I mean, with your dad's blood being (16/99)
read, if she had to take blood, would that have been a problem for the nurse, do you think? I don't know. It's, you know, I'm still deeply, also deeply unethical. She should be fired for that. I'm stung by that. That's not a joke. We were so shocked. But there's another like element of this, which is, as you said, the Democrats are pro-growth. They're also pro-war. It's super weird. Like, suddenly the Republicans are the anti-war party and the Democrats are like, we have to fight to the bitter end in Ukraine, in addressing Taiwan, like multiple locations. And that's another layer of this. But for me, I've kind of tried to understand, okay, what the heck is going on? And I keep being drawn back into the history of the world since the Second World War. And I think part of how we got here is we gave a huge amount of authority to the community that's all about keeping secrets. And so that's the intelligence world and it's the military defense establishment. And they made a lot of decisions (17/99)
about what would be the right thing to do. And that led us into many wars. And a lot of spending that no one can account for. And I was listening last week to Chinese commentators at the moment, trying to understand how are we going to negotiate to a deal with China, which I think we are. I'm very optimistic that we're going to get to a deal with China. But one of them was saying, you guys were the best economy in the world and you took all the money you made and you spent it on wars and you spent it on stuff that no one can know about. And I would like, yeah, that's true. So the secrecy community, of course, don't want any transparency or any conversation or any reform. And they believe they know better than everyone else because they believe more intelligence than anyone else. But I'm not sure that's actually true anymore in an internet world. What is the truth of a situation maybe more apparent in open source information than it is from all these secret classified sources? And (18/99)
that's partly why Trump is saying we're going to lift the lid on the classification side. So we'll leave the nuclear codes classified, but pretty much everything else, we're going to declassify it. And the whole intelligence community is like, whoa, whoa, whoa, wait, wait, wait, because now they're naked and they got to explain what have you been doing and they're not used to. So there's a kind of a constitutional crisis here about the most powerful element of the US government, which is not accustomed to being accountable or answerable to anybody, including the president. I have a question, people. So as you were talking, I was just thinking about how the real challenge that I face, and I feel like I feel like this is a general problem for people, but it's certainly one that I face in general, is that I have a hard time, an increasingly difficult time making sense of reality and filtering signal from noise. And in some sense, there does seem to be a sense in which we're kind of losing (19/99)
our minds collectively. There are so many different theories out there competing with each other. Some that seem so patently ridiculous like flatter theory, it's an easy one to sort of point to. But then there are other ones where you kind of ask yourself, okay, well, here's this competing theory, but do I really know whether it's true or not? What are the actual sources of my conviction in my previous worldview? So I feel like glass notes is a great example. So maybe it's destalinization if we're reaching for the USSR because of how this administration in particular has kind of made enemies with the quote, deep state. And there's this kind of like narrative around a battle between the Trump administration and the deep state and trying to uproot the previous power structure. Because I feel like one of the things that is really helpful with your writing and your perspective is that you do take sort of non-consensus, I wouldn't say positions, it's more like you kind of play with (20/99)
alternative stories or interpretations of a prevailing narrative. How do you approach trying to assess the underlying drivers of phenomena or of stories? And to the extent that you want to answer it, what do you think is causing this reassessment of what we believe to be true in the world? I love this question. And I remember first listening to Daniel Schmockdenberger, who has such a great name, Schmockdenberger. And of course, he's a philosopher, because to be a philosopher, you have to have a name like that, right? And he's so brilliant. And he talks about sense making and why can't we make sense of things anymore? So this is really a central question. So I'm going to give you several strands of an answer. So one, I think Marshall McLuhan, the Canadian philosopher was correct, that when the volume of information that we have to process to make sense of things becomes too large, there's just too much stuff to take into consideration. We humans can't handle it. We get a headache. And (21/99)
so we stop reading, which is a time consuming process that by definition involves using your eyes to go letter by letter, word by word, line by line, which pushes you into a linear thought process that gets crushed by the weight, you don't have time. So now you start turning to symbols instead of words, because symbols encompass massive amount of information. And what are the symbols, right? People are like, I'm not using symbols. I'm like, give me your phone. Your phone is completely full of emoticons, right? Because it's a compression of information. Brand logos are a compression of information, right? If you see the Starbucks logo, you know exactly what you're talking about. So what people start to do is depend on the symbol. And that is why now the question is not what do you understand, it's are you watching Fox or CNN? That tells you everything. If you're a CNN, you're a Democrat, if you're Fox or Republican, okay, then you only trust that source and you won't take information, (22/99)
you won't bother with information that has the CNN logo anywhere near it or vice versa. So this also stops a linear rational logical thought process. By definition, once you move into symbols, this is about emotion. It's about that you're processing a different part of your brain in an emotional way. So that raises the temperature as well. There's a disciple of McLuhan called Leonard Schlein, who was a brain surgeon from Canada, who wrote a brilliant book called The Alphabet and the Goddess back in the early 70s, I think it was. And he says, whenever in the course of history, we shift from words to symbols or symbols to words, we always go to war. We always go to war. And that's an internal war because the left hemisphere and the right hemisphere of your brain are literally fighting with each other now, right? The one side being rational, logical, linear, and the other being creative, symbol dependent. So you're having a headache in your head as you are struggling with these two ways (23/99)
of sense making. But we also go to war in a battlefield. And he talks about, for example, how is it that the witch trials happened? How is it that humanity turned on the child bearing part of our species? He says, it's never happened in any other species. Why would we do that? And he talks about at that time in history, literacy has been introduced. Everyone's locking into their left brain, the logical, rational, reductive, and who are witches? Those are people who are not logical, rational, reductive. They're not using official medicine. They are relying on ancient wisdoms of homeopathic medicines, for example. And fundamentally, I would throw in as an economist, what you have here now are competing cash flows. And that creates a fight. Right? Think about it this way. If you're dying or your child is dying, you're really ill, who do you go to? In the course of history, you always have two fundamental choices, the establishment, or what is effectively a medicine man or a medicine woman (24/99)
or a shaman or a witch doctor. And the establishment, the Catholic church, right? And you pay your money to the priest and the priest gives you blessings, and that saves your life. Or you go to the witch, right? Or the shaman. Even with the Holy Roman Empire, we had this conflict between official medicine versus ancient wisdom medicine today, NHS. Or, you know, talking to doctors who have left the profession and have alternative views about, for example, vaccines. Huge fight throughout history between these two camps. So this business of rule books for officialdom written, and it's literary, versus symbols of ancient traditions that are not codified. But intuitively, we know they've worked through because grandma saved mom that way, right? So that's one element of it is our brains are being affected by the volume of information that one is required to process. Number one. Number two, the information is then being accompanied by, I would say, a sheepdog. Every one of us, when we wake up (25/99)
in the morning, there is an invisible sheepdog right there with us. And that sheepdog is an algorithm. The algorithm is designed to give you more of what you like. So, you know, Grant, you love sports, I'm sure that you're in boxes full of sports stuff. I'm more in that it's a ball, like, you know, is this, you know, it's not my thing so much. I have to learn this, especially living in America, because it's religion here. But I've never been a massive, I get playing sports, but not watching it on TV. So anyway, my algorithm is not giving me any sports news. And I'm interested in space, for example. And maybe you're not. So I'm like aware all these things are happening in space that are important for geopolitics, they're important for markets. But most people have not clicked on a single space story. So they're like, what is she talking about? I haven't seen any of this in the news. That is because that little sheepdog is corralling us into ever narrower intellectual pens. And narrowing (26/99)
the aperture of the view of the landscape that we get to see. So every day, you have to have an argument with that dog. And you have to train that dog, widen the number of sheep that get to be in your pen. And so that's the second contributing factor to why we can't make sense of anything. And then finally, I will add, and now we'll get into what many will call conspiracy theory, which by the way, is a phrase actually created by the intelligence community to stop people from asking any questions of them. So I was fascinated, you know, I grew up in the Watergate era. And my dad was working for Nixon, it affected, you know, my family life at the time. So I read a lot about Bob Woodward and Carl Bernstein. And I hadn't realized after those two broke the Watergate story, and became so famous for that, Carl Bernstein wrote amazing article in Rolling Stone magazine where he said, I had no idea that all of my fellow journalists were working for the intelligence community. I was surrounded by (27/99)
people who were employed by and paid by the CIA and other intelligence agencies. He clearly is like, what? I thought we were the third estate, I thought we were independent. And today, it was so interesting, I wish I could remember their names, but there were two journalists at Politico recently, last year, who had broken the big story on the Hunter Biden laptop, and they had done massive research, they had huge information, and they kept giving the articles to their bosses, and it kept just sitting in the inbox, and the boss wouldn't publish it. And there was always some excuse or another. And only after they left Politico, they were like, you don't think they didn't want us to write that story? And you're like, you guys are journalists, how can you not work this out? But the answer is, it's very, very difficult and painful to tell yourself, oh, I've been a patsy. I've been used by a system that wants to deliver some information in a certain way, but not other information. In other (28/99)
words, we are living in a curated information environment. Now that changed with the introduction of X. And X is not a curated information environment, and it has allowed alternative voices to pop through. And that is totally discombobulating not only the general public who are like, wait a minute, what? Is that true? Is that not true? It's also discombobulating all those in authority who had control over what the narrative is, and suddenly they don't have control. And that is creating a massive fight that Washington is the epicenter of. So a lot of what you said there really resonates with me. And I'm just trying to think about how to be thoughtful and not to ask too many questions at once. I mean, one of the observations I have is that we're going through a kind of reordering of our frameworks, our collective frameworks as a society, which raise questions about objectivity, whether it even exists. I think a lot of people are questioning that as well. Of course, in the last few years, (29/99)
we've seen a lot of people become introduced to the concept of a simulation or a simulation theory, which actually isn't just about computer simulations. This goes all the way back to Plato's cave or even to Cart's demon. And how do we know what we know? The question of what is real? How do I know that it's real? I also, I feel like there are some significant consequences that we're immediately dealing with. And because we were like the frog in the boiling pot, we may not really be conscious of it on a day to day. And I feel like one of the consequences of this informational reordering, this sort of overflow of information, and the phone as this, I like this term used as a sheepdog, is that we've gone from a much more local existence to a more, I don't know if the term global is quite right, more of an existence determined by our social graph and the curated media streams that we experience. And that, I wonder, it seems, and these are all questions for you people. I'm kind of just (30/99)
trying to get them out in a coherent sense. It feels like it's destabilizing in a way, because we're no longer tied to our local environment. And our political structures were built on such an environment. We've already seen the economy has adjusted much more readily than our political systems to remote work and stuff like this. I also feel like, again, what you've touched on here, I think, which is really interesting, is that we've seen a kind of deterioration and independent thinking. And because, again, it's hard to know what's real, what to focus on. And our concepts and frameworks around subjectivity and objective reality, I think, are under strain. And so I feel like that also opens the door to demagoguery. So I'm curious if you can speak to some of those things, some of the immediate consequences that you feel like, and I would say some of the more immediate perilous or dangerous consequences that stem from this reordering, in your opinion. Yes, I have very strong views on this. (31/99)
I think the way you've posed the question is exactly right. And that's why we're in a kind of Copernican moment where our fundamental understanding about how this universe works is being challenged by new provable facts that the sun is not revolving around us, we're revolving around it. That's a very profound change. And I went back and I looked at that period in history and realized, wow, it took like 100 years before people could actually say, yes, this is the case. That's three generations, it required to get comfortable with this notion. So why are we in that situation today? It's, as you say, the simulation theory is one of them. And by the way, I shared a taxi once because I spoke on a stage with Nick Bostrom, and I tried to have a conversation with him. I was very difficult. He's so brilliant, he just can't talk to a regular person like me. Like I just couldn't get anywhere. I think. Was he too focused on the details and he couldn't sort of zoom out? Well, and I wasn't (32/99)
sufficiently up to speed with his version of simulation theory to be able to really grab him. He reminded me of Alan Greenspan. Alan Greenspan was the same, no chitchat. You had to go straight into like a really gnarly technical problem in order to engage him in a conversation. Very fascinating minds, but difficult to engage with. Elon Musk is like this too. I talked to him once and I remember thinking he is solving 15 incredibly hard problems in his mind while he's talking to me and I am clearly dragging like an anchor on the weight of his mental process. Anyway, it's interesting because our understanding of how the universe works is changing so fast that people are almost having to like look for a handrail to hang on to. So I'll give you some examples of what I mean. One is the introduction of quantum physics and of course the Nobel Prize for that was only awarded last year and we do not have standard theories of physics that are comfortable with the notion of quantum entanglement. (33/99)
And so what we know about how the universe works isn't matching up with what we're finding out at a time when we have ever more sophisticated data gathering devices. And not only that, I would say humanity is adjusting to using prosthetics. So the James Webb telescope, which is now I believe 1.5 million kilometers away, is a prosthetic. It is allowing our eyes to see 1.5 million miles away in the galaxy. And similarly, there's a the most powerful microscope is the Titan cryos. I can't remember how minuscule it allows you to see, but we have a prosthetic to see deep, deep, deep into the subatomic structure of reality now. And what we're finding is we punch into these new frontiers that all of the things we thought were true, not so true. Maybe there's other explanations. And we're not comfortable with this letting go of an old framework, as you say, when we don't have a new one, because we don't have theories yet that fully explain all this weird stuff we're finding. And I would add to (34/99)
that and finish with this thought. I think we are losing our minds because of Renee Descartes. And Renee Descartes introduced this notion of a cartesian split between the soul and the body. And the soul became the responsibility of the church back in the 17th, 18th century when he was writing. And the body became property of the scientists. And we in the West, in Western Europe, in the United States, we believe very firmly there's a split between these two things. So anyone who tries to explore stuff that's not easily quantified, that can't be measured and quantum by definition is heavily in this realm, we ascribe that we go, that's mystical, that's magic, and that's not serious. So we can't study any of that. We only are interested in the things that are measurable. And that cartesian split is breaking down as we punch into the furthest reaches of our universe at the nano scale and at the macro scale into space. And now we have to reunite this left brain and right brain into a whole (35/99)
and think holistically again. Now in Russia, in China, in India, in Africa, they never had a cartesian split. They are perfectly capable of holding information and studying things that don't fit the scientific method. And for this reason, I think they're making faster progress on a lot of science. It helps explain part in part why they're pulling ahead. But for us in the West, to overcome the cartesian split is as profound as the Copernican moment. And I think that is also why we can't reframe or like, how do we even take into account, for example, in politics, how people feel about inflation? We're stuck in the arguing whether there is any inflation. But the fact that people felt it was what overturned the political establishment. And I still talk to people in the markets who are like, there's no inflation. This is all imaginary. We can measure it. And this is how it measures up. And I'm like, okay, maybe, but there are a lot of people who feel they can't fill the fridge, and they're (36/99)
paying a fortune for eggs right now. And we're not giving any credence to that story because we've already decided that stories and antidotes are not important, only measurable facts. That is a cartesian split way of thinking. All right. Okay. So look, everywhere we look, there's this sense of splitting apart, whether it's left and right, whether it's rich and poor, whether it's old and young, everyone's being pulled apart. And because of that, there's this feeling that we don't understand the world anymore. The young can't understand the old, the rich can't understand the poor, the left can't understand right. And so you've got this, the scientific community, which have never, it seems, been pushing forward at greater pace than they are right now, aided by technology and computing power and all this kind of stuff. And they are trying to understand the universe on a subatomic level or an astrophysical level. And they are making this progress, the like of which we've not seen in our (37/99)
lifetimes. And that's only going to increase in both pace and depth. And at the same time, you have the man in the street trying to understand why he can't afford to buy eggs. Right. So you've got, that's another split. And we're being bombarded by all this incredible advancement, all this amazing technology, all these incredible stories. And you can feel people, you know, the UAP stuff that's come up in the last couple of years, you can almost watch in real time, the process that people go through, which is, oh my God, little green men. And then it's, wait a second, that was pretty cool video I saw. And then it's the congressional hearings. And then just at the point where you can grab onto that and go, okay, I'm going to go deep into it like you do. They go to your earlier point. This is all too much. I'm going back to little green men because it's too complicated. I need to fill the fridge. It's tough for me to see away the left and right divide. I can see away back from there. I (38/99)
think it's the way through. And we end up back there. I think the rich and poor divide, there's also a way back there. And that's through because we've been through that before we can get bad. The old and young, again, I feel that there's common ground there in families and communities that will help. But the gap between science and reality, the gap between informational superpowers and computational superpowers and the man in the street is only going to get wider. How do we find a way back from that so that people don't just give up and don't just become so overwhelmed by the incredible progress that they discount it in a world where they can't even trust what their own elected representatives are saying? Yes. And I'd like to separate out this interesting UAP issue and talk a little bit about that. But before I get to that, because it's a great example of this Cartesian split problem, and oh, we're not allowed to study that. By the way, only last week, the former chief medical officer (39/99)
of NASA came out and said, I'm now retired. And I got to tell you, it's all true. And all the astronauts have seen it, but nobody can say it because they'll be thrown off the astronaut squad. How many people do you need of this caliber coming out before you go, something's going on here, which is kind of how I ended up in this subject and really looking at it. But the bigger issue is the loss of compassion. And the feeling, two of the earlier questions as well, that it's not just, I'm right, you're wrong. It's I'm right. And the reason you must be wrong is you're either an idiot or you're evil or both. Right? That's the kind of the core way we're beginning conversations. The idea that I'm wrong, and you may have wisdom and knowledge that I don't yet understand. This is not a very typical position these days. So one is just there's a mindset that is actually not that hard to change. And I've been playing with an idea, which I have not yet written about, and I'm going to test it out on (40/99)
you guys right now. I'm halfway through an article. It's a little out there. But I've been thinking, if we're shifting from, you know, this rational left brain way of thinking into a more holistic and right brain way of thinking, what's the point of connection? What's the mechanism for getting the two sides to communicate better and opening up this possibility of compassion and understanding I am not always right. Maybe I've stuff to learn. And the answer is your heart. And I think actually I want to call it, we have not spent any time on our heart where we're. So we spent a lot of time building hardware and a lot of time building software. And you know I've made up this word shardware, which is a category of product that's both deeply integrated, which cannot be separated. But now I've realized actually none of that works if your heart where is not in the right place. And the heart where is about as a human being, what grace do afford another person who has a completely different (41/99)
point of view than your own. So the reason I know about Daniel Schmockdenberger is because when we had lockdown, I had time on my hands like everybody. And I made a decision, I am going to spend time with communities that are the opposite side of the political spectrum from where I live. And I remember joining an online group that he was part of that was full of the guys who organized the protests against the banks in the city of London, who are throwing paint on paintings and museums, who are locking trucks down, at Hyde Park Corner to protest oil extraction, like those guys. It's basically it was extinction rebellion. Right now I work for George W. Bush, right? And I'm going to hang out with the extinction rebellion folks because I just want to understand like where they're coming from. And you know, I learned a huge amount. I am not an extinction rebellion person. I don't agree that this is the right way to go. However, I learned a lot about the world and how to think about it. And (42/99)
I don't think we do this very much. We don't reach into our discomfort zones. We don't try to go figure out why is this opponent of mine over there? So we're not affording any grace or compassion. And that is a hardware issue in ourselves, which I think we can fix. I think we can spend time. I'll add to that. The more advanced your technology becomes, the more spiritually elevated you must become as well. And that sounds so woo woo. But you know, at one time during the industrial revolution, we were chaining children to the machine so they wouldn't run away. Right? And then somebody with some decent hardware went, um, this is not a good idea. And we stopped chaining children to machines similar with this whole slavery movement. We thought that was okay. And then somebody had a hardware moment. You know, maybe this is not okay. And today, as Peter Teal has pointed out, we have weapon systems that are so fast, that are so destructive that we really have to either be angels or demons. We (43/99)
can't even be halfway. Because if we have any demon element of I got to kill the other guy, we'll kill everybody and ourselves. Right? We don't have limited use stuff anymore. We have smashed the whole thing stuff. So he too says we need spiritual elevation in order to handle the technology we're creating. So I think it is happening. And I do detect that there is this spiritual elevation, particularly amongst young people. My generation think this is all nonsense and can't even have a conversation about it in the main. But the younger people are like, yes, this is the way I have to open my heart. And that will lead me and us to a better place. I think that's right. You know, Pip, this idea of compassion is such an important one. And this is one of the things that I've been kind of thinking about. And I think that's absolutely right. That's what we need. But unfortunately, compassion comes from civility. It's very difficult to have compassion without civility. And civility in the (44/99)
discourse and civility in society has not only crumbled, but to bring us back to what we were talking about earlier with the sheepdog, it's being amplified and reinforced over and over and over again. And I mean, every day, and this is not what I don't click on any of them, but I am constantly fed videos of, you know, fights that break out the airline check in desks and fights that break out on the street here and fights that break out here. And this idea that, you know, the keyboard warriors can control everybody and abuse people. And it almost feels like that's become the default. People are, when given the freedom to behave any way they want, because they're behind a keyboard, they're defaulting to that basic human instinct to hunt and kill as opposed to to be kind and compassionate and civil. And wherever you look now, whether it is starting on the ground on Twitter, or going up to our elected representatives in every country, there's no beacon of compassion, no beacon of civility (45/99)
left, unless you actively go out seeking it, and you will find them, you'll find them in people like you. But you have to be looking for you, you're not going to be served that. And I, I just don't know, as I say, I can see ways through a lot of these things. But it seems that the way back to civility and compassion either goes through a much darker place, or it's impossible. And I'm curious as to, as to how you think about that particular journey. Yeah, and I totally, totally hear you. I think part of it is you have to be the change. You have to be the change. So we have to make a personal decision to enter into that way of thinking. And maybe compassion is not the only word to use, empathy is another important word, which is different from sympathy. Empathy is just the beginning to try to understand how or where somebody else is coming from. I think this also involves some courage. And I've found as, you know, an economist, I've had to draw on my personal courage, much more in the (46/99)
last few years than ever before. So I'll give you a very practical example. The Trump tariff tantrum that's going on. And obviously the headlines are full of, you know, Trump is a disaster and Trump is ruining the world order and da da da da. But when I really look at it and try to separate out the emotional response and look at, okay, but what is the policy? What he is saying on one level is the major American and European corporations were ripping everybody off. They ripped off the American worker and the European worker by moving their operations to China, where they then paid the Chinese worker nothing. And then they charged the consumers in the West a fortune. And this needs to stop. We need to remove this rent seeking corporate world from smashing both the consumer and the creator. So look what's happened since the temper tantrum on the tariffs started. We have all these Chinese workers who've been making, for example, the handbags for the big luxury firms out of Europe. And they (47/99)
are going on Instagram and holding up the handbags and saying, we make these for Gucci and for whoever. And we have incredible craftsmanship and skill, which they do. And why don't you buy directly from us? And by the way, we've got some design ideas of our own that are cool and interesting. And young people like, yeah, I want to work with these creative artists and pay them what is a reasonable wage for them, but not what Gucci is charging us. Right. And suddenly we have connectivity between the creators and the consumers and removing the big brand name corporates. I think that's very interesting. And that is how innovation happens. And I think that's a good outcome of the tariff discussion. And that's the purpose of it. It's not only to raise the income of American workers, though Trump has to position it that way because of his electoral base, but it will also raise the income of the Chinese workers as they build brands that can go global. And they've already done it, by the way. I (48/99)
always use an example of HIER, the company in China that it's such a wonderful story and nobody knows it. So they make fridges that came to the US in, I believe it was 1998, 1999, and said, we're going to make fridges in the US. Right. So when everyone else is leaving the US to make that kind of stuff, they're coming in. People are like, are you guys out of your mind? But the founder says, no, no, no. The American consumer is the most discerning, most sophisticated, and we have to learn how to service that consumer. We need to learn quality control. And he's famous for smashing 72 or 73 of the fridges because they had some minor scratch on it. And his workers were like, oh my God, what are you doing? This is a huge amount of capital that you're destroying. And he's like, quality control. This is not quality control. And it became a Harvard Business School case study, which is worth looking at. And then he came to the US, they started to build, and they got into two sectors because no (49/99)
America was going to buy a Chinese fridge at that time. Right. There was just no way. But two categories, wine fridges. At a time, Americans were buying wine like crazy. No one was selling quiet and elegant ones. So he moved to South Carolina, where they make beautiful furniture, wood panel furniture. So he combined the wood paneling with the quiet fridge, flew off the shelves, and he realized students were on the rise. Everybody's going to college. They all want a little fridge in the dorm for the beer. He makes those. Huge success. And that led to buying General Electric's home appliance division for five and a half billion dollars, which they still run today. Now, could we have more Chinese companies that do this? Yes. I would say we must have more Chinese companies that do this. They cannot raise national incomes if they don't go global. But every time they start to try to go global, we shut them down. Why? We arrest their senior people at the airport. Why? Because we make the (50/99)
argument, oh, you're really an instrument of the state and you're spying. And they say, oh, well, we'll shut down Google and Metta because we think they are too. And now we have two different arguments. Why don't we separate them, which is what Trump is saying, and let's allow commercial competition. And let's have a separate discussion about spy games and figure out rules of the game there instead of disqualifying everyone because we have spy game worries. Now, to say that makes me sound like a trooper, right? And now anybody who's blue is like, gosh, she's crazy. We don't like her. It's hard because you're trying to have the courage to say, actually, there may be sense in this policy approach at a time when everyone else, it's all terrible. So how do you find your heart where and your courage and screw them to the sticking place as Shakespeare said? Can I jump in with a question? But the thing is, the thing is, though, I'm still stuck on the previous part of the conversation because (51/99)
while this is fascinating and interesting, this conversation about what I would describe as a narrative collapse, and I don't know if you agree with that, Pippa, but I feel like that's what we're undergoing. And the reason I think it's important is because it presents a collective action problem. And so all of these other things we're discussing, in my opinion, are downstream from collective action. They can be addressed through collective action. And it's interesting, like we're talking about, I think, yes, that's right, you brought up the Salem witch trials and maybe think of the Middle Ages, and we went through this thousand year dark period in society where we lost, whether we lost the ability to view things more objectively, people can debate whether that's actually true or not. We can get into an ontological debate about the nature of reality and the nobility of reality. But what I think we can certainly agree on is that we lost a shared protocol or Western society lost a shared (52/99)
protocol for thinking, reasoned and scientific inquiry. And what's, I think, both fascinating intellectually, but also sort of really scary is that as we're going through this narrative collapse, and I would say, I would argue that a core part of why we're going through a narrative collapse in America, especially, is a series of traumas, 9-11. And you can see this, you wrote some posts recently where you cited an interview that Tucker Carlson did with a representative of the firefighters in America. And they had a whole section on 9-11. And they brought up, again, the thermite and claims of controlled demolition on the buildings and all sorts of stuff. And there's a whole sort of avenue of discussion there. But the point is, 9-11, the 2003 invasion of Iraq, and a series of traumas that resulted from the mismatch of the narrative, Abu Ghraib, the lies that took us to war, et cetera, and reality. Same thing with the 2008 financial crisis, and same thing again with COVID. And it feels (53/99)
like that social trauma has opened up a portal to reassess everything. And within that chaos, as we mentioned earlier, lots of competing narratives, many of which seem on their face to be patently ridiculous, like Flat Earth Theory, for example, are nonetheless gaining a lot of mindshare. And here's where I'm sort of driving this onto the focal point of a question. It feels like what's really interesting, again, intellectually interesting and also scary is that this narrative collapse is happening at the same time. And you made this really great point about information overwhelm, right? And like, what do you do? You seek for ways to compress information, symbols, or demagogues. We're going through a new technological revolution with AI and LLMs. And what are these systems? They're ways of compressing information. Now, we human beings used to be far more ambidextrous and accustomed to solving a wide range of oftentimes novel problems in physical space, hunting and gathering, building (54/99)
cabins and fixing the leaky roofs. A lot of these skills in our increasingly intermediate and specialized society have slowly dissipated an atrophy for a lot of people on a physical level. And they don't know how all these systems work, like especially in America. We don't know how so many of the systems on which we subsist actually work. We've delegated that authority, which again, is a huge problem we think about the industrialization and trying to reindustrialize. I feel like we're about to have this potentially the same thing happen to our mental aptitude. And it's frightening to me that we're passing through this focal point while we are in a state of mental and emotional trauma. And I don't know how that problem can be addressed. And I'm just curious, again, it's not a great question, but it's kind of like a data dump on you. And I'm curious to what degree that resonates with both of you, by the way, and how responsible members of society who can see this problem can or should (55/99)
respond to it. So if you don't allow me to ask any questions, then I'm going to question everything. That's the situation we're in because we weren't allowed to ask any questions about some of these major events, as you say, trauma events. And when we did manage to get a question in like, were there really weapons of mass destruction in Iraq? No, there weren't. Then your trust begins to fall. And what we're witnessing and what you've described is what has caused a collapse of trust. And so, you know, Richard Feynman, the famous physicist, had this lovely line where he said, I would rather have questions I can't answer than answers I can't question. And we've been in a, well, you can't question the answers kind of environment. For quite a long time, I would really date it to the Second World War again, of narrative control. You know, even, for example, during Vietnam, which again, that's my father's era when he was serving in government at the highest levels. And his best friends, one (56/99)
of his best friends was Daniel Ellsberg, who released the Pentagon Papers. And, you know, Ellsberg was a Marine who did many secret missions for presidents and found out things that were really shocking. But one of them was the generals are lying to you. We are losing in Vietnam and we cannot win this thing. And of course, he was viewed as a total traitor. And that was partly what led to the release of the Pentagon Papers. He's like, I can't fix this situation without the public becoming aware of the true situation on the ground in Vietnam. Once the public understood, then the president changed his view and we got out of Vietnam. But it required someone really questioning. And that was not viewed in a friendly way by the establishment. They wanted the war for reasons we can discuss later. But maybe we're in a parallel situation today, for example, with, I think, with Ukraine. And now I'm going to step into landmine territory. But, you know, let's think about what's the official (57/99)
narrative been. Good guys versus bad guys were the good guys easy. But go back and now we're seeing an unveiling of some truths. We've seen the former head of the CIA come out and say, well, actually, we did build 10 operational stations on the Ukrainian-Russian border in 2014, which kind of implies they had something to do with the Maidan Revolution, which overthrew what would otherwise have been a pro-Russian result in that election process. Do we have a history of overthrowing democracies? Yeah, we do. Because of the post-war focus on, we mustn't allow the communists to be in charge. So you can understand the rationale, but nonetheless, maybe our hands are not entirely clean in the origin. Then there's this whole question of the biolabs. And the official story is, you know, Putin keeps saying, they're biolabs in Ukraine. The US says it's ridiculous. There are no biolabs in Ukraine. Tulsi Gabbard during the election said, but there are, they have addresses like we know they're there, (58/99)
and they were built by American money and by particular contractors that are associated with the intelligence community. And then Senator Kerry says, she's a traitor, right? Just wrong. She's lying. She's a Putin propagandist. Then it turns out that Victoria Nuland testifies to Senator Rubio and the public hearing. And he says, do we have biolabs in Ukraine? And she says, yes. And we have pathogens in them, and we're very worried. What happens if they get hit in this war because then they're loose and humanity will be affected? So we got to get this locked down, which by the way, Tulsi Gabbard again talking about now. And suddenly you start to realize, because I talked to some bio weapons inspectors to try to understand what the hell is happening with the story. It's real, not real. And here's what I got. Well, yes, we have biolabs, but they're not bioweapons labs. So this is semantics now. I'm like, okay, but are they dual use? Well, everything in biology is dual use. So is there a (59/99)
possibility that the Russians could perceive that we were making biological weapons in these labs? Well, yes. And particularly since now we know the origin of COVID is kind of messy too. It turns out we were funding the gain of function research, which is why Bobby Kennedy has just announced no more gain of function research. So what you were told was a crazy idea. It turns out is true. So now we want to continue the war in Ukraine, even though Putin is right, we did have biolabs and they are still there and they still have pathogens and they aren't secure. Okay, do we think it's a good idea to continue this war? Do we think it's not a good idea to continue this war? Now we have a split. I am myself more on the side of let's end the wars because the president like him or not has just been elected on a end the wars platform. This is where the youth of America are. The voters are clear. Nobody wants to go to war. So he's saying, okay, let's cut a deal with all the superpowers. Let's cut (60/99)
a deal over Taiwan, over Gaza and over Ukraine and like settle this. Then I think that is what's in motion. And I'm actually quite optimistic that that is working. But for people who want the war to continue, and who are willing to, for example, go to war over Taiwan, I keep asking the why. Why is that a better way to go than diplomacy? I'm not getting good answers from that side. And I'm frightened because I'm like, is this really just about weapon sales? Like really? Is that what the driver is? I mean, so these are the things that come in answer to your question is if you don't let me ask questions of these answers, that I'm going to question everything. And that's what the public is doing. So there's been, I think, also a loss of trust in quote, expertise. And the United States and Europe have been run for many years by technocrats. We've seen a shift towards populism now, which in some sense is a form of demagoguery. And to use your analogy of symbols and symbolism, leans heavily (61/99)
on symbols and symbolism. There's also been a significant deterioration of the quality of journalistic practices and ethics. And I feel like this, I have not really talked much on my show or thought much about journalistic ethics weirdly. And as you're talking, it's come up quite a bit for me. Because I feel like, again, this metaphor of a shepherd, the algorithm, it's a great example, people need shepherds. And I feel that the lack of credible voices, now, it's a sensitive topic. I get it. Anytime you talk about politics or journalism, you end up falling in the tribal camp. I think at least this is a safe space. I feel like all of us are not very tribal and sort of we understand that that's not where any of us are coming from. But I brought up Tucker Carlson earlier. And I think it's a good example because he had that conversation about 9-11. And when this individual who, going back to the point of expertise, is a firefighter, but has no discernible expertise in explosives that he's (62/99)
put forward, at least, or structural engineering, makes the unequivocal claim that the buildings, all three, the towers, one tower two and building seven, were controlled demolitioned, offers no real evidence for it. Actually, just to interrupt you, I'm so sorry. So let's be clear who we're talking about. Kurt Weldon. Sure, thank you. So Kurt Weldon was the deputy chair of the House Armed Services Committee, so one of our most senior intelligence officers in the country. He was loved by both sides, Republicans and Democrats, but he'd been a lifelong firefighter. And he was very close with that community. And he went up to be at the World Trade Center on 9-11. And it was his mates who went up to whatever the floor was, the 68th or the 70th floor. And he doesn't say in the interview it was a controlled demolition. What he does is he says, the story of what happened doesn't match the acoustics, and it doesn't match the experience of the very skilled firefighters. And we need to ask better (63/99)
questions. And then for me, the killer bit was, he goes on to say, and then we launched the war in Afghanistan on the grounds that Ben Laden was in Afghanistan, but he had four intelligence sources come to him and say, Ben Laden is in Iran, and he's being protected by the Iranians. So we now are sending all these Americans to have their limbs blown off by IEDs looking for someone who we already know isn't there. That's his allegation. And he's angry about the inability to ask any questions about all this. And of course, his daughter, by the way, got raided by the FBI, which created headlines that meant he didn't get reelected. And then it turned out she was never charged with anything. And then there wasn't a story there. So he's coming out 25 years later, and he's angry, and he's informed. And that's just to put it in for... Yeah, yeah. I would encourage people to go listen to it. My recollection was that he was pretty explicit about the claims around thermite that firefighters... And (64/99)
the reason I brought up his firefighter credentials, because that was essentially the basis of his claims around 9-11, he mentioned that fellow firefighters heard explosions, that when they went up at the top of the building, there was hardly a fire, and then it collapsed. And Tucker seemed to not along, and no one questioned this. And I want to bring it up because it's a great example, because it also brings us to... It's not as good an example as the UAP story or the UAP conspiracy, which truly has no good explanation. I mean, that is a great example of where I cannot... And this is... I would love to ask you about this, because I know you write quite a bit about it. The 9-11 example, it's true. You look at building 7 collapse, and it looks like a controlled demolition. By the way, the killer for me was that the BBC reported the collapse of the building 20 minutes before it collapsed, while it's still standing in the background behind the journalist. You're like, what? Yeah, so I (65/99)
bring that up because you watch that, and as a layperson, you're like this. But then if you think that through and you say, okay, what would be required in order to actually have three buildings wired, prepared for a controlled demolition? It would require a very large conspiracy, presumably, and what is the tangible benefit? In other words, what is the cost-benefit analysis that you would run to say you're going to fly planes into buildings? And then, as if that's not sufficient to justify a preemptive military action or a war on terror, you would control demolition. My point is simply to say that I would have felt that for someone like Tucker, and this is true in general, our journalistic centers have deteriorated, I would have expected it, and certainly 10 years ago or 20 years ago, you would have certainly seen more pushback, and you would have asked the person to put forward a competing theory. And I feel like that isn't something that we see much anymore. We just see everyone (66/99)
kind of goes into their camps, especially on the right. I would actually say this is very true of the right. Again, it's not a criticism of the right, or this is not a way of absolving the left for their contributions and sort of doubling down on official narratives and supporting the power structure. But it seems that on the American right, the narrative weavers are very focused on dismantling the narratives, dismantling the institutions, but not really proffering a competing narrative. And I find that to be rather dangerous because it creates that vacuum that we talked about earlier. And in that vacuum, what comes out? Who rises from there to present order to the public? Does that concern you? And then I'd love to, after that, I'd love to really broach a conversation at UAP if we have a chance, because I'm really fascinated by the topic. It's like what I said about science. How do you let go of a paradigm framework that you know isn't correct any longer, but you don't have a new one. (67/99)
You just have a bunch of information that the old one is not right. So you don't have something to swing to. And until we get a new paradigm that comprehensively explains how the universe works from a quantum physics angle that everybody's comfortable with, nobody wants to let go of the framework they're currently hanging onto. What do you think? I mean, so we talked about simulation theory. It might sound ridiculous for me to put it forward, but actually I've put it forward in past on episodes on UAP because actually if you just wanted to just spitball stuff, the simulation hypothesis would actually solve the UAP conundrum. I think that's exactly it. Similarly, it would solve the 9-11 conundrum in this particular case. And I don't know that it's fair to call that a conundrum because I'm not a structural engineer. Maybe if I spoke to one, they would give me a good explanation for why building 7 was able to collapse that it's much more compelling than a broad conspiracy and rigging the (68/99)
building and then for no apparently justifiable reason just collapsing it. How do you make sense of these types of discrepancies or disturbances in the matrix? So I'm, it is in the matrix is the right word. I am studying deeply various forms of simulation theory. I am finding myself drawn into the discoveries in the realm of physics. It is not my natural comfort zone, but it's like you can't make sense of the world if you don't understand how it works. And I remember when I was very young, my mom came in one day and she said, oh, they found the first subatomic particle and they were called quarks at the time. I mean, I must have been 10 or something. And she started crying and she said, they've named them truth and beauty. And she was so moved that we would call these new findings something of such a, you know, beautiful nature. And maybe that for me made me realize, oh, we're connected to this stuff that, you know, we're all kind of stardust, aren't we? And understanding the nature of (69/99)
our stardust is part of what makes us human. Who am I? What am I made of? Where am I? What is this stuff? What is this wall behind me? I know a lot of people don't think about these things, but that's where my brain goes. So I am still studying. I don't have any definitive answers on any of this. I think it's fascinating that so many very brilliant people are struggling and talking to each other about these competing theories. So it's a discovery process. It's uncomfortable because you want an answer, but there isn't an answer yet. We're getting better answers every day, though, because we have better data gathering. We have better instrumentation. We have better supercomputing. We have AI, which is vastly accelerating the process. We now have, you know, the chips that are being created today, you know, this famous story about the new Willow chip from Google, which they say solves a problem that in the past, theoretically would have taken every computer on Earth 10 septillion years to (70/99)
solve, which means a period that's longer than the entire history of our universe. And today, the Willow chip can solve that same problem in five minutes. Now, maybe there's some hyperbole there, but the speed at which we can solve problems is so accelerating that you should be asking, like, wait, how does stuff work exactly? Because we're getting better answers all the time. So I'll just say that I don't have an answer, but I'm now I no longer start with, well, that's ridiculous. I used to start with, like, when I grew up, if you said there was water on the moon, you were certifiably insane. Today, we know there's actually quite a lot of water on the moon and a lot of other stuff too. And there's a proper space race to get to it between particularly the US and China. So you're not certifiably insane. So now I'm more like less inclined to say that's ridiculous. Or if I feel the instinct to say that's ridiculous, I'm like, oh, this is going to be interesting. Let's see. Let's explore. (71/99)
That's how I got into the key thing, which, you know, literally six years ago, I would said, don't be ridiculous. And then some mates of mine from government days said, you need to look at this. And I'm like, what? This is just stupid. And they're like, you need to look at this. And then I started looking and I'm like, holy moly, Congress is passing whistleblower legislation. They don't do this on a whim. We have whistleblowers testifying to Congress. I start digging around and a lot of serious scientists are involved in this. And holy moly, maybe our understanding of reality is not what I thought. That's how I got into it. So, Pip, we'll come back to the UOP stuff. Because I think that there's a whole thing to do there. But before we get to that, and this is one more thing I'd like to kind of insert in, and we're going back to a phrase that you used at the very, very beginning of this conversation that stuck in my head because it brings me back to something, Neil, how it says to us in (72/99)
the first episode of this conversation. So, in that you use the phrase constitutional crisis. And when we spoke to Neil, we talked about the fourth turning, and we talked about how one of the characteristics of a fourth turning is the tearing down of institutions that are no longer fit for purpose and how that's an important part of the process because we then get to rebuild them in a better, more trusted, more useful fashion. And Neil stopped me dead in my tracks when he said, I talked about the IMF and NATO, obviously it was a clear one, the UN. And Neil basically said, what about the US Constitution? And I hadn't thought about that as an institution. But of course, it is the institution that is and defines and has defined the United States of America. And in the last couple of weeks, we've had Donald Trump talk about running for third turn very flippantly. And as I keep saying, he's selling Trump 2028 hats at his merch store and all this kind of stuff, which is off the cuff, but he (73/99)
clung onto it for a few weeks, realizing I'm sure about the press he was getting, but he didn't say that ridiculous. And if his motivation is to get more coverage, it worked. But there's some fundamental damage done by that. And then we have this past week, him saying, I don't even need to uphold the Constitution of the United States. And Steve Diggle and I were talking about this. And as Steve said, he says, it's literally the thing you read out when you hold your hand up is I will uphold and defend the Constitution of the United States of America. So when we talk about constitutional crisis, and we talk about the institution one year shy of a 250th anniversary, how do you assess the state of the Constitution as an institution that defines America? Is it under threat? And how do you think about that? It's very, very interesting, because what you've described is one side of the story. There's also the view that the reason we have all these massive holes in the budget that nobody can (74/99)
explain is also because we've had elements of government who have been doing their own thing without any congressional oversight or having to confer with the president. So, you know, everybody likes to use this term, the deep state. I actually break it a little bit into two categories. I think the deep state is like that British program, yes, minister, right? It's technocrat officials who think they know better, and they run circles around the temporarily elected officials, right? But there's something deeper than the deep state. It might even be like a counter state, which has control over weapon systems and that feel that they can do what they want, like, for example, build biolabs in Ukraine and then deny they've done it and initiate wars on that basis. That is a bigger issue in my mind. And then their inability to explain like, where's the money and what have you been doing with the money? And their view that it's a perfectly okay to have a trillion dollars missing from the defense (75/99)
budget, that that's just an accounting technical issue. It's not waste, fraud or abuse. And their kind of unwillingness to address it. And then you could go to another extreme. I'm sure you've heard of Catherine Austin Fitz, who also was recently on Tucker. She says, this is not one trillion, we're missing 21 trillion. 21 trillion is like another country, right? That's a whole economy. So where is the truth on that? I don't know exactly, but this raises this question of is the deep state really what we're talking about? Or is it something darker? I don't know. And is that a constitutional crisis? So this is where again, the UIP issue comes in. When I started to clock that the secrecy around much of the spending is so great that the president is not informed, not whether they're Democrat or Republican. And if they ask, they are told that it's a need to know basis and they do not need to know. And you're like, that is a constitutional crisis right there. So that to me is like, yeah, (76/99)
exactly why this UAP issue is not just fascinating from the perspective, if we're not alone in this universe, if there is intelligence in this universe, that's obviously a magnificent question for mankind, human kind, as to how to contend with that. But a narrower, more specific question is, it's revealed that there's lots of stuff that goes on that the Congress and the president are not informed about. Now that also is a constitutional crisis. So that's the way I've kind of framed it in my mind. But what does that mean? If the Constitution is in crisis, is it any wonder that Americans are in crisis left and right? Because between that document and the Bill of Rights, that's the very foundation of America. And if you have a foundation that is weak and is potentially vulnerable, as an Englishman that has always admired and loved the United States, I see in America, and I first went to the United States on its 200th anniversary. I was, what was it, nine years old. And I was there in (77/99)
And all the celebrations and all the stuff going on. So it's weird for me to be looking at this 49 years later, and seeing a very different state of affairs in the lead up to something that should be and will be celebrated, but against the backdrop that, I don't know, it worries me a great deal. Because without America as America in the world, I do wonder what falls apart that it's holding together, even if we can't see that it's holding together. It's interesting. I hear you completely the way you've described that. I'm like, you know, actually, the problem isn't the Constitution and the Bill of Rights, our fundamental documents are remarkably sound, considering the passage of time. The problem is the immense weight of laws and regulations that have been placed on top of it. And the fact that in the US, we have no mechanism for ever removing a law or a regulation, we only add them. And the Congress is a machine for writing not just legislation, but really bad legislation, where (78/99)
they throw all kinds of nonsense, you know, it'll be a bill on abortion, but it has embedded in it something about, you know, immunity for some corporates from litigation. And honestly, when I worked in the White House, I realized no one has read all of the words in a thousand page piece of legislation, no congressman, no senator. They've read the bit that is relevant to their interests. But who understands this comprehensive picture? A few members of the staff, very, very, very few. And so is there all kinds of nonsense in there that has to do with fundraising and things that are not about the fundamental truths of the Constitution and the Bill of Rights? Yes. So we've got decades and decades of all this noise piled on top. And that has caused the underlying infrastructure of the Constitution to become a little shaky. So I just wonder where is the problem? It's maybe not with the foundation, it's with this stuff we keep adding on top. And look at, for example, even, you know, all (79/99)
codes, building codes, the tax code, everything, it's almost impossible for a regular person to even understand anymore. You have to deploy professionals, employ professionals to get a grip. And that's not how the Constitution was designed. It was designed to be very simple, very elegantly simple. And we've made everything very, very complex. I feel like that, I mean, that speaks to this loss of faith in expertise and in technocrats, because there's a loss of common sense in the operational aptitude of government. It's become operationally dysfunctional. Yes. And I think it's interesting this talk about a constitutional crisis, I think also flows nicely along this idea that we're going through a kind of narrative collapse, which leads to a collapse in identity and a collapse in institutional trust. Because what is a constitution? It's the founding and governing principles of a society. And I feel like we're really questioning a lot of those things. And a lot of the narratives that (80/99)
supported those institutions and practices and principles are dissolving. I'd love to ask you about the UAP story, since it's something that you've covered. And I mentioned in the context of 9-11 and narratives around collapsing controlled demolitions, although it's not a really good example, because the controlled demolition explanation, again, it's not something that I've spent enough time on, but it's not sufficiently compelling to me to sort of be comparable to the dysfunctional experience of trying to understand the UAP story. Because I feel like the UAP story truly confounds my ability to proffer an explanation. And it challenges my most basic understanding of how government works. And I'm framing it this way, because I want this to be a portal for empathy to the audience, perhaps, who also feel this way in how I ask this question. I remember who was a David Grush, who was testifying before Congress, and he was talking about having biologics. Basically, it sounded like alien DNA (81/99)
or non-human DNA or something like that, biological material that is not of this earth. And that contractors, it sounded like he was suggesting private contractors are housing this material, either on behalf of the US government or possibly at one time on behalf of the US government. It's not entirely clear. Again, this gets us into a conversation about shadow networks that sort of operate in parallel to the official constitutional bodies. And it sort of raises questions about where is the power structure really? This gets us to kind of like secret society, almost type stuff. So he's talking about biological material, he's making all these allegations as a whistleblower, but we can't get to the bottom of it. This is the thing I don't understand. So Congress is like, these are the people that are supposed to be the most powerful people in the country. The legislative branch is supposed to be the most powerful branch. And these individuals are elected by the people of the United States. (82/99)
This is the pointed question. Why is it that our elected representatives, including like Harry Reid, who was sort of the center of this disclosure process, how is it possible that allegations that are so life altering and mind altering cannot be investigated and explained in a clear coherent manner? Yes. So you've answered the question in a way. The subject is so mind blowing. It's so challenging to our notions of who we are that there's an element of Congress doesn't want to explore this. They're kind of forced to, but there's this sort of theater going on of not actually pursuing the story, also because that would involve challenging this sort of military industrial complex. Are you touching on the same principle behind the theory for why people on the Warren Commission just kind of went along or people on the 9-11 Commission just went along? Are you basically saying that they're afraid of this sort of like dark power structure that would be able to actually threaten their lives and (83/99)
their families? Well, I think there's an element of that. I think that threats are real. I once sat next to the original writer of House of Cards at a dinner and I turned to him and I said, I think that you kind of lighten it up and dump it down a little because if you wrote what really happens in Washington, people would be terrified. He said, you must be from Washington. I said, I am. He said, you're right because if I wrote what actually goes on, people would freak out. So let's think of House of Cards as the light gentle version of what happens in Washington. Now we can begin with that. People are like, what? House of Cards is outrageous. People are killing each other. You're like, there are a lot of dead bodies in Washington as well. And there are a lot of dead bodies around this UAP question and not all physically dead. Some are character assassinations. You're like, wait, why? What's the big deal? Who cares? It's interesting. And the story that nobody can know because the (84/99)
public's not ready, this huge ontological crisis will happen. I don't think that's actually true. And I also don't think these folks care that humans have an ontological crisis. So there has to be another explanation for this. And I think there are other explanations for this. So we were talking earlier about how it doesn't really make sense to have secrets anymore because the public already knows everything. And the CIA and the intelligence community don't really have that much of an edge over the public internet. So how is it possible that the government could be hiding information that's so revolutionary about aliens, interdimensional beings, non-human intelligence, but the public and everybody else just doesn't have any evidence. Well, they're not hiding it. That's the point. It's coming out all over the place. And now you can look back at history and say, there's been a series of... But I'm saying, why is that the focal point of the investigation, the government as opposed to the (85/99)
phenomenon which should be ever present? No, I love this because I agree with that. And I don't think, look, we've already had the announcements from government that this is real. We've had a White House press conference where they've said, the phenomena is real. We've had Pentagon press conferences, Air Force press conferences. So in their view, they've already told us. Most people missed it because they're not watching it closely enough. And they're like, okay, we're done. We told you it's real. But the next question is, well, what the heck is it? And that's where the cone of silence comes down. And the reality is, what's the history? The history is every individual who's not unofficial, who comes forward and says, I had this weird thing happen. We don't believe them. It's kind of like the Weinstein phenomena where women for decades were saying, I'm having a problem with this guy. And everybody was like, you're imagining it. Why? Because he's so powerful. You don't want to go up (86/99)
against that thing. But now we find out actually, he was systematically being abusive. And that's why he's in jail. Why do we disbelieve? And especially it's a very interesting question, given that our entire legal and justice system relies on the account of witnesses. So now we have so many witnesses, and we say they're all nuts. So that can't be right. So for me, a pivotal moment, in my understanding of this issue was this fellow Ryan Graves, who was not just a Navy pilot, but he was the commander of his squadron, and he was a top gun instructor. And he said, we were going up over Norfolk and San Diego, and every time, not every once in a while, every time we were bumping into these things that were flying at insane speeds, we can't explain that move in ways that defy physics. And what has also come out, but he didn't articulate so much, is that it interferes with the instrumentation of our aircraft, including may messes with the engines. Luckily, our Navy pilots are really good. If (87/99)
your plane starts falling out of the sky, they know how to pick it up again. But he's like, this is dangerous. My people are being put in physical risk. But if you go to the Pentagon, you say, we see these things, they're going to fire you, you're going to be gone. So he cleverly went, okay, we're going to triangulate with FLIR cameras, our most sophisticated cameras, with the targeting cameras, with radar, with infrared, and we're going to triangulate with also multiple sets of very senior pilot eyes, we're going to triangulate. And it turns out, the data all matches up. There's something there. So for the first time, this is nobody's imagination. We have evidence, there's something going on. Then he sits and he goes, okay, I've got these facts, truth, data, but they're still going to fire me. So the only way to put it forward is to present it as a health and safety issue. And to say, look, we've got billions of dollars of equipment at risk, and millions and millions of dollars of (88/99)
pilots at risk, and they can't ignore a health and safety complaint, which is true. So that's how it went forward. And sure enough, Pentagon can't ignore a health and safety complaint. So this is the beginning of it getting traction in our modern era. And since then, we have more and more coming out. The thing is, why are we waiting for government, and particularly the US government, we can all explore this. But now we come back to the Cartesian split, which is scientists are either, they're mainly stuck in what I call scientism, which is, I say, why don't we bring science to this subject? Why don't we bring our best scientific methods to study this? And they're like, no, this is mystical magic. This is crazy. This is not worthy of our attention. So they won't bring the science to the subject. They're being into scientism, which is we already are the answer is it's your nuts. So I think the question is, why are they all in that frame of mind? We devote science to many obscure, remote (89/99)
possibilities. Again, back to we spend a lot of time and science and money on the creation of the COVID virus on this remote possibility that it might be a biological weapon, we needed to be prepared for that. That's a pretty remote thing. We spent a lot of money on that. Why are we spending money on this remote possibility? And by the way, all these black swan super remote events keep happening. So we need to spend more insurance money on understanding these remote possibilities. Anyway, I haven't got a good answer yet from anybody on why we shouldn't study this given the volume of testimony and information that we already have. And then I'll finish if you give me a minute, I'll stop for a second to see where you want to go. But I'll talk a little bit about I stumbled into this. And then I went to my dad, who worked for so many presidents. And I said, dad, you're going to think I've lost my marbles, but I got to tell you, there's this weird thing going on. And to my surprise, he said, (90/99)
yes, and I've been involved with it since 1962. And that led to my father doing a very long elaborate interview with Jesse Michael on his American alchemy about his experience of the subject. And he's probably the most senior person who was directly involved. And what a shock and surprise to me to find my own father was at the center of this. And that's one of the features of the subject, which is so super weird. It's not just that there's this phenomena that you can see with a camera or whatever. It's also that everyone who comes into contact with it seems to also start having weird spiritual experiences, synchronicities, strange stuff. And that's the story all of its own. But it certainly came as a total surprise to me to find that my question out of the blue that seemed insane six years before was answered by my own father. You know, Pip, that is a podcast all of its own. And hopefully at some point along this journey, we will actually have an entire conversation about that. But (91/99)
just to wrap up today's conversation, which has just been fantastic. And you've done it to me again. I've got to get on a plane this afternoon. And I know instead of watching movies and relaxing, I'll be thinking all this stuff. Thank you, as always. But the people listening to this podcast, you are of all the people that I know you are, you seem to be the single best equipped person to be able to take this information in and seek out not just answers, but questions, you know, and that's one of the things you do so brilliantly, you seek out the questions to ask. So perhaps if you wouldn't mind just if you have any tips for people as to how they can be better, because ultimately, everybody needs a much more open mind. But in terms of practical advice as to how you do what you do, because you're just an absolute phenomenon at doing this stuff. And I marvel at it all the time, privately, but publicly, I'd love people to get a sense of how you're able to do the things you do. I am so (92/99)
grateful for your kind words. Thank you so much. You know, sometimes I'm sitting here by myself with my computer thinking, wow, you know, I'm really on the outer edge of possibility right now. Like, and you do start and you are and you are pit, but you go there. You go there and a lot people don't. Yeah. So I think I'll come back to this concept of hardware. And, you know, it's a kind of a software in ourselves. And how do we upgrade our own hardware to be able to deal with this. And so some things I would suggest are whenever you have a really firm, convicted view on something, it becomes very important to challenge yourself and to really explore the opposition and move into that to try to stress test your own ideas. And it's hard, but it will only make your ideas stronger if you go through that process. It's like tempering steel. Throw yourself into the heat of that debate in order to strengthen what you're made of. But you may also find that ideas that you held to be absolutely firm (93/99)
start to break under that pressure and you will end up in a better place if you go through that process. So that's one thing. Another thing is when you look at the news to think about that sheepdog by your side and what is it choosing on your behalf and how could you play tricks with that dog and throw the ball into a different part of the field, make it chase that and bring you back some stories from this other part of the fields, right? And that's a very useful way every day. There's that dog sitting with you. I think as well that back to the heart where the bringing of anger and this sort of fight mentality, how do we park that and instead drop into a more empathy led space just for the purposes of hearing the other side of the conversation. I think we have to open our ears, right? It's that old story, two ears, one mouth. A lot of people are mainly on transmit. Listening is a massive skill in this overwhelming environment. And I have to admit, I think, look, I get paid to talk. And (94/99)
ever since being the chief currency strategist of Bankers Trust, any dinner party I go to, I was like, Peppa, what do you think? It's very easy for me to play that role of I'll give you some answers. But I've realized actually, I prefer being able to drop into listening. I need to be a better listener. And I suspect most of us are better talkers than listeners. Those are a few of the things that I think are so foundational that they will change all the other stuff that we've talked about. If you begin with that, again, you have to be the change yourself. Pip, that was amazing. This has been so much fun. And I'm so glad to give people even a little insight to the conversations you and I have had over the years, because it's a nonstop cavalcade of ideas and stuff. And it's the perfect conversation for this idea of Astymetry. You guys are so great to do this series, really. It's also cool because Grant and I had talked about how one of the things that we were excited about is that we were (95/99)
going to not only interview people that we both had interviewed before and that by interviewing them together, it would inspire us to ask you questions and be excited about the interview. Whereas at least for me, once I interview someone once, most of what I'm excited about, I feel like I already address. But also that we're going to have people on the podcast that each of us hasn't interviewed. So I was trying to do my best not to ask too many questions and take up too much time. But this was very thought provoking for me. And I think that the value I've gotten from reading your work in anticipation of this interview is that it is very gaseous and invites you to think about phenomena in a manner that you haven't necessarily. Back to your point about not having a rigid framework and question your priors and also provides you, in my opinion, some of the stuff that you've written consistently with a different perspective, a different take on something that I feel like you, when I say (96/99)
you, I mean us, we, me, may already feel like I know the answer to. And so I've found that to be very helpful. Oh, I'm so, so delighted. Yeah, we need to drop into less certainty. Yeah, absolutely. And I say talking of that work, just point people in the right direction to read more of it. Because I know after listening to this, there's going to be plenty of people that want to read more of it and understand it better. That's kind. So I write a column on sub-stack called Pippa's Pet and Podcast. I put things up on X, I put things up on LinkedIn, but my place I really write is that and I'm working on a book right now that's drawing my father's wisdom into the picture as well, because we were collaborating on it before he passed away. So that'll come out probably next year. Fantastic. Pip, listen, as always, it's such a joy to talk to you and hopefully I get to see you in person soon. Exactly. We have to figure that out. So wonderful. Thank you guys. Great. Speak with you, Pipa. Well, (97/99)
mate, that was another just terrific conversation. For those you're listening out there that aren't familiar with Pipa's work, do yourselves a favor, go to Substack. That's the best place to find her. It's Dr. Pipa. That's drpippa.substack.com. Pipa's Ben and Pock are subscribed to her work and get the stuff coming in. You'll find her on Twitter at drpippa.em. LinkedIn, I wouldn't have the first clue how to find anybody, but you'll definitely find Pipa on there too. I think she's pretty active on LinkedIn every now and again. Do follow her, because as you just heard, she is someone who will have you thinking about things that you weren't thinking about before. And to the whole point of that conversation, that is perhaps the most important thing we can all do right now. Yeah, I think it's extremely helpful to expose yourself to not only different ideas, but also to speak with people who tend to view the same phenomena from different perspectives, not only because you might be missing (98/99)
something, but because the very act of doing that is clarifying and makes you a better thinker. It's a skill like any other. Yeah, I think it's exactly right. Well, my friend, we will do this again next week and see what that takes us. But in the meantime, everybody out there, thanks for listening to us. We'll see you next time. (99/99)
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. The second hour of today's conversation with geopolitical analyst and forecaster, Kamran Bihari, was originally made available to premium subscribers only. I've decided to publish the entire two hours on the Hidden Forces main feed as a public service to those of you who are trying to understand what's happening right now in the Middle East and how it fits into the larger story that we have been telling on this podcast for years. Kamran is the senior director of the Eurasian Security and Prosperity portfolio at the New Lines Institute for Strategy and Policy and has served at the U.S. State Department and as a senior consultant with the World Bank. The subject of today's conversation concerns the escalating (1/99)
violence ignited by last weekend's brutal attacks on Israeli civilians by Hamas and the Israeli Defense Forces' ongoing counter-offensive and bombing of the Gaza Strip. Kamran and I spend the first hour of our conversation discussing the attacks, what we know about the original scope and intention, what role Iran may have played in helping plan the attacks, and whether or not we can expect Hezbollah to open a second front of attack in the north of Israel and other potential pathways of escalation that could open the United States and turn what is currently a war between Israel and Hamas into a larger regional conflict. In the second hour, we expand the scope of our conversation to look at the bigger picture. How do the events transpiring in the Middle East today fit into the story we have been telling on this podcast for years about the fragmentation of the rules-based international order and the emergence of a new multi-polarity where nation states will seek to resolve long-standing (2/99)
border and ethnic disputes by force as everyone jostles to reposition themselves favorably ahead of the emergence of a new status quo. What this means for the future of Israel, Iran, Turkey, China, Russia, and the United States is all part of that discussion. If you want access to all of today's conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at (3/99)
hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this exceptionally timely and in-depth conversation with my guest, Kamran Bahari. Kamran Bahari, welcome to Hidden Forces. Thank you for having me, Dimitri. No, I was telling you, I really appreciate you making yourself available. We're recording this on Sunday, October 15th, so more than a week since the initial attacks took place in Israel. Before we start today's conversation, I'd love for you to just give us a quick background to who you are, what you do, and what your specialty is. Well, thank you for the opportunity. So essentially, I'm a geopolitical intelligence analyst by occupation. That's sort of my experience, my skill set, my trade craft. I spent a lot of time in the private sector intelligence analysis business. I was with a company called Stratfor for many, many years, for about a dozen years. And then I joined a successor group called Geopolitical Futures. Spent some (4/99)
years there. I have a PhD in political science. I'm Canadian and I'm a co-founder of the New Lines Institute for Strategy and Policy. It's a think tank we established. We worked on it for quite a while back in the 2016-2017 time period, but its current iteration really launched in very early 2019. And we have grown, I used to be the director of analytical development at the New Lines Institute, but recently I took over a new responsibility called Senior Director for the Eurasian Security and Prosperity portfolio. And basically, we're a small boutique think tank in Washington that doesn't do advocacy, unlike different think tanks that advocate for a certain policy outcome. We like to do the intelligence gathering, the analysis, the forecasting, and then distill policy recommendations from that exercise. I mean, obviously we don't want to conflate what ought to happen with what is happening and what will likely happen. We try to be disciplined about that. But yeah, like everybody else, (5/99)
we operate by certain values. We want a better world, but we try not to make that sort of the starting point of the conversation. The question is that if we understand what's really going on, then perhaps we can chart a path towards a better future. But we have to be disciplined, and that's sort of our ethos. Well, that's why I brought you here today, Kamran, because the process that we're going to use to figure out what's going on here and the larger regional implications is very important. So let's start there. Can you summarize for us, as I said, we're a week out from the initial attacks that took place in Israel that started this or that ignited this latest round of violence. Can you summarize for us what we know at this point about the events of this past week and where we find ourselves today? So what we have right now is an unprecedented attack by Hamas and supported by Iran, Hezbollah. I mean, there is a serious uptick in Hamas's offensive capabilities. Between 1987 and 2004, (6/99)
they were known for suicide bombings. The Israelis were able to neutralize that in 2004. And then, you know, they tried their hand in governing and ruling, but by the time they took over Gaza and imposed their rule there in 2007, they were well underway in terms of developing rocket capability. Now that continued from 2008. We've had several wars, 2008 slash 2009, 2012, 2014, 2021. But now this time around, you know, last weekend, about seven days ago, they displayed something that we've not seen before, which is this complex operation involving hundreds of militants that, you know, basically broke through the barrier, staged an operation that went from township to township and killing Israelis and whoever they could find. And basically doing all this, preparing for this kind of operation while, you know, remaining below the Israeli intelligence radar. That's very different. That's a tradecraft that you don't sort of just acquire by looking at YouTube videos, or it's not one of those (7/99)
mail order kits that you get and then you can train your people. That's a specific tradecraft. It requires a lot of planning, preparation, and of course training of people. And to be able to do that and not be detected that you're planning such an operation means that you've gotten help. You've just upped your game. And like I said, you know, this is signature playbook of the Islamic Revolutionary Guards Corps, the Kuds Force, the overseas operations arm of the IRGC. And of course, you know, Iran can't parachute into Gaza, so it needs that medium of Hezbollah. So most likely this stuff was planned and prepared in Lebanon, then they did their training in Gaza, and then they executed it. So now what we have is a new reality. This isn't your normal Gaza war that happens every few years or has been happening since 2008. And it's become an intolerable threat to Israel's national security. And we now have something which is a regional war in the making, unless somehow Iran can be pressured (8/99)
to remain out of it. But everybody has constraints, you know, all the different players have constraints. The Israelis have constraints. Their issue is how do you neutralize Hamas without killing Palestinian civilians? That's a conundrum. Iran has helped Hamas do this. Now if it stands aside and lets Hamas get neutralized and destroyed, then its credibility amongst its proxies in Iraq and Syria and Yemen, they're going to begin to think that, you know, when the going gets tough, do the Iranians just sort of sit back and let the proxies take the hit and secure themselves. So this is a very dangerous situation. In all of this, the Biden administration is trying to, you know, is working that diplomacy machine to try and see if there's a way out of it and minimize the risks of conflagration. So I want to emphasize something that's obvious to both of us, which is that there's so much uncertainty right now. I mean, this is a very fluid situation. And in fact, even the Israelis took some time (9/99)
to assess the scope of the damage that they took with that initial attack. How long to that point, how long did it take for them to actually realize and come to an understanding of how big that attack was and to begin to respond to it? How off guard were they actually caught? I mean, if you look at the fact that so much carnage was possible, that Hamas was able to engage in so much death and destruction before they met resistance from IDF forces and IDF forces swung into action, tells you how off guard they were. I mean, and there are reasons for this. Look, you know, first of all, intelligence agencies, security agencies can't be on like a 24-7, 365 state of red alert for a long period of time. There's exhaustion sets in. So there's that natural element that we need to factor in. And it's not something that there is any good solution for. You can mitigate by, you know, rotating people out and, you know, have a duty clock and whatnot. But at some point, the other side is looking for (10/99)
those chinks in the armor and the opportunities to exploit, and they do find one. So that's number one. Number two is I think that Hamas deliberately sent out signals, deliberately engaged in perception shaping that, hey, we're not interested in another Gaza war. And I think that was misinterpreted by Mossad and IDF. The other thing is that there was a cadence that was set in. If you look at the idea of rocket attacks, there was a cadence, there was a pattern, and the Israelis were not expecting anything else. So if you're Israel and you're looking at this and saying, what is the worst that can happen? Rocket attacks. And so they prepare for that. They were not prepared for this kind of an operation. And therefore, you know, you sort of start to look for things that you are used to in terms of a threat perception, and you don't look for the anomalies. It is quite possible and we'll just have to wait and see, you know, when we learn more when the investigation completes its cycle and we (11/99)
find out that where the balls were dropped. But it is possible. It is, we can't rule out the possibility that it was zero intel. There was some intel. They had to be some intel that was disregarded. There were reports circulating that the Egyptian foreign minister or the president, prime minister, alerted Netanyahu to the imminence of some kind of attack. What do we know about what those reports were? I've seen those reports. I don't have too many details on it as of yet. Netanyahu's office denied it, correct? Yes, they've denied it. But you know, there's also a political imperative to deny such things because it's politically costly. Maybe the intelligence wasn't, we have to understand what the Egyptian imperative here is in actually saying this. So they know that they're going to have to deal with the fallout of this counter offensive that Israel is going to engage in or is engaging in Gaza. And then this is going to be nothing like we've seen before. So it's a regime change (12/99)
essentially and regime chains are messy. The Egyptians want to be sure that their interests are secure, that they're putting pressure on Israel. This is their way of putting pressure on Israel. So we just have to wait and see. But look, there are always signs that are missed. But more importantly, intelligence is a twofold process. There's collection and there's analysis. More often than not, the collection is pretty good. You know, the collection happens electronically. There are human sources, there's satellite imagery, etc., etc. And you just sort of keep collecting. A lot of times what happens is you have more intelligence than you can actually process. And processing is a human activity. And you can't, you know, this is why, you know, I think AI can be a great researcher, but it can't analyze. It needs that human touch. So I think that there's also a tendency to sort of fall in love with our analysis. We all do this. We have a net assessment. We basically say, hey, this is what I (13/99)
know about this actor or this place. I know how it ticks. And I'm pretty confident about my assessment until, you know, something happens and then your net assessment is blown out of the water. But that's another element. But I think that there was also this idea that, hey, Gaza's logic, we understand its rockets. And we have the tools to manage it, but we have a problem in the West Bank. The Palestinian Authority is essentially in meltdown mode. The president Mahmoud Abbas is 87 years old. There's no clear successor. There is bitter factualization. There is massive corruption. We have Jewish settlements there. We're also thinking, you know, and over on this issue, there's a divide amongst the Israelis as well. The far right actors are saying, let's go and annex parts of the West Bank. But then there's pushback from those who don't agree with that. So you have a very messy situation and you're saying, can Hamas exploit this? I actually wrote a piece for Geopolitical Futures on this (14/99)
very issue less than 48 hours before the Hamas attack. I read that. It was great. And I said, this is the reason why this is one of the drivers that is propelling the Saudi Crown Prince, Mohamed bin Salman, to engage in negotiations with the Netanyahu government, despite sort of, you know, all the risks and whatnot, because it's such an important issue. So the Israelis were looking at the West Bank. They thought they had the Gaza under control. They knew what was going to happen, what's the worst can happen, and we can deal with it. So I think all of these factors and Hamas, you know, obviously I mentioned the tradecraft aspect, that's sort of the big, I think, the most important thing that we need to focus on is this new spike in terrorist tradecraft, insurgent tradecraft that was not there before. And so between the two, and they're also looking for sort of these opportunities, they're looking that the Israeli public is divided, the Israeli government is having a problem, it's (15/99)
affecting their military posture. So all of these things basically led them and their Iranian patrons and Hisbullah to say, hey, you know what, this is the moment to pull the trigger. And that's why we're here where we are today. So you've mentioned a number of things that I've wanted to touch on. One is the political backdrop in Israel heading into these attacks. Another one is the relationship between Israel, especially the Netanyahu government, Likud Party, and Hamas, and what they have done to facilitate the position that Hamas now finds itself in because of the political expediency and pitting it against the Palestinian Authority and FATA. So let's start with the political backdrop in Israel. What is that political backdrop for people that aren't familiar with the situation? And how do you feel that that could have contributed to the situation that the idea found itself in, whether it was Saturday morning, I believe, was that the official time that occurred Saturday morning (16/99)
Israel? The early hours of Saturday morning. Yeah. As people were dissipating from a party. So what is the political backdrop in Israel and what is the relevancy of that here? Look, I mean, you have a very unprecedented situation inside Israel. The political divide between the left and the right has always been there. The two things have happened. First on the left, the left weakened. Why did the left weaken? Because the Israeli-Palestinian conflict really intensified since the intra-Palestinian civil war between FATA and Hamas after the 2006 elections. In 2007, you had two de facto Palestinian authorities, Hamas controlling Gaza, FATA, and the officially recognized PA controlling the West Bank. After that, you had the rocket attacks. And the idea that we can actually negotiate, we being the Israelis, can negotiate a settlement with the Palestinians just wasn't there anymore. I mean, that argument could no longer fly. That was the argument of the left. If you remember, as far back as (17/99)
2000, there was an effort on the part of then Prime Minister Ahud Barak. And Yasser Arafat was still alive and he was leading the negotiation mediated by President Bill Clinton. That camp David, the Oslo Accords. Exactly. And so the idea was, hey, can we reach a final status settlement? And so that wasn't possible, but that was the left's position, a two-state solution. On the other hand, the right basically splintered. One of the reasons why the right splintered is that, and this is before the Hamas took over Gaza. This is like we're talking now, 2005. In 2005, you had then Prime Minister Ariel Sharon of Likud, who is a powerful figure. Former general. Former general, a known, if you will, hawk, who decided, you know what, I'm going to do something that no Israeli Prime Minister has done. And I'm going to try and solve this problem. My first step is to go ahead and unilaterally withdraw from Gaza. We don't need to be there. We have neutralized Hamas' suicide bombing capabilities. They (18/99)
seem to want to now be focused on the political mainstream. They're trying to take advantage of the fact that Fatah and the Palestinian Authority is weakening. So this is the best thing to do. That was a very controversial move. I still remember footage from those days where IDF soldiers are literally forcibly removing Jewish settlers who are resisting from Gaza. And that sort of led to a split within the Likud. And obviously Likud has more far-right religious, you know, Orthodox parties that were supporting it back then. They said, hey, this isn't good. So in order to maintain his political majority, Prime Minister Sharon basically created a new party called Khadimah. Taking sort of the pragmatic conservatives, the centrists, center-right people from Likud to this new party and maintaining government. And that was his solution. It seemed to be working fine. Likud seemed to have weakened. They became sort of like, you know, Likud was in disarray. But then what we have is the stroke. (19/99)
Ariel Sharon suffered a stroke and he was leading this effort to create sort of a pragmatic conservative centrist platform that could pursue the kind of things that the traditional left could not. You know, you needed a conservative to sort of say, hey, you know, if I'm doing this, I'm not being soft on the Palestinians. I'm not being soft on Hamas. I know what I'm doing. That entire thing eviscerated with the stroke. And you know, today Khadimah does not exist as a political party. It was very short-lived. That led to the revival of Likud. But Likud and Prime Minister Netanyahu took charge of basically came back and became the leader of Likud and he's dominated that position since then. But what has happened is the weakening of the left and the argument about a two-state solution, the strengthening of Likud and hardening of Likud, it's moved further to the right. It's literally aligning with political parties that are really far right. They are sort of in many ways, you can say that (20/99)
they are, they have a very hawkish attitude towards Palestinians. They think that there shouldn't be a Palestine. They think that they should just take over Gaza, take over the West Bank, and that's the way to move forward. And then this political alliance tried to tinker with the judicial system. And so as long as it was on the Palestinian issue, it was controversial, but it wasn't existential for those who disagree with the political right in Israel. All the opponents of Netanyahu and his right wing alliance mobilized after he tried to go after the judiciary and we've seen protests after protests, including from people who wear the uniform, the IDF, who basically came out and said, this is democratic erosion. This isn't about the Palestinians anymore. This is about Israel. This reality, and you know, when you have this level of political divide inside a country, then your opponents, and in this case Hamas backed by Hezbollah in Iran are watching this very closely and saying, how can (21/99)
we exploit this to our advantage? And I think that that is what happened here. What do we know or understand about the role that Likud played in bolstering the political position of Hamas, Vizavi, the Palestinian Authority that could have a political repercussions for them and for Netanyahu as we sort of go through this conflict now and eventually hopefully find some kind of political resolution? Well, I think that there are two stages of this. So one stage and it isn't just Likud. It was an Israeli policy in general. Mind you, until 1987, there was nothing called Hamas. There was a group called Mujama al-Islamiyyah, which was the name of the group led by the founder of Hamas, Sheikh Ahmad Yassin, who was killed in an Israeli airstrike in 2004 that had been formed right after the Israelis took control of the West Bank and the Gaza Strip. Now, mind you, Hamas, its origins are in Gaza. That's its core turf. The West Bank was far more dominated by Fatah. But in those days, it was the PLO (22/99)
that was pushing for armed struggle. And the predecessor group to Hamas was not only not a militant organization, it was apolitical. In fact, it was encouraged by the Israeli authorities as a counterweight to the PLO back then. So this is kind of what happens with a lot of people will go into this and say, hey, you know, they'll delve into conspiracy theory. But reality is, look, the United States at the time when we were fighting the Soviets, we didn't know there's going to be an al-Qaeda, much less an ISIS, or there will be a 9-11. All we knew was there's a Cold War. The Soviets have breached the containment line that runs from Greece all the way to Pakistan by intervening militarily in Afghanistan. And we had to respond. And so we mobilized fighters and we mobilized fighters who were Islamists. At that point in time in our in history, Islamism was something that academics talked about. Policymakers had very little interest and it wasn't until the Iranian Revolution that happened (23/99)
right about the same time. We were just sort of getting to know what Islamism is, but we thought it was an Iranian phenomenon and it didn't really affect the Sunni world. And we supported the arming of Afghan Islamists and then the mobilization of foreign fighters, massive mobilization. It led to, you know, it forced the Soviets out, but we had unintended consequences. We have jihadism to deal with now. Same thing here. The Israelis did not know. They thought that this Mujammah, Islam, and they knew this was the Palestinian Muslim Brotherhood, but they said, you know, these guys are looking, they're a charity group. They run mosques. They do humanitarian stuff, social work and whatnot. If we're going to counter the PLO, this may be a useful tool. You don't know that, you know, your actions have unintended consequences. And this continued. Mujammah, Islam, continued well into the 80s until the first intifada. And then these guys, now let's call them proto Hamas, they're looking at this (24/99)
and saying, oh my God, the intifada, we didn't plan for this. Our people are, there's an uprising going on. PLO was as surprised by it as well because remember the PLO was not in the territories. It had been pushed to Jordan in the early 70s. Then from there they were pushed into Lebanon and the 1982 invasion pushed them out of Lebanon and they were headquartered in Tunisia far away from the Palestinian territories far away from Israel. So this thing caught both sides, you know, PLO, FATTA by surprise and this proto Hamas. That's when they said, hey, if we don't board this train, it's leaving without us. And that's where they decided that they will not only become political, but they'll adopt armed struggle. And by the way, by that time, if you remember, the PLO had already started to gravitate towards diplomacy and giving up armed struggle negotiations as a path to resolving the Palestinian issue. So as PLO was moving towards negotiations, that armed struggle mantle, there was a (25/99)
vacuum there and Hamas filled it along with the Palestinian Islamic jihad, which is a much smaller faction. And so that's sort of one way of how, you know, Israel inadvertently enabled the rise of Hamas. I think afterwards the Israeli state has been battling Hamas first in terms of trying to eliminate its suicide bombing capability. And since 2008, it's rocket capability. So I don't know if they deliberately empowered. I can't make that argument. But what I can say is that the fact that the Palestinian issue has not been resolved. I mean, we're now what we're about 30 years out from the Oslo Accords. And that's more than a generation. And the fact that despite all that work that was done, there isn't a, you know, we don't have the solution for the Palestinian. There isn't a Palestinian state. Now, mind you that the Palestinian state is not just the inability of the Palestinians and the Israelis to negotiate a settlement. It's also the fact that the Palestinians themselves are divided. (26/99)
And this division emerged right after the first intifada. So I want to be careful when I when I sort of assign blame. So yes, there is a lot of blame on the part of the Israeli right of center spectrum for, you know, really moving away from this two state solution. And the fact and giving creating the conditions that then Hamas, Pij, Hezbollah, Iran exploit and even ISIS, if it could exploit Al Qaeda, if it could exploit. So that's clear that if there had been progress, we would not be here where we are today. And at the same time, I get the Israeli argument as well that who do we negotiate with anymore? And who can we depend on to provide internal security to protect us? If we're going to give autonomy over to the Palestinians, how do we know that we're going to be safe? Exactly. And I mean, the geography is so small. I can't imagine, you know, you have, you know, rocket fire from Hamas in Gaza. Do you want that to happen from the West Bank as well? No. So using empathetic analysis, (27/99)
you know, the Palestinians don't have a land, don't have a state. They are suppressed. They're suffering and their suffering has been going on for a very long time. What do they do? They will turn to whoever when you're suffering, when you're miserable, you'll turn to whoever appears to be, you know, saying, hey, we're going to lead us out of this mess. And it's easy to be duped to buy characters like Hamas. Hamas is exploiting the Palestinian, the genuine, legitimate Palestinian struggle for self-determination for its own ideological agenda. And this is one of the problems that we're having right now is those pro-Palestinian voices that we hear today. They are, you know, unfortunately, and it's tragic that they cannot disaggregate and disentangle Hamas' agenda from what is a genuine, legitimate Palestinian demand for self-determination. Those two have been conflated because people are emotional. People see this and it's, this is the biggest tragedy in all of this is that Hamas just (28/99)
murdered 1200 Israeli citizens and brutally. But we're, you know, in other words, we're in a war because of Hamas' action. It's not, yes, there's an occupation, but the occupation didn't bring us to this war. The occupation was continuing. There was a need for that resolution, but we need to recognize that Hamas, and as you know, a lot of people I know are very emotional and they're unable to sort of say they're disregarding at the very least what Hamas did and saying, well, you know, this happened because of the occupation. So it's a very simplistic argument and it makes the situation worse. It exacerbates tensions. You know, I could speak to you for hours about this part of the conversation and I really appreciate the nuance that you brought to bear here because indeed that is part of the problem. People dig in. I think there's also people on the pro-Palestinian side don't give enough agency to actors on that side of the conflict. And I think put too much responsibility on the (29/99)
Israelis. And I also always emphasize that this is such a difficult problem. You know, a lot of times we're confronted with problems that they don't have a good political solution, but they do have a good theoretical solution. But in the case of the Israeli-Palestinian conflict, even the theoretical solution is absent or it's very difficult to understand what that would be because of also these deep security concerns and the fact that both sides have reasons to be fearful. I do want to add, Dimitri, the one more thing if you allow me. Sure. Right now there is no, if you will, group that is championing or can champion the Palestinian struggle in an effective way. So you have Fatha PLO PNA, which by the way is led by one guy who is 87 years old. And, you know, I can only imagine and I shudder to think what will happen to that landscape once he's no more. And it is ineffective. It does not even control all of Palestinian territory. It is unpopular. But yet it's the internationally (30/99)
recognized authority amongst the Palestinians even now, you know, and not that they're not. And not that anything is wrong with it. This is exactly how the US Secretary of State is supposed to behave is to go and meet a boss because he has to. He's even though he has very little power, he's still the nominal head of the Palestinian authority. But that nominal reality means there's nobody championing that cause effectively. Who is trying to subvert, pervert, hijack that cause is Hamas. So if you're Palestinian, you're caught between a rock and a hard place, you know, the devil and the deep blue sea. So the political vacuum that exists amongst the Palestinians is a key reason why there isn't any movement and we're stuck in this sort of causality loop. Great point. And in fact, I think you mentioned it earlier that the eventuality of Mahmoud Abbas's exit, the fact that he's 87 years old and the political vacuum that that would create was the impetus or one of the impetus is for the (31/99)
Abraham Accords and the desire to, you know, bring a diplomatic solution between Israel and Saudi Arabia that would involve a solution for the Palestinians. This could have been also the reason that we got this attack by Hamas. So let's talk a little bit about that. Let's switch now to a conversation about intentions and what we can theorize about Hamas's intentions. And do we have any sense of whether or not they understood that that first of all, did they know there was a concert going on? Do we know anything about that? And did they expect in your view to have this kind of success or did this kind of, was this a kind of fortuitous slaughter of Israeli civilians that they chanced upon and now they succeeded in ways that they didn't even imagine? So let me start from the strategic intent and then go down to the sort of the tactical performance that we saw. Look, there is no way Hamas did not know that if they do this, then they are plunging the Palestinians into a very, very (32/99)
horrendous situation. The Israeli response will be ferocious. And this isn't just going to be like, oh, we fired some rockets. It went on for a few days or weeks and then there was a truce. They knew that was not going to happen. Yet they did it and they don't really care for them. The more Israel is ferocious in its response, they think it's better off in the long term. They will suffer losses in the short term, but they think it'll create the kind of crisis that could append the regional security architecture that could sort of create such chaos in which they think they will emerge victorious in the end. That's the same logic that Iran applies. And that is the same reason why Iran or sort of the MO of Iran, and that's the same MO of Hezbollah. So I want this to be clear that it's not like they didn't know what they were doing and it's not like, oh, where these are a bunch of, yes, people, the people who carried it out, the recruits, the foot soldiers who are treated like cannon (33/99)
fodder by Hamas. They obviously aren't at that strategic level. They're the guys with the guns. They probably don't even know. In fact, there are reports now that many of them did not know what they were training for. And this is part of the tradecraft that I'm talking about is you keep a thing a secret when you don't even tell your own people too much because you fear that it'll get to the other side and you won't succeed. That's sort of the strategic intent here. Did they think that they were going to be successful to this extent? No. No actor is. Everything, as you were saying earlier, Dmitri, there is the theoretical. So you do this wargaming on the drawing board and you say, hey, this is what could happen. You try to game it out as best as possible, but no battle plan, no attack, no offensive terrorist attack, insurgent attack, you know, conventional armed forces engaging in an operation. Do not know how things will play out once, you know, they pulled a trigger. So I think that (34/99)
there is a strong element of what we call catastrophic success where they have, they weren't expecting to be this good. Not to answer your question. Did they know about the concert that was going on the music festival? I think it was like what, two and a half miles. Very close. Yeah. Yeah. It is quite possible. They knew something about it, but I don't think that they had like a whole lot of granular intelligence. And they must have planned for a certain degree of resistance from Israeli security forces that they, they, they probably knew that these guys are distracted. There is a crisis going on involving the IDF. The focus is on the West Bank. We've been sending false signals. We don't want conflict. Okay. And the security over there, the security cordon or the security, if you will, force structure will not be what, you know, it is in times of, you know, tension. So there's some opportunity we will be able to make headway. The fact that they had paragliders, the fact that they also (35/99)
came via the sea and they, you know, they used bulldozers because look, when you use bulldozers, it makes a lot of noise. It alerts a lot of people. So they had to factor in that once we start this, the other side is going to kick into high gear and we're only going to go so far. So when they were able to go in, I think it became opportunistic. I think these are radicalized individuals who are willing. They know that they're going to. It would have been a suicide mission. It is a suicide mission. You know you're not going to come, you know, if you come out of this alive, you're lucky. So you're going on a suicide mission. You have to have a highly radicalized and conditioned mind for that. And usually these people are very violent. And so when they saw the opportunity, they went on a rampage and nothing makes sense of this. It's inhuman. It's barbaric and savage. But I'm trying to understand the mechanics, the decision making amongst these militants. You know, obviously there must have (36/99)
been some commanders and then followers and whatnot and they were broken up into cells because this is a large area. You can't just sort of go from one town to the other. They had to fan out. And so they looked at this and, you know, their radicalism drove them. They were fed hatred of Israel and Jewish people that they went on a rampage. And unfortunately they were able to do a lot of damage before they were interdicted and forced back. But by that time they've taken hostages. So I think that no one really knows what will happen. Actual kinetic conditions and battle space conditions, you know, shape what you can do and what you cannot do. So let's broaden the scope here. I don't remember exactly what words you used, but it sounded like something along the lines of, we know the Iranians are involved. What do we know about the scope of Iranian involvement here? Because the administration, the Biden administration and the Israeli government have both come out saying that we don't know if (37/99)
the Iranians were involved. Yes, Kirby said that Iranians are complicit in the fact that they've always, they have ties to Hamas, they help fund terrorist operations, etc. But do we know as a fact that they were directly involved in this operation? No, we don't. What is your view on the nature of Iran's involvement here and what is the nature of that knowledge? So that's a great question. As someone who's been studying Iran for a very long time, I can tell you that, and this isn't just Iran. This is sort of the nature of the intelligence and special operations business. You know, there's a report out there that says, at least there's one report, if not more, that the US intelligence detected surprise on the part of Iranian officials when they found out about it. So this was a counter to the Wall Street Journal report of Hamas and Hezbollah guys and even Iranians saying, hey, we were involved. I took it as a deliberate leak to shape perceptions. And so this Washington Post report was, (38/99)
hey, we have administration people saying we have no evidence on the contrary. Everything we know from our intelligence, you know, listening posts is that the Iranian leadership, when they found out about it, they were surprised. And publicly also the Iranians denied it publicly as well. Well, nobody will ever say that we're going to do this. Although the Iranian foreign minister meeting with Hamas leaders in Qatar, you're basically saying without hugging and kissing, there's a video. Exactly. And you know, those those high fives and whatnot, you're basically saying that, yes, we did it. We're just not saying it. Okay. So but anyway, let's go back to that intelligence. Who is being watched? Okay. Whose phone is being tapped? Who is under surveillance? Which leader? Because that matters. There is no way an operation of this kind will be known by Hamani himself. He's two way up there. It's a need to know basis kind of how many is the supreme leader, the supreme leader. Let's even drop (39/99)
down to the president of no, did his defense minister know interior minister know his intelligence minister know? I doubt it. Who knew it's not even the leadership of the IRGC. The IRGC is the Iranian Revolutionary Guard Corps, the Islamic Revolutionary Guards Corps. The elite ideological military force. And mind you, there is a parallel military force, which is more professional, less ideological, the regular armed forces. And they're a much bigger entity than the IRGC. Within the IRGC, we know that the Kuds force, which used to be headed by Soleimani, who the Trump administration took out several years ago. Exactly. Because look, it's like this, you have a corporate entity, you have a government. Who is designated as the interface as the manager in this case Hamas? I mean, this isn't going to be done by the top leadership. So if you're listening to the foreign minister's phone, or you're listening to, you know, someone even high up in the IRGC, chances are you're not, you're only (40/99)
going so deep into that leadership structure. This kind of operation is known by Soleimani's successor Ismail Qani, Brigadier General Ismail Qani, who, because Soleimani was made out to be this larger than life figure. And so he has big shoes to fill. He needs to demonstrate that, hey, this Kuds force, I can lead it. And I'm not sort of like one of the proverbial deputies to Soleimani. So he has to take charge on this. But even he is basically managing the Iraqi Shiite militias, the relationship with the Taliban, which is his experience, which is his expertise while Soleimani was dealing with the Arab world. This guy was dealing with the Eastern Front. There is the Assad regime that needs to be supported. There are Shiite militias that are in Syria that need to be maintained. There is Hezbollah, that relationship needs to be maintained. Hamas, Palestinian Islamic jihad, the Houthis in Yemen. This is all his portfolio. So operationally, he can only know so much. Okay. He has, you know, (41/99)
subordinates who are dealing with the tactical on a day to day basis. So imagine you're sitting in the Supreme National Security Council meeting in Tehran. You have the president, the supreme leader, the IRGC, the regular armed forces, everybody, you know, in that top political and military leadership is there. What are they discussing? Are they discussing a plan to attack Israel? That would be bad tradecraft if they did that because they have to assume that they're being listened into, or at least parts of it. So at that level, they say, yes, we need to support Hamas. How much money do you need? We will authorize it and, you know, off you go. And then it's the Quds Force commander, Qani's job to make it happen. Now, then who's planning this? Who's training? Who's providing that tradecraft? Where is it taking place? So are we listening to the right people when we say that, hey, they were expressed surprise? So I think there's nuance and granularity here that is really, really missed in (42/99)
the conversation. There is another element to this, that the Biden administration has been negotiating with these guys, and they have an interest in whether it's the Biden administration or a Republican administration. When you're in office, you don't want war. Okay. There's already a war. You have Ukraine. Now you have Hamas starting another war and it can get out of hand. You don't want war. So chances are there is a political imperative to sort of say, hey, you know what? Yes, the Iranians are involved, but we don't know. And it's safe to say that we don't know and we'll dig deeper into it. But not right now. Right now we want to be able to make sure this thing doesn't get out of hand. So in all these imperatives, in all these pursuits, the idea, the conversation of who knew when, what, who was involved, that conversation gets muddled. It takes place amongst us analysts and people who are studying this phenomenon and in the conversations that I'm having with you, but it's (43/99)
compartmentalized at the government level, if that makes sense. Sure. I don't know if there will be time in the second hour if this is really a conversation for a whole other podcast to look at and examine and help the audience understand where power resides in Iran, how that power is divided in ways that are very different than in the United States. And also the mission of the Quds Force in spreading revolution throughout the region, I can only imagine the kind of paranoia that must be overtaking the Israeli government at this present time considering the intelligence failures here. And they're sort of at this point questioning everything. Do you think that's kind of where they're at at this moment in time? They don't know what to believe. They don't know the scope of the strategy here. And then to that point, as we're talking about strategy, maybe the next question is, so one question is, I'm curious, just your thoughts on what is going on right now in the cabinet in Israel. And then (44/99)
the other one is, what do you think the strategy here is? If this was something that was directed by Iran, what is the overall strategy? What is the end game here? Okay, those are a bunch of different questions. And so I'm going to go through them one at a time. So I think that if you are Israel, and before this attack happened, your reputation, your self confidence as a very sophisticated intelligence entity, Mossad and the whole community, the whole Israeli intelligence community, IDF, Intel, Shabbat, Shin Bet, all of that was that you are on top of your game. The reason for that is that you even have an overwatch over what the Iranians and the Quds force are doing in Syria, hence the air strikes from time to time. And the introduction of weapons shipments, fighters and whatnot, you keep Iran off base. And on top of that, you have deeply penetrated Iran itself, you know, the elimination of nuclear scientists, the attacks on nuclear facilities. So you're really brimming with (45/99)
confidence. Then all of a sudden this happens. And you say, while we were focusing on these long distance threats. And on the verge of peace of historic peace with Saudi Arabia. Exactly. We took our eye off the ball in Gaza, where we needed to know. In other words, while we had the Iranians penetrated, they circumvented us and found a way to hit us back. And we were caught, you know, With our britches down. Yeah, I mean, basically sleeping on the job if you want to be, you know, blunt about it. So now, obviously, there's not just paranoia, there's a loss of confidence. And why does this matter? This matters because that's so this is the problem with the intelligence services and intelligence failures is that it once there is a failure, then that same entity has to take you out of failure and towards success. So it's a paradoxical situation. An entity that whose intelligence was net assessments you can no longer are not now suspect, you're asking them to say, What will it look like when (46/99)
we go into Gaza? What else do we know about, you know, what the Iranians are up to? You know, I have to assume, Dimitri, that Hamas didn't do this, knowing that it would be hit hard, like never before, without any planning. They have some planning going on. That's what these really need to know right now. What's that planning? And then is Iran going to just sit back and say, Hey, it was nice knowing you. You know, you're on your own guys, you know, know what do they have planned that hence the second front, hence the whole thing about Lebanon, hence the two aircraft carrier groups, the carrier strike groups that are now, you know, I think it was yesterday that the USS Eisenhower left Norfolk for the eastern Mediterranean. There's a reason for all of that because you don't know. And those are sort of the tactical and strategic implications of intelligence failure. So I think at this point, the Israeli cabinet is focused on how do we square this circle? We need those hostages. We need to (47/99)
secure those hostages and get them back safely. We need to destroy Hamas. We need to make sure that there's not a whole lot of Palestinian life that is, you know, lost in the process. That's just going to make it even worse for us. And I mean, if you're Prime Minister Netanyahu, you are now assuming my political career is over. I'm not going to come out of this. He can't assume that he can fix all of this. So he's assuming it's over. Now I just need to not be remembered as the guy who completely, you know, messed things up. I had divided the nation under my watch Israel was attacked by Hamas. Iran has found a loopholes into our system. I will be remembered for this forever. So he's trying to minimize damage to his legacy. And so these are sort of the very human frailties, both in terms of decision making, and quite frankly, capability that are constraining these Israelis. And it leads to making mistakes more because you're under intense pressure. You have the Biden administration (48/99)
saying to you and if I had to guess, you know, the Biden administration is big the conversation that look the readouts will not say this, but the real conversation that's happening is we know you need to go in and destroy Hamas. We support you on that. Make sure that this doesn't get messy. Because if it does, then we're going to have a hard time supporting you. Even today, the president's statement has kind of shifted this morning. He said, we need to care about Palestinian lives and he's getting criticized for that saying, oh, it's, you know, you're late in the game. You should have said this before the air strikes began. What an incredibly insightful analysis. I really love what you had to say about that. Yahoo. It's something that I hadn't even considered. And it's a perspective that I think is just invaluable. I also think when I think about the paranoia and the loss of trust in the intelligence that they're getting, I also think about what risks they're not willing to take in (49/99)
Gaza and will that result in them using air power much more than they would their actual military and how that feeds into the propaganda war, which also gets us into a conversation about the nature of propaganda and media and public relations today versus what it has been in the past, which is just something I think we could touch on in the second hour. I'm going to move us to that part of the conversation and I want to give people a sense of where I want to focus that discussion. I do want to continue this conversation about Iran because I want to understand also the complexity of the threat environment that Israel faces, what it would look like for a second front to open up in the north with Hezbollah and what you imagine the Americans are prepared to do in that situation and how this could really escalate. What are some of the worst case scenarios as well as what are some of the better case scenarios? How could this de-escalate? That's where I'd want to take us in the second hour. (50/99)
For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Kamran, head over to hiddenforces.io. Subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app just like you're listening to this episode right now. Kamran, stick around. We're going to move the second hour of our conversation onto the premium feed. Kamran, welcome back. Thanks for having me. So when we were moving to the second hour, I said that I wanted to really dig into this conversation about Iran because for me, we have the ongoing war with Ukraine. I can't help but feel like at the very least, America's adversaries and those who are looking to reposition (51/99)
themselves in a favorable way as this international rules-based order begins to fragment that they're not seeing these weak points and looking to take advantage of them. And when I think about the situation now unfolding in the Middle East and the fact that the United States has tried so hard to pivot out of the Middle East, having left Afghanistan in a way that was not ideal, let's put it that way. And they're already dealing with an open front in Europe with Ukraine that is making that more difficult, the pivotation more difficult. I can only imagine some of the ways in which this could go really bad if this war spills out and becomes a regional conflict that involves the Iranians. And now the United States has to defend Israel and has to get involved and how that exactly happens. And then you layer on top of that the conversation that we were opening up about media and the fact that there's no longer a singular media ecosystem. The United States is very divided. People are, of (52/99)
course, segmenting into their own camps here once again. So I'm curious, let's start just with Iran. What do you think the strategy here is for the Iranians and how do you think that this plays out, the likely scenarios in which this plays out? So starting points matter in sort of trying to understand what any actor is doing. Obviously, we can say, well, when did it start? Five years ago, 10 years ago, 20 years ago, there are different sort of obviously starting points. But let's look at what's happening in the current moment and try to understand what is the Iranian imperative. The Iranians, from my point of view, are operating from a position of relative weakness, significant relative weakness. The reason I say that is because they have a very bad domestic political economic situation. They are under sanctions. They hoped that with the nuclear deal in 2015 that a lot of their problems are going to be solved without making too many compromises with the United States. Then the Trump (53/99)
administration nixed the nuclear deal and slapped more sanctions than there were even before. And so that's where they are. They're being squeezed from the outside. They have had massive protests since 2017, at least 2016, 2017, culminating in the huge uprising after the killing of the young lady, Masa Amini, who was the hands of the morality police for allegedly not covering up as per law. And we saw year-long protests. Those vulnerabilities are still there. All these vulnerabilities exist for Iran. On top of that, the Iranian regime is reaching an inflection point. I've been writing about this for the past five years that, and I've been saying, Iran is in the throes of evolutionary regime change. Which the process is gaining momentum as time goes on. Why? Because you have an 84-year-old supreme leader who's sort of controlled from a high level the various power centers and factions and whatnot, and this edifice that we call the Islamic Republic of Iran since 1989. That is a long (54/99)
time. The guy who founded this clerical regime, this theocratic sort of Republican hybrid regime, only ruled it for 10 years. You know, Ayatollah Rouh al-Akhmeni, who overthrew the Shah. This is Khaminiz Republic for all intents and purposes. His imprint is all over it. And we have seen new power centers emerge in the country. And we can go into many details, but for the purposes of this conversation, I think, what we have is the clergy weakening. The idea that the doctrine of the will-e-at-faqih, which is that, you know, the doctrine upon which the Islamic Republic is built, that the political system should be overseen by a jurist, by a religious scholar, should be theocratically overseen. Yes, there will be some elected officials here and there, but the clergy has sort of this central position. I think that doctrine is no longer popular. And it's even lost currency amongst its own supporters, given the factionalization. And I'm not talking about the Iranian left or the reformists. (55/99)
I'm talking about a split amongst the conservatives. There are so many factions amongst the conservatives that started out under when we had former president Ahmadinejad, Mahmoud Ahmadinejad, take office. And now we're like, you know, that was 2005 and we're in 2023. We're almost 20 years out from that. In 20 years, there's been a lot of fermentation. The Iranians feel vulnerable. On top of that, they have had a conundrum. And this isn't something that has, you know, just started. It's been going on for a long time. And in fact, it was one of the reasons why they decided to negotiate with the Obama administration, because there's only so much money they have. Okay, they are an oil exporter, you know, and their economy generates a certain amount of revenues. And a large chunk of it goes to foreign policy power projection. It's not easy. It's costly to support Houthis, Iraqi political groups, Shi'ite militias, Hezbollah, Hamas, all these guys. How can Iran do this, continue to do this? (56/99)
And it has made gains. It has really deeply penetrated the Arab world and has created a contiguous sphere of influence from, you know, the Iraqi-Iranian border, the Zagros Mountains, all the way to the eastern Mediterranean. And in recent years, with the Houthis in Yemen, they now have a significant outpost on the southern tip of the Arabian Peninsula, where the Arabian and the Red Sea meet. This cannot continue, and they cannot ignore the domestic political economy at the same time. 70% of all Iranians are young people. They were born well after the revolution. Nobody remembers the revolution. So that revolutionary fervor is gone. So how do you maintain this regime? And you need to balance both foreign policy and domestic political economic prerogatives. They had maxed out, which is why they thought, hey, let's do a nuclear deal, make some compromises, get fresh cash into the system, and then we should be good for, you know, whatever, another decade maybe. And then we'll figure it out (57/99)
later. That didn't happen. So in your view, it wasn't necessarily clear to the Iranians what would come out the other side of that nuclear deal. It wasn't necessarily that they entered into the deal as a way to buy time, but eventually go nuclear and maintain the revolution. There was a genuine sense of we're still figuring things out. Yes, because no actor can be certain about the future. Everybody has their forecast, but it's only so you got to keep updating it in the light of new realities. That's why maintaining constant situational awareness in, you know, intelligence analysis is so important. So they needed to figure it out. They thought that that would be a solution. The estimates were that they were going to get like $150 billion because of the nuclear deal. Let's say it was even half of that. That's a lot of money that could help them improve economic conditions on the home front and continue to push hard in the Arab world. And mind you, there's sort of a historical thing (58/99)
here. And this is what I call geo sectarianism. It's the Shia Sunni sectarianism at a geopolitical scale. It's not religious at this scale. It's more identitarian. And it's about identity camps locked in power struggles. So I've written an essay for, you know, New Line's magazine, which is our New Line's Institute sister organization a few years ago, in which I basically laid out how since the year 1000, when Sunni power in the Middle East was crumbling and we saw the rise of Shiite actors every 500 years, we've seen this phenomenon repeat itself. Why is it 500 years? I don't know. But the historical data shows that, you know, every 500 years or so, you have the rise of Shiite power. It happened because back then the Abbasid Empire, which was the main Sunni Empire in the region, it crumbled, gave rise to independent Sunni polities. The Sunni world was in fragmentation. We saw a few different Shiite entities emerge on the Arabian Peninsula in Mesopotamia in North Africa. And obviously (59/99)
that the Sunnis regained their posture, the Ottomans came in. But then again, 500 years later, you in the early 1500s, you see the rise of the Suflid Empire as, you know, a major rival to the to the Ottomans. And it was a Shiite Empire centered in Iran. 500 years later, roughly in 1979, you see the rise of Islamic Republic of Iran. Now, the Iranians know their history. Okay, they look at this, the Iranian strategists look at this and say, this is an opportunity that's not going to come again. And we have to exploit it to the maximum. Right now, the Sunni world, the Arab world is weak. And our only competitor is Turkey. But this time, unlike in the past, it's us who dominate Syria and Iraq, not the Turks. And we'd like to keep it that way. And therefore, this what I'm saying is this is important for them. And you have to also bear in mind that Iran is an anomaly in the region from a sectarian point of view, and from an ethnic identity point of view. The Middle East is Arab majority. (60/99)
Okay, Sunni Arab majority, there are Christian Arabs, there are Shiite Arabs, but by and large, this is the nature of the region. Whereas Iran is a Persian entity. And even on the level of Muslim religiosity or even Islamism, the political ideology, it's Shia. It has a different flavor. It is a competitor to Al Qaeda and ISIS, in that sense. So they face all these constraints. So this is why I'm saying that they're operating not necessarily from a position of strength. So let's bring it back to where the situation is contemporaneously. In the here and now, you have the Abraham Accords taking off. You have several Arab states signing on to it. And that process was culminating in what would have been a deal between Saudi Arabia and Israel, which you just pointed out earlier in our conversation. This is bad for the Iranians. I mean, if that happened, then it amounts to a massive geopolitical reversal for their interests. And so I think that this is them trying to, through Hezbollah, (61/99)
through Hamas, trying to create a crisis for the Arabs, crisis for the United States, crisis for Israel and Turkey, that basically prevents their position from being weakened. And I think that this is one of the goals that they hope to achieve, because there's always a strategic objective behind all the tactical details of how much money goes to Hamas, what training. And they're all sort of, you know, serving a strategic objective. And this is their strategic objective and forcing a situation where the United States basically does a deal with them. And they want to be able to get out of sanctions. So if they create a crisis, the goal is to create enough of a crisis to get the Americans to say, Okay, guys, what will it take for you to cooperate and knock this off and we not have, you know, the situation get out of hand. This is what they're trying to force. They're trying to force a negotiation. They're trying to bring the Americans to the table. They're trying to bring the Americans to (62/99)
the table. But in the meantime, it's not just a table. In the meantime, that's the short term benefit. They want sanctions respite. But in the long run, this is just like the nuclear issue. Give some concessions. Don't mothball the nuclear issue. Keep the program running. Eventually you'll get to the, you know, you cross the red line and you're going to be a nuclear state. But in the meantime, use it to extract concessions. Same thing here. Create chaos. Eventually this region will become more and more favorable for your foreign policy objectives, because there's going to be so much anarchy, the old order with crumble. Remember, Iran is a revisionist power. It wants to alter the regional security architecture. And I think that even if Iran tomorrow somehow, you know, once this evolutionary regime change evolved, you know, plays itself out and the clerics, it's not so theocratic. It's going to be like China. China had a understanding with the Nixon administration, but it did not become (63/99)
a friend of the United States. It pursued its own independent foreign policy. And I think that's the model that the Iranians have in their mind is we just need to reduce tensions with the West. We need to extract concessions. We don't want to be hostile. There are a lot of people in Iran who don't like the theocracy, who don't want, you know, to be, you know, forcing women to cover up and all this obscurantism that comes with a theocracy. But they are deeply Iranian nationalists. They have a deep sense of history. In other words, they're not going to give up what they see as their geopolitical moment. And even if tomorrow there was another regime, it's not going to. I unless there's a catastrophic conflict along the lines of what happened to Nazi Germany and Germany turned into a democracy afterwards, barring that. I don't think that any regime, however moderate it becomes in Iran, will ever give up on these assets in the region, this fear of influence that Iran has created. Wow. You (64/99)
know, I was thinking towards the end of that answer that I wanted to try to hold your feet to the fire here while we have people listening and ask you if you could come back for an episode dedicated on the history of Iran and your vision for where it's going in the future. Because your knowledge on this is really just it's enviable, but it's I just want to I want to learn from you as much as possible while you're talking. So I don't necessarily want to maybe I'll ask one more question about what the region will look like if we have time towards the end. But I want to circle back to the more immediate question. They want to bring the Americans to the negotiating table. The Israelis right now are bombing Gaza. I don't know if they were again, we're recording this on Sunday. I don't think that they've moved troops. I don't think the IDF has rolled into Gaza yet. It's not clear when and how they're going to do that, the extent of it. Again, it's unclear the scope of American support, the (65/99)
pressure that the Americans are applying on the Israelis. I also wonder to what degree the Americans are applying pressure on the Chinese to the extent that the Chinese have leverage over the Iranians, because the Chinese would obviously be very concerned about the Americans bombing while infrastructure in Iran. How do you see this right now here now, evolving over the next days and weeks, whether it's Hezbollah, whether it is, I don't know. I mean, how do you see it escalating or de-escalating? So it all depends on what happens in Gaza. It all depends. And I mean, notice there's a lot of and again, this goes back to human frailties, bad intelligence, difficult situations to deal with. There's almost sort of like, you know, if you look at the reports from a higher level as to what these Israelis have been doing, hey, evacuate northern part of Gaza. Well, how can that happen? There's one million people, you're forcing them into an even smaller box, you know, than 25 by seven, which is (66/99)
miles by seven miles, which is total. Because the Egyptians don't want them. The Egyptians certainly don't want them. You look at there are certain raids that are conducted by the IDF forces to try and retrieve the hostages. Hamas is saying, well, a certain number of hostages have died because of that. The Israelis are trying different things because they don't. It is difficult. They don't have a game plan. They don't have any good options. You don't have any good options. Yes, if you listen to the noise, the global noise, it is either that Hamas haven't conducted a very savage barbaric attack or look what Israel is doing to the Palestinians yet again. But both those things, those views are sort of taking away from the difficulties that Israel faces. Look, if this was easy, Israel would already have been pushed in. You know, we're now what, more than a week out and there is no ground offensive still yet. As of now, I mean, may happen the next minute. I don't know. But we don't have (67/99)
one. Why? Because it's very, very difficult. And I think it's going to be. And you see the, you know, Secretary Blinken going around the region trying to get some diplomacy going. I think that what's happening here is, or what will likely happen is that the, then we haven't talked about the Russians. Let's connect the Ukraine conflict with this one. Let's try to do empathetic analysis on Russia. What does Russia need right now? So there are a lot of rumors going on that, hey, did Russia have something to do with this to distract from the Ukraine war, distract the United States? I don't think so. I seriously doubt that Russia supported this or provided any assistance because they have a relationship with the Israelis. That's a relationship that the Russians value. They do not want that, you know, gone. And the Russians, you know, flirt with Iran, but they don't share their ideology. It's a marriage of convenience. So I think that what Putin may have said to the Iranian leadership, (68/99)
because Iran is helping them in Ukraine with weapons and whatnot, that gosh, we could use a Middle Eastern conflict right now, you know, because they're stuck there and they want to push forward, and they're not able to make headway, because they're not able to force the Americans to come to the table and say, We have all this area. We've created the land bridge from Donbass to Crimea along the Sea of Ozov. Tell Zelensky, we won't move any further, but these areas are ours. And that's let's call it a truce. Let's have an agreement here. That agreement is not taking place. So they have to push militarily more harder. In Ukraine, it's they're finding it difficult. But now, I think if I had to imagine and I'm being facetious here, I just want to lay that out for your listeners that if they said to the Iranians, hey, you know, we could use a Middle Middle Eastern crisis right about now. I think the Iranians probably said, Let's see what we can do about it. Not because they did it, they (69/99)
were going to, you know, deliberately do something for the Russians, because they are already working on these things. They already know that they have all these strategic plans and tactical operations in play. So now that there is a crisis, Putin is looking at this and saying, and if I had to sort of bet, I would say that, you know, the Kremlin signal to the Biden White House that, Hey, looks like you have two wars now. It doesn't have to be this way. We can help you. You can't talk to Hamas. You can't talk to Iran. We're friends with Iran. We can mediate in this, but it's not going to come for free. So can we talk about us helping you figure this one out while you help us reach a settlement? You know, you don't want the Ukraine war to begin with. Your own people are saying, How long is this going to go on? So can we come to some form of a grand arrangement or quid pro quo or something like that? So I think we need to watch for what the Russians are doing because they're going to be (70/99)
key. The Iranians rely on the Russians quite a bit. You asked about the Chinese. I think the Chinese are a very small player. They're overrated. I mean, they have serious financial problems going on right now that are turning into political problems for Xi. Their economy isn't doing well. They like to go in and benefit from what others are doing. So just to give a sense of how the world has changed in just a few months. It was only a few months ago that we were all talking about, Oh my God, the Chinese have, you know, displaced the Americans as the great power in the Middle East because they broke a deal between the Iranians and the Saudis. So much for that. You know, the Iranians turned around and while they were doing this, they were also planning this. So the Chinese are not a major player. Yes, that we can use their help at a tactical level to press the Iranians and they won't do it for free. They won't do it for free. You saw Mr. Wang Yi come out, the foreign minister of China (71/99)
come out and talk about how, you know, the Palestinian issue cannot go on like this. It has to be resolved. Why is he saying that? Does he may care about the Palestinians? But he's a Chinese foreign minister. He cares about Chinese national interests more than Palestinians. So it's safe to say he's using that to say to the Americans, we could stop talking about this, you know, and we can help you because what did Senator Schumer try to get from G when he met? He said, you know, we need you to support Israel right now. And the Chinese turn around and said, Well, you know, we're going to support the Palestinians verbally issue statements. So they're going to say, you know, all that pressure that you're applying on us in terms of our access to high technology and, you know, the limits placed on doing US companies to do business with us. If you can be flexible on that, we can be flexible on this. We can help everyone wants something. Everyone wants something. And so this is the problem. (72/99)
And this is the nature of revisionist powers. They know all these things. Those powers that are not revisionist want to maintain, you know, the existing order, you know, and as Americans as Canadians as as Westerners, we want the international rules based order. But while that is a cherished value for us, our opponents, our adversaries want to tear it down, and they have the means to tear it down because this is such a fragile thing by nature. It requires actors to play ball to cooperate with one another to comply with those rules. And creating chaos is the way for revisionist powers. And they have the upper hand, unfortunately, because it's easy to create chaos and harder to stabilize. And so this is why Iran exploits Fili. The Chinese exploit this as well in their own way. And the Russians are masters of this. Absolutely. Also, the Chinese have seen what a disaster the Middle East has been for the United States and for the Soviets. They don't want any part of it. So who comes out (73/99)
where as a result of what's transpiring today? Who benefits from it? And how do you see it? I mean, again, I've asked you this a number of times, so I don't want to keep pressing. I tend to think about scenarios and likelihoods about what's most likely, what are the various likely possibilities? What are the scenarios that you see here and who comes up or down in those various scenarios? Let's go through the list. The United States wants to restabilize the situation, which means that these that the underlying problems aren't going to go away. So it's kind of like, can we not have this right now because we're dealing with Ukraine and we're dealing with great power competition with China? We don't have a solution for the Middle East. There is none to be fair to ourselves. But we want to stabilize. So I think that the path towards stability again depends on what happens in Gaza. Is Israel going to be successful in regime change in Gaza? What does that look like? How long will the Israelis (74/99)
have to reoccupy Gaza? How do the Egyptians cooperate with that? Do the Iranians accept the loss of Hamas in Gaza at this moment and not open a second front? Do the Iranians think that if Hamas is neutralized is removed from power, neutralizing means, you know, zero Hamas. Hamas will still exist in some shape or form because it's a social movement as well. But if Hamas is removed from power in Gaza to be very specific, will that satisfy the Israelis? Or do the Israelis then say, hey, we are successful in doing this? We're going to turn north. We need to get rid of Hezbollah as well. And otherwise, if we don't break with this pattern, if we just sort of go in clean house and kick the can down the road, then we're emboldening the other side. So the Iranians will look at this and say, OK, these guys are weak. We can add more pressure. Iranians also have constraints. They want to keep Hezbollah as an insurance policy for any future direct Iranian-Israeli confrontation, especially. Sami, (75/99)
did they're reluctant to use them? They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. But if a settlement allows their assets intact, they'll accept a certain loss of Hamas. But we've seen them rebuild as well over and over again. So I think that that's the kind of scenario that I'm looking at at this point. Not knowing what else is coming because the situation is so fluid, it's hard to make a forecast or even a scenario. So it seems that that wouldn't be something that the Israelis would accept or would want. I was just going to get to that. Right. And then my next question is also, though, the Iranians also don't want a two-state solution. That's the last thing that they want. Right? Presumably they want the grievance to maintain so they continue to exert (76/99)
influence. So a two-state solution would also be in the interest of the Israelis if they could get the security guarantees that they want, but they haven't been able to get them. So I don't know. Go ahead and you said you were about to get to the, that the Israelis wouldn't be satisfied with that. I don't want to interrupt you. So I was listening and I wrote about this in my piece, the one that published a couple of days before the Hamas attack. Everybody knows that the two-state solution is not going to be realized anytime soon for the foreseeable future, given just the sheer complexity of the situation. But what did Crown Prince Mohammed bin Salman say in his interview with Fox News? He said, it didn't say I want a state. He said, I want to make the lives of the Palestinians better. I want to improve their situation. He wasn't talking about Gaza because he has no control over Gaza. Iran has more influence over in Gaza. He was talking about the West Bank. So it's concessions. So the (77/99)
non-revisionist powers want a solution that can show marked improvement for the Palestinians. The Iranians, on the other hand, demonstrate that they are championing the Palestinian cause, maintain their influence by showing that they can attack the enemies of the Palestinians. So they show they're standing up for it. So the actions of the United States and its allies inadvertently work for the Iranians. And so I think that the Iranians also know the two-state solution is not there. Right now, their goal is they're not looking at a solution. Their first order of business is to preserve as much of Hamas as possible, basically not have necessarily a second front open up with Hezbollah because it's very unpredictable. They got lucky in 2006 with the Israeli Hezbollah war. They don't want to take chances. They are setting up shop. They're not consolidated themselves in Syria, where the Assad regime is very fragile. They want to be the kingmakers in Syria. They know Assad is not going to be (78/99)
there forever, but they want to be the ones bringing the next leadership. They're playing the long game. They're looking to improve their position for the long term. Exactly. Iraq is also a place where they have a lot of problems that they need to manage. They're looking at the West Bank because the West Bank is tanking. And that's the price for the Iranians and for Hamas. And so let's say Hamas is neutralized in the Gaza Strip. It still exists in some shape or form in the West Bank. Its leadership is overseas. And if there's chaos in the West Bank, then the Iranians have a chance to expand into that theater. This is far more important than any solution. All they have to show to the Palestinians to keep them within their orbit or the people that sort of look up to the Iranians amongst the Palestinians. Most of them are supporters of Hamas or Pij. Is that we're there for you. Look what the other side is doing. It's not getting you anything. And so this is the unfortunate situation, the (79/99)
inability of the United States and its allies in the region to resolve or move the Palestinian-Israeli conflict forward, show some progress is working to the advantage long term for Iran and its agenda. So how do the Israelis move forward and manage this really just disastrous, catastrophic, giant, complex mess that is their entire security environment? What do they do? If you were advising the Israelis, what would be a realistic way forward for them? Because it genuinely feels like, and it's not just today. This has been the case for a long time. There's no good solution and everything is just moving them more towards a more complicated, worse situation over time. So what is the way forward for them? Again, I can offer analysis and forecast, maybe some policy recommendations. But I think that first let me say what I think the Israelis will do. And then let me talk about what I think they should do. I like that. Let's do that. So the Israelis need regime change in Gaza. That's clear. (80/99)
Everybody knows that, how it happens, when it happens, those are details. It's not easy. It's easier said than done. And it'll be a long time before they deal with that. Right now, they want to do that, focus on that. The US is helping them make sure that his bullet doesn't jump into this. And the US is doing that how? By implicitly threatening the Iranians, by bringing two aircraft carriers into Mediterranean? By putting pressure on them saying, hey, if you do that, then we'll be forced to jump in. And jumping in means attacking southern Lebanon or jumping in means attacking Iran? Air strikes. I mean, you have to telegraph to the Iranians that all bets are off. They should know that, let's put it this way, they should be uncertain of what the US needs to do. Iran is behaved as an unpredictable power. The Israelis are saying, we're unpredictable as well. And so is the United States in order to force the Iranians back. So they're saying, they're having the Iranians wonder, I mean, that (81/99)
are these aircraft carriers going to just strike at Lebanon? Are they going to strike in Syria as well? Iraq? Maybe even Iran itself. Is there also a level of sort of like madman theory when it comes to Israeli policy here that the Iranians might think that they could have pushed the Israelis to a place that they don't want them to go? And that might discourage them? Or would that actually be great for them to have the Israelis attack them directly? So again, in the short term, everybody's risk averse. Even the Iranians as a revisionist power is risk averse. They don't want them because they don't know the outcome. It's a gamble. It's a high stakes maneuver. And they don't know that they're going to come out on the other side with their hand on top of the situation. It's a risky move. But eventually, if their calculus is, if Israel goes all out in the long run, it works for us. Because there's, there'll be more chaos. The more there is chaos in the region, the more we benefit. So we (82/99)
don't want to get hurt. We don't want our assets to be hurt. But if it happens, then we still win. Do you see what I'm trying to say here? Sure, I do. And so the Israelis are looking at first order of business Gaza, make sure Hezbollah doesn't open up a second front. If it does, then we have a contingency plan for it. But let's say they don't. Let's hope they don't. We focus on that. Once we have Gaza neutralized, then we will focus fully on Hezbollah. Because this is an intolerable security threat on the northern border. Hamas is a much smaller weaker group compared to Hezbollah. Hezbollah is literally the armed forces of Lebanon. It is more powerful than the Lebanese armed forces. And then we will exploit their vulnerabilities because look, there is also the Hezbollah has its hands full as well. Lebanese economy is doing very bad. It's tanked. They need to keep a certain number of forces in Syria to maintain Assad in power. So it's not like they have freedom of movement either. So (83/99)
this is what the Israelis are hoping to do. And eventually, I think the best way to deal with from an Israeli point of view, the best way to deal with Iran is to neutralize its assets one by one in a way that they can manage. They know they can't deal with it in Syria. It's too big. But they don't have any guarantees that they will succeed against Hezbollah either. Because they already have the history of the 1982 Lebanese invasion. They have the withdrawal in 2006. The war that didn't go anywhere in 2000, sorry, in 2000, the withdrawal 2006 war that the Israelis could not impose a military solution on Hezbollah. And so they have that. So they need the time to deal with it in an effective way. Now is not that time from an Israeli point of view. Now, what do I think that the Israelis should do? I think that the Israelis, and it's very hard for them to do this because they're politically divided on this, extremely politically divided, is that they need to sit down and say, if Hamas is (84/99)
taken out of the equation somehow, let's say regime change. Hamas is weakened. Let's just say Hamas is weakened because it still exists in the West Bank. It'll still have some presence in Gaza. Can that be a moment in which the Israelis and mainstream Palestinians, the Palestinian Authority, can sit down and work out an arrangement and say, let's finally get the Palestinians some measure of autonomy. I hesitate to say an independent state because that's such a big thing. That's not realizable in the short term. But can they make sufficient progress? Can they give them more autonomy and reach a settlement? Again, because the PA, FATA, the PLO are in meltdown, that is very hard to do. So I would say every crisis provides opportunities. I think this is an opportunity, while it's a crisis, while it's ugly, but I think that it also has embedded within it the space and the time to think outside the box and try things that have not been tried so far. Again, I say that with lots of caveats. (85/99)
The Israeli political spectrum is divided. The Palestinians are divided. You need two coherent partners to move towards that. That's not there. But if the United States can steer in that direction, it's going to be a long-term process. But if we can see movement, maybe this place becomes manageable. And because the key here is to limit the space and time that Iran has to exploit the situation. I see. So in your mind, both the Israelis and the Americans right now are aligned in so far as wanting to end hostilities as quickly as possible, create some kind of stable foundation so that the Iranians have a limited opportunity to exploit it, and then from there reassess for the long term. Whereas the Iranians want to keep the wound open for as long as they have to in order to get concessions so that they can end up on higher ground. And that's sort of where we are right now. Exactly. How sensitive is the Israeli government to the public perception of what's going on right now in Gaza? And (86/99)
how does that factor into how you think that they're going to approach this and whether or not they're going to continue the bombing, the scale of the bombing, and whether or not they're going to send troops in? In other words, that it's not just about the political pressure they're getting from other governments and capitals, but also the awareness of what the perception is publicly and how that factors into everything else and the pressure that it applies on other governments. I think they're very highly sensitive to that. They have to be. Israel is a serious power. And you don't become a serious power by being sloppy, by being sort of ignoring the obvious. Look, for the longest time, they have relied on strong American support. And that has been a function of the fact that for the longest time, there weren't voices inside the United States that would talk about the Palestinians in the media in, you know, the public square, definitely not at the government level. It was Israel is an (87/99)
ally and we need to have a solution. You know, Bush wanted a solution that started the Oslo negotiations or the peace process. Clinton signed the Oslo Accords. He tried to reach final status. You know, the Bush administration was caught up in 911 and post 911 world. So there was sort of a status quo as far as American support for Israel. Now you have voices in the American media, in the American public square coming out that are critical of Israel. Those voices are gaining strength. I have a hard time believing that the Israelis are not sensitive about that. The fact that I believe that even the Biden administration in its conversations with the Netanyahu government is saying, guys, it's very difficult for us to just support an all out war in Gaza because of the cost. It can cost me politically. I mean, Biden's own party has a strong sort of left and hard left leaning constituency. If he's going to be reelected, or if the Democrats are going to hold on to the White House and build upon (88/99)
the Republican disarray in Congress, they need to keep themselves coherent. And I think that the Israelis are being told that we're with you. You tell us what you need. Make this as quick as possible. Make sure that you limit the number of Palestinian lives lost because if this gets ugly, then we can't promise that we can continue to support you because it's going to get really hot for us as well. So I think that the Israelis are very mindful of this. You see how the debate is taking place when Western media, international media is interviewing Israeli leaders, civil and military on this. You see the tensions. Why is that tension there? That tension is there because the Israelis know that global public opinion is now growing. If you have the Chinese, the Russians, country like South Africa, it's president coming out and saying you need to solve the Palestinian problem. They know that their room for maneuver has shrunk. So I think that they are really mindful of this. And this is what (89/99)
is frustrating for the Israeli leadership because they have to balance what the international mood sentiment with their own divisions because the Israelis are divided as well. So right now everybody wants Hamas gone. Palestinian rights are secondary. But for Netanyahu and for the, let's say, forget Netanyahu right now because Netanyahu's political career is at the very least uncertain and possibly over. Okay. Whoever is going to inherit the political right has to deal with far right groups. I mean, this government has really far right people who are, who can be easily called extremists in the Israeli government. How do you balance their demands with the international mood? It's a very difficult position for the principles in the Israeli government. And one of the things that we'll see right now is while this unity government has come about, the opponents of Netanyahu want to use this opportunity to push him out. And therefore, I wouldn't be surprised if there is infighting within the (90/99)
Israeli government over what to do as time goes by. Because right now everybody's on the same page saying, hey, we got attacked. We need to respond. This is our 9-11. And one understands that. But it doesn't take long for that camaraderie to sort of descend into disagreements and differences. I really appreciate that you brought up politics and I want to encourage listeners to go back and listen to our episode with Henry Olsen. And this is something that we've been talking about on the show for a long time, that the division within American society, political division, it does not come without costs. And that it makes it increasingly difficult to operate a foreign policy and manage foreign threats when that traditional division has existed in American society between domestic politics, which were open to negotiation and foreign affairs, which there was a bipartisan consensus for, is breaking down. And I think that's all part of a new political realignment in American society. Last (91/99)
question for you, is this a wake-up call for America's military and strategic planners? And if so, how do you think this is going to affect the strategic direction of the United States and the urgency with which they might seek to reassess and improve upon some of the long-standing issues that have maybe been highlighted initially by the war in Ukraine, like the defense industrial base, which presumably would be stretched even more in the event of an open war in the Middle East. How does this factor into U.S. strategic planning long-term, do you think? I think that this is just the latest in terms of wake-up calls or sort of red alert situations. So let me step back here and sort of say the world was simple until 1991. It was a Cold War. It was a bipolar world. And the United States federal government was built and designed to do that, deal with the Soviet Union. All our agencies that we, you know, the most powerful security, national security agencies came out of the Second World War (92/99)
and basically were consolidated fighting the Cold War. After the end of the Cold War, the United States government found itself in the position of being the only superpower with some rising other regional powers, other global powers. China was rising at the time and now China is a major economy in the world. India is rising as we speak. The world is getting complicated. Russia is weakening, but it's still there. The European Union in 1991 was created and it's also has its fault lines and its limitations. And the rest of the world that was unstable has become more unstable. The nation states that emerged after the First World War and after the Second World War, those are weakening. You see the rise of non-state actors, strategic vacuums being emerging. So the United States has not really rejiggered its institutional architecture to deal with the world where it is still the superpower, but there are other power centers in the world that are emerging. And in the meantime, the United (93/99)
States is going through an unprecedented evolution on the domestic political front. We talk about right and left. That's always there. It's becoming more polarized, but the right is fractured, especially after the Trump presidency. The left is not too far behind in terms of fracturing. It's a generational thing. You know, once the Nancy Pelosi's of this world, the Bidens of this world move on, a younger leadership comes in. You're going to see a crisis emerge as to who speaks for the left. Right now, there's a lot of people who we can say are far left that are emerging, younger congressmen and congresswoman. And so you have a domestic situation that is constraining the United States. You have the fact that you have a governmental structure, a strategic outlook that is dated that needs overhauling. I think this is going to be the challenge of the 2020s, maybe even the 2030s. I can't see that far out. But I know that it's not going to be resolved anytime soon. So absolutely, the United (94/99)
States federal government needs to rejigger itself to be able to deal with, institutionally deal with these problems. So the last time this happened was FDR because of the 29 stock market crash, the economic crisis, then world coming out of World War One and then you had World War Two, then the Cold War. But FDR had four terms as president. Now we only have presidents with two terms. So we need domestic political consensus for this. We're not there yet. So we're in a very sort of long stretch of putting out fires, if we will, before we can get to a stage where we have a strategy to manage the world. What does China look like given its crises? And, you know, we're still thinking China is a big threat, but China has vulnerabilities. What does that net assessment look like? Russia is weakening. We've already seen this in the South Caucasus with how the map of the South Caucasus has changed since 2020. And the Turks are rising in the Black Sea region. Iran, we've talked a lot about how (95/99)
Iran's intentions are and Iran's reality is. We haven't talked about India and how India is projecting soft and will project hard power in the future. There is a new world emerging out there unfolding right before our eyes. And I think that it will require serious leadership from both Republicans and Democrats to be able to, for the United States, to be able to deal with it. Look, the United States is not declining per se. The United States needs to evolve. It's held back by all these problems. And somehow we need to figure our way through it. There isn't a power that is challenging the United States in absolute terms. You have powers that are creating problems for the United States. We need to analyze and diagnose the situation globally very clearly and move forward. I think we can do it. I think we have it, but it's going to be, you know, a long-term effort. I couldn't agree more. There was an excellent series of closing remarks. The need for a new Democratic consensus is actually (96/99)
the subject of the newsletter that publishes today. We'll have published yesterday if this comes out on Monday, as my intention. And we talk a little bit about that history from agrarian populism through the progressive era to FDR and the need for something new. I think we are really, I mean, I completely agree with your analysis. And I think in general, your analysis today has just been really high level. And I really appreciate it. I really enjoyed this conversation. So thank you again. I will have a link in the summary section to the New Lines Institute's website. For people who heard your analysis today and also found it as useful and enlightening as I did, how can they get more of it? What can they do to learn more about your thinking, to get access to your writing? What is the way for people to do that? Follow me on Twitter. I'm not a big social media person just due to the nature of my job. And probably I'm from an older generation that's not so social media savvy. But follow me (97/99)
on Twitter. I have a very active LinkedIn page. I post stuff on Facebook, but not so much. But follow, you know, www.NewLinesInstitute.org and www.NewLinesMagazine.com. And you will get this kind of different thinking. We'd like to believe it's different. And you'll get more of this. I also write for GeopoliticalFutures.com as well. I publish other outlets like the Wall Street Journal, Foreign Affairs, Foreign Policy, National Interest. So yeah, I write a lot. And so you can't miss me. I don't know if I'm going to be useful all the time. But yeah. No, look, I speak to a lot of people. You don't need me to tell you this. I'm going to speak to a lot of people. This is definitely one of the better conversations. So your Twitter handle is at KamranBohari. It's spelled exactly as your name is spelled on this episode. So people can just combine that together in no space. And that's how they can find you. Kamran, thank you so much. This is really wonderful. I appreciate you taking the time. (98/99)
And on a Sunday as well, we're really fortunate to have had this conversation. Thanks for the opportunity, Dimitri. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (99/99)
What's up everybody? My name is Demetrius Cofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. What you're about to hear is my recent appearance on the Grant Williams podcast hosted by my good friend, Grant Williams. Grant was kind enough to have me on his show to discuss some of the more aberrant developments in American politics, society and culture and how they feed directly into our concerns about national security, the public interest and the future of humanity on this planet. I was pleasantly surprised at how much this conversation seems to have resonated with his audience and I am very excited to share it with all of you today. In it, we discuss my concept of financial nihilism and how it continues to explain much of the aberrant behavior that we see in financial markets, the corruption of our politics (1/99)
and the transformation of the American political economy from an imperfect capitalist meritocracy to a banana republic, the inter-elite competition between the old ruling class and a new cadre of Silicon Valley elites and tech pros, the fragmentation of our information ecosystems and the breakdown of consensus reality, the dangerous disintegration of the global security order and its implications for further international conflict, the broken social contract and the general moral decline that has been taking place in America. I encourage all of you who aren't already subscribed to Grant's podcast to take this opportunity to do so. He's been a wonderful friend to me over the years as he has to many people and he has done more than anyone to help elevate and amplify my thoughts and ideas on financial nihilism and the challenges that our societies face in this new century. You can learn more about his podcast at grant-williams.com where you can also sign up to one of his three content (2/99)
tiers that include his podcast, newsletter, long-form video interviews and online community. And with that, please enjoy this wonderful and important conversation about American society, our financial markets and how to navigate and make sense of the challenges of this moment with my friend, Grant Williams. Dmitri Kovinovsky, my friend, welcome back to the show. It's been way too long. It's great to be back, Grant. Thanks for having me on. Yeah, it's funny times we find ourselves in. I mean, I'll get to the reason why we're having this conversation now in a second. But first, since we last spoke, you've become a father. So congratulations on that and welcome to a very different world, my friend. Thank you. Yes, we were just talking about before we started the show and it's wonderful. I'm very happy. It's a wonderful experience to live through, tiring, exhausting, but very, very, very fulfilling. Yeah, I think that's the perfect way to encapsulate it. But I think for both of us, the (3/99)
fatherhood aspect of this is certainly one of the things that kind of kicks up some of the things we're going to talk about today. And just to frame this conversation for the listeners, this conversation is going to be very free-form in nature because it's really about feelings and just a sense that I'm getting. I know you've had for a while now and the switch that flipped me was the Trump coin. Something happened to me when I woke up on that Saturday morning and read about what was going on. It took me to a dark place. It took me to a place that I haven't been, despite having kind of written about the way the world is heading and chronicled it for many years now and done presentations on it and all kinds of things. And I wanted to talk with you about that because it was your framing of this concept of financial nihilism a few years ago, which really gave me some scaffolding to put around this. And since you framed that beautiful phrase those years ago, being able to look at it as (4/99)
financial nihilism has helped me make sense of it and helped me to understand what's unfolding. But still, I feel like we've reached a point now where it's kind of taking over. So I just wanted to talk with you again today about this concept and about what's happened since we last spoke and where the world is going. Because more and more of the people that I've spoken to and kind of shared my thoughts and concerns about this have echoed them right back to me. And these are thoughtful people who I've had these conversations conceptually with for years now. And all of a sudden, those conversations have become very real and people are feeling it rather than kind of thinking about it. So let's go back to the idea of financial nihilism because there will be people perhaps who aren't familiar with that concept. So talk a little bit about that, how you framed it and what you kind of mean by that phrase. Yes. So I've always defined financial nihilism as an investment philosophy that views the (5/99)
objects of speculation as though they were intrinsically worthless. And it's a departure, as I've described before, from Carl Popper's view of reflexivity, later made famous by George Soros, whereby there is some, albeit at times, tenuous relationship between price and value. It rejects that entirely and views value entirely as being subjective. And in a world of subjective value, the things that really matter are narrative and flow. And the fervent adherence and faith of the community of hodlers and the convexity of the potential returns, the YOLO, those are the core ingredients for understanding financial nihilism. And I think that in order to understand how this, again, investment philosophy for lack of a better term has evolved and spread over the years, you have to understand the transformation that's taken place in crypto because crypto began as an ideological movement based in a view of bettering the world. It was the solution to the corruption in the aftermath of the great (6/99)
financial crisis. And what has happened is that that is no longer what drives prices in crypto. What drives prices in crypto is the potential for financial returns. And that, I think, is something that we increasingly see in other parts of the economy and in society, so much so that the president of the United States launched his own cryptocurrency as a sort of concession basket that anyone can put money into, post the transaction on the blockchain or in this case on Solana's blockchain, and prove that they've given the president money. The president's wife is on the same thing. And this is part of a slow evolution towards a more corrupt society. This isn't some anomaly. We have various forms of corruption that contribute to this kind of nihilism. The Biden administration used lawfare to go after its political enemies, most notably Donald Trump. And I have begun this process. I've talked about the twin crises, the two seminal events of the 21st century, which was the illegal by (7/99)
international law invasion of Iraq. And it was important that it was illegal because it was hypocritical. And it undermined the very argument for unipolarity, for the rules-based liberal order, for American foreign policy and the beneficence of American empire. And the 2008 financial crisis and its aftermath, which once again showed that the elites in society were willing to change the rules. Everything they said about why they were doing, what they were doing, turned out to be just a story. And that goes back to the nihilism. It's just a story. It doesn't matter. It doesn't mean anything. In that sense, it's also very post-modern, which is why you also see as a core framework in financial nihilism, this concept of narrative investing, which is that it's all just a narrative. It's not actually true. We just have to believe it hard enough and get enough people to believe it along with us, and the price will go up. And price is the signifier. Price is the thing that matters to us. That's (8/99)
what we're all coalescing around, and it's money. It's ultimately the worshiping of money. And our society has become so corrupt and so wealth obsessed that the target has become money and not progress, not growth, not moral excellence, not something else that could result in the betterment of society and a sustainable path towards the future. And that's what I find so alarming. That's why I also went into a very dark place on that day. It's interesting to hear and wonderful to hear also the experience that you had, because I also got calls from friends. And the best people I know in my life, there are also people that we didn't, I didn't speak to that day that are also good people, but the only the best people I know had this reaction. People that really, really, really actually cared about the world, about the country, about the future. And I think that says something. And I'm not sure it's hard for me to suss out what percentage of this country really is in this sense embracing of (9/99)
the nihilism. But it's a sufficient amount that I find it rather alarming. Yeah, I mean, that's so beautifully put. I mean, that's a podcast, all in itself, though, we could just clip that and be done with it. But there's so many places I want to dig into with you. And that's, I guess to start with, there's this sense of cyclicality about this, this sense of we've been here before, you know, everyone talks about the roaring 20s and this kind of hedonistic approach before the Great Depression and this kind of blow off top. And you know, you and I both believe as encyclicals, we're willing to believe that mankind is cyclical and therefore history is cyclical. And you know, there's been this feeling as I've gone through the last number of years, and really, you know, I can't give you enough credit for this. And I'm going to keep hammering on this. It was that framing of financial nihilism that kind of almost accelerated my understanding of what was going on. And I think once you can find (10/99)
a way to put things that you feel into something quantifiable, it helps. And as it turns out now, and in the dark days that I've had since, hinders. But I gave a presentation, I guess it must have been two years ago now, which was all about trust, trust in society, trust in money and the decaying of that trust. And at the time, it was an important topic to me, I'm not saying the presentation was important, but to talk about this with people was important. And I put this thing together. And not really knowing what the response to it was going to be, because it was a personal thing. I wasn't normally if I go to give a presentation, I try and work out what the people want me to talk about. And I create a presentation that's appropriate for the people in that room. But I felt so strongly about this that I went against that and I put together a presentation that I felt people ought to be exposed to. And I really didn't know what the response was going to be to that. And I gave that (11/99)
presentation four or five times. And each time the response was actually very powerful. And people could feel what I was talking about and had felt just the same way your financial nihilism kind of frames stuff. For them, this presentation had been something of a jumpstart to help people perhaps think about the role of trust in society and trust your money is trust, crederic credits is from the Latin to believe. And so when I think about whether this is all just inevitable, and it was always going to happen. And we just now reach the point where it's going to happen. I keep coming back to this idea of trust. And this all the things you laid out there, after, particularly after 2008 and the invasion of Iraq, you know, the trust just evaporated. The trust evaporated in leaders after Iraq. The trust evaporated in financial regulators after the crisis. And, you know, for many people trust evaporated in Obama, because nobody was punished for Oh, eight. So how do you see trust? Where do you (12/99)
see its role in the causes of financial nihilism? And where do you see trust being now? And what happens to it next? How do we get it back if it's completely gone? Or what is there left to erode in it before we reach that capitulation phase? Yeah, I mean, obviously, trust is very important as is faith in the institutions, in the leaders, the people that have governed. And I, you know, it's interesting, as you ask, if it's completely gone, my answer to questions that are framed that way is almost always well, it's not completely gone. But we're actually, I do think trust is completely gone. I don't think anyone really trusts the previous power structure anymore. There might be people that have benefited from it, that are closer to the source of power. And so they just like it and it works for them. But I don't think trust is there. I think that fundamentally what's happened and there's something again that I've talked about quite a bit on the show is that the social contract is broken. (13/99)
Again, in the context of the two examples I gave earlier, the war in Iraq, the war in Iraq broke the international contract, so to speak, the contract that allowed the United States to be the leader of an alliance of global free states. And it transformed us into an empire that used aggression and force to get its way. Again, the rules didn't work for us. We couldn't get a United Nations resolution to invade Iraq. So we went ahead and did it anyway. And the 2008 financial crisis was a breaking, I think, of the social contract. And it accelerated the inequities in society and moved us further away from meritocracy to the kind of patronage system that we are now living in. Again, this issuance of a cryptocurrency meme coin is significant, not because it signifies necessarily a meaningful increase in the amount of corruption in society, but in the form that that corruption takes, moving from a clandestine form of corruption, where we've always kind of assumed that corruption has existed, (14/99)
but there's always been an attempt to kind of hide it to now where it's a kind of open larceny. And that is indicative of a banana republic. And in banana republics, there is no trust. And I think now that you say that, I'm reminded of that tweet that I wrote, because I did say that I think part of the challenge that people have who look at this and may genuinely not think of it as such a big deal, kind of like whatever, Trump is kind of doing this thing. But so what? Look at Biden, look at Hunter Biden. He was on the board of Barisma. What did he know? Biden put him there. I think that what people who haven't lived in low trust societies don't necessarily realize is that when you lose trust, when you lose faith in institutions, and you hand over power to populist demagogues and increasingly rely on figures to lead you, whoever those figures may be, you can't get that back. Like once the institutions are broken, you can't just fix it again. And a great example of that is Argentina. (15/99)
Look at the example of Argentina. You know, I've thought about this recently because I recorded an episode on Argentina. I have another one that I'm doing with the head of their doge department, Federico Sturzeneger. And one of the critical periods for Argentina was the 1930s. Now, the Great Depression obviously hit Argentina exceptionally hard because it was an export driven economy, and it was a commodity driven economy. So the depression hit them harder and earlier. But unlike the United States, Argentina, one experienced a coup in 1930. And now maybe that was because their democracy was more fragile than the United States, because democracy wasn't necessarily sort of inherent to the Argentine experiment as it is in the United States. But the United States also almost experienced a coup in 1930, 33, 34, which is medley butler, blew the whistle on, and it was the sort of Wall Street push, a fascist coup. So countries are very fragile. It may have happened to the United States, but it (16/99)
happened to Argentina, and you see that Argentina remains a basket case. And even now, in order for Argentina to try and undo all the bureaucratic red tape and all the problems that have arisen from these state edicts and all the price controls and everything else, you need a very charismatic and sort of cinematic, larger than life, mythical figure like Millet to come in with his chainsaw and afuera, and all these things to get people to move in his direction because no one believes in the state. And this is also, again, there are other examples. There's a wonderful example of some Russian anthropologists who tells the story about how in the Soviet Union, they used to, whenever a Soviet leader would die, I'm going to butcher the story, but they used to place their remains on the Kremlin Wall, and for years, they didn't actually put their remains on the wall. They put it inside the wall, but the newscasters continued to just say one thing, and reality was something totally different. (17/99)
And I think that's also a big part of the story, which is that the organs of propaganda no longer work. The official narrative storytellers have lost all credibility, and they didn't realize that they lost that credibility in the course of doing so to the point where we are now, I think, in a stage in America of rapid decline. And I want to caution myself here because I don't want to sort of be spreading undue pessimism, though I must say that I've generally been optimistic, though I've recently gone to a dark place as you have. I think that the ruling class, so to speak, has not, really has, I don't even know if they still understand it, quite frankly. They ran Hillary Clinton in 2016, which was obviously a giant red flag. They wanted to run Biden again. They wanted to keep Biden in for as long as they did, which was just like they were totally, it's almost as if they felt that they could control the narrative. Even though they clearly weren't, and most Americans could see that (18/99)
plainly. And so I think that we're past the point now. I think they've lost control. But what we do see, and what people like you and I see, is that we see a power grab here. There's a new set of elites who want to come in and use the government for their purposes. You saw them all lining up. Mark Zuckerberg did his whole new PR tour with Joe Rogan and everybody else. What we're seeing is the rapid formation of a new power structure in America. And what's absent in all of that is a conversation about the public interest. What is in the best interest of the majority of Americans? Is it the creation of a patronage state that allows for certain large tech companies to centralize power or to use the government to pad their balance sheets? Or is it to strengthen free market capitalism, strengthen democracy, set guidelines or rules around some of these really powerful technologies that increasingly sit in the middle between reality and our perception of it, and which obviously has a very (19/99)
consequential impact on our democracy and how well it works. These conversations aren't happening. And there's no one stepping up with credibility in a platform to speak on behalf of the public, in my opinion. I think for the most part, what I see is people who are aligning themselves with the power structure, with this new power structure or with the old power structure. And that's what we saw in the previous administration, people that were aligning with the old power structure, lawfare against President Trump, former President Trump. And now we see a new form. And it's very concerning that there isn't what seems to have happened. And I'll just leave it there. It seems like we've really lost our way and there's been moral decline in America. So when I spend as much time thinking about as I am, and I'm down in Australia at the moment to see my daughter. And so it's the summertime here. It's the perfect time to go for long walks and just think. And I've been doing a lot of that as I'm (20/99)
trying to get over my jet lag at strange times of the day. But the cyclicality of all this and almost the inevitability of it. And I keep thinking about our mutual friend Neil Howe and Bill Strauss's The Fourth Turning. And I keep thinking about the impact that book had on me when I read it, that getting to know Neil and being able to talk to him about it and ask questions about it had on me. And this feeling I had that because I read the book and because I've been fortunate to spend so much time with Neil talking about it, I understood it. And because I understood it, I was prepared for it. And I felt bad for the people that hadn't read it. And I bought so many copies, you give to people and I've recommended a book to everyone I can. And I felt that by reading that and understanding how these turnings work, would prepare you for it. And here I am, I'm in the middle of The Fourth Turning. And we have been for years and I've recognized that and I've spoken about it and I've said the (21/99)
phrase, you know, we're in The Fourth Turning. Suddenly it seems to mean so much more to me now. And I, when I think about what Neil and Bill wrote about The Fourth Turning and how the first turning comes after that. And that's what, where the hope comes from. When we tear down these institutions, you know, conceptually, you kind of kind of like make sense, but living through the part where those institutions are torn down and more importantly, I guess, feeling the reasons why those institutions are being torn down. I find to be incredibly turbulent, incredibly unsettling, even though I'm prepared for it. So I try to imagine what this feels like for someone who has no framework, who hasn't read The Fourth Turning, who doesn't have a way of understanding what's going on, even if it's difficult. And I keep coming back to consequence. I keep coming back to the lack of consequence for anything, any action that doesn't seem to be a consequence for it. And that, once you take away (22/99)
consequence for bad actors, it just accelerates everything because without consequence, there's no meaning. There's no meaning. And also the phase that we're in where it's like, okay, we may as well grab as much money as we can from this. You know, you talked about technological progress. In the 60s, it was to get man to the moon. People weren't making themselves rich from getting to the moon. It was a collective desire to do something meaningful. Now, AI is a perfect example. It's all about getting rich from AI, you know, and the deep seek thing comes along. And we can talk about that later if you feel that as a partner. But consequence, let's talk about how important consequence is and where we got off track. Because I've been trying to figure out where we got off track. And it may well be the Iraq stuff. It may well be the WMD and the lack of consequence for anything that went on there. It was Iraq. But what are your... Okay, so let's talk about consequence, how that happened and (23/99)
why it's so important. Yeah, because Iraq, and look, my experience of Iraq at the time for whatever reason was one where I understood that this was a diversion. I've talked about this on the show. I was very lucky because I was also a student of foreign policy. And my professor before the Iraq war explained exactly, he understood the sectarian divides in Iraq. He explained why this was such a bad idea. He had worked in the administration, he'd worked in the defense department. So I was fortunate in that regard. But the Iraq war was a blatant abuse of power on a scale that I at that age had never experienced in my life. I don't know enough about American history to be able to point to another example. I don't know of another one where the president of the United States centralized power. Again, we should also remember that the passage of the Patriot Act, the tightening of financial regulations around money laundering, et cetera, post 2001 was a dramatic departure from the world that we (24/99)
lived in before that, given the experience of going through the airport security. So that was just one thing. That was the backdrop. And you could argue for those changes, for the same reason that you could argue for some of the changes during the COVID-19 pandemic. In other words, you could make an argument that you're doing this to protect people. There was absolutely no argument for the invasion of Iraq that can possibly be made that I think is charitable. At the end of the day, the Bush administration lied to the American people, the press was complicit in doing so, and the entire nation was driven to a war of aggression against the sovereign nation that undermined the entire rules-based liberal order, undermined the United Nations, which was the key international institution for global cooperation and global international law. And it not only did it undermine the trust of Americans, which led also to many veterans returning home with PTSD, many of whom became disillusioned with (25/99)
American policy and with politics, but it also deeply unnerved our adversaries. It unnerved the Russians and it unnerved the Chinese. And so I think you have to begin with the war in Iraq. And it also set us back. Remember, it isn't just that we lost trust. The Bush administration was much more focused on China when it entered in 2000 than it was when it exited in 2008, because the two wars in Iraq and Afghanistan consumed American foreign policymakers, not just in the administration, but in the think tank community, in academia, in the press, everything became about the Middle East. And during that entire time, America's adversaries were growing stronger. Fast forward, again, the 2008 financial crisis is also very important, but fast forward from the invasion of Iraq to today, and the world looks dramatically different. The security picture for the United States looks dramatically different. So much so that the smallest detail, like the story around DeepSeek and the competency (26/99)
relative to JEP, GPT01 preview model, has literally unnerved people invested in Nvidia, the whole market sold off, but it didn't even sell off that much, by the way, just shows you how fragile, how fragile the bull market is and people's optimism. And also, again, it brings us back to what is it that people worship here? Like, what are we doing? Is there no sense of national mission? Is there no national project? And so anyway, the answer to your question is, I think it does, you have to look at the 2003 invasion of Iraq. That was peak American empire. And we're in a dramatically different place now. We're in a multipolar world, quasi bipolar, and it's not clear what the final order will look like when we get through this turning, if you want to use Neal House framework. As I think that through, and I think you're absolutely right about this, but sticking with this idea of consequences and the lack of them for that, it seems to me that what that's done is the worst, most dangerous (27/99)
thing. It's emboldened the leaders in America to believe that they can push and push and push, and they can use America's hegemony, declining as it may have been at the time, and it may be now, evermore. And I think nowhere is that perhaps less understood, but more important than with the freezing of the Russian central bank assets. That was a blatant power grab, a blatant flexing that really had no basis in law, certainly in the international understanding between countries that reserves should have some kind of sanctity about them. That military might and the lack of consequence has moved on to financial might and lack of consequence. So what happens to you think to me, Tric, because somewhere there is a consequence. There is a consequence of this, and it will manifest at some point in the future. It feels to me like it's brewing now in perhaps the treasury market. That might be somewhere where the consequence might be shown. But when you think that through the procession of lack of (28/99)
consequence, where does that procession go for you? When you say lack of consequence, do you mean lack of consequence for the freezing of the reserves? Well, I mean the fact that- Lack of consequence for the value of the dollar? I think what I mean to be clear, and you're right, I probably frame that as clear as I could have done. The lack of ability for other countries to push back, the fact that nobody could go and strike when America took that move and froze those assets, no one could do anything about it. There was a powerlessness. The rest of the world could palpably feel. You could see it. The only response they could possibly have, it seems, is to buy gold and not even sell treasuries, because that would put them in the spotlight, but gently buy fewer treasuries and try and quietly slip out the back door while America was on the stage, on the bully pulpit, telling everybody what they could and couldn't do. Yes. So I think what I'm getting from what you're saying is also, is the (29/99)
United States now relying on financial tools in the absence of the coercive power of hard power, because we're no longer the unipolar power. I don't know how long the United States will be able to continue to sanction countries without consequence to the value of the dollar. I think the reason why I feel like this answer is complicated is because I feel like so much of this also is tied up in the global order and absent an international war. I don't necessarily see consequences for them. Okay. That in other words, how do I say this? I also want to suss things out, because I think the issue for me is less about whether the United States was morally correct in sanctioning Russia, because we already established the real moral failure was the 2003 invasion of Iraq. The invasion of Russia, in my opinion, I don't know where you stand on this, but I've been very clear about it. I think it was not just morally incorrect, but unjustifiable based on the enlargement of NATO. I also think that a (30/99)
lot of people don't hold the Russians to the same standard that they hold themselves. We talked about how the invasion of Iraq was illegal. It was an illegal war. It was also horrific for the Americans. The blowback was enormous. There doesn't seem to be the same sort of accountability to the Russians for their actions, or I think also a lot of folks see the Russian invasion as having been some sort of 3D chess move by Putin. But I think this is a very long game and it's going to be a long term. It's going to be awful for the Russians. Not to mention that for Russia, they are now closer to the arms of the Chinese. It's been bad for the United States, and I also do think that long term, it is possible for the US relationship to Russia to strengthen, for Russia to re-enter the Western fold. I think long term that's perfectly possible, because their long term interest aren't with China. I'm kind of diverting from your question a little bit. No, but that's the beauty of this conversation. (31/99)
It goes where it goes. It's just fascinating to talk about these things. Yeah, but partly because I don't, I guess I still don't quite understand the through line of consequence. Okay, so let me try and do a better job. I'm mostly doing a lousy job. No, no, it's okay. It's not an easy subject. But for me, I've just got so many thoughts in my head, and I'm trying to get them in order, and that's why talking to friends like you will help me do that. And so the questioning of my questions is a really useful thing to help me frame my thoughts correctly. I think what I'm trying to say is, is this idea of lack of consequence. From 2003, there was no consequence because everybody was involved. Blair was involved, Bush was involved, all the people that fell in behind were all involved. And so when the lack of WMD, when the unnecessariness of this whole invasion truly came to light, enough high powered, well placed people were likely culpable that it just got brushed under the carpet and (32/99)
nothing was ever done about it. And nobody was punished. There was no, I mean, yes, we had inquiries, but they were a whitewash. And so people were angry because they felt like, think what you will about humankind, particularly in the West, there is this deep seated sense of fairness and justice and accountability that we feel. You know, we're taught our whole lives and we're taught that we live in these countries where the rule of law is paramount and that's the basis of everything that is built upon this rule of law. And so people felt that viscerally and it changed the way they felt towards power, towards their leaders. And then we had the 2008 financial crisis. And again, too many well placed people, nobody was punished for it. This is lack of punishment. And I think in Western Judeo-Christian society, there is this sense that punishment is appropriate when people transgress. And so as we've gone through, whether it be kinetic warfare, whether it be the ignoring of international (33/99)
norms and orders, or whether it be the enrichment of oneself at the expense of others, and then the little people feel powerless because all those elites that you talked about earlier on have their inquiry, they all wag their fingers at each other. A few people pay a few fines, but nobody really gets punished. This idea of consequence, I feel, has fed directly through into the cryptographed this idea that, well, what's going to happen? Right? I mean, look at the Hawk tour girl recently, right? You know, a classic rug pull and it's now become a rug pull. It's not become fraud. It's not become anything. Nobody has been punished for anything major, any headline making enterprise. There's no punishment. And so this idea that there's no consequence just accelerates the decline because people who would ordinarily never dream of committing anything that was remotely close to breaking the law will now be tempted because it's like, well, what's the worst that could happen? You know? So again, (34/99)
it's a meandering stream of conscious, unfortunately, but I just feel like there's a line of lack of consequence that runs right through all this to the point where people don't feel like doing something bad will lead to a bad outcome anymore. I agree with that. So just to tie off the conversation about Russia, I think that because the way I view it, the sanctions put on Russia were an attempt to create consequences for the Russians for their invasion of Ukraine. So for me, the more interesting line of inquiry there is what was different about America's response or the way it was interpreted than it would have been, let's say, 20 years ago. And I think that speaks to, again, 2003 and the hypocrisy. It was just much more difficult for the United States to make a moral argument against Russia's invasion of Ukraine because they did it in Iraq. So I think that's sort of like where I view it. And I think also because the United States is no longer a unipolar power, it just has less teeth. (35/99)
And so that may also explain why it decided to use sanctions as a tool to try and do something, to punish the Russians, to show this was not allowed. This could have also been an opportunity, again, not to stray too far from the initial question of consequence, which I think I understand that where you're going and we can discuss it. I think it was also an opportunity to rewrite the ship of state and to create a new consensus with American allies about what the future will look like because the United States is not a unipolar power. We need to offload some of the security burden to the Europeans and NATO. I am someone who believes in NATO. I do not want to see NATO disbanded. I think it's an important security architecture for Europe, but it has to be a security architecture that's going to work. And by work, I mean, it's something that the American people have to support. And it has to be constructed in a way that's sustainable. And I think the big failure to me since the 2022 (36/99)
invasion of Ukraine is the perplexing inability to scale basic military production, to support the Ukrainians and to support them in a manner that would allow a US-backed peace that was on the best terms possible. We're not even talking about what led to the war, what could have been done in the months before the invasion to have possibly arrested the war. So anyway, that's my view on that because I do think that the security picture is terrifying. The invasion of Ukraine accelerated this deterioration and the possibility of things going south with China also are very scary. Now, in terms of this idea of consequence and peep these scams all over the place, there's so many scams. I mean, Coffee Zilla does such a great job highlighting this stuff. I also see a lot of the thing that's also for me just shocking is the scale of the debauchery that I see in many of the new media platform, which right now, the mainstream media. There are people and news, whatever you want to call them, news (37/99)
organizations centered around influencers that have so much influence today. And their views and takes are so disgusting and so immoral on so many issues that I think this also speaks to the moral vacuum, the collapse in the institutions of old because the hypocrisy, right? We say we believe in one thing, but then we don't actually do it, whether it's the Bush administration invading Iraq, whether it's the media saying one thing and the reality is something totally different, you know, the horse dewormer of Ivermectin as an example. I mean, one of the reasons I think that Joe Rogan has been so radicalized is because he experienced the mismatch between reality and perception in his own particular saga during COVID. So this moral collapse of the traditional morgans of propaganda and consensus making in society has opened the door to something else. But rather than something positive fill the vacuum, what's filled the vacuum is greater depravity. And I think that's the darkness that I (38/99)
encountered with the launch of the Trump meme coin followed by Melania's meme coin. And I think that's, if that's what you're describing, I see that. And we saw that back, remember, I mean, Elon was way ahead of the curve with, you know, taking Tesla private at what was it, 420 and the lack of consequences. But again, I think that on the financial side, that financial nihilism was born out of the 2008 financial crisis and the lack of consequences coming out of it, all right? And the drop to zero of interest rates and the expansion of the Fed balance sheet and so many of the things that we thought were not supposed to happen actually happened and there were no consequences as a result of it. And that's what breeds the nihilism. That's what breeds the cynicism. And we haven't made any progress in that direction. We just keep going down the road of the Banana Republic and towards a patronage system. And a patronage system is not compatible with meritocracy. And those systems breed a lot (39/99)
of resentment. And I'm very concerned about that. And I think that's probably what you're also describing. Yeah, I think, you know, being, it's funny, this idea of being bearish about markets as they've climbed coming back to 2008 and what happened after that and this lack of consequence, you know, I think this idea of being bearish is coming more into focus for me now personally, personally. And it's not about markets. It is a bearishness for society. It's a bearishness for what happens when we reach that moral vacuum that you talk about, you know, this idea that if number go up becomes the only thing that matters, you know, that's what leads to only fans and all these God awful women putting themselves on the internet, proudly boasting of how many men they can sleep with in a day and all this stuff for attention. And you talk about influences. It is a complete and utter moral vacuum. And I think I'm only now starting to understand what my own bearishness was really all about, because (40/99)
it's not that I haven't invested in in all these years. It's not that I haven't, you know, I've just sat there on a pile of gold, you know, and can't so most people think about you, right? Yeah, yeah. We're the shock out of my hand, waiting to repel the zombies. It's not about that at all. For me, it's been an attempt to try and talk about something other than what's going to go up tomorrow. And that to me has felt important. It's felt that there are plenty of places where you can talk about the number going up. There aren't so many places where you can listen to people like you have meaningful conversations with people about meaningful subjects that don't end with a, so just to distill that, here's three letter acronym that you need to buy to make money out of this conversation. And that you use the word moral vacuum there. And that's what it feels like to me. It feels like we've entered this moral vacuum. And a lot of that, I feel, is because money has become to your point in your (41/99)
opening monologue, which was quite brilliant, by the way, the one thing that matters to anybody. And I don't know if it's chicken or egg. I don't know if the, if the morals go and so all that's left is money, or money becomes so important that all the morals go. But the two are inextricably linked. There is no question about that in my mind. So I wonder if you can help me figure all those little bits of that chicken. So again, I'm floundering here, and anybody listening to this, I apologize if I'm talking complete nonsense. But this is so real to me. And these thoughts are flying around my head. And I don't have that many people that I can talk to to try and make sense of it. And you happen to be one of them. So apologies for anything random. Go wherever you want with it. And I'll try and hang on for dear life. Yeah. So I guess a few thoughts. One is that I just think part of this isn't all that complicated. When money becomes free, the economy and the financial markets come to (42/99)
resemble more of a casino. And that's, I think partly what we've seen. I told you before we got on here, I got a notification coin base about, I don't have it now up there, but it was something about like there's still a chance to enter, make a trade for a chance to win. And this is a brokerage app. You know, Robin, who was doing the same thing, it's the gamification of investing. So part of it's just that. Again, that's the debauchery. That's the, again, what is the term of affection crypto degen? Degen, yeah. But I think there's also something else that's important here, which is there's this, we all are familiar with the concept of exit liquidity. And what we've seen is that this idea of exit liquidity has elevated itself to this idea of exiting the system overall, that whether it's Bitcoin, whether it's some other cryptocurrency, whether it's a meme coin, whatever it is, if you can make it, just make enough, you can exit. You can exit the rat race. You can exit the feudal manner in (43/99)
which you've been assigned. And you can achieve escape philosophy. And there's a kind of sort of religious resonance there too. And what that really also suggests is that, or it assumes is that you can live and you can exist and you can be happy outside of the systems that support life on this planet. And there's nowhere you can go by the way, there's nuclear war, or if we have more high tech warfare, if we have EMP attacks or cyber attacks in this country, because by the way, World War III is going to look very different than World War II. Yeah. World War III is a world where no one's safe. The entire world is a battlefield because everything is connected. And so I think that's particularly scary, that also I think aligns with a trend that has occurred over years now, increasingly every year more and more, which is that people just kind of check out and they just assume that someone else will handle it. Mike Green and I have talked about this. In fact, I've said before that Mike Green (44/99)
deserves some credit for my term financial nihilism because it was a conversation that he and I had in 2019 on a long walk from Union Square to a diner in the early hours of the night. And we talked about a lot of things and it was out of that in 2019 that I developed this concept of financial nihilism. But one of the things that I remember distinctly him talking about in that conversation that we had was about how, whether it was passive, because of course that's the area where Mike has made I think one of his most important contributions, whether it's passive where you just assign the discretionary allocation intelligence to another investor to the market. You're just riding off of their pricing decisions or whether it's just kind of following the GPS on your phone, even as you're driving off a cliff. People have increasingly checked out of making the decisions themselves or participating in a manner that is critical for the functioning of society. And democracy is another one of (45/99)
those areas. Yes, people vote, but there's a lack of seriousness which people take their role as voters in this country. So I think that generally speaking, and again, I'm actually hesitant to say this because I think that doesn't fully explain things because of course there are many MAGA voters who feel that they're taking a lot of responsibility in their vote. But maybe they're what I'm also sensing in the case of MAGAism and Trump populism is maybe too much of an embrace of the entertainment factor. And maybe that's sort of what I'm also touching on, which is that we're kind of in it for the lulls. A lot of people are in it for the lulls and that also is part of it. That implies a level of sort of checking out, right? I'm not particularly concerned about how things are going to work out. I'm actually here for the show. Well, that's also scary. It's like, because we're not Argentina. If Argentina collapses tomorrow, it actually has no impact on the rest of the world. Right. Like (46/99)
it'll have some impact on commodity prices and natural resource prices, but there's no security architecture built on Argentina. And there's no embedded national security state that could go buck wild and launch a preemptive world war in Argentina. Like we are still the most powerful state in the world. And if we withdraw from the rest of the world rapidly, that's going to have massive consequences. And if we decide to go full Hitler, not suggesting in any way that there's anyone just to be clear, because I don't want people to think that I'm somehow saying that that's the case here. I've never, by the way, bought into that argument. I didn't say that you have to point that out, but you just said you're like, yeah. I think it's important though, because I never actually bought into it. I think that our democracy is at risk, but not because of who's in the White House now, I think for systemic factors. And I never bought into the argument that Trump was a danger to democracy when he was (47/99)
first elected. And in fact, what we saw was that the party that was more willing to use lawfare was the Democrats and not Trump. But I do think that if we lost control of our country, if we had a coup d'etat, or we elected someone to office who centralized power, who was very interested in doing that, and maybe Trump is interested in doing that today, but not necessarily for the same reasons, regardless, that person would control the most powerful military on earth. And so these are not a games. I remember also that during the invasion, of Ukraine, there was a video circulating. I'm sure there was lots of this kind of stuff, but I saw it and I had tweeted it and I said, this is absolute nihilism. This is an example of it. The whole conversations about escalation, it might have actually not been in the initial invasion. It might have been during the peak escalation fears about nuclear when Putin was making some of those threats right around the time, maybe also Nord Stream, the Nord (48/99)
Stream pipe breaking or being bombed, attacked. There was a video circulating of a sort of, you know, fake video of this Putin character dancing to house music with a cake in front of him and a giant red button and like crushing the red button. And that's just so incredibly disturbing. Like this is our life. Human beings have been on earth for at the very least 100,000 years or more. Civilization has been around for a very long period of time, not in the grand scheme of things, but a long time, that we could just kind of flirt with it and play with it and kind of make jokes about it like that. And that people generally have this kind of, I don't know, yo lo view of a lot of these things. It's disturbing, but we keep getting used to it. I'm already used to the fact that Trump launched the meme coin. I'm over it now. I've forgotten about it. I'm on to the next thing. And that also, that sort of chaotic sense of progression in our society just leaves, I think, a lot of people feeling (49/99)
uneasy. That's something's going to go wrong. And the consequence of something going wrong in this particular version of human civilization is bigger than at any other time in our history that we know of, unless there's some law civilization that we're not aware of. Well, it's interesting to just come back on a few little bits and pieces of that, which is really interesting. I come back to this idea that the feelings like those you and I are having are very much generational. Like exes, boomers and above, I think feel this way. I think we're a lot more prone to feeling like this because we've been around longer. We've seen more. We have seen inflations. We have seen huge recessions. We've seen political violence and the IRA or the red brigade. We've seen all this stuff. We also lived through consensus reality where there was a popular culture and we all had a general idea of what was and what wasn't. Exactly. Right. And we are used to there being consequence. We are used to bad actors (50/99)
being prosecuted. And I'm curious, the generations, I remember that meme very well. I think you shared it and I remember seeing it on your Twitter feed. But there's a generation who have grown up where everything is a video game and you can destroy worlds with no consequence and Grand Theft Auto, you can rape and murder and steal and loot and all this stuff with no consequence. And this feeling like is this whole thing just a game? Is it all just a video game? And again, this is just, I'm just talking with the things that you're saying that are resonating with me. This idea of exit, my generation, I remember my first day, literally my first day at work, thinking to myself, I missed the excitement of having a job and traveling up to London and being in the city and all that stuff. But I remember that my goal was to be able to buy a house and pay for my house and exit and be able to retire and not have to worry about that kind of stuff. And so when we talk about exit liquidity, the (51/99)
amount of exit liquidity that has been generated in meme coins and crypto and all these get rich quick schemes that has been left on the table. And a mutual friend of ours told me a story about someone that worked for him who made a ton of money in one of the crypto booms. And he said to this kid, look, just pay off your mortgage, buy your house, spend some of that Bitcoin and buy your house. At least then if something crazy happens, you don't have to worry about it. And the guy's response was like, are you insane? Why on earth would I give up some of my Bitcoin to pay off my house? I mean, that's just ludicrous. Subsequent Bitcoin went down to $13,000 and then back up. Who knows what he's done? But this idea of an exit, it feels to me as though you're in the game and you don't want to exit the game because if you're in, not in the game, the game's going on without you. And it might cost you everything to participate. Absolutely brilliant observation, such a brilliant observation. It's (52/99)
also that your identity is wrapped up in owning these call options. Right. It's part of a dream and that dream is tied up in meaning for you in your life. So I think that's also absolutely true in crypto. But the thing about dreams, right, is... We have to realize them at some point? Yeah, we've all dreamt about winning that lottery to you. What would you do if you won the lottery? And no one's answer is, ever, I would buy 100 billion more tickets to the next lottery. No one ever says that. So let me turn the mic on you and ask you, what is that about? So what does it mean that you have the money to exit and you don't exit? What does that say about what you're chasing? And what people are chasing? I think for me personally, when I think about that, because there's a degree of hypocrisy in what I'm saying, because I'm still doing this, but I love doing this. I love doing it. I do this because I love it, not because I'm trying to take over the world or build some big mega organization. I (53/99)
love having these conversations. I love writing. I love thinking and doing all those things. I do it because I love it. I'm fortunate having worked for 40 years in finance that I can pay off my mortgage. And it's not a case of, oh, you're not the kid who dreamed of paying off his mortgage all these years ago. You're still in the game. I do it because I love it. And one day, when I don't love it anymore, that will be the determinant for me to stop doing it. So I'm very fortunate from that regard, but I've worked incredibly hard for four decades to get to that point. But when I think about the people who've made life changing paper gains, and it doesn't seem to have changed their lives, and you could argue that and say, wasn't that great? They got all this money and they still want to carry on doing what they're doing. But I don't know if that's the reality. I don't know if coming back to money, the fact that money has been so debased that it doesn't necessarily mean that much anymore. (54/99)
And it's just a means of keeping score. It's not a means to provide for your kids and provide for your future and to take savings and use them productively for enterprise. It's a means of keeping score. And that comes back to this. And I talked about the corruption of money many, many years ago, and I had to explain what I meant. It's not corruption in the sense of some bad guy doing something with a brown paper bag under a table. You have absolutely corrupted what money means. And because money is trust, you are corrupting the trust in everything. This is the thing that people outside the world of finance don't perhaps understand is that every single thing is ultimately built on money, which is trust. And you have chipped away and chipped away and chipped away at one of the very foundational bedrock pieces of society. And you've rendered it to a lot of people, as we're seeing now, completely meaningless. And if the bedrock of society is completely meaningless, where do you go from (55/99)
there? What do you build anything upon if you don't have a foundation that has meaning? So I'm going to hopefully answer your question, but a few things can't... I don't care if you don't at this point. I'm just enjoying the conversation. No, no, I think it's relevant to your question. So just to address this thing about meaning, I think this is in my experience, and I'll bring it back to myself because I've actually had a personal experience of life-changing returns, which I'll share, which I've never shared before, and what my experience of that was, realized gains and so how that ties back in. But I think that what I have seen in this cycle and increasingly is that the types of returns that were once available only to financiers, the kinds of returns that would lead someone, and I met people like this years ago, over the years, people that made so much money when financial gains, contributing nothing to society, that they basically exited and tried to do art and spent crazy amounts (56/99)
of money sort of painting on walls and having people tell them that they're great painters, but the art sucks and they're unhappy because money didn't fill the hole. Money wasn't the thing that they thought it was, and when they got it, that's when the depression began to set in. I think that more and more people experienced that today because that call option has been available to more people as we've sucked capital out of a bigger part of the pyramid at the base and allocated it up to the Keystone. So I think that's where my head goes at when you say that. I've talked about not in any detail like maybe I'm prepared to talk about here, not in too much detail, but I have talked about how I've actually applied this framework in my own investing. And in this cycle, I actually did realize returns. I mean, I've realized some gains in the previous cycle, but not to this extent. And my experience, and I think this is relevant again to this idea of nihilism because these gains were in crypto. (57/99)
My experience of realizing these gains left me feeling empty and empty is not quite the word actually. Yeah, a little bit empty, but it didn't feel the way I expected it to feel, and it also felt bad because I felt that I was dumping on other people. I didn't feel that I was making money and being rewarded for my contribution to the allocation of capital. I felt that I was making money in a pyramid scheme, and I was taking other people's money. And I called my wife, actually called a few people after the experience. By the way, it didn't stop me from doing it. I kept doing it. And that experience, and I think it's also instrumental because I think also the thing that's, again, I don't mean to harp on crypto here, but it's just such a unique experience to be in an industry where everyone who's smart that I know who's in it, who's made money, knows that almost all of it is a scam, that almost all of it is a pyramid scheme, rather. That's a better way to put it, that it's almost all (58/99)
pyramid driven. If you've been in crypto long enough, you remember what it was like when people actually believed that most of this stuff was going to do something. Now, maybe it eventually will. You throw enough money at something, you get enough government regulation to support it. There are ways to use blockchain and other DLTs to certainly do certain things in finance. But the amount of capital, the amount of wealth that's been generated, in my opinion, just doesn't justify. And I worry about, and I have been open about this, I worry for in the long term, what does that mean for the success of our economy? If we're expending all this effort and capital in an area of the economy that's only going to produce so many gains in return, of real wealth in the economy, what are we doing? And is that what the Chinese aren't doing that? So I guess that's where my mind goes and has gone quite often, which is that we are in a phase where we are just focused on financial gains at the expense of (59/99)
everything else. Our capital model is broken. The capital isn't going to the places where it needs to go in order to address some of these deeper social inequities, some of the bigger strategic needs that we have. And the launch of Trump's meme coin, I think, was especially disturbing because Trump was elected on a certain platform that had to do with national rejuvenation. So when he came into office and the first thing he did on inauguration day was to launch a meme coin, it was like a gut punch, man. And I've never been someone that believes in the... I don't mythologize people. I didn't mythologize Trump, I didn't mythologize Biden, I was young enough to mythologize Obama. I was a Ron Paul and Obama supporter who voted for Obama in 2008, but I was young. All right, I'm not that stupid now. But it was a gut punch because I still know that lots of people, millions of people believe that he is their savior and that he's going to change things. And I'm also someone that when he was (60/99)
elected in 2016, I supported the guy, I wanted him to do well. And I was less optimistic this time around, but I would still welcome it. And I was hopeful that maybe something, maybe they're right, maybe he really did change after he was shot. But he didn't. Clearly, he launched a meme coin. Who are we kidding here? The guy launched a meme coin. I tried to think about what... Sometimes when I see things like this, I say to myself, I put myself in the other person's state of mind. I'm like, what would it take mentally in your framework and in your worldview and in your heart to do something like that? And I just cannot square that with someone that's mission-driven and focused on what's in the best interest of the country. It feels like it's time to loot and pillage. That's the stage we're at in America. It's time to loot and pillage. Everyone get on board the Gryff train, all the tech bros, come to the White House. Let's see what we can do. This is now a patronage system. We've moved (61/99)
to a patronage system, it feels like. Yeah, I think that's incredibly to the point here. And I think the Trump meme coin, I don't think Trump sat up all night on the Solana blockchain. I think one of his guys said, hey, you know what we should do? We should launch a coin. Oh yeah, fine, go for it because and you'll make X. Great, I'm all for making money. The Scorpion and the Frog and that is yours by Trump. But that's crazy, right? But just think about it. Totally crazy. That's totally insane. You're president of the United States. This used to be the most glorious office in the world, an incredible privilege to sit in the Oval Office, an opportunity to make change. You're in your 70s to have an impact, to have a legacy, to change people's lives for the better. And you're launching a meme coin. It doesn't make any sense. It shows you how depraved the morality in our society is. But this, you know, to me, this comes back to something else that I'm glad you've brought me back to. And (62/99)
that's the distinction between the president and the office of the presidency. You know, because it used to be about the office of the presidency, right? Nixon resigned because he brought shame upon the office of the presidency. Right? I can't continue this job because the presidency is bigger than the president. And I'd be curious in your thought on this because I've brought this up with a couple of people and I've got different responses. And I'd be curious in yours because I know what a thoughtful guy you are. You know, I go back to Bill Clinton and the Lewinsky affair. And to me, that was a turning point because that was the first time that someone had brought shame upon the office of the presidency and said, you know what, I'm going to brazen this out. I'm not going to go. I'm just going to stand there and I'm going to go through this. And I think I'll still be the president at the end of this. And since then, we've had what, four or five impeachment attempts thrown at Trump or (63/99)
Biden or whoever. I mean, the impeachments are thrown around like confetti these days. But once you conflate the president with the office of the presidency, you end up with exactly this kind of problem and that the two become intertwined and it becomes about the president because you can't see the office of the presidency. You know, I remember our mutual friend, Pippa Malcom, telling me that when she was in the White House, she would sit outside the Oval Office with the CEOs of big, big American companies and they'd be, I'm going to go and tell the president he's making a big mistake here and he needs to do this and he needs to do that. And she would say, you go in there and you tell him, you know, he wants to hear this stuff, you go in there and tell him. And the way she framed it was beautiful. She said that she came to believe that Gollum lived above the transom of the Oval Office. She would see these guys cross under that transom into the seat of power and become complete (64/99)
pussycats. Oh, Mr. President, what an honor to meet you. And here I am in the seat of power. And nowadays, you kind of know it's about, oh, I got to meet Trump. I didn't get to go to the White House. I got to go and meet Trump. And I think once you humanize an office- What a really great, what a really great observation grad. Oh, I mean, she's brilliant, absolutely brilliant. But once you humanize the office, once the office becomes about the person, the office is gone. It's a popularity contest. There's no gravitas anymore. It's just, hey, our guy's in this time and let's make sure their guy doesn't get in. And I spent some time in Montana last year with a guy who was a very senior in the Democrat Party, very senior in the DNC. And a superb guy. We had a great conversation. We were talking about the upcoming election. And I said, the way I see it, I think Trump's going to win pretty handily. I just don't think this is going to work out for the Democrats. And we had a very good and (65/99)
open conversation until we got to the point where I said, I said, you know, the things really surprised me. I knew it was going to kind of happen, but I've been amazed at the degree to which the media is in the tank for Harris, how hard they've come out and desperately tried the second Biden step down to reinvent her, the Time Magazine covered his presidential illustration and they've done everything. And he just, he said, I don't see where you're getting that from. I think that's ludicrous. I'm not seeing that at all. And, you know, I said, I don't have a dog in the hunt. I can't vote in this election. So I'm just observing it without any dog whatsoever. But you're genuinely telling me that you don't think that the media are pulling hard for Harris. You said, no, I think the media have been pretty even handed in their coverage. And that was a real aha moment for me because this was a, he was a great guy. I've been a great conversation and he was very pragmatic about the shortcomings (66/99)
of certain parts of his party, blah, blah, blah, until it got to that. There's a blind spot. And so it seems everybody now, it's an our team against their team competition. It's not about the president anymore. It's not about the presidency. It's about, we got to win. We got to get our guy to win over their guy. And if their guy wins, we've got to do everything we can to make sure their guy doesn't win next time. To hell with who's the president going to be? Who's the winner? Yeah. First of all, I just want to reiterate that I think that that observation that you made about how the office of the president used to be, oh, Mr. President, when you, once you became president, you were no longer George W. Bush, you were Mr. President to now where the personality supersedes the cachet of the office. Part of that may also have to do with the directness and power of social media and the ability to speak directly to your audience. I think that what's more notable is that he actually believed (67/99)
it. But in any case, I guess that just speaks to just how aloof those folks are, that they could see the media's biased support for Harris and not really notice it at all. But look, I mean, this brings us back to, I think, a really big, important part of the story, which is the transformation of media. You and I are part of this in our own particular way, though. We're not political. I mean, I guess I'm political more, certainly more than you, but I'm not political in the way that the sort of talking heads are political. But what we've seen is we've really now seen the alternative media is no longer alternative. The old media is dead. This is the new media. This is the media. The media is these big influencers with their own private platforms, and they are forming part of a new power structure. And what I think we have seen here is a battle of elites, the old elites versus the new elites. The old elites had a different power structure aligned with different industries, and this new (68/99)
elite is, I think, also very tech driven. And something I think, you know, talked a little bit about Gen X. I'm actually technically a millennial, but I'm on the cusp. Dude, you're the most Gen X millennial I know. I think so. I think so. And I think that this moved towards a more disembodied experience of the world through digital media. And because we're such rapacious capitalists as a society today, we've become such corrupt capitalists, and we worship money so fervently, we don't have the proper framework to talk about the public interest, so much so that we can allow these rapacious tech companies with their extractive ad driven ecosystems and some of their demonic applications to exploit the minds of our children, and we don't stop it. And there are other areas where this is important, but I always go back to the impact on kids, on the health of children. You mentioned this OnlyFans thing, the prostitution of young people, as though this was like post-Soviet Russia, and we don't (69/99)
do anything about it. That's the sign of a moral failure. Why don't we do anything about it? Why? Is the excuse that the Mitt Romney Republican, and I use Mitt Romney, even though perhaps he's not the best example because of Mormon, maybe he would have a moral problem with it, but maybe not, is kind of like, well, this is free market capitalism work, we can't put our thumbs on the scale. What are you talking about? What's the point of money if you can't protect your kids? You see a strong correlation between the usage of a particular application and the rise in gender dysphoria among girls. So does that concern you? So your point is that it's more important to protect the private profits of these corporations than it is to try and address the problem, try to get your arms around the problem. And that's the other thing. We're at a point in society where there's a kind of inertia, an embedded inertia in our policy making, such that we can't seem to address these deeper social ills. And (70/99)
also, building new social contract because the old one's broken. So is the new social contract, is the argument that some of these folks make, and I call them free speech bros, I'm very much in favor of free speech. Of course I am. I support the First Amendment, but I don't, of course, buy into the lie that what happens on Twitter is free speech. I don't buy that lie. And so I think that, again, the clear ominous dangers besides the impact on children is the capturing of speech and the ability for one man who owns one platform that's dominant in political discourse to surreptitiously undermine the nature of that discourse and to define the parameters around which it exists because there is no free speech on Twitter. You type something in, it goes to the Twitter database, and then it comes out as whatever the algorithm spits it out to be. And this is the more important thing. It isn't necessarily that Elon Musk is sitting on top of Twitter and calling balls and strikes. It's that we're (71/99)
building increasingly automated systems by AI that are determining the scope and nature of our reality. And people are just kind of plopping along and moving forward. And part of the other, I think, major fault lines in society today, and it's not along party lines. I mean, I think people that are just party-driven minds will default to whatever position the party supports, but it's people that have a sort of conservative sense of our values and who we are as human beings, and what matters, and what do we want to hold on to, and people that are just like, full speed ahead. Let's just go. Disembodied future, transhumanism, whatever. Let's just go. And I think for me, that has been a huge thing that I talk about on the show for years now. It's deeply concerning what kind of world are we building? What are we speeding forwards towards? Do we even want this? But because we can't have a conversation between ourselves, because we've lost a sense of common identity, there's no place or way (72/99)
for us to have that conversation. And so it ends up filling that vacuum with populists and demagogues and oligarchs. And that's what we're seeing in American today. It's a free-for-all among people with power who are looking to use the system to advantage themselves. And nowhere is there a conversation about the public interest. And I hope, I hope, I pray I'm still waiting for some kind of critical threshold to be reached where we see people stand up and take a stand. I mean, Navalny took a stand in Putin's Russia, and he ended up dead in a gulag. Why are people not taking a stand here? Why are not people with power and money taking a stand? I don't know. Well, I think because the people with power and money realize that there's more power and money to be had by Zuckerberg's a perfect example, right? I mean, a perfect example. Watching his flip-flop once Trump won tells you everything you need to know. It tells me everything I need to know anyway, that there's more money and power (73/99)
being aligned with the winner. You know, let's take the example of Joe Rogan, who I don't know, and I've always liked and I've always felt and continue to think that the man has a strong moral compass. At the same time, I don't understand the way he talks about the election of Trump as sort of like, thank God, again, and I just really want to make this clear for your audience. I did not support Kamala Harris. I was not someone who thought, oh my God, let's hope Kamala Harris wins the election. I really am in a place of sort of pox on both your houses. Kind of place. But what I did understand about Joe was, he said that he supported RFK. RFK was the only one that made sense for him is what he said. And right after that, he was attacked by Donald Trump. And shortly after he had Trump on his show and he became a full Trump supporter. And now he just talks about how much he likes Trump and he gets chummy with all the sort of pro-Trump people. And it feels like he just joined a club. It (74/99)
feels like there wasn't some other sense of kind of what he wanted or his own sort of sense of what's right for the country. It's just kind of like, well, this is the club. It's better to be in this club. It's a good club. It's better than the other club. Like there's no like sort of independent sense of what's right and wrong here somehow. And that was also, I think, I wouldn't call it disturbing, but it was also confusing for me to see Joe not, I guess, take a more independent stand there. I don't know, man. I mean, I'm a small voice. I'm nobody. So maybe if I was somebody- But you're a consistent one, Dmitry. You're a consistent one. Maybe I'd be scared. I mean, I don't know. Maybe these guys are scared. No, I think, I'm not sure it's that. I think you are. You may be a small-ish voice, but you're a consistent one. And I think when you get to that level that where Rogan is, you have something that you're incredibly keen to protect, right? You want your standing. You want everything (75/99)
that comes with it. And you kind of feel a need to be on the inside because if I'm on the outside, what do I have in the world this media? If you get disavowed by Donald Trump in the world of media today, you know, I guess these guys, it's about the prestige. And look, we live in an age where narcissism is rampant, right? I mean, because of all the things we've talked about, of course it generates millions upon millions upon millions of people who are driven by ego and the need for reaffirmation of how amazing they are. And if you're in that situation, it is more important than money, right? Especially when you get, once you've got the money, the money doesn't matter anymore. It's just I need to be worse. And the good graces of the power structure. Right. And so there's one other component to this that I'd love to get your thoughts on if you can. And that is religion. And this is a difficult one for me because I'm not a religious man. I grew up in the UK in the 70s and religion wasn't (76/99)
a thing. You know, I went to school with all creeds and races and religions and I had no idea. I have very good friends who were Jewish, for example. I didn't know they were Jewish until we were in our 40s. Religions has not been in my life at all. It's not an important thing to me. Never has been. And I don't care if people are religious, but it's just not been important to me. I have a very, very good friend of mine who is a religious man. In fact, I have two very good friends of mine who are religious men and they're incredible human beings, incredibly thoughtful. And I've had plenty of conversations with them about religion because I'm curious as to their grounding in that and where it comes from. And as I've thought this through, there was an article recently which I saw and sent on these friends of mine, Neil Ferguson came out as having renounced atheism and embraced Christianity. And I find that interesting and I found this thread to be very interesting because if I tied this to (77/99)
my view that your money has become the God and it's become the thing that everybody worships above all else, then it stands to reason for me that once money reaches the end of that place where I can't worship money anymore, we're going to see people turning back to their God. And there definitely seems to have been a rise in certainly Christianity in the West, a certain people turning back to the church. And I've talked to my friend about this and his view is based in the Gospels, is based in religion, but it is that ultimately there is only one God and people will come back to that. So I'm curious as to your thought, A, whether you've seen this happening the way I have and if you've thought about it or any thoughts you might have about this. Yeah, so I want to segment my answer. First of all, there's clearly recently been a rise in opportunistic Christianity. Yeah, okay. People coming out to say how Christian they are, including Elon Musk, making illusions if not outright statements (78/99)
to that regard, because that's the new heuristic for signaling that you're on board with this whatever this new movement is. So I actually find it really disgusting to the extent that which is happening. And those people are truly lost spiritually. I also think it's just insulting how many people will at once both suggest that they're Christian, but then you can't find Christ anywhere in their heart. Nowhere do I see them talk about love or express compassion. Where is that in their religion and in their framework? As far as whether there has been a rise in interest in religion or Christianity, I definitely think there has been. I definitely think that reflects a lost sense of community and a search for meaning. I think that's something that's been ongoing for a while. And I think that the teachings of Christ are valuable and that personally speaking, I don't, I've never, not true. When I was very young, high school and maybe my very early 20s, I had a sort of radically atheistic, (79/99)
materialist framework of the world that, you know, kind of it's all just atoms and bits and consciousness is some emergent phenomenon. That's not a view that I've held for a long time. I don't know what the nature of reality is. I don't know what the nature of my own identity is. Where my own sense of ego ends and something larger begins, is this just a temporary expression of a larger source energy? I don't have the words to describe those things and that's part of what religion is. It uses allegories and myths and stories to try and grasp at something that many of us intuitively feel, but don't know how to find the words to describe, which is that there's something more that this world doesn't make sense, that I open my eyes, I'm here. What is this, you know, what is the nature of this world? These are basic philosophical questions. So, part of it is the search for community, which by the way, you may remember this or may not remember this. In our conversation, you and me and Ben (80/99)
Haunted in 2020, in that episode that I titled, this is before the pandemic, February, titled Financial Nihilism, Price Discovery in a World That Nothing Matters. In the second hour of that conversation, if I remember correctly, we talked about the cult of the Church of Tesla and the meme stock crazes and crypto and I made the point, I remember Ben Haunted saying that people are really saying something along the lines of like, what's motivating folks here is the sort of the desire for money and, you know, the product. My point was actually, I think, you know, that a bigger component that people are missing is the search and need for community. And again, that's something I learned from crypto because I was navigating the circles long enough that I remember that that's so much it was about community. So, I think part of it is community. That explains part of what has been happening. And I think another part of it is that because the nature, I don't know if you've ever smoked weed or (81/99)
done any kind of recreational drugs, but I haven't. I'm not cool enough, I'm afraid. Sorry, mate. Okay, no, no, no, no, no. Actually, I think one of the actually positive things that's happened in recent years is that the sort of like, you're cool if you do drugs thing has kind of, you know, taken a bit of a hit, which is fantastic because actually, I don't think that drugs are good, but I used to use, and it was only marijuana, that I used to use marijuana. I started it late when I was, I'm trying to think 22 or something. And I did it for some years when I launched the business. And I used it as part of my creative process. And it was remarkable, I must say. It was such a benefit for me. Somebody of my best ideas came out from smoking marijuana. And I can't do that now because I'll go brain dead. I can't. But I, the way that your perception changes when you're on drugs, whether you drink alcohol or you smoke marijuana or whatever it is, it alters your reality. And I think part of (82/99)
what's happening to people is that their time spent on digital platforms is altering people's perception of reality. And that they're beginning to realize just how tenuous their preexisting sense of what is real actually is, that they realize that what they thought was real, was substantive, actually isn't. It was just a matter of perception. So I think part of what's happening is that people are in a sense kind of losing their minds in a sense. And if you believe that the nature of the world and the nature of who you are is more in your heart than it is in your head, that could explain partly what people are searching for. They're searching for a sense of, a sense of what's real that isn't, you know, subject to the manipulations of their mind. So that's my best way of describing it. But I do think that that's part of the explanation, the changing perception of the world and also people's loss of community in a sense of, you know, sense of community and the search for it. So, look, (83/99)
it's time to wrap this up. But just, I mean, this is a huge question and it's one I'm pondering and there's no answer to it. I realize that after all the thinking I've been doing. But a broad question like where do we go from here? What I'm trying to get a sense of is, does this necessarily get worse? Do we have to burn this whole thing down before we can actually rise up from the ashes? Or is there a way that we can arrest, you know, pull back on the joystick before we hit the mountain and pull out of this dive? Because it feels to me from, you know, reading Neil's work and reading history that you almost have to slam the plane to the ground before there's no way to pull out of this because so many people are making so much money and getting so paper rich forever to change on its own. All that has to go up in smoke before people, and I'm using the air quotes this time, find religion. Man, it's a great question, right? And I think that's something I thought about as well. I think we (84/99)
have to probably begin by asking ourselves what a crash looks like. What is sufficient to qualify as hitting the mountain? I bet if you told me 10 years ago, we would be here, I'd be like, we hit the mountain. Yeah, right. You know, so the question is like, you know, at what point does that qualify? Of course, like everyone's always thinking in the back of their head about World War II or World War I, right? You know, conscription, people going off to die, cities being burned to the ground. That is my fear. My fear is a new World War, a World War III. I said earlier that a World War III would not look like the previous World Wars because everything is a battlefield today, because everything is connected and everything is vulnerable. All our devices and our cities and the way we live, we're so vulnerable to these types of disruptions. And the worry, of course, is that once you enter a war, the logic of war takes over. And then the bottom is unclear, you know, when you hit bottom. So I (85/99)
guess to answer question, I am afraid that in order for this to change, yes. So unfortunately, reflecting honestly on your question, I think we have to get to a place where circumstances demand collective sacrifice. Right. Great way to put it. In order to forge a consensus that will allow us to rebuild. And then the question becomes, what qualifies as such an event that requires collective sacrifice? Otherwise, do we just turn into Argentina? And we just kind of roll from one crisis to the next and never kind of escape until we eventually maybe do. But what we don't... So is it a V-shaped recession or is it an L-shaped recession? Yeah. And I don't know the answer to that question, but I think that it will depend... Ultimately, what that will depend on is the U.S. relationship to China. Well, you know, I go back to the 20s and 30s and I think about the Wall Street crash, which we in finance is a day that we mark in our diaries. But after that came the Great Depression, of course. And it (86/99)
feels to me as though... I think you're right, that period of collective sacrifice, but with money being the most important thing now to so many people, you know, it feels to me that something as simple as a proper stock market crash, a proper one, not one that's arrested by all kinds of throw everything at it to make sure that number doesn't go down, but a proper stock market crash might even be all... That could be the plane going into the ground there because the stock market has become so important, not just to the people that have money invested in it, but to the psyche of the population, right? This idea that even people who aren't invested in markets, you know, they may have a 401k, they may not, but they don't actively look at markets. When they see on the front page of the New York Times, or the Washington Post, never mind the Wall Street Journal, or the Seattle Tribune, or whatever it is, stock market crash, they panic because if the stock market's crashing, we are programmed (87/99)
to panic. And so the fact that we've avoided stock market crash, you know, we have markets in turmoil and all the joke segments on CNBC, but it feels to me as though the plane going into the ground at this point would be the evaporation of paper wealth that would come with the stock market crash. It feels like that's the thing that everybody, the one place people are aligned in terms of business community, investors, policymakers, central bankers, governments, presidents, is we don't want to get poor overnight. We don't want to get poor. And so do everything we can to not get poor. Never mind building, you know, repairing the interstate system. Never mind high speed trains between New York and San Francisco. Never mind all that. Just let's not get poor overnight. And so that for me might be the only catalyst that would actually send the plane to the ground. I don't know. Do you think that that would be driven by an exogenous shock or an endogenous shock? Well, I think the deep seek (88/99)
thing that we've seen happen over the weekend tells you that, you know, these shocks come when you least expect them. You know, I think it would have to be a shock. I don't think we'll get a creeping people suddenly deciding, you know, I've had enough making money now, I'm going to take my money out and I'm going to be, you know, so I think it will have to be a shock. And I think it'll come from outside markets. And then you'll just see this capitulation of people who do quickly say, look, I've lost half of it, but I've still got a whole load left. I need to get that out. But it just, it feels to me that everything is wrapped up in money now. There's nothing else that really seems to matter with people, money and influence. And, you know, if you're poor, you lose all your money, you lose your influence. So I would take the under on that. I think my sense is that it's likely to be endogenously driven. I'm not convinced that this latest particular thing is going to knock markets over. I (89/99)
mean, look at how resilient they have been in the face of exogenous shocks, the invasion of Ukraine, the proxy war between Israel and Iran, just blip just onwards higher. My sense, again, I have no idea, right? But we're just like spippling here. My sense is that at some point, the endogenous flywheel of capital appreciation will go into reverse. Whether it is, you know, some analogous, maybe something analogous to what Mike Green has talked about, it doesn't necessarily have to be passive, it could be something else. Maybe it's just psyche. And at some point, people stop believing. And again, I have no basis to stand on this, but I feel like this rally could go on a bit longer until the end of this year. But my sense is that at some point in this administration, something is going to break. I feel like I'm in that meme where I was like, tell us what will break and there's like a goose chasing the person. I'm that guy that said something will break. The most unscientific thing in the (90/99)
world. But at some point, I think the bull phase of this long expansion and prices will exhaust itself. But my sense is that it will exhaust itself. And it will not be some exogenous shock. There may be something that happens and it'll grab ahold of it and say that this is it. And so maybe this is it. Maybe, you know, the mania is over. Right. But my sense is there's still a bit more sort of euphoria to go with the tech pros in the White House and their home narrative. Yeah, I think that could be the case. But do you subscribe to my theory that a stock market crash could be the tipping point for all of this? Or will it happen in isolation, do you think? Absolutely. I think that if a stock market crash is big enough, it depends on how bad it is. Right. If it's big enough to impact the economy, given how many people are invested in it, certainly it would be catastrophic for people of a certain demographic. Whether or not that wouldn't though lead to the kind of, in my opinion, need for (91/99)
social cohesion that I think would be necessary to mark a bottom. Something has to happen that's big enough that it impacts either the whole of society or near the whole of society. You look at the pandemic, that impact the people above a certain age, didn't do anything to bring us together. But I don't know what that is, man. And the thing is also, Grant, what worries me, man, Jesus Christ, I'm trying to remember what it was that gave me this realization. But when I was young, I read a world only by fire by William Manchester. And of course, I've read histories of World War II and wondered how societies go crazy, how people lose their minds and believe things that you're like, man, those people were nuts. And you're kind of just like, well, we're sophisticated now. We wouldn't do something like that. What worries me is that because the central square and also both the central square, the fact that there isn't as much of a unified media ecosystem today as there was in certainly in the (92/99)
lead up to World War II, though obviously that wasn't the case in the Middle Ages. But because there's not as much of a unified ecosystem, and because again, the nature of reality is changing so rapidly, our ability to verify things is dissipating. And people are questioning the most basic things. I mean, you see all sorts of rumors catch fire. It might have been the drone story. The drone story is a great example. What are these drones flying over New Jersey? Why can't we get an answer? They're just drones in the sky. No one knows. Governors are coming out and saying, no one's telling us, mayors, the media can't tell us. And there's a, I worry that the nature of our reality and how we perceive the world and how we communicate with each other and we form consensus truth is breaking down to such a degree that maybe what the future holds for us is anarchy. And the ability to come together disappears because our society is so large that the only way you can manage 300 or 400 or 500 or a (93/99)
billion people in a unified sort of nation state is through very strong, common narrative structures held together by media institutions that form some sort of shared reality. And if our reality is each person's own reality on social media, on YouTube, whatever your particular channel is getting, and people are increasingly checked out, as we talked about earlier, in the process of governing themselves and in being responsible for the world that they live in, I mean, again, this is, people interact less with their neighbors, talk with fewer people out in the world or on their phones, with their headphones on. I do worry that we're ceding a potential anarchy. And that is very scary. That's very scary, man. That's what it feels like also when the president launches a meme coin, or maybe what that just means is either it's anarchy or dictatorship. And I do think that dictatorship is totally in the cards for America's future. And I feel more like that today than I did four years ago. I (94/99)
hate you, man. I hate you. Well, you know, it's very difficult to imagine a way that a conversation like this can finish on a bright note, to be honest with you. But I am... It used to finish. I used to, you know, this is the first time I've ever had a conversation like this, where I've actually ended on such a dark note. So I apologize to... No, no, actually, to be honest, for me, I think it's important. If part of this is, everybody's like, well, let's try and find a bright note to end on. Let's just be real about this, you know. And the reason why I wanted to talk to you particularly is because I know the depth of your thinking on this stuff. I know your ability to communicate it. And I know you don't shy away from the reality and the hard topics. And so, you know, I was really keen of all people to have a chance to talk to you about this. And I'm incredibly grateful you've given up a couple of hours of your time to sit and do this. And, you know, I have no idea where this goes. And (95/99)
I'm okay with that at the moment, because I know I'm not going to stop thinking about it and just curl up on a ball. I'm going to keep thinking about it and keep trying to figure it out. And, you know, conversations like these are the only way that I can not get through it, but move through it, you know, without having the access to people like you and to be able to talk these things through and go away with a few new threads to pull on. All you can do is curl up on a ball. So, you know, my friend, thanks to you so much for doing this. And look, I mean, I would imagine the Venn diagram of overlap for our audience is as close to two circles on top of each other as possible. But just let people know if they aren't listening to Hidden Forces already how to do that and how to become a Patreon subscriber, because it's just your conversations are the best in the business, and everybody should be listening to all of them. Yeah. I also, one more thought that came up while you were talking (96/99)
there is, number one, I totally agree with you that these conversations are very important. And I think one of the other corrupting influences that money has had is in the sphere of thought leadership, where people have converted their ideas into intellectual wares to be sold. And their sort of thought leadership is a brand that needs protected and people are always trying to IP everything. And again, there's just, it seeps into all the cracks. So Hidden Forces is, yes, we used to be years ago on Patreon. It's not added supported. We have a subscription-based business, always have. And you can learn about our subscriptions at hiddenforces.io slash subscribe. I also have a community, a private community that I run that's not been around for more than two years where I put dinners on all over the world, among other things. And we have a dinner in Argentina in Buenos Aires next Friday, the 7th of February, where we bring together people in intimate settings of 14 folks, a mix of our (97/99)
members and special guests. And we work on these problems. Sometimes we work on these specific problems, but other times we work in the case of Buenos Aires, we work on the specific opportunities that present themselves in Argentina and how to navigate them for investors. And I try to use the show as, in a sense, as a kind of pipeline between the show to the Genius Community online Q&As where people will join. And I also share, in some cases, Payworld subscriber material to people to help them educate them on specific subjects and sort of guide them slowly towards an understanding on various particular themes. So anyway, that, I don't know if that was a useful description of what I do or what the podcast is or how to subscribe. But again, hiddenforces.io slash subscribe. And thank you so much, Grant, for having me on the show. It was more than good enough, trust me. Dimitri, my friend, thank you. I have been to one of those dinners in London. It was fantastic. I'm very jealous. I won't (98/99)
be an artist. That one got a little rowdy if my recollection is right. It was terrific. It got a little rowdy. Yeah, it's a great conversation too. But I would love to come to Argentina, but I'm downhill with my daughter. So I won't be going anywhere for a while. But again, thank you so much for doing this. And I will see you down the road somewhere soon, I hope. My pleasure, Grant. I hope to see you soon. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (99/99)
Absolutely, I'm at the point, I can't even believe any reported user behavior in my company's software. It might be all #ai agent orchestrate to do some meta things xD
This is the full transcription of podcast 'Hidden Forces'.
Dollar Milkshake Wrecking Ball Brent Johnson & Michael Kao #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. In this episode of Hidden Forces, I republished the audio from a Twitter Spaces event that I hosted earlier this week, headlined by Brent Johnson and Michael Kow, who were later joined by Michael Nicolettos and Michael Howell. Brent is CEO of Santiago Capital and the author of the Dollar milkshake theory, which we delved into during his previous appearance on the podcast for episode 250. Michael Kow is CIO and portfolio manager of Kow family offices and is well known for coining the quote, dollar wrecking ball as a similar metaphor for describing the dynamics of dollar hegemony. Michael Nicolettos is a macro investor and the founder and former CIO at Apple Tree Capital. And Michael Howell is the CEO of Crossborder (1/92)
Capital and a regular contributor and active member of our Hidden Forces genius community. The purpose of this conversation and why I convene the panel is to help advance our understanding of the dynamics of dollar strength, something that has befuddled many analysts and which runs counter to common perceptions of how currency and sovereign debt crises unfold. It turned into a very lively discussion about a topic that has become increasingly relevant in recent months, as the US dollar has appreciated dramatically against the basket of international currencies from the pound sterling and the euro to the Japanese yen and the Chinese yuan. Because of the dollar's outsized role as a global funding currency, dollar strength often translates into foreign weakness, not just for other currencies, but also for their respective economies and asset markets. The consequences of a further strengthening dollar, how long it can continue and possible end game scenarios for economies and governments (2/92)
are all topics that we discuss. For anyone new to the program, Hidden Forces is listener supportive. I don't rely on advertisers or commercial sponsors, which is why the second hour of our conversations is normally available to premium subscribers only. If you want access to our full episode library, as well as the transcripts and intelligence reports, which include my takeaways from every episode and my thoughts on what comes next, head over to hiddenforces.io, select the episode that you're interested in and click on the premium extras, where you can then sign up to one of our premium content tiers. If you have questions about our Genius tier, which includes access to the Hidden Forces community, Q&A calls with guests, in-person events and dinners, feel free to send an email to info at hiddenforces.io, an I or someone from our team will get right back to you. And with that, please enjoy this lively and engaging conversation. So guys, let's start off first by clarifying what we mean. (3/92)
When we talk about the Dollar milkshake or when we talk about the Dollar wrecking ball, what is it fundamentally about the Dollar system that each of you have described in your own particular metaphors that explains its strengths? In other words, what is the common dynamic that you are all speaking to? Well, first of all, thanks for having me, Dimitri. I'm glad you did this. I think it's rather timely as what we've seen go on in the markets over the last few months. And I guess really year to date. To really break it down in a very simplified manner, the Dollar milkshake is really nothing more than a framework for how I see a sovereign debt crisis and a sovereign currency crisis playing out. At its base core, what it says is that over the last, call it 10 to 15 years, as we've gotten into these financial crises, these perpetual crises, the solution has been to borrow more money, kick the can down the road, print money for lack of a better way of saying it, and pray for a brighter day (4/92)
in the future. And so the whole world has, quote unquote, mixed this milkshake. But for a number of reasons, based on the design of the system, whether it's fair or not fair, whether it's moral or immoral, the simple fact is that the US Dollar has several advantages that none of its competing currencies do. And as a result, as this milkshake gets mixed in order to combat these financial crises, I believe the US is the only one that has the straw, or at least has the biggest and the best straw, and will therefore drink that milkshake that the rest of the world is mixing. I don't think it's so important who prints the money. It's more important who captures the money. And I think, again, for better or for worse, I think the US Dollar and the US markets are going to capture most of the capital that's being provided. Before we go to Cal, I have one more question, Brent, which is when you talk about, when you say capturing, what matters is who captures the money. It's not as important who (5/92)
prints it. What do you mean? Well, so this is where it starts to get a little confusing when you use terminology, because we could probably spend two hours debating whether or not any money is actually printed or not. But just to keep it very simple, let's just use the term money printing. The central banks provide liquidity, print money, do stimulus, however you want to describe that process. And what I mean by capture is that I think in many ways, capital that is able to move will seek out where it is treated best. And for better or for worse, I think capital will be treated best in the United States. Now, I want to be clear, that doesn't necessarily mean that it's treated well, it just treated best. It's a relative game here. And I think as we get further into a crisis, because the world needs dollars, and because the system is designed to favor dollars over other currencies, I think capital will flow into the dollar at the expense of other currencies. And I think that liquidity (6/92)
will flow to the United States. And when it flows the United States, it will deprive the places that it's leaving of that liquidity. And it will become a self-reinforcing doom loop that will squeeze the dollar higher. That's the thesis. Now, whether it will play out, I don't know for sure. I have a high degree of confidence, but nothing is ever certain. So, but that's what I mean. I mean, the US will be seen as a relative safe port in the coming storm. Great. So, we'll get into that as the discussion progresses. So, Michael Cow, why don't you jump in here? You are the author, as we said, of the dollar wrecking ball, a much more aggressive thesis, though. It describes, I think, a very similar dynamic. What are you capturing in your description of the dollar system? And how does it similar to Brent's? What are the differences? And how would you describe it? Sure. Thanks a lot for doing this. I've been looking forward to this discussion. And Brent and Michael Nicolettis and I have, we've (7/92)
all spoken separately offline about this, but I find it interesting that each of us have come at it from slightly different angles, but yet kind of arrive at the same place. So, I spent most of my career, I started my career in macro and then spent most of my career in micro and micro, meaning in the world of capital structure and reorgs, bankruptcies, et cetera. And since the bear market in oil of around 2015, I've been very, very enmeshed in the oil space and getting to understand the nitty gritty fundamentals of it. So, I'm approaching this dollar wrecking ball from a very commodity, specifically oil-centric perspective, because in the beginning of 2021, I wrote a number of threads talking about how the combination of a number of factors, long-term cap X starvation for years in the oil space, plus this hell bent for leather, ESG mandate, and exacerbated by Ukraine, Russia, et cetera, have conspired to create this very, very structural inflation that originated in oil, but then has (8/92)
leapt into now much stickier components. In the middle of 2021, I also got into a number of, that's really when I started my sort of Twitter adventures and I got into a number of debates online about how, well, about the dollar, implications on the dollar and how this sticky structural inflation, originating in oil would create an aggressively hawkish fed well ahead of the rest of the world's central banks. And in turn, create, that's when I first started using the word dollar wrecking ball. And here we are. I think there's a lot we can talk about, but the determinants where I agree a lot with what Brent says, the determinants of a currency's value are manyfold. First of all, it's a relative value. Despite years and years of money printing and an overt weak dollar policy, if you want to talk about insults to the dollar, our Fed has done it with the amount, the aggressive, five to six trillion of balance sheet expansion, plus aggressive MMT. And yet during that process, you saw the DXY (9/92)
basically go no lower than around 90. The reason is because other central banks were doing the same. So I call the US dollar the least dirty shirt, amongst a bunch. And then we can also talk about, I know that we can also talk about some of the geopolitical factors. So it's not just a matter of debt to GDP that guarantees the safety and soundness of a country's currency. You have to also look at the left side of the left side of the balance sheet, the sovereign balance sheet, looking at natural resources, geographical advantages, military, hard and soft power advantages. So all of these things, I encapsulated in a thread about how this, back in May of last year, when Bitcoin was all the rage and people were talking about Bitcoin being the solution to the end of dollar hegemony. And I said, well, not so fast because I think all this talk about the US dollar going the way of the Reichsmark ignores so many other factors. So I guess I'll leave it there for now. That's a great summary, (10/92)
Michael. And it's easy to forget. I've forgotten all those J-Powell, Money Printer, Go Burr memes that were so popular making the rounds on the internet during that period. So let's go to Michael, Nicolettos, we're going to call you Michael number two for this Twitter spaces. So why don't you introduce yourself, unlike with Brent and Michael, I didn't give you a formal introduction. Please make sure to introduce yourself, tell us a little bit about you, and then talk to us about how where you come to this dynamic from like what's your perspective, how do you tackle it? Hi, Dimitri. Thank you for having me. It's a pleasure talking to you and to Brent and to Michael Cow. As Michael said, we've been speaking a lot offline and with Brent, we've known each other for quite a few years. I spent the last 10 years being the CIO and co-founder of Apple Tree Capital, which was running a long short emerging market fund. So I spent most of my life looking at emerging markets. And when you spend (11/92)
your life looking at emerging markets, you spend a lot of time looking at currencies. So a few years ago, actually, speaking to Brent, who was telling me about his milkshake theory, and something clicked. And it clicked because when you're an American or you live in the States, you tend to see the world through the US dollar. And when you look at the world through the US dollar, you feel that the US is doing a lot of things wrong, which it is. But you fail. Actually, most people fail to see what the other countries are doing wrong. So having spent a lot of time in emerging markets, I could understand what the effects of the dollar could be on other countries. Now, being a European as well, and having seen the European crisis, and having seen what is going on right now, it's pretty clear for me and to still Michael Kakao, Michael Kakao's line about the cleanest shirt, which I share the, I share the SKU. The US, even though it's not a clean shirt, it appears to be the cleanest shirt, (12/92)
which means it's, let's say, in a lot less, there's not so much trouble in the US dollar versus the other currencies. Now, if we go to the world we live in today, we see that the main theme tends to be inflation. And inflation is a fact, but not each country faces the same issues when we talk about inflation. When we talk about inflation, it's not the same thing about every country. So for the US, there's a demand side inflation, which is, you know, the labor market is very tight. So there's a lot of demand, but there's also supply side issue, which is the energy crisis. And when we talk about the energy crisis, people think about the energy as a standalone problem, but fertilizers use a lot of energy. So that means higher food prices. And what's the problem with higher food prices and higher energy prices? These are both inelastic goods. So it's not like you can live without, you might stop having another drink or you might not buy a second shirt, but you'll need energy and you'll (13/92)
need food. So when we go to Europe, for example, or we go to Japan or we go to the UK, and commodities are priced in dollars, and you get a supply shock like the one we got, it means that the inflation you get in the rest of the countries is more supply sided because of the economy, the labor market is not that tight. So the demand side is not that tight. And the supply side has just got a shock, which is a supply shock. So monetary policy is really effective when inflation is coming from the demand side. When it's coming from the supply side, you face a serious issue which the monetary policy can't really fix unless it crashes demand. And to crash the demand, it takes a big downturn for the economy. So the US is raising rates to fight that in both the demand side of its inflation problem, it raises the value of the dollar, and all the rest of the world is chasing the US in order to keep their currencies from falling and reducing the import pressure of inflation. So right now, the way (14/92)
the world is structured, and Brent is actually really good at explaining this. He's been on it for a few years and I have to say he's been early, but he's been there and he never changes the view and this is really admirable, even though it wasn't working, his thesis wasn't working for him for a few years, but he kept on saying that this would happen. And having been there, I can say this is a very tough to keep your position and not change your mind, even though markets are going against you. So the structure of the world right now is favoring the dollar. And as the Fed raises rates, everyone chases the Fed, and this creates a vicious loop which is self-reinforcing. Can I say something real quick to what Michael and Nicolettis just pointed out? Yes, please. Go ahead. Sure. So what Michael just said about, especially EM countries or any countries that are dependent on energy, I think that's a very critical component of this because last week, we saw the PBOC intervene to actually (15/92)
strengthen the yuan, which had been weakening precipitously throughout the year. And that, I think, is a tell on just how worried China is on inflation because when you think about China's economy, it's an export-driven economy, right? And they are very dependent on their current account surplus. So one would think that if their economy is on the back foot, given the property crisis, the zero COVID policies, one would end the fact that all of their neighboring countries have devalued currencies, that they would jump at the opportunity to allow the Reming B or the yuan to weaken. But instead, they did the opposite. So to me, that really is a tell on how worried they are about importing commodity inflation. So guys, a lot of things were said in the course of the three of you speaking separately. And I wrote down some notes. And I'm thinking, let's go to this one first, something that came up in my mind while I was listening to Brent talking, which had to do with the source of dollar (16/92)
strength. How much, and in trying to understand really what is it that maybe people have a hard time understanding about the source of dollar strength, how much of the dollar's strength is endogenous? It is an outgrowth of the structure of the system and its place within that system. And how much of it is exogenous factors having to do with America's maybe role in the world or the bounty of its economy or its capital account, its current account, etc. How do you guys think about that? Whoever wants to take a stab at that first, go ahead. Well, I'll jump in here. This is Brent. I think it has a lot to do with it, Dimitri. And I can't put a percentage on it, but I would say not all of it, but 70 or 80% of it, I think has to do with the structure of the system itself. And then I would put another big portion on the US, as the global hegemon, putting pressure on everyone else to keep the system as it is. And what I mean by that is the basic design of the system basically ensures that the (17/92)
US dollar will fall last. Now, the only way that the US dollar is going to fall first before these other currencies is if the Fed or the Treasury or the US government in general all got together and agreed that overnight we are going to devalue it just unilaterally, right? In which case the dollar falls versus all the other currencies. I don't think we're anywhere close to that happening. But anything outside of that, the structure of the system almost ensures that eventually we will get back to right where we are now. And a follow on to that is that there's a lot of people who have said, well, the dollar will fall when the Fed pivots and goes back to QE. And that's probably true. QE would probably put a dent in the dollar's rise and maybe even make it fall, right? It would definitely be a headwind and probably make it fall. But to Michael's point at the beginning, look at everything they did between 2020 and 2022. I mean, they threw everything at it and yet here we are at the 20-year (18/92)
high, right? And so the point I want to make is that until the system is completely redesigned, we will end up right back where we are today. Now, I don't know if it will take six months to end up back where we're at or if it will take six years to end up back where we are. But until the system is reset, until all the debts are wiped off the table, the system design basically ensures we end up back where we are. And then the second thing I would say regarding the US's role in the world is this system favors the United States. And it kind of goes to what Michael Cowell was saying about you can't just look at the liability side of the balance sheet. You got to look at the asset side of the balance sheet. And then you can't just look at the supply of currency. You have to look at the demand for the currency. So the system design ensures there's more demand for the dollar than there is for any other currency. And then the US roles as a global hegemon and the global military power ensures (19/92)
that if anybody gets out of line, they can very either nicely or very not nicely encourage them back in line, right? And every now and then somebody tries to take them on and escape the system. And it works to varying degrees. But in the last 100 years, it's never worked, you know, totally. And until the whole world gets together and decides that we are all at the same time going to leave the system and move to another system, and they're willing to fight a war to do it, the US is going to keep the global reserve currency. And I'll just do one little add on to that. And then I'll be quite handed off to a couple of the other guys is that in the last year, since the dollar started to rise again, first of all, QE was going to solve everything and the dollar was going to be debased and, you know, the rest of the world was going to rise versus the US. When that kind of started to go by the wayside, then this new theory kind of popped up that the US no longer benefited the US to have the (20/92)
global reserve currency. In fact, it was no longer an exorbitant privilege. It was becoming an exorbitant burden. And therefore, the US would prefer to lose the global currency or the global reserve currency and perhaps, you know, give away some of this power and the burden that came with it. And the problem with, and part of the burden there was an economic burden. And so they said, for these economic reasons, it would benefit the US to change the structure of the system. The problem with that is global reserve currencies are not about economics. I mean, they sort of are, but they're really about power. They're really about enforcing your will and the rest of the globe. And I know people don't like to hear that, but if you really get down to the real politic of it, that's the way it is. It doesn't really have to make sense. It's kind of like when you're a kid and you do something and your parents don't want you to do it. And you say, why not? And they say, because I told you to. And (21/92)
you say, but what's the reason? And they give you some stupid reason that doesn't make any sense. But it's still the way it is because they're bigger and they're more powerful than you. And as a kid, you just kind of have to live with it. And that's kind of how the global reserve currency is. It doesn't always make sense. It's not always the most efficient. It's not always fair. It's not moral. But it's the way it is. And it's the way it is because the US is the most powerful entity on the planet. Now, that could change someday. And when that happens, then maybe the rules will change. But as of right now, that's kind of the way I see it. I love that metaphor. So this is a question for all of you guys again, but maybe Brent, you can take it first if you want. If you think you can be concise. Again, I just try to want to manage everybody's. Everyone's got such great comments to make. But I wonder if people have the order of operations wrong in their macro frameworks, so many investors (22/92)
and so many commentators in macro, when it comes to where markets are situated within the political system itself, situated within the national security paradigm, because they've been living within a very anomalous period in human history during a unipolar period with the United States guaranteed security for almost every country in the world, with the exception of a few rogue states. And so the appreciation for the primacy of politics and where power is situated in all of that maybe doesn't exist for a lot of folks. I'm curious what you guys think of that. The fact that we are now in this phase of transitioning manifestly, it's undeniable that unipolarity is not the world we're living in today. And that just is obvious based on the geopolitical challenges and ruptures that we're seeing in the world. Do you guys think that that dynamic, that shift from unipolarity to multi-polarity or maybe to a new bipolarity is something that's messing with so many investors' models because they grew (23/92)
up in a world where all they knew was the neoliberal international order? I'll take a stab at that. I like how you framed it originally where the sources of dollar strength, are they endogenous or exogenous? And I would say it's actually both. So let's break down the endogenous sources. So as Brent said, after World War II, there was this Bretton Woods one where essentially the overlords decided that this was going to be the new world order. But since then, I would say that the market has chosen to keep the dollar primacy. It's not as if there's behind closed doors that the overlords are still trying to keep prop the dollar up and against the market's wishes. The market has chosen the dollar system because of its unrivaled liquidity, adoption, underlying depth of bond market liquidity, which is another key importance. And all of that in turn stems from geopolitical advantages. To borrow Peter Zahan's phrase, he called in 2014, he wrote a book called The Accidental Superpower. He calls (24/92)
the United States the accidental superpower because despite all of our, I guess you could argue, bad policy choices on the world stage, ephemeral presidential cycles that lead to inconsistent policies from one administration to another, we've become an accidental superpower by dint of our unrivaled geographical advantages. So you can break it down into a number of categories. Our river networks, our bicoastal oceanic buffers, just on arable land. Here's an interesting stat for you. Our arable land per capita is 15 times that of China's. So how do you put a price, a relative price on that? How do you put a relative price on the relative hard and soft power? So these are all factors that go into a very complex calculation, well beyond simple debt to GDP metrics and even interest rate differentials. So let's talk about interest rate differentials for a second because that's what kind of drives the exogenous source of current dollar strength, which I would say is a more cyclical thing. So (25/92)
from what I started with, with the commodity angle, it's interesting that usually in the past people have associated oil strength with dollar weakness. But this time around, I note that this bout of dollar strength stemmed from commodity strength to begin with. And the reason why there is a US dollar wrecking ball is our Fed is now ahead of the cycle. We were ahead of everybody else in the world in terms of easing and heaping loads and loads of liquidity into this COVID environment. But now we're the first to emerge out of it. And from an economic relative strength perspective, there is no major economic region that can compare. So even though nothing moves in a straight line, and it's debatable whether or not we've seen a local high in the USD, DXY, I would say that the real test for when we see a high in the dollar is when you come at a point in time where the other major regional blocks, economic blocks, are comparatively weaker than the United States economy that allow their (26/92)
central banks to essentially outhawk the Fed. And right now, if I'm looking at the Eurozone and the ECB or Japan with the BoJ or China with the PBOC, all of them are in far weaker relative positioning to the dollar. So I think that that's my answer to your endogenous, exogenous question. Great. And Michael N, you've been sitting there patiently. Feel free to respond to anything that we've discussed so far. Yeah, sure. I was listening carefully to what my predecessor was saying. It's very interesting the point you made about unipolarity and multipolarity. I think the world or the rest of the world is trying to go to a multipolar system. But trying to do that, it means that they're trying to change, let's say, quote unquote, the benchmark. The reason that the dollar is so popular is not only because US is 25% of global GDP. It's also because it has the most liquid financial market. You can raise capital easy. You can, you're very liquid, you can raise credit as well. So you can switch (27/92)
from dollars to any currency at any moment. You can buy dollars, you can sell dollars. So the fact that the economy is so open gives it, it's a sign of strength, not a sign of weakness. Because if it was the other way around, then the PBOC would probably be the strongest currency around there, out there. Now, the US is 25% of global GDP, but it's 87% of global trade. So when everyone needs the dollar to trade, and you can see that from commodities, which is pretty clear, everyone's settling in dollars, there have been some exercises and some attempts to trade in other currencies. But this is a very small amount in terms of percentage versus a total amount traded. You see that everyone wants the dollar. Now, the thing is, having been an emerging market fan manager, I've seen what emerging markets do and what do they do? They borrow in dollars. Why do they borrow in dollars? Because the interest rates in their local currency are so expensive. So they go to the US dollar, which is a (28/92)
liquid market, it has lower rates, and they can borrow these rates. So this happened on a global scale. And as a dollar strengthens, this means that all these countries and all these corporations in these countries need to repay these dollars at the more expensive FX trade, and they need to pay a higher interest rate because interest rates are going up. So they have a double whammy when it comes to their interest payments in their interest debt. So this thing is a self-reinforcing loop. And to go back to the earlier points regarding if it's an endogenous or an exogenous, everyone who watches the US comes out and says, the Fed is monetizing the debt, the Fed cannot fund the US deficit, and so on. But if you look at the rest of the balance sheets, the BOJ is around 120%, 128% of Japan's GDP. The eurozone is 81% of the eurozone GDP. The Bank of England is 39%, and the Fed is 35%. So if you are the biggest economy in the world, everyone wants your currency. Everyone trades in your (29/92)
currency, and your Fed has only 35% only, well, only the relative world in this discussion, you understand. And everyone, and you have only 35% is owned by your Fed. Actually, you've not monetized so much debt versus other people, versus other central banks. So I think that talking about the dollar, we tend to focus on the bad things. But if you go specifically and check all the other, especially the developed economies, you'll see that the central banks balance sheets are in the worst position than the US. You see that everyone wants to trade in US dollars, and this hasn't changed. So as we speak, the structure is still the same. A lot of countries try to go to a multipolar world, but they find out that when they try to do that, their currencies start to fall, and then they are facing serious problems. So I'm not sure this attempt will work at this stage. It could work someday, but I think the more they try, the higher the friction will be, and that friction will cause at some point (30/92)
something to break. We've seen a few signs the last 20 days, 10 days actually, the BOJ intervening, the BOE hard to intervene. And I think these are only the first signs. We're going to see more issues such as these in the future, unless of course the Fed pivots, which I tend to agree with Brent, that we do not believe, I don't believe that this will happen anytime soon. Although history suggests that whenever the ISM number in the US goes below 50, the Fed either poses or pivots, I think at this stage, the way things are and the way and what the Fed has communicated, they want the US economy to slow down. And I think as they overdid it in QE, they will overdo it in raising rates. So I think we're going to see the same way of doing monetary policy. And again, the Fed will be criticized if it stops early, if it stops late, they will switch. So I don't think it's easy for them to stop early and say, yes, we believe it's done enough. They need to see the number come down, the inflation (31/92)
number come down before they stop. Yeah. Hey, Dmitry, before I forget, Michael, I want to piggyback on something that both Michael's talked about with regards to the potential for a move from unipolar to multipolar. It's not that we don't see it, and we've all three of us, and we've discussed this, it's not that we don't see the attempts, it's not that we don't believe there is a desire to do it. The fact is, it's much easier to talk about doing it than actually doing it for a couple reasons that I don't think we've talked about yet. And part of it is the amount of dollar debt that is out there in the world. Everybody knows about the US dollar debt is like $30 trillion. An unfunded lab at Bilities is probably multiple hundred trillion dollars. But the fact is there's a Euro dollar market out there, which is dollars that exist outside the United States. That's probably bigger, or actually it is bigger, the Euro dollar market is bigger than the domestic US dollar market. And so then a (32/92)
lot of people will say, well, why don't the rest of the world just default on all of these loans that they have, and then just there won't be any demand left for the dollar? Well, the problem with doing that is that they would not be defaulting on the United States. It's not the United States that lent the Euro dollar market all this money. I mean, they lent them some of it. But the fact is, is that the Euro dollar market lent other people in the Euro dollar market all this Euro dollar debt. So if all this dollar debt that sits outside the United States gets defaulted on, they're defaulting on themselves. So this would be like if you're living in New York City and you have a bank account with dollars, and you get transferred to Hong Kong, and you're, or you get transferred to Germany, and you fly over to Germany and you rent an apartment and now you got to use euros. Well, you don't just destroy your bank account over there that has dollars in it, right? You want to convert those into (33/92)
something else. You wouldn't just burn them and let them go to zero just because you're not going to be using them anymore. But that's what the Euro dollar market would have to do. Yeah, they would get rid of their dollar debt, but they'd be like if you found a bunch of black mold in your house and you had to get rid of the black mold. Yeah, you get to get rid of the black mold, but you got to burn your house down to do it, right? So it's easy to talk about, yeah, let's just do it. But when it actually involves you losing assets in the process, it's much easier or it's much harder to pull off. The second thing I would say is that there's, earlier this year when the U.S. quote unquote weaponized the dollar and seized Russian assets and froze bank accounts, there was a big uproar. I'm really not sure why. I mean, this has happened before in history, but there's this big uproar that nobody in the rest of the world would no longer trust the dollar and they will go elsewhere because this is (34/92)
just immoral and the wrong way to behave. And I would say again, it makes a lot of sense just to say that, but to actually do it is something different. And the example I'll give is we're hosting this call right here on Twitter. Now in the last year, Twitter has canceled people. Twitter has denied freedom of speech. Twitter has shadow banned different people. And so we're still all here though. And the reason we're here is because this is where the action is. This is where the social media liquidity is, right? And so it's one thing to say, yeah, we wish it wasn't this way. Yeah, we wish it was a little better. But where else are you going to go? And it's just not that easy. There are competing social media programs or platforms that we could all go to. But the reason we don't is there's just not that many people there, right? This is again, this is where it's at. And it's hard to get everybody to migrate to a different system. Now you can get a few here and there and you can get a (35/92)
bunch of big announcements. And you know, Trump can say, I'm leaving Twitter and I'm going to go start my own thing. But look at the relative size. It's just very, very hard to transition. Yeah, I just want to say one thing real quick there, maybe a couple of things. One is, so a great example is Russia's inability to pay debts, dollar denominated debts, euro denominated debts, but let's just stick to the dollar. They went out of their way to try to pay dollar denominated liabilities. So that's how powerful the dollar is in the international system at the same time as they were being sanctioned. And to your point, the euro dollar market didn't grow up. It wasn't something that America imposed on the world. Foreign institutions and actors wanted to transact in dollars and the US, if anything, facilitated the growth of the euro dollar market in response to the demand for dollar usage. In terms of censorship, I think it's Michael Dooley. I was going to look for the paper, but it was too (36/92)
much multitasking. I think Michael Dooley and other authors authored a paper some years ago that looked at the benefits of censorship to running the global reserve currency. That in other words, some level of censorship, some level of the ability to impose sanctions is a feature to a system like this, not a bug. So that is, I think, also speaks to your point. Cal, were you going to jump in if you want to go ahead? Sure. I wanted to riff on a couple of different themes, but first I wanted to talk about what Brent just said about the weaponization of the dollar. And again, it comes back to relative advantages and disadvantages because people, I find it kind of funny that the, you know, a lot of the reasoning behind, you know, sort of, you know, Bitcoin and crypto adoption was network effects and Metcalf's law, etc., etc. Well, you want to know what has the ultimate network effects. It's the US dollar system. And so when you talk about alternatives to the dollar, you know, yes, there's (37/92)
some oil trade being conducted in between, you know, the Yuan and Russia directly between Iran and China. But let's turn the tables for a second and think about, okay, do any of them even present a remotely, even remotely an alternative to the US dollar as a global reserve currency? In other words, you know, despite the occasional bad policies of the United States, I would say that generally the world would probably agree that as a, as the sort of the benefactor, if you will, of the global reserve currency that the United States has generally been a fairly benevolent benefactor, would you trust your reserves to be in Rubles, or in the Iranian Riyal, or in the North Korean currency, or the Chinese R&B? So I think it's, you know, there's a lot, it's all a relative game. The other thing that I wanted to talk about that Mike Nicolettos alluded to is this differing of incentives between the different regions. And, you know, to the Greeks on stage here, you'll appreciate that I made a drink (38/92)
last night and I dedicated it to the Fed. I called it the Silla and Cariptus, because that is, that represents the choice that our Fed has right now. And, you know, it used to be that, you know, if everybody were aligned cyclically, economically, then the Fed can be the plunge protection team for the rest of the world, right? But as last week's Bank of England intervention in the gilt market showed, there are things about the current situation that make the macro setup very, very unstable, because there are differing incentives. The Bank of England had to intervene in the gilt market because of how levered their pension systems were, right? So they cannot allow longer rates to go up. In other words, they cannot allow for a bear steepening. However, because England doesn't have longer dated mortgages beyond five years, if they keep hiking the short end to keep up with the Fed, they're going to break homeowners. The third choice they had is they do nothing and then they break everybody (39/92)
through inflation, right? And so if you notice what happened, trust had to backpedal on her fiscal stimulus for exactly that reason. England will probably see double digit inflation if they go that route. Now, let's talk about the Fed for a second. Our choices aren't exactly, are very different because I've been espousing this notion that the least bad option for the United States might be to bear steepen the curve. So if we bear steepen... Can you tell people what bear steepening means, Mike, also as you continue? Yeah. So a bear steepening means that longer rates go higher even as the Fed is hiking the front end. Compare and contrast that to a bull steepening where the yield curve steepens when the Fed is easing the front end, right? So the knee jerk response guided by decades of easy money is that the yield curve only steepens through bull steepening. But I have news for you because during periods of stagflation, bear steepening is possible. In fact, I believe it was last week, both (40/92)
Jay Powell and Brainard said that they would like to see all points on our yield curve to have positive real rates and their measure of inflation being the core PCE deflator. So we're talking 4.6 to 4.8%. So they're talking about having nominal rates all along our yield curve higher than potentially 4.8%. Now, think about that for a second. If we did that, it would crush demand for long dated assets like residential real estate, which is a big component of CPI. So they kind of want to do that. They want to weaken wealth effects, but it might allow the Fed to ease up on the Fed funds rate, right? And so, the problem here is that if we bear steepen, what are the knock-on effects for the rest of the world? And I think that the presence of structural inflation is what is different this time around, and it presents all sorts of problems because the presence of structural inflation creates an every man for himself dynamic where our Fed is not necessarily aligned with the other central banks (41/92)
of the world and will not count on our Fed to go back to QE just because the Bank of England has to do so or that the Bank of Japan has to do so. And so, that obviously has implications on the US dollar as well. So this is a perfect setup because I want to ask the other Michael a question having to do with the negative effects that tightening dollar liquidity has on some of the European countries in the context of the war in Ukraine and the national security concerns in Europe. Quick point before I do that, the paper I mentioned written by Michael Dooley and a couple of other authors is titled US sanctions reinforce the dollar's dominance. And that's, I think NBER, it's published on the NBER's website, the National Bureau of Economic Research. So anyone that wants to check that out. So Michael, I'm curious, one of the things that I have talked about on the show multiple times, and I think Brent has also alluded to this, and I've seen Cal also make some similar statements on Twitter at (42/92)
various moments, which is that, well, what I have specifically felt is that the Fed would be less concerned this time around about the negative impacts of a rising dollar globally because a rising dollar would have a negative impact on commodity prices and therefore Russia's ability to procure the funds it needs to prosecute its war against Ukraine. During a time when really there was a great sense of urgency around trying to stall the progress they were having in their initial month of their invasion, whatever progress they were going to have. And I'm curious if, one, you agree with that, and in two, if you think that that dynamic is no longer as important because now the consequence of a strong dollar have negative political implications for the Europeans. And so I'm curious what the view is over there. You're talking to us from Athens right now. Is there a threshold at which dollar strength risks undermining the economic and political stability of U.S. allies during a time when they (43/92)
are going into winter without a regular supply of energy? Like, I'm just curious what your thoughts are. Well, let's start from the fact that the euro was created and when it was created, it was supposed to become a challenger for the U.S. dollar global reserve currency. So 20 years have gone by and this hasn't happened. And as we speak, the euro is probably in its most fragile state since inception. And the reason I'm saying this is, yes, when the dollar goes up, traditionally commodities go down. However, this is usually done when there is, it's driven by demand. Commodity oil has gone up in Europe, especially, and most, most importantly, natural gas has gone just to put the number. In November of 2020, natural gas was in Europe was around 10 euros per, I don't know what the metric is exactly. And now it's 200. So you understand that the cost being at 200 is the equivalent of oil being around $500. So Europe imports 50% of its energy from Russia. So suddenly you have a war, you have (44/92)
a supply constraint, the prices go up, and that supply constraint creates inflationary pressures across Europe. Now, given that it's supply sided and not demand sided, there's not much the ECB can do. But the ECB is forced to raise rates in order to stop the euro from falling versus a U.S. dollar. So Europe is between a rock and a hard place actually, because they can't do much. And everyone, supposedly, Europe was supposed to be helping each other. And right now, as we saw today, or this week, at least a few last few days, Germany decided to launch a stimulus of 200 billion for itself. Now, here, Germany can do that. Not all countries in Europe can do the same. So suddenly, everyone's for themselves. ECB cannot stop inflation. They can only crush the economy. And if they crush the economy, yes, inflation will come down. But again, as we pointed out earlier, energy and food are in the last goods. You need to move around. You need to eat. You need to heat your house, your home. So going (45/92)
into winter, these things will likely, these pressures will likely exacerbate and become worse. So the dollar getting stronger poses, in this case, a bigger threat for Europe, because it reduces the value of the euro. And Europe has to import commodities, which as the euro falls, the price of these commodities become more expensive. So right now, Europe is facing a big, let's say, is about to face a big crisis, because not all European countries have benefited as much from the euro. And most notably, Italy has suffered the most, being that since getting into the euro, it hasn't seen much, many benefits from being in the euro. And right now, Italy is in a tough situation, as everyone has noticed, they just had elections, and we were going to see what they're going to do. But I'm pretty sure that after a certain point, Italy will not accept Germany being able to borrow 200 billion, and Italy not having energy, because it cannot afford to buy or it cannot borrow. Now, let me give you (46/92)
another example, where the problem is. As the crisis exacerbated, European spreads started to widen, meaning that all sovereign bonds versus the German bonds started to widen. So as this happened, the ECB had to intervene and say that we'll not let the spreads widen any further. For example, in Italy, inflation is around 9%. When you cap the bond yields, and they haven't given a specific number, but let's say they cap the bond yields at 5%, it means that the investor who buys the Italian bond is willing to lose 4% in real terms. Given that inflation is 9%, the bond yield is 5%. Now, who will be the marginal bond buyer for Italy? Who will be the marginal bond? At some point, yes, initially, someone will come up and say, okay, I'm getting 5%, I used to get 0%. 5% is good. But after a certain point, when they realize that inflation is not coming down, they'll say, ah, no, 5% is not that good. So who's going to be the marginal buyer? So ECB will be forced to start buying more and more and (47/92)
more. And this thing will come to a point where things will get very ugly because Germany, Netherlands, the Northern country will say, enough is enough. And the Southern country will say, what do you mean enough is enough? We need to survive. So there will be a political issue going forward, which we don't know how it will be resolved. So I think Europe is in a very tough spot and things are likely to get worse before they get any better because ECB is going to raise rates. They cannot do anything regarding demand. So they'll have to crush the economy in order to reduce demand. And again, but crushing the economy will not reduce demand for these goods so much because there are in elastic and necessary goods for everyone. So I think this thing is going to get much worse before it gets any better for Europe at least. Yeah. So Michael, you're on board with a secular inflation thesis. You think that inflation is here to stay and its primary drivers are going to be energy? Or I'm just (48/92)
curious to understand exactly what you're thinking is there because I would like to also talk to you guys about what the role of energy policy is here and what kind of role you expect that to play and support for that because so much of what has driven investment in the space has been mandates around climate change and meeting those climate goals. So anyway, go ahead Michael and then Cal can jump in. Okay. So as I said in the beginning, inflation is not the same. When we talk about inflation, we don't talk about the same thing everywhere. In regards to Europe, given that it's a supply driven and meaning that energy feeds into fertilizers and fertilizers feed into food prices, which are both necessary goods that we need on our daily lives. And these are in elastic goods. I think that as the war continues, the inflation will not come down in Europe unless there's a big crash or unless there's a big shock to the system provided that none of these happen in the meantime. Yes, Europe will (49/92)
keep having inflation and even if we have a shock, I don't think you'll see inflation coming down from 9, 10% to 2%. It might come to 4%. Okay, it's more manageable, but inflation will stay as is. You mentioned the green energy. I want to say that one of the big causes that Europe is in such a mess is because it decided to become green before being ready to be green. So they decided by 2025 or 27, Europe would be green and they thought that natural gas is green and they would turn into solar and wind and they would be fine. But they thought this would happen much faster without even putting a plan in place and they got so fixated with this idea that Europe became so dependent on Russia and that's why Europe is here right now. So unless the war stops, which doesn't look likely at least in the next few months, and unless a big shock happens in the economy, I think inflation in Europe is here to stay. It won't be easy for it to come down. Cal, you want to jump in? Yeah, I wanted to (50/92)
actually underline what Michael has been saying about how the criticality of oil in this entire debate, it all rests with oil. And as Michael alluded to, I call oil an OPEX commodity. You compare and contrast that to CAPEX commodities like for instance copper, cement, etc. that are more based upon economic growth. Oil is an operating expense, right? So it is definitely demand inelastic in the short term. However, there is more demand elasticity in the longer term. So one thing to note is that on the day of the BOE intervention in the gilt market, you remember that we had a huge risk on market across the board. And that day, I basically tweeted out the following. I said, the plunge protection team is back today with the vengeance, re-injecting fed pivot hopium back into bonds and risk assets. But here's the rub, oil. If there is a real pivot, oil will moon and we will be right back to where we started. Now, let's examine the risk-rip today. What's interesting about today, I found, was (51/92)
aside, you could talk about all the technicals and the oversold conditions and whatnot, but a new stakeholder has entered the mosh pit, so to speak. That new stakeholder is OPEC plus, who is now jaw boning. And I have my reasons to perhaps doubt the jaw boning, but they are saying that they're willing to potentially cut up to a million barrels per day. Now, my doubts stem from the fact that I think them entering the fray this early with prices this high, especially with the eurozone on the precipice of falling into a depression with a capital D is not the most politically astute thing for OPEC to do here. And I think there are potential repercussions for them to do that. But if they did that, it would bring about what I call the structural supply and demand singularity point in oil that much closer. Let me talk about that for just a second. My base case for this whole sort of stagflationary setup is that it started with commodity price inflation. It leapt into stickier components that (52/92)
are now in wages and rents, which is core inflation. And at some point, you're going to see those indicators start turning down. But I predict that even absent any OPEC cuts in the next several years, we're going to reach a point in time where because of the lack of investment in the space, we're going to reach a point in time where even a recession impacted demand is going to exceed global spare capacity. I don't believe we are there yet. And I can say that with some confidence because otherwise we would not have seen oil go from 130 down to 70s. But I think we are getting close to that point. Now, so my thesis has been that throughout potentially the rest of this decade, we could see this start-stop sort of tag team effect where just as core starts slowing down, energy starts picking back up again, and then vice versa. So kind of like a asynchronous start-stop between core inflation and energy inflation. If OPEC plus actually cuts and enters the fray, then instead of this sort of (53/92)
asynchronous tag team effect, you have a synchronous wallop that pushes the Fed pivot even further out. So to me, this is it's very, very interesting because there are so many sort of every man for himself dynamics here. And OPEC plus is now in the mosh pit. So I want to bring an additional speaker on here, guys. Before I bring him on, and that speaker is Michael Howell, the CEO and founder of Crossborder Capital. I want to give Brent a chance just to comment on anything he wants. And then I can bring Michael on. And this is the thing, this is the second spaces in a row where I find myself surrounded by Michaels. And I wonder if that is it them or is it me? I'm much, if I have too many Michaels in my life. But anyway, Brent, go ahead if you have anything that you want to say. Well, I'm actually excited to hear what Michael, Michael Howell has to say because I love his work. The one thing I would say is I think everybody can now see in real time the fact that these green initiatives, (54/92)
we've had these announcements for the last three, four, five, ten years of these green initiatives, they're going to completely change the entire energy system. And the problem is, is we've run into the wall before these new systems are up and running, right? And as a result, it's just too little too late on the green front. I would encourage everybody to think of that same thing in terms of dollars and de-dollarization. For one, two, three, five, ten years, we've heard all these plans that there's going to be a competing currency system, there's going to be a competing payment system, there's going to be a new trade block. But I would tell people to consider what happens if it's too little too late. It's not that the desire is not there, it's not that the temps aren't being made. But if you hit the wall before these systems are up and running in the same way that Europe has hit the wall before their green projects are up and running, what happens to the price of the dollar just the (55/92)
same way as what's happening to the price of oil and gas? And again, there's a big difference between saying you're going to do something and actually being able to pull it off. So I'll leave it at that and I'll pass the baton to Michael. I also want to say this kind of highlights something that we talked about earlier, which is the move from unipolarity to a new system that has not come into being yet. It's not formed. We're in this period of undoing and then creating something new. And these initiatives are possible in a liberal world where you have a security guarantor. But in the world that we're moving into, national security comes front and center again. And you know that something, again, I don't want to put out too many thoughts here, but when Michael N. was talking, one of the things that came to mind for me is something that I've talked about on the show quite a bit on numerous occasions, which is that the European Union itself came into being in response to security (56/92)
concerns, a desire to tie the Germans into a European economy. It was the European coal and steel community. And I wonder whether or not the right framework to think about whether or not the euro and the European Union survives in the face of the challenges that we see today is one that puts economics first or one that puts national security first. Because I tend to think that so long as the United States continues to lead and is able to sustain its role as the leader of this alliance in NATO and in Asia, the European Union will stay together. And I want to actually point people on this Twitter space to one episode in particular, went back a couple of years with John Meersheimer on Hidden Forces, where we talked about exactly this. It was about the power of nationalism and the failure, the coming apart of American hegemony and the wide nationalism, Trump's liberalism every single time. So Michael Howell, why don't you jump in here? As I mentioned, Michael Howell is the CEO and founder (57/92)
of Crossborder Capital, which is a London-based independent research and investment company. Michael is also one of our regular contributors and researchers for genius tier members of Hidden Forces. So Michael, why don't you share your thoughts, tell us a little bit about where you're coming from on this? Sure. Hi, everyone. Thanks to me, too. Thanks for the introduction. I suppose all we need now is Michael Green to come on and we've got four, Michael. So let's look forward to that. A few years ago, I wrote a book called Capital Wars, which essentially addressed the whole idea about the hegemony of the dollar and the challenge to that by from China. And American hegemony is basically about currency imperialism. It gives America a great exorbitant privilege, as it was called. Other countries, Britain had that for 100 years through the 19th century. It's a great underpinning of power. And the US can't lose that or it shouldn't you lose that. But China is basically coming. Now, I think (58/92)
we've all got to distinguish between the use of a currency and the level of a currency because the two things can be completely different. I happen to think that we're somewhere near the peak in the dollar at the moment, but I don't think we're near the peak in the use of the dollar. And I think that's the thing that is really sustained. Now, one of the things that my book addressed was the whole idea about the architecture as Brent says, that's really important. It is probably 80% of the story here. And a lot of people talk about Bretton Woods 2, Bretton Woods 3, Bretton Woods 1. Actually, we've never left Bretton Woods 1. And if you look at Bretton Woods 1, what was it really about? It wasn't really about fixed exchange rates. That was, if you like, an accident that came out of the Bretton Woods Agreement. What Bretton Woods 1 was principally about was creating a system where you get the free flow of trade and ultimately capital, where the dollar was the centerpiece of those (59/92)
arrangements, where the IMF and the World Bank pleased errant countries, and where the US military essentially backstopped the system. Now, if you look at what we've got today, that's exactly what we've got. There's been no change. We haven't got a Bretton Woods 2. We're not going to get a Bretton Woods 3 based on commodities, whatever people may say. It's basically about the role of the dollar. China is coming and China is coming fast here. And what China basically is trying to do is to unseat the dollar, and they've been very explicit about doing that. And it's definitely what the US has to do to address this challenge. What China is doing, and there's the number of avenues it's pushing at, the number of doors it's pushing at. But one of the most important is the whole idea about redenominating trade in dollars, sorry, in yuan. China is the world's biggest importer and exporter, but it basically is also outside of America, the world's biggest dollar user. It re-exports dollars, and (60/92)
what it should be doing is exporting yuan, if that's in its long-term interest. And basically what China has done in the last few years is to set up swap lines around the region. I think there are 36 swap lines with other countries with their currencies into yuan. Now, the only reason that that will be done, or is being done, is that China basically intends at some stage overnight to re-denominate trade, its trade in yuan, and basically try and kick the dollar out of its trade. Now, what we're moving to is a world which is basically segmented into or cleaved in half. You've got a free world, which was actually the Bretton Woods One World, which basically excluded the Soviet Union and excluded China. Welcome to the new world, because that's pretty much where we are now. Russia is excluded, China is excluded, Iran is excluded, North Korea is excluded, etc. And basically that is the challenge that America has to face. China's opened up its bond markets to try and get more capital. That's (61/92)
not a particular success at the moment. Capital is leaving China, and they're trying to embark on a digital initiative with a digital yuan that will allow peer-to-peer transfers. But again, America is still very much in the lead, despite what the SEC is doing to try and hamper US innovation. The second question is about the level of the dollar. And I think here is an interesting insight about the UK. Now, I went back and looked at the math of the US, the UK fiscal situation. And there's been a lot of nonsense spoken about the UK, particularly in some of the liberal media in the last week or so. Basically, the situation is that if you look at the debt coverage of the UK fiscal situation, looking at, let's say, entitlement spending plus military expenditure relative to tax, and then looking at that surplus against interest payments, interest was covered before the budget in the UK 1.8 times. So it was 180% coverage. After the budget and excluding the backtracking on these taxes, it was (62/92)
still 120%. Where is America now? Right now, America is at 80%. So currently, entitlement spending plus military subtract taxes does not cover the interest bill on US debt. There's a 20% shortfall, which means the US has to borrow. In five years time, that 80% goes to 25%. So the US fiscal situation is deteriorating fast, which is basically something that could undermine the dollar. So one of the things we've got to keep sight of here is that, number one, the challenge from China and number two, the challenge domestically in terms of the deterioration of US debt and the rise of entitlement spending, which kind of looks out of control in many ways. The US may be the dirtiest shirt in the room, but there's a lot of shirts coming and some people are finding soap. Michael, I have a question about this, and I'm not going to articulate it super well because I'm still working on getting a coherent theory around it. But it seems to me that China disproportionately benefits from being plugged (63/92)
into the international trading system. It also depends on the US export market and export markets in general in order to build up its capital base. And the other point I was going to make was, I'm not entirely convinced, and there are many other reasons why people would be reticent to hold the yuan. I'm not entirely convinced that while the Chinese do want some of the benefits of being able to use their own currency, that they're willing to bear the costs of actually doing that. And so what do you think of that line of argument for why the Chinese and the Chinese yuan is not close to replacing the dollar anytime soon? And that doing so, I suppose, would lock it into a trading system that really sits outside of where the main value chains are created, case in point, the semiconductor supply chain, where all the major difficult, high value processes of that chain happen outside of China so that the US and its allies can actually produce high-end semiconductors, whereas the Chinese would (64/92)
not be able to do that without being plugged into that system. Yeah, I think those are all really good points. And I think with hindsight, being sort of 2020 vision, it was a mistake to let China into the World Trade Organization in 2001. And if you look at the dynamic since then, I think that's what's created the deflationary background in the West and the slow growth environment and saddled us with a lot more debt. And if you look at how China has benefited from that stage, in year 2000, China basically was responsible for 6% of global liquidity. Currently, China accounts for over 30%. It's just overtaking the US. So in other words, China has got some huge, huge benefits in terms of monetizing a lot of these surpluses that it enjoyed following entry into World Trade. So I think that there is a clear benefit. I'm not too sure what the cost would be in that, but I think there are some clear benefits that China has got, particularly if it gets the yuan to become a major currency. And (65/92)
it's got a foothold in the international markets right now. So I would be, I'm still a rapture of the view that China needs to be addressed to or the Chinese problem needs to be addressed. Now, maybe the Russian attack on Ukraine and the response to that is some way recognizing that there is a bigger problem out there with China. Maybe China is the end goal. And what I mean by that is coming back to this Bretton Woods one idea that backstopping the system is the US military. China needs to import a huge amount of oil. It can get that oil from the Gulf, which it's doing now, or it can get it from Russia, which is not doing, but it will do, but in the ideal world for China in the future. The problem we're getting Middle Eastern oil or Gulf oil for China is that there's a long serial route back to China where the Chinese tankers are vulnerable to any attack. So in any military conflict, the supply chain that China would run, the would run a gauntlet basically through Southeast Asia, it (66/92)
would be very, very vulnerable. There would be nothing able to protect the Chinese convoys. And basically China doesn't have the naval strength yet to do that. It really depends on the US. Now, if China got its oil from Russia, there would be far, far less of a problem. It'd be more defendable. So I think ultimately maybe a lot of this or the subtext here is that we want the Russian regime to fail. And that way it would support China's ambitions in the longer term. And that may be left field, but I think currencies are geopolitics. Yeah, super. Go ahead. Yes, go, Mike. I want to say that I tend to agree that there is a geopolitical aspect to what's happening in Russia. Russia, China, I think is importing about 75% of its energy. So if you can control the energy sources that China is getting, definitely you can put some pressure on it. Regarding the Chinese one becoming a global reserve currency, in order to do that, it would have to open up its capital account and have its currency (67/92)
free float. Now, there's a problem there, which right now we can see because China cannot raise rates right now because it's facing some real estate issues domestically while the US is raising rates. So it's putting an extra pressure on China. But if China were to open up its capital account, if you look at, and I mentioned this, I've had this discussion with Michael Cow previously, if you look at M2 versus its FX reserves in China, you will see that the ratio is about 8%. So if it were the Chinese Tigers, the Asian Tigers in 87, the pegs broke when that number breached 25%. So now imagine with an 8% M2 to FX reserves and China opening its capital account, everyone with one will convert their money and leave, if at least most of them. So I don't think, even though China wants to make a reserve currency, in order to make it an actual reserve currency, it will need to be able to be freely converted. And I'm not sure at this stage, China can do that. So I just wanted to mention that to (68/92)
put it on note. Can I ask Michael Howell a question? Please do. Michael, I thought what your comments about China's sort of end game in setting up these swap lines, I thought that was very, very interesting. The question is, what is the time frame involved? Because, as Mike Nicoletta said, I think that if they actually freely floated the Yuan right now, they would have a nine handle at least. So what's the saying? You could lead a horse to water, but you can't make them drink. I don't see any foreign banks taking them up on their swap lines in the near future. Yeah, I agree. I mean, I don't think that the Yuan as a major threat to the dollar is coming in the near term. I'm absolutely one with you on that. But China, we know, plays the long game. But I think the other thing is, history is often a good teacher in these situations. And if you go back and take the UK example, and this is a slightly colorful one, but it's an interesting point, is that in 1897, in the UK, it was Queen (69/92)
Victoria's Diamond Jubilee. And to celebrate the Diamond Jubilee, they had a sail pass of the British fleet, which she was allegedly watching and giving a salute. That fleet took eight hours to pass by the Queen. It showed the military power that the UK had in 1897. And that involved a fleet where no ships from Asia or India were included. It was purely the Atlantic and Mediterranean fleets. So that basically showed the, if you like, the military prowess of the UK. Within 20 years, sterling have been eclipsed by the US dollar. So 20 years from now, the same could happen. And all I'm indicating is that basically, wars can happen. And what happened in World War I is that Britain basically suspended all overseas lending by UK banks. US banks muscled in. They developed a trade credit market. And that was the beginnings of Dollar Hagemene. The dollar went from nowhere to being the major reserve currency in foreign exchange reserves of major countries by 1921. In 1914, the Austro-Hungarian (70/92)
Pengo, what it was called, was used more widely than the US dollar was. That's how quickly these things can change. Except the big wrinkle here is demographics. Because if you believe Peter Zahan's demographics, and it's hard to argue the math, by 2050, he thinks the Chinese population could be half of what it is today. Oh, look, I'm not promoting China. I'm not, and I agree absolutely. These are big demographic challenges. China's not in a good place, that's for sure. But in terms of their motivation and what they're trying to do, this is clearly, they're clearly trying to attack US Dollar Hagemene in the Asian region. What they'd like to do is basically get the yuan used more widely. And I would suggest that if you'd look, if you go back and look at the period from 2016 after what is labeled the Shanghai Accord, when there was an attempt to get the dollar down among the G20 countries, from that time until March of this year, what you basically have seen or what you saw was (71/92)
unbelievable stability across the Asian units, cross currency, volatility, basically subsided. And that, I think, was most countries were targeting the yuan. And that clearly wasn't a healthy situation. But fortunately, that was broken in March, April of this year, where you started to see some big devaluations of other Asian currencies. Now, that may have been, if you like, a Trojan horse to try and destabilize the yuan. But it certainly worked because the yuan is now a much, much weaker currency. I want to give Brent an opportunity to jump in here, because I know that Brent is going to have to leave soon. And of course, Michael Nicolettos is over, like it's like 3 a.m. over there. So I just want to make sure everyone gets a chance to leave when they need to. Also, I want to say, if you're interested in the way that Michael how views the world, where he's coming from, like I've said, he's a really, really, really, really smart guy and a contributor to our Genius tier. We're doing a (72/92)
live Q&A with him this Friday. So if you have any questions or you want to get a link to that, we can share one with you. You can just send me an email at info at hiddenforces.io. Just don't DM me. Brent, jump in here. Let us know some of your thoughts before you have to jump off. Yeah, thanks. Thanks, Dimitri. And I'll say thank you to all the Michaels right now for joining me in this. And I want to say a big thank you to Michael how for jumping in because I thought he did a masterful job of explaining Bretton Woods, the role of the United States, the role of the dollar, the role of the IMF, the role of the World Bank. I wish I could speak as eloquently and I wish I could speak with an English accent. Unfortunately, you guys are stuck with a kid from the Midwest who talks about milkshakes. But what I would say, what I'd like to leave with is I would definitely recommend people read Michael's book, because it will give you again an understanding of kind of the framework of the world (73/92)
monetary system, the powers that be so to speak. There's another book that I would encourage everybody to read and it's called The Political Economy of International Relations and it's by a guy named Robert Gilpin. And you should put it by your bed because it is boring and it will put you to sleep, but it will also tell you how the world works and how or the institutions that run the world. And I think it's important to have those as a framework. And I'm going to make a couple points here because then I've got to jump and so I apologize for kind of monopolizing the time here, but just give me a minute or two. And I want to leave people with these thoughts and that is, I listen, I don't know if I'm going to be right or not. I really don't. I'm not so arrogant as to think that I couldn't be wrong. But what I do know is I've put an incredible amount of work into this and I've come to the following conclusions. One is that based on the design of the system, the dollar will be the last to (74/92)
fall and it's just kind of built that way. So if we get into a death of fiat scenario, betting against the dollar is, in my opinion, a fool's game. Secondly, the dollar falling is not a problem. So if they go back to QE and they're able to get the dollar back to, I don't know, 195, even 90, that's going to extend the game. That's not going to bring the system to an end. That actually helps perpetuate the status quo as opposed to bringing it down. The third thing I'd say is there's nothing that the rest of the world can do to bring the dollar down that the Fed didn't try to do over the last two years. And there's nothing that they can do that would bring the dollar down more than what the Fed did. They can do things that would ultimately bring the system down, but in the short term, all that chaos would drive the dollar higher, in my opinion. The next thing I'd say is the dollar might fall from here. It's had a heck of a run. And I've never said it can go up in a straight line forever. (75/92)
I think this could actually play out over several, several years. We could have one, two, three more bouts of QE before this is all said and done. There's nothing that says this all has to play out in the next three to six months. It could easily take another three to six years. One thing I'd say is if the Fed pivots, again, that's just a temporary solution. It just kicks the can down the road and we end up right back where we are now unless they completely change the system. And then I would say that, and I touched on this earlier, those who think that the U.S. will rank the global reserve currency because of some economic benefits, I would encourage you to take a look through a different lens. I don't think the dollar is necessarily viewed as an economic tool only. It is a power tool and it is used to exert force as opposed to just make this profit or make that profit. And then the final thing I'm going to say is I know that in many cases and in many times and in many of the (76/92)
discussions I've had with people on this topic, it becomes very clear that my position is not necessarily liked because that's not what the other side wants to see happen. And it shouldn't be this way and that it's an immoral system and all these different adjectives that you can put on it. And I just want to be clear that advocating for something is completely different than acknowledging something. I am not an advocate for the system. I just acknowledge that it exists and I'm doing my best to help everybody see what's happening. Now, whether it actually plays out this way, I don't know. But so far, a lot of the things seem to be firing. And so if you have big bets against the dollar, I would encourage you just to at least think where you could potentially be wrong. I know I always think always how I can potentially be wrong. And I've been proven wrong several times before and I may be proven wrong again. But I would encourage you to look hard and deep and put your own desires aside (77/92)
and just look at the world as it actually is. And with that, unfortunately, I guys, I have to jump. Well said, Brent. Anyone who hasn't heard Brent's appearance on Hidden Forces, that was episode 250. The title of that episode was The Revenge of the Dollar. So I strongly suggest listening to that episode as well as our episodes with Michael Howell and a recent episode with Lev Menand on the shadow banking system, which also describes much of what we talked about today. Let's talk end game here to end the space and kind of think about where all of this goes. Michael Cowell, why don't you take this first? Brent said he didn't talk about how it ends, but he did say that it's going to take a lot longer than folks think that these types of unwinding and changes in the global monetary order take a very long time to work themselves out. I'm curious how you think this ends and feel free to incorporate into that conversations about war and anything else. So I've used this analogy on another (78/92)
space before, but I've, you know, this whole notion that the global debt levels have to keep rising forever, and there's no way out of that loop. To me, that reminds me of the Tacoma Narrows Bridge, which was a bridge that many physics professors used to highlight the physical concept of resonance. Resonance is a positive feedback loop in physics where, you know, if the breeze starts swing the bridge to its natural harmonic, that it creates a self-reinforcing positive feedback loop, and the oscillations get larger and larger until it exceeds the physical capacity of the bridge, and the entire thing crashes. So the financial equivalent of that would be a complete system meltdown where, you know, the oscillations and the debt levels just get so large that eventually the entire system breaks, right, which is kind of what you saw during, like, the Weimar hyperinflation. So, you know, today I had an interesting discussion on my feed. I said, here's a thought experiment. Let's say that BOJ (79/92)
bought up 100% of its outstanding JGBs and then just canceled all the debt. What happens to the Jpy? What happens to the stock market? And, you know, I've got a number of different questions, but, you know, I guess in a perfect, you know, my thoughts on that end game are that, well, in a perfect world where they no longer need access to global markets, then maybe nothing happens. Maybe the yen actually appreciates. But to me, that's a very unlikely scenario. To me, it's very unlikely that there's such a thing as a free lunch and a perpetual motion machine, because if you're a country that has been profligate enough in its spending ways to have gotten to the point where you need to do yield curve control to the point where your central bank owns, you know, a significant portion of all debt outstanding, then the world is going to view your currency as trash. And so, you know, I mentioned at the outset, you know, so I spent much of my career in corporate bankruptcies and restructurings. (80/92)
And so the thought that I want to kind of throw to the panel is, what is the sovereign analog to a corporate restructuring? What is the sovereign analog to a post-reorg equity where debt gets canceled, right? If debt gets so large that the debtor can no longer afford the interest payments, right? There's something called the bankruptcy process that cancels the debt, and the debt gets restructured into post-reorg equity, right? So here, I'll start by just saying my own thoughts, and I would love to hear the panel's points of view on this. Here is where I feel that even if it came to that, the US once again stands at the top of the heap because it comes down to what is on the left side of the national balance sheet. Because if you're talking about an end-game scenario where debt has to be restructured into some sort of sovereign post-reorg equity, well, then those equity claims are going to be based upon what the country owns as assets. What are its natural resources? What are its gold (81/92)
reserves? What's its ability to just create economic rents? So I don't know how the end-game, if that is really the end-game, that there is an endlessly bigger amount of debt, then that has to be the end-game, right? But the alternative is, and I think that there's no better way to, or there's no better excuse to try to put in, to sort of dampen the oscillations in that mental model, than 9% or 10% inflation. Sooner or later, you have to acknowledge that there is something called a business cycle, and that austerity actually may have to come to pass. And national balance sheets need to be shrunken one way or the other. So those are my thoughts as to end-game. I would love to hear the panel's thoughts. So whichever Michael wants to go next, feel free to unmute yourself and take a stab at it. Okay. Well, hearing your question, I wish I was Michael J. Fox in Back to the Future and having the Almanang to give that answer. It's one of the hardest questions I get to think about because there (82/92)
are so many variables here that if one of them changes, for example, the war ends or the dollar gets stronger, where it changes the whole story. I don't mean to... And by the way, that you're totally right. So like 100%, in some ways, these are ridiculous questions to ask. So feel free to answer it however you want, Mike. No, no, no, no, no. I'm putting it out there the way I'm trying to think about it because... Sure. Yeah, believe me, I think anyone who runs money or looks at markets thinks this question over and over and over and tries to figure out what's going to happen. Again, I don't think there is an end game in the sense that there is an end game because it's an ongoing process that never ends when we talk about market. But what do you think happens to Europe? That was something that we were talking about earlier. What's your view? Does the EU stay together? Incorporate that into your answer. No, no, I think that the euro is either the probabilities of the euro lasting as it (83/92)
is are very small. And why do I say that? Because in order for a currency block to work, interests need to be aligned. And I don't see how interests will be aligned going forward. So I think at the years past, the frictions get stronger and stronger and at some point, something breaks. I don't know if it breaks, let's say in a controlled manner, being that one day 19 countries decide altogether to go back to their currencies with a peg and steadily go back to their currencies free-floating while keeping, let's say, all the EU benefits. That could be one scenario or it could be one country deciding to leave because it had enough and it can't take it anymore. I don't know what that is, but I can't see the euro lasting as it is past 2030. I would say I would put 2030 because it's 30 years since it started. So I think frictions will increase. And there's a famous quote by Henry Kissinger when he said, when I call Europe, who do I call? And that embeds actually the answer. Who do you call (84/92)
when you call Europe? Who is Europe? It used to be Germany, it used to be Angela Merkel. Now who is it? Macron. It's not a clear answer. So I think unless this question is resolved and it resolved clearly, Europe, it will be very hard for Europe, for the euro to last. So I think this is a main challenge, a very big challenge. The other challenge that is out there is as Michael said, it's the debt. What happens to the debt? What happens to the BOJ, for example? Do they cancel their debt? Or do they do the Treasury Secretary gets with the central bank and says, hey man, how much do I owe you? You owe me XYZ, okay, let's do a swap and issue a 100-year bond at 1%. And that debt goes 100 years out. That could be a scenario. What happens to the Yen then? Does it rally or does it fall? It's a hard question. What I can say with a strong conviction is that the two things that will play will be the most important things in the next couple of months and years is liquidity risk. People need to (85/92)
focus more on liquidity risk because when there's no liquidity, a lot of things go bad. So you need to focus on that. And the second thing that a lot of investors will need to start paying attention to, which they haven't been for a long time, is counterparty risk, which everyone thinks that their counterparty is safe. But assets with no counterparty risk, I think in the next few years, will deserve a premium. So I think that's something to pay attention to. So I think this is where people should focus. I do believe that the dollar gets stronger. I don't believe it goes get strong in a straight line. So I think we haven't seen the end of this move. Probably it goes back and then it goes back higher. And I think that if something breaks and the Fed pivots, as Michael Cowell said earlier, then commodities shoot the moon, and then we go back to square one and inflation goes back up. And I heard Muhammad Al-Ara'in's interview a few days ago, where he suggested that we might be entering a (86/92)
period where the Fed goes back and forth, where it pivots with rate hikes, and then it pivots with rate cuts, and then it's forth back to rate hikes. So this could be a scenario which has been in my mind for some time now. But I would focus on liquidity risk and on counterparty risk. And I would be very patient and very prudent, because I think well, the ability is here to stay in slightly to increase. And in 2008, all the debt from the banks went to the government. And now the government, we're seeing the government experiencing issues which are seen in their currencies. So I think people need to be very careful. And if I were an investor running other people's money, because I'm not right now, I would reduce my exposure. I'd be having a low gross exposure just to be safe, because I think we haven't seen the end of it. This is the end of the beginning as Brent likes to say. So let's be patient and wait it out. That's my two cents. Michael, you and the other Michael Cow are both two (87/92)
people who haven't been and need to come on Hidden Forces both individually. So we're going to have to make that happen at some point. And we'll have a chance to dig into your views about markets in the world more deeply. But great analysis. Thank you. Michael H, why don't you give us your view, whatever it is again, like very impossible question to answer. So take a stab at it however you like. Yeah, I think the big issue is liquidity risk. I mean, that's what we see. And my simple take on what policy was this year was that US policy was pretty much about getting the Fed balance sheet down and getting the US dollar up. I think policy in 23 is going to be about getting the balance sheet up and the US dollar down. And I think because the reason for that is the Fed is going to break something. And I think things are breaking fast. If you look at the ISM survey today, you look at the internals on that, it looked really quite bad in my view. So the economy is definitely weakening a lot. If (88/92)
you think the US economy is weakening, just look outside of the US, it's a lot worse out there. So we're looking at world recession. Look at what FedEx announced 10 days ago. If you extrapolate FedEx's announcement, it's telling you pretty much that world trade is going to be down 30%. That's what it's consistent with. So the outlook is not great. What are they going to do? My view is that, and I think that was largely underscored by what the Bank of England did last week, the alacrity with which they moved suggested that yield curve control is coming back. And yield curve control is something that we've seen in Japan, we've seen in Australia. The US did it between 1942 and 1951, pretty successfully, generally. Interestingly, I looked today at previous FOMC statements about yield curve control. And to my great surprise, I discovered that Leal Brainard and Janet Yellen, when she was chair, were big advocates of yield curve control. And the endorsement on yield control came from a paper (89/92)
by the St. Louis Fed that basically said it's had great success. So I think that's the way the policymakers move. Although I see the illogic, if you like, of printing money or whatever, I just think that what policymakers are going to do is kick the can down the road. And is that a 10-year road, a 20-year road, a 30-year road? I don't know. But I think it's in most of our lifetimes that they're going to keep kicking the can down the road. And we suffer the consequences. But ultimately, the consequences seem to be some form of asset market inflation. What that does is it creates a huge skew in society. It disadvantages a huge amount of people. But for the moment, that's the world we're living in. And I don't really see there's any alternative or anybody's coming up with an alternative, sadly, perhaps. Well said, Michael. Again, if anyone wants to join our live Q&A with Michael, this Friday where we also take audience questions as part of our Genius tier, you can either subscribe to our (90/92)
Genius tier at hiddenforces.io slash subscribe. Or if you want to try it out, you just want to see what the live is like, shoot me an email at info at hiddenforces.io. And my team can send you guys a link. This was awesome, guys. I've really enjoyed doing these live spaces. I'm going to republish this on the Hidden Forces feed. And of course, the audio remains on Twitter as well for anyone that wants to listen to it. But our main guests were also recording locally on their microphones. So in certain cases where you heard Brent breakup, or I don't know that it happened that often to cow, that you'll be able to hear it because we have that original recording. Again, thanks so much. And I hope everyone has a great night. Thank you very much for having us. Thanks. It was a great discussion. Thank you, Dimitri. Thanks, everybody. For more information about this week's episode, or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free (91/92)
email list. If you want to access the full episodes, transcripts and intelligence reports, which include additional notes, resources, links and other material that will help you get the most out of each and every episode, check out our premium subscription available through the Hidden Forces website at hiddenforces.io slash subscribe. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation on Twitter at hiddenforcespod or send me an email at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (92/92)
This is the full transcription of podcast 'Hidden Forces'.
Lessons from the Soviet Union and the Flight to Safety Simon Mikhailovich #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. My guest in this week's episode is Simon Mihailovic, founder and managing partner of the Bullion Reserve, a professionally managed private vehicle that holds only physical gold, while at the same time providing a full service solution that ensures legal compliance, jurisdictional diversification, liquidity, physical access and deliverability, all within a single structure that maximizes flexibility and in the words of TBR's founders, enables the use of gold bullion as a deep, out of the money put option on the failure of extreme monetary policies with an asymmetric upside. Because Simon and I go back some years, this is a more congenial episode that you might otherwise expect though, I think in this case it (1/96)
actually makes for a much better conversation because Simon has a very interesting personal story and one that he recently shared in an episode of the Grant Williams podcast back in June as part of his Endgame series. And while I've known Simon for a decade now, I never actually heard him speak at such length about his experience living in and emigrating from the Soviet Union and how that experience informs his political and investment philosophy today. We spent most of the first hour and change discussing that experience and drawing from it economic, political and social lessons that we can apply to the present moment. The last 20 to 25 minutes or so is spent specifically on TBR and the value proposition of holding gold bullion in a world where the traditional safe haven asset of US treasuries no longer inspires the same degree of investor confidence that it did only 10 or 20 years ago. And what that means for not only portfolio construction, but political and social stability as (2/96)
well. Because some of today's conversation deals with investing, it's important to make absolutely clear that nothing we discuss on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this special midweek episode with my guest, Simon Mihailovich. Simon Mihailovich, welcome to Hidden Forces. Thank you for having me. It's great having you on, my friend. It's great to be here. You and I have known each other for what, 10 years, Simon? At least. Do you remember where we met? I think it was at Grant's Conference, right? It was at Grant's Conference many years ago and when you were a producer of, I've got the name of the program. Capital account. Capital account. That's exactly right. That's how we met. Yeah. I think we actually met down at the bar after the conference was over. I don't know that we met before that. I (3/96)
think it's an easy assumption. Yeah. It's a good assumption. I've met a lot of folks through Jim Grant either directly or as a result of the conference. That's how I met Chris Cole and I can't even remember now. I mean, I first saw Mark Cahodas there. He has a great gathering. He's had great gatherings over the years, but now with the pandemic, I don't know how that's going to play. At some point, I guess it'll come back. Look, life is going to come back. I mean, but this is not the first pandemic or epidemic in the world. This too shall pass. It's great having you on the podcast. You were recently on Grant Williams' podcast, another mutual friend. I believe that podcast was June 11th or something like that. I even though we've known each other, I was used to talking to you about precious metals or financial markets. Of course, I knew that you emigrated from the Soviet Union, but I didn't know the specifics of your story. I was captivated by it. I was captivated by the way you (4/96)
described not just your journey, but also the end of the Soviet Union, your personal experience of it in the final years when you were there, as well as your general experience of it as you were watching it, I assume, collapse. If maybe we could think of a better word, dissolve. Maybe that's actually the ideal word to use. Because it wasn't just the Soviet Union as an institution that dissolved. It was an ideology. It was a way of life. That's something I really want to get into as a prelude or a stepping stone into a larger discussion that I think can be instrumental for understanding where we are today in the United States and as Westerners. But first of all, another thing I didn't know about you was that not only did you grow up in the Soviet Union, I did know that, but I didn't know that you grew up in Leningrad in St. Petersburg. Of course, Leningrad is the famous place of the siege of Leningrad. I think almost two years or two and a half years of basically starvation conditions (5/96)
that the people had to endure through. I presume your grandparents lived through that. They did. 900 days. I mean, that's wild. I'm always fascinated by these types of the people that survive these types of cataclysms, the qualities that you find in those types of folks, whether it's the Nazi death camps or in this case, again, Leningrad. I guess, first of all, we'll have a chance also to get into what you do professionally. So first of all, why don't you just tell me a little bit about what that was like? Who are you? What's your personal story? Can you walk us down the path? Where I grew up and who I am is a bigger topic. But I mean, I grew up in, I was born in Leningrad or now St. Petersburg. My parents were born there as well and grew up there as well. My grandparents came from different parts of Russia, mostly Ukraine and Latvia, which is the western Russia. But they all moved after the revolution. They moved to St. Petersburg or Leningrad and they had their kids there and my (6/96)
parents met there and married there. I guess of the four grandparents, one was evacuated during World War II, but three were in the siege as were my great grandparents and survived the siege, which was, that's a whole separate story. It's incredible. Did they talk about it at all to you? Yes, of course. Yes, yes. But three of the grandparents that were there, they were all in the armed forces. So one grandmother was a military surgeon and my grandfather was a, he was an economist. He was a municipal transportation planner. So he was working at what was called the road of life, which was the only connection that the besieged city had to the mainland across a lake. And so he was in charge of planning, you know, trucks and transportation and all that. Right. Because there were periodically supply lines from the south. They were either by air or by water or by ice, depending on the time of year. I mean, to the point where you told me stories about the commanding general, who's actually the (7/96)
real person. I've looked him up since then, you know, standing there with a gun and telling the drivers, if you don't go on this ice, I'm shooting you right here and now, because people didn't want to, you know, nobody wanted to drive because the Germans were shelling, the cars were going underwater. I mean, just to understand, I mean, the depth of the predicament there is these trucks, they had to take off the doors off the trucks. This is 40 below winter. They're going on ice. They had to take off the doors because whenever the shell fell in the wrong place and the truck would start going down, if the doors weren't off, you'd be trapped and drowned. At least with the doors off, drivers had a chance to jump out before the truck went down. But can you imagine driving with open doors with no doors at 40 below? And how long was the drive? Probably a couple of hours. I mean, it's crazy. Yeah, yeah, it was crazy. Anyway, so my, yes, I've heard those stories and how they survived and all (8/96)
that. And of course, by the time my parents were evacuated, they were not, they were children, so they were not there. They were evacuated to Siberia or Kazakhstan, whatever, Far East. And yeah, it was a real experience. And then a lot of stories from that, then they came back and they grew up there and I was born there and I grew up there. And we left in 1978. So you were, yeah, you were born in 1961, right? I was born in 59. 1959. Okay, so you lived for the first 20 years of your life, your adolescence, your formative years in the Soviet Union. Yes, I went to nursery school, kindergarten, school through high school and two years of college. What was that like? I'm curious, your general impressions of it, looking back on it now as an adult who lives in the West? Well, it's, what's an interesting question, because, you know, from a child's point of view, I don't know. I mean, I guess it's like going to school and reciting the Plegio allegiance and thinking that very similar. It's very (9/96)
similar. You know, before we had this injury, I was thinking about this conversation. Yeah, I realized that a lot of people, a lot of Americans think of, you know, know anything they know from the Soviet Union is sort of connected to Reagan's evil empire kind of thing. And so they think that, I don't know what they think was going on there, but I would encourage anybody who wants to understand a little better how it was growing up in the Soviet Union to Google, I'm going to say to Google, it's called the moral code of the builder of communism. So the moral code of the builder of communism was 12 commandments, if you will, that were adopted in 1960 or 61, I don't remember, that all members of the Communist Party and all members of the young Communist League, to whom all children from, I think, 13 to 20 or something belonged almost automatically, were signed up. And to read those commandments to understand what it's all about, because people think that like there was people were eating (10/96)
people there, but it's actually based on 10 commandments. And communism is mentioned in two of the 12. And the rest of it is about taking care of your community, about one for all and all for one, about mutual respect within the family and caring for the children, about modesty and personal and public affairs. I mean, not terrible stuff. Now, of course, didn't necessarily have anything to do with what actually was going on, which I guess is somewhat of the topic of today's conversation as it applies to where we are today. But the principles, the ideology itself, it was not like, let's go and kill some people. It's the Soviet Union is the, I mean, we were told is the beacon of freedom for all progressive mankind. Yeah. Well, I actually, I wondered to what degree a lot of people alive today have really no concept of the Soviet Union at all, right? Like for many Americans, they had an image that was provided to them by the American media. But today it's for most people, it's ancient (11/96)
history. And it isn't necessarily even history that's taught in school. My recollection is that we didn't really learn much about the Soviet Union. But to that point, I'm curious, growing up, what was your impression or understanding of the United States? How did you guys learn about the Western world? Well, I mean, the official version of the United States or the imperialist aggressors, it was in the middle of, you know, as I was growing up, it was Vietnam War was going on. And so in that context, there was always a discussion of the United States as the forces of darkness, just like the United States was presenting the Soviet Union as the forces of darkness. And so it just was a complete, I mean, take the US quote unquote propaganda, whatever ideology and flip it on its head and say everything the opposite. But in a positive way, meaning like, yes, we have freedom and they don't. We have, you know, one of those 12 commandments is intolerance towards racial and national, whatever (12/96)
intolerance or prejudice. So we were told, well, in America, they exploit black people and working people. And here we are standing for the cause of freedom and equality for all people. And in the meantime, you know, I was Jewish, I mean, I am Jewish. So as a Jewish person, I mean, you're massive discrimination. Couldn't get into college, couldn't get a job, couldn't do this, couldn't do that. But in the meantime, the commandments is complete intolerance towards any racial or religious or any kind of prejudice. So what I'm curious then, because this now, you know, I want to bring us to your, your move to the United States, what prompted that move? And who was it? Was it you and all of your family that left? And what made that possible? The move was prompted by myself and my father. I became politically aware at a much earlier age than most children. How did that happen? How did you inform yourself? It was an accident in a way, because when my grandfather passed away, my grandfather was (13/96)
from Latvia. Latvia is a Western Republic that was not part of the Soviet Union until 1940. It was part of the Baltic States that was annexed in 1940. So when my father passed away, for some reason, we sort of rekindled the connections with his family in Latvia and started spending summers there. And our relatives there were very differently politically inclined, because their parents and they, when they were young, I mean, they were the older generation. I mean, so this was early 70s. Let's say this started in 1970. So they were quote unquote liberated in 1940. Then of course, during the war, they were occupied by the Germans and they were liberated again in the 40s. Some of the members of that distant relatives ended up in Siberia and pretty much spending life there because they were shop owners or whatever. And they were the Soviets took them and send them out there. So they were small business people. I mean, they had a completely different view of the Soviet Union. Some relatives (14/96)
there had emigrated to Israel, because again, they knew differently and they didn't see the Soviet system in the same way that people who grew up there saw it. And so between that and the letters and the conversations, a month, a summer for a few years, that that would kind of for a young impressionable child, you know, that leaves an impression. And then of course, my father, who was a freelance photographer, which is a very unusual situation, so it didn't everybody had to have a job and he had sort of a job, but his job was freelance. So he was by, I don't know, by design or by construction, much more of a free spirit, in a sense that he didn't have to go to an office. He had his own little studio. And so between that and the relatives and listening to the voice of America and listening to the BBC and the German stations and Israeli radio, whatever, all were broadcasting at the Soviet Union and the Soviet Union was massively trying to jam all that. So it was hard to hear. I had a (15/96)
professor of Soviet studies. I took one class on the history of the Soviet Union. And he recounted, this is like seared in my mind because it was so funny, he talked about what his early experiences were like going to the Soviet Union and speaking with people there who would laugh and say, oh, you Americans, you're so, he would say that they, in fact, Russians were better informed than he was or his friends were. That's what he found to be true. And he said that they would sort of jokingly say, oh, you Americans, you don't know how to read the news. You got to flip the newspaper upside down. We look here in the corner. And so I guess that's another way of asking, was there a different approach? I mean, by that time, by the 1970s, let's say, were people already beginning to become aware or had they already become aware? Or is this even not the right framing of the disconnect between what they were told by the state apparatus and what they either felt to be true or knew to be true or was (16/96)
true? Well, I think this started in a big way in 1956. In that year, so this was, so Stalin passed away in 1953, three years later, Khrushchev, who was his successor, gave a speech that essentially unmasked Stalin and the purges and the horrors that went on during that time. And it's almost like you can think of it as like Germans after Hitler in a way. But here, there was no victory defeat. This is the government itself admitted that this God on earth, that people worshiped or were told to worship was mass murder and a criminal. And people's ideas or ideals were put up on there completely upside down. So you can't... It's the period that people refer to as destalinization. Destalinization. But you can't get the dream back. You can't just build some construct and then just say that this was all a fault of one person and that the system itself was wonderful and that he just completely perverted the cause of everything. Of course, that's what they said. But you can see from people's mind (17/96)
that people who've lived through that and even those who believed in the cause, if you will, suddenly discovering that it was all a lie. So that was a major gambit, I guess, by the Soviet government, but it basically led to eventual disaster. So sort of if this is a lie, what else ain't so? Correct. So what else ain't so? But in exchange for buying into the dream, if you will, Khrushchev promised that the current generation, this was like in 1960, which is what this moral code of the builder of communism, where that comes from. So basically promised everybody that they would live under communism within their lifetime. So by 1980 something, they were supposed to be communism. Now, first of all, what is communism? That's the other thing. Communism is essentially, as it applied to the economic system, it was a situation, it's universal basic income. From each according to his ability to each according to his contribution. In other words, the people were supposed to reach such high level (18/96)
of conscientiousness, I guess, and conscience and social awareness that they would contribute according to their ability. They would diligently work as hard as they can, doing whatever they can do. And in exchange for that, the society would provide them without regard to the value, monetary value of their contribution, with whatever they need. And they would be so conscientious that they would not take more than what they need. That's sort of a little bit like kibbutz, the Israeli version of that. Right. Do you think that that is sort of something that can work in a very small society where everyone knows each other and there is sort of social credit system that can keep people honest? Yes, it can work. It's like a cult can work for a small group of people who are convinced of some ideas. I'm not using it pejoratively. I'm just saying, that's how cults exist, right? People suddenly get a small group of people get convinced of some idea as if it's reality. And maybe for them, it is (19/96)
reality. And they live these tenets, if you will. And that's basically what it is. But this is absolutely cannot work for a society at large, has never worked and never will work because people are different and different people have different ideas. Some people always take advantage and some people don't. I mean, it's just, they tried, they gave it their best shot. So when people say that the Soviets, you know, we have an idea that communism or whatever, socialism or community property on all those ideas, universal basic income, that this can work, that the Soviet Union was different, they didn't try hard enough. I promise you, they tried hard enough with bayonets to support them. They tried. It doesn't work. It has never worked. It can never work. But it sounds good. I mean, it sounds, it sounds good now. And that's something I want to explore with you, which is, you know, to what degree the language of today sounds similar to some of what, you know, people were told either in the (20/96)
Soviet Union or in the United States, say in the 60s or 70s. But to bring it back, so you, you had heard things about the United States, I assume you were able to see some video footage here and there, solicit some broadcasts. But for the most part, you'd certainly never been there. You didn't know what you were going to encounter when you got there beyond some of the things you heard and read. But you decided to make the leap and go. What was that experience like for you and your family? So you asked me, I didn't, I didn't answer you fully. You asked me, how was that possible? So in the early 1970s, the Soviet Union started suffering from the wages, I guess, of its economic system in a big way. They had a failed crop in 1972 and they had to buy American grain. Some politicians in the U.S. were able to take advantage of that situation and pass something was called Jackson-Vanikomend to a trade bill with the Soviet Union that tied preferential treatment of tariffs on grain sold to the (21/96)
Soviet Union to Jewish immigration out of the Soviet and so because Jews were probably the most discriminated group there, not the most. I mean, there were other Tartars and whatever, but I guess they had the better representation international than some other groups that didn't have diaspora the way Jews had diaspora. And so they passed a law here that made it difficult for the Soviets to buy grain without relaxing the immigration policies somewhat, but the somewhat relaxation was very somewhat. So for instance, to leave the Soviet Union, you had to apply in order to apply, you had to probably quit your job, quit your college, lose your, I had to lose deferment from military service, because in college you're given whatever five years at five years there was college. So you don't have to go to the draft while you're in college, but as soon as you quit, if you have to apply, you quit, you're immediately eligible for the draft. So they went after me that way. You had to surrender your (22/96)
citizenship if allowed to leave. Now, so you had to do all these things, meaning leave your job, probably sell most of the things, because the other thing is you couldn't leave with more than $100 a person in a suitcase. So you knew that ahead of time. So you applied, and you knew that A, if they said yes, you'd give up your citizenship and you'd only keep $100 in a suitcase. So when we asked, we actually asked them, like, what do we do with the rest? And they said, well, you can give it to your friends or family or spend it or whatever. It's not our problem. These are the terms. Okay, if you don't like it, don't go. You are branded a trader to the motherland, because obviously if the United States is a dark force and we are the beacon of freedom, then if you're going to the dark force, then obviously you're the trader to the beacon of freedom for all progressive mankind. So it was a massive, I guess what I'm saying is it was a massive bet. It was a massive asymmetric bet with if you (23/96)
were not allowed, and there was absolutely no rhyme or reason as to why some people were allowed and other people were not allowed. Many were refused. If you were refused, you were screwed in the biggest way. Because you had already made clear that you wanted to go. Yes, you've exposed yourself as a trader to the cause. Right? And you don't have a job and now try to get a job after that if you're a trader. But if they let you go, they gave us two weeks. What was it like finding out the moment you found out that you had been given the go ahead that you could go? What was that like? Well, I remember that very well. We were invited for meeting at this police, whatever this visa office, I guess. And the full reception room, and you can see people go, people are called and they go into the door and some people are coming, smiling and some people are coming out crying. Oh my God. And so they call you in and there's a person sitting behind the table and just open the folder and says, your (24/96)
case has been reviewed. You're given permission here. In order to get your visa, you need to present the following things. You surrender your passports, surrender this, that and the other. And you have a visa that's valid for two weeks to exit the country. And what happens if we can't get out in two weeks? Well, maybe we can't extend it. I don't know. It's your problem. So my mother, of course, was hysterical and, you know, therapists coming home, you know, to come or down. And you can't take anything with you. And you can't sell everything before they tell you whether you can go because then you're sitting on the floor in an empty room because then you don't have anything. Right. So I mean, it was terrible. Wow. But I think we got lucky. We got a two week extension. So we took away 30 days to clear out. And so 30 days later, you had to liquidate it, everything you had to pay enormous exit taxes, you had to pay for visas for the renunciation of citizenship, like years of salary, I (25/96)
mean, years and years of it. You had to say goodbye to your friends. Everything. And of course, when you say goodbye to your friends and relatives, at the time, nobody knew that the Soviet Union was going to collapse. So this is 13 years before it did. And the travel abroad was extremely difficult and almost impossible. So it was like saying goodbye forever. Essentially, the party to say goodbye to people was awake because you had no idea that you'd ever see these people again, ever. Wow. And you're family, your best friends, your childhood friends, everybody. So you're leaving forever. That's it. That must have been such an unusual mix of both sadness, immense sadness and suffering, but also excitement. Elation. Right. Elation, especially for a 20 year old kid. The fact that you're at the right at the beginning of your life, your most vital years are ahead of you. Yeah. But think of my parents in their 40s and early 50s, you know, they're leaving careers. They're leaving. I mean, it's (26/96)
easy to say. Did they make that decision for you guys because of their kids? Was that the reason that they did that? Yeah, absolutely. They wouldn't have done it. Absolutely. We brought two grandmothers with us because we couldn't leave them behind because otherwise you'd never, my parents would have never seen their parents again. So that was the thought. So I thought that you, in my head, I had it that you guys moved to New York, but you guys moved to Baltimore, right? We did. Totally accidental. I mean, we didn't know anybody anywhere. Anybody there? No, we didn't know anybody anywhere. So we ended up there by a fluke and showed up, you know, knowing not a person with a suitcase and a hundred bucks. A stateless refugee on a refugee visa had no passport of any kind for seven years. Yeah. But I imagine that despite the difficulties, it must have been like the most exciting experience in the world for you. For me, but for my parents who did not speak English, who bewildering, terrible. (27/96)
I mean, really hard, really hard to learn the language, to get jobs, but they were both professionals. Fortunately, they both got jobs in their field, and my mother was an engineer at HVAC, and my father was a photographer, and he ended up working for the Metropolitan Museum of Art and the photo studio in his field. He was an art photographer. But that, I don't know whether it's luck or pluck or what, so it worked out. Yeah. But yeah, this was all complete chance in a sense like it was a total gamble that any of this would work. So I'm curious now, this is also very interesting for me to imagine what it's like to grow up in one world and visit or inhabit a completely different one. You know, I've seen extreme examples of this in the accounts of friars accompanying the conquistadores in Latin America, or for example, in the accounts of members of the Nixon Kissinger delegation to China in 1972, who described it as a totally alien world. Those are granted extreme examples, but still, in (28/96)
terms of the world we live in today, most of that world is accessible to us. And American consumer culture has pervaded most corners of the world, the exceptions like South Korea, I mean North Korea and maybe a few other pockets, maybe some, you know, pockets in the Amazon where there are aboriginals running about. What was it like for you to go from this one society that was very different and also had a completely different information landscape? And I suppose, set of models for understanding the world and then coming to this one, how did you adjust to this new reality? How prepared were you to encounter something totally different? And was there any sense of disillusionment or were you able to kind of process it in real time? It's not as alien as you're describing it. It's a different situation. St. Petersburg is a western city, but at least physically, if anybody has been there. The Soviet Empire has, despite its ideology, has retained all of the cultural treasures of the Russian (29/96)
Empire. So St. Petersburg had two Philharmonic orchestras, it had two ballet companies, two opera companies, Hermitage is one of the greatest museums in the world. So the treasures of the Western civilization, the cultural treasures of Western civilization, of course, Russian literature is an integral part of the Western civilization and the Western literature. And so in a social cultural sense, it was very different. In a big sea cultural sense, you know, New York is a cultural capital, say, of the United States and St. Petersburg was the cultural co-capital with Moscow of Russia. And so the same core sort of Western civilizational values were no different. But yes, socially and economically, it was a completely different system. But you asked me, you know, how Russians or Soviets thought of America actually at a human level, there was absolutely no enmity or against Americans. It was actually admiration. There was a magazine called America, America. In the Soviet Union, there was (30/96)
very difficult to get, but it was published by one of these propaganda organizations that presented America to the Russians. Of course, Russians have been enamored with American Hollywood and movies and all that, even then, even though they were very difficult to come by, but on a pirated basis, we listened to Beatles and, you know, whatever. Amazing. It was all not official. So for example, they would use X-ray film to cut bootleg records of Beatles. So you would listen to Beatles on somebody's chest X-ray, if you can imagine that. Wow. This was before the, you know, the tape recorders came around. So it wasn't like we were totally isolated. And because by that time, by the 70s, some people started, I guess what happened in the 80s to most people in the 70s, some people started realizing that what they were being told is completely non-commentary with the ideology or anything. Corruption, thievery, consumer goods and deficit, horrible infrastructure, bad health care. Yes, education (31/96)
system was decent, but, you know, highly ideologically directed, if you will. And so it wasn't as alien the world, maybe in the 50s and 60s it was, but the time the 70s came around, it was not as alien the world at all. But by the 80s, then the bloom was off the rose completely. And that's where, you know, perestroika started happening and that's where it collapsed, or whatever you want to call it, accelerated. Right. So how much of it was that corruption and things like that, that perestroika prompted the search for reform, the attempt to reform Soviet communism without dissolving it? It was, I hate to say that similar to what's going on in the United States, I mean, it became clear that the system, as it existed in real life as opposed to in ideological slogans, was not delivering for the majority of the population. It just wasn't delivering. And, you know, at some point the rubber meets the road and that's usually at the refrigerator where there's no food in it or not enough food in (32/96)
it, where people have difficulty making ends meet. And when enough people are in that position, I mean, that's, yeah, be it a French revolution or the Russian revolution or whatever revolution. I mean, that causes a disturbance in the society. You know, one of the interesting things that I've read from multiple scholars of the Soviet Union is how unimaginable the end, the collapse, whatever word you want to use, of the Soviet Union was. And at the same time, how inevitable it seems in retrospect and how people have the same people look at, talk about it today versus what they actually felt up until the moment of the collapse. I'm curious if that resonates, if that's your experience. And I wonder what your experience was like. I mean, in 1989, did you have any sense in your mind that at some point in your lifetime you would see the collapse of the Berlin Wall? And what was it like to actually see those images from the US? When we left the Soviet Union, the reason we left is because we (33/96)
felt that there was no future there, that the system was completely unsustainable. But thinking that is not the same as predicting a collapse. The fact that something is unsustainable and yet it is so entrenched that it's almost inconceivable that it will ever end. Not only was it entrenched, I mean, like I said, on the bayonets, you know, the KGB, the population control, the pervasive surveillance, all those types of things which we're now observing over and out parts here, they were very much a part of life at a much lower technological level. I mean, the KGB, I mean, they couldn't dream of the kinds of tools that are available today, but they did a pretty good job with the tools that they had at their disposal then. So it wasn't like these two ideas are incompatible. On the one hand, deciding this has no future, and I want to remove myself from this and build a future somewhere where there's a future. And at the same time thinking, this is going to collapse. So I went back to the (34/96)
Soviet Union for the first time after leaving in 1988. My wife is American and she'd never been there. And so I wanted to show her where I grew up. I mean, I was very worried about going back there. So we went back there during the time to coincide when Reagan was visiting Moscow. They had a summit with Gorbachev. And so I figured if I go there, I was not a citizen of Soviet Union, a Russia. I mean, they took away my passport. I was an American citizen by the time. Now when you left in 79, it was 79 that you left, right? 78. 78. Were you told that you would not be allowed to come back? I mean, what was the agreement there? Oh, absolutely. I mean, you were told when you crossed the border of the Soviet Union, your citizenship is null and void. And that's it. You're gone from here. But you weren't told that you couldn't visit. It was implicit. I mean, it was implicit. Oh, interesting. So what's interesting? Did something change that made you willing? Yes, absolutely. What changed was (35/96)
perestroika. All of a sudden there was liberalization, and it became suddenly possible that by that time I was an American citizen already. I was not a Russian citizen or Soviet citizen. And so my wife and I, we went and we got visas and we went there as tourists in 1988. And so I can tell you from that experience that it was much worse economically by that time. People were having a much harder time even than we were having in the 70s. But there was absolutely no concept. This is before the wall came down, the Berlin Wall. There was no idea on the part of us or anybody who we saw there, my high school friends or relatives that were still there, that anything like that was possible, that the collapse of the Soviet Union was possible was a preposterous idea. All you need to do to understand how preposterous an idea that was is to look up the opening stanza of the Soviet national anthem. Forever, unshakable, unbreakable, mighty, forever. That's it, forever. That's the opening line. The (36/96)
English translation is, United forever in friendship and labor, our mighty republics shall ever endure. The great Soviet Union shall live through the ages. It's fortress secure. I mean, that's the national anthem. I mean, that's the... Right. So what was it like for you to see, first of all, how did you first learn of it? I mean, apparently the president learned about it from CNN. Was that where you learned about it too? Of course. Of course. Everyone learned about it from CNN. But it was clear that things were changing even though nobody understood or appreciated the implications of the changes. I mean, it's like what Gorbachev was doing is he was trying to rearrange cards in the House of Cards. That's what he was trying to do. He was deck chairs in the Titanic. Yes, yes, deck chairs in the Titanic, but you know, the House of Cards, you can't rearrange cards in the House of Cards. What does that gain, Django or whatever, where you keep taking out? Yeah, exactly. Yeah. Yeah. Because (37/96)
you start pulling one string, you start pulling one, you don't know what it's attached to. It could bring the whole system down. That's what effectively happened. That's exactly what happened. And so it basically, you keep doing it until it collapses, but you can pull a few out before it collapses. Oh, it's still standing. Okay. So we can pull this support. Oh, but still standing. And then, of course, you don't know which one is the one that takes it down. So it's essentially what was going on in the Soviet Union. And it kept on going until it just fell apart. Yeah. So I'm curious here, two questions. One is the observation again that I made earlier, which is that in retrospect, it seemed inevitable, but at the time it seemed impossible. Do you think that's because even though we might, our brains might say, yes, this is unsustainable, we all talk about it, for example, in the current dynamic and financial markets. It's unsustainable. This isn't a sustainable equilibrium. And yet, the (38/96)
implications of it being unsustainable, we can't imagine them because they're so foreign to our experience. One, that's my first question. And then my second question, you can take this as you will, as you like, and when I can remind you again, my second question is, okay, now in retrospect, when we look at the USSR, what were the factors that ultimately led to its demise? So first of all, I absolutely agree with you in that everybody thought it was not everybody, but people who even those people who thought it was unsustainable did not think that it was conceivable that it would collapse. This is called normalcy bias. This is not nothing new. I mean, some people left Nazi Germany as soon as Hitler took power and other people stayed and paid the ultimate price. And the question you can ask now is what did you people not understand about what you heard him say? Or what did you not understand about the Nazi policies that made you think that you're going to be okay in that environment? (39/96)
How do you explain that? The boiling pot phenomenon. It's a boiling pot phenomenon. It's like, how can this happen? I mean, it can't happen to us. It can't happen here. We're civilized people. This can never happen. Also, the things to that point or the things that would have seemed insane, like I think about that today for where we are in 2021, I think about it, if you went back in time to 1991, you told people, can you imagine that in 10 years and 15 years, America will be less free than it is today, even though the Soviet Union has just collapsed, but people wouldn't completely find that implausible. The world, I mean, five years later, a few years later today, the way we live with the pandemic, totally foreign to the experience of a few years ago, but we quickly become acclimated to it. And we no longer look at the future and say, we might look at events in the future and say, that's outside of my experience, but it's no more of a step function than what we just went through. Look, (40/96)
I live in Deja Vu. My life is spent in Deja Vu. How do you mean? Everything I see just echoes to me how I grew up and what I saw happen afterwards. When something is not sustainable, it will not be sustained. That's a rational thing, but emotionally, it's impossible to imagine that and particularly to someone who grew up with a certain set of notions about one's country, one's values, one's government, one's financial system, one's economic system, to step back and to say what I was taught is completely different from what I'm observing and to have the intellectual, wherewithal, and courage to draw the line, intellectual line from what I'm observing versus what I'm told and what the implications of that either might be or are inevitably are. That requires some personal experience probably, and that requires some rigorous study of history and a sober mind. And even at that, at an emotional level, it's difficult to accept or imagine because the implications are pretty bad. But what I (41/96)
want to say about that, but unfortunately, a lot of people stop from thinking that way because they equate systemic crisis or change of a system with end of life in Armageddon. It's a fear of death, if you will, in a social form. So it's interesting, is that because when you're in the car and you keep raising the temperature, you keep lowering the temperature, there's a point at which it no longer gives the temperature, high or low. Because there's a threshold beyond which it's just unimaginable for us. It's too horrific, so I'm not willing to make preparations for it. Even though when you're encountering it, it isn't never as bad as you imagine it to be. It's survivable, it's livable. Absolutely. And you and I talked before this, we started this. Look, I mean, Soviet Union is gone, that way of life is gone. The old Russia is gone, 1917, it's gone. Russia is still there. Imperial Russia is gone, Soviet Empire is gone, Russian Empire is gone. Russia is still there, Ukraine is still (42/96)
there, people are having children, living standards there are better than- Chernobyl is still there. Chernobyl is still there. Hiroshima is still there. And Nagasaki is still there. Yes, through horrors and Dresden that get completely destroyed by the Allied bombing to the ground. Kurt Vonnegut wrote a book about it, Slaughterhouse 5. These places are there. So life is, unless human species manages to eliminate itself, life is everlasting. And so to think in the way that people are thinking is very dangerous in a sense. It's dangerous for their own well-being because they're dismissing realistic outcomes and actually probable outcomes that are not life-ending, they're life-changing, but they're not life-ending. And therefore, there are strategies and things that people can do, but they don't want to do it because it's like contemplating death, it's just too painful. And they don't want to contemplate that. And of course, people inside the financial system don't want to contemplate that (43/96)
because they're profiting from it every minute that it continues. So keep writing till, why should I stop making money when I can continue to make money? So there are perverse incentives for a lot of people. So back to that one question, what were the factors that made the collapse of the USSR possible that didn't make it predictable at the time? Well, it's so that we can look back at now and say, ah, those were the things. It's so clear to us now. It wasn't clear to us then, but it's clear to us now. What are those factors and what are those patterns and what do we see any of those today? What are some of the similar patterns that you see having lived in the United States since 1978 and seen the changes that have come about? I'm curious to know your impression. Well, I mean, fundamental systemic dysfunction is what led to the collapse of the Soviet Union. So on a purely economic level, it was a dysfunction. On a intellectual or ideological and political level, it was a complete (44/96)
divorce from ideology and reality. In other words, what the politicians were saying was going on and what was actually going on didn't have anything to do with each other. And I don't know if you're noticing in the United States. I'm noticing plenty of it in the United States because, you know, it's nice to talk about freedom and democracy and the equality and this and that and the other, but civil society and the rule of law, but when you look at the reality of what's going on, so what did down the Soviet Union? It was perverse incentives across the economic system. It was pervasive corruption. It was ideological corruption as well as factual, you know, just corruption, corruption, money, politicians taking money. And eventually, people just found that it wasn't what they thought it was. And when that became clear to everybody, it just collapsed of its own. It's like it changed. And again, when I say collapsed, it's not a collapse in a sense like the building collapsed. It's a sense (45/96)
of people woke up in the morning, they still had eggs for breakfast, but then the kids went to school. So the everyday life continued, but the savings were gone. You had to suddenly work three jobs to survive. And you know, there were... Right. So that's a really important question. What do we mean when we talk about collapse? So yes, there's the obvious tangible effect, which is that the economy takes a hit, your living standards drop, and we can talk about that. But there are other factors as well. Certainly in the Soviet Union, there was this disillusionment with the collapse of an ideology of a worldview, of a place in the world, of an identity. And I wonder, is it too much of a stretch to say that that's the most traumatic part, not necessarily, you know, your wages being cut in half or being cut by 90%. I guess, tell me, what is that experience like? And then do you see any signs of that happening here? And what does that look like? Because I can... At some point, I'd like to (46/96)
share my own personal experience of coming of age in this country, where it is and when it is that I began to see things change. But I'm curious by your impression. The fundamental difference between the Soviet Union and the United States is that the Soviet ideology encompassed both social and economic spheres. It was patently unworkable in the economic sense. I mean, the incentives were fundamentally perverse at an ideological level. In other words, it was an idea that sounded compelling, that in practice, actually could not work in the absence of a continuous compulsion of the population. Right. An overwhelming police state, an authoritarian system. Correct. Without an authoritarian police. Right. The situation in the United States is very different, in that sense. United States has an ideology and it has or had an economic system that went with that ideology that actually worked. Free enterprise capitalism. Free enterprise capitalism with all of its excesses, with all of its (47/96)
difficulties, with all of its warts, nevertheless managed to produce the largest spurt of economic growth and well-being for a massive number of people. In reality, this is not mythology. This is true, including poor people on a relative, yes, the inequality within the society is one thing, but the fact that most people in the United States have running water and indoor plumbing and refrigerator and basic standards may be taken for granted, but it shouldn't be taken for granted. I mean, that is the problem. There are many places in the world where that doesn't exist. So this system has produced tremendous results. So I see fundamental difference in that there was no place to go back to basics for the Soviet Union. You could go back to basics, to moral basics, like purity of thought and one for all and all for one and this idea of community, but it didn't economically work. I mean, that system economically could never work, and it didn't in the end. The United States has a situation (48/96)
where its ideology continues, but the reality does not comport with the ideology. So we talk about free market capitalism, but we don't have free market capitalism. So when people say there's a failure of capitalism, my answer is it's a failure of whatever we have, but it isn't what free market capitalism is. We don't have that. There's no concept in free market capitalism that failures of private businesses, entities are bailed out by the taxpayers or by the community. That's just not part of the system. So whatever system we have now is not the system that has succeeded and made the United States what it became. Can we go back into that system is a big discussion that I don't have a ready answer for and I don't think anybody does, but the principles of that system, which is free market capitalism and ability for the market to set the prices, to set the relationships, creating incentives for companies not to pillage and plunder their customers, as some of the financial institutions (49/96)
are doing, and some of the big tech is doing, but to actually provide goods and services that people want to buy and are happy to buy, and to compete in a free marketplace with other people who are willing to provide even better and cheaper goods and services. That may be an ideal. I'm not being idealistic. I'm just saying that there are core principles out there and a proven record of achievement, not universal, not for everybody with a lot of problems, but nevertheless, of legitimate achievement on the merits. So that gives me a lot more hope than let's say some situation like the Soviet collapse. So here's a question. As long as I can remember in terms of being politically aware, which I would say goes back to 2001 with the 9-11 attacks, the world that is presented to us through the media has always seemed at odds with reality. And I understood that as someone that was Greek and had exposure to alternative cultures and news ecosystems. And so when George Bush would talk about how (50/96)
they hate us because we're free, I knew that was bullshit. And I knew it was an overly simplistic explanation. And I could see how different the perception was of my friends in the United States and my friends in Greece. So I had that and I knew that there was a discrepancy. It does seem to me that that discrepancy, I don't know if it's gotten, yeah, sure, in many ways it's gotten bigger, the gap. But I think more importantly, more people see the gap today than saw it in 2000 or 2001. In other words, to what degree that gap has expanded, I don't know. But the most important thing is that more and more people are calling the bluff. And I'm curious if you agree with that and what you think, sort of when this began, because for me, it really began with 2001. 2001, 9-11, the invasion of Iraq, that and the 2008 crisis, of course, and the way in which the government resolved that crisis or sought to manage it and turned our system from a financial system to a refinancing system, those are (51/96)
the two major events that I think have led us to where we are today. I'm curious, how do you interpret that process? Like, what is it even possible? Oftentimes, I think we try to apply impossible, discrete timelines to things and it's never really like that. It's much more continuous. But I'm curious how you interpret it. First of all, I agree with you. I think that the gap was always there, but I do believe that the degree of the gap has increased dramatically and with it, the awareness has increased dramatically. So, I'd say 2001, I had a similar sort of epiphany, although I would say that the dot-com bust of 2000, being in the financial markets, and then the way that was handled by dropping interest rates, I wasn't as aware economically and politically before that, like for example, when they bailed out Chrysler, when they bailed out Conneney, Illinois, when they bailed out the Tequila Bonds. It didn't ring as much of a bell with me that something was fundamentally shifting. But (52/96)
after the 2000 crisis and then 2001, a Patriot Act, where I felt that America has taken a sharp turn into a different direction, where everything that I thought or took for granted in this new country for me, which is basically anything that's not expressly forbidden is allowed. Did you think of the Patriot Act then and the state response to 9-11? Did you view it even then as an overreaction? Absolutely. No, I thought this was the end of America. To me, that was the end of America that I knew. Because you had seen much worse. No, but when I saw this, I mean, I can't impart it to anybody who hasn't been there. Standing in the security line in the airport, if you want to know what it's like to be in the Soviet Union, you are in the Soviet Union. In that moment, you are in the Soviet Union. You're in a line waiting for something, and at the end of that line, a lot of bad things can happen to you. People don't think that way, but in reality that- I remember when people like Naomi Wolfe (53/96)
announced that she had been put on a blacklist, on a no fly list. Remember these lists? These were new to the American experience. Thousands of people ending up on these lists having no idea how they got on, but more importantly, having no idea how to get off. You think it's hard to contact Google? Imagine trying to contact the government and not being able to find anybody to explain to you how you got there. You're on it. You're on it for life. When I stand in that line, I'm not on that list, thank God, and I hope I won't be. But I feel it very much at a visceral level because I understand how these types of population control measures evolve in the hands of governments and bureaucrats. To me, it's not benign in any way, but to most people, it's just like Pastor Niemoller in Nazi Germany said when they first came for the Socialists, I didn't say anything because I wasn't a Socialist. Then they came for the Communists, whatever, and I wasn't a Communist. Then they came for the Jews, (54/96)
and I wasn't a Jew. So that's what happens. People on this list is not you, and therefore, you feel like it's not about you until it is about you. It's amazing how different America is today than what it was in the 90s when I was a kid. Completely. It felt like a way freer country. When I remember it now, I just remember what it was like. Forget just traveling. Traveling changed dramatically after 9-11 to some degree disproportionately because of the fact that 9-11 was an attack using airplanes. But the country is unrecognizable, and I often wonder if we were to be transported back in time 25 years. Would we be shocked? In other words, has it changed more than we even remember it? I mean, to me, there's no question about it. It's a completely different place with completely different rules. Again, I'm not expressing political views. I'm just stating observations. The fact that the people in academia are being quote-unquote canceled because of their crazy whatever their views are, that (55/96)
is so profoundly undemocratic and un-American. I remember how Nazis were allowed to march in Skokie, Illinois, despite the protests of Holocaust survivors, because it was decided at the time that the principle was more important than specific case. Yes, these people may be repugnant, but we have a law that allows people to say what they want to say no matter how repugnant it is to other people. That's what freedom of speech is. I mean, freedom of speech is not being able to say what everybody is comfortable listening to. In the Soviet Union, by that measure, there was complete freedom of speech. If you wanted to praise the government, you could do that as much as you wanted to. It just, as long as you didn't say anything against the system. What kind of freedom of speech is that? Yes, no, I am absolutely, I see that. I think it's completely incompatible with our constitution. It's completely incompatible with the entire idea of America, which is what made the idea so compelling and a (56/96)
true beacon for the world. That's the idea. Now, maybe that idea was never practiced because, of course, we had McCarthyism in the 1950s, but it's all a question of percentages. There's always excess, there's always BS, there's always stuff. Is it 10%? Is it 20% or is it 90%? Where is the prevailing side? Is it the way things are? Is it the way things are with some people, in some cases? So when it goes from a little bit to MO, Maudisaparanda, it becomes a different animal. And that's where I think there's a concept of bezel that John Keynard Galbraith has. Bezel basically is graft in the economy. It's a little more complicated than that, and we can talk about it. So his point was in defining that term, was to say that during times when money is easy in credit bubbles, there's tons of bezel. There's tons of graft because money is easy, people are trusting, everybody's making money. And when things go down, all of that gets wrung out. And then at the bottom of depression, there's very (57/96)
little bezel because it's very hard to get your hands on money. It's very hard to earn people's trust. It's very hard. Like two brothers, I've given that example before, just recently, two brothers in South Africa, 19 and 20, absconded with $3.6 billion worth of crypto essence. Like in what world, a 19-year-old and a 20-year-old would have an opportunity to abscond with $3.6 billion? I wonder if what's happening, this just kind of hit me a little bit now, I wonder if what's happening is that after the fall of the Soviet Union, after the end of the Cold War, the lack of a concrete enemy led American politicians and the system at large to sort of feed on itself, to become more corrupt in the absence of an existential threat. And that this is exactly what we've been living through and we're at the tail end of that. I don't have any question about it. And it's really accelerating. You agree with that? That's interesting. The competition, I mean, it's competition, survival of the fittest (58/96)
makes one athletic and nimble and you have to roll with the punches. That maybe creates accountability maybe also because it doesn't seem to be, what seems to be lacking today more than ever, there's been a systematic decline in accountability among the political class. And that, I think, explains some of the corruption that we see, specifically in markets. The insane level of absence from regulatory standpoint and the blossoming of so many outright frauds. Right? It's amazing. And where is the law enforcement and all that? But then look at the regulators. I mean, they're just all going between private equity firms and then the government and back and back and back. So there is no public, I mean, there are no really public servants at high level, career public service. I mean, the political appointees are not career public servants. Political appointees in all these positions are basically bankers or wealthy people who go in and out of government. And if they're not wealthy, a few (59/96)
years in government, and they become wealthy by going back into the private industry and advising it how to extract money from the government. I mean, that's basically what it becomes, a revolving door. It's a proverbial revolving door. And that is part of the systemic decay of standards, if you will. And because you're right, fighting against the Soviet Union, there was some pressure. Failure was a real failure. I mean, because somebody is going to eat your lunch. When nobody is going to eat your lunch, you're relaxed. Do you think that America, since the end of the Cold War, has been in a long interregnum? In other words, that we're moving from one regime, one form of political organization to another. And it doesn't have to be very discreet. And I don't want to fall back on caricatures, but for example, are we moving from a liberal, open democratic society to one that's going to be governed by some kind of authoritarian system? Or does this ship right itself? And we not return to (60/96)
what existed in the past, because you never, I've heard you quote Heraclitus, you never stepped in the same river twice. But to something that more closely resembles the system that's in line with our cultural foundations. I don't know. Nobody knows. So essentially, what I think is inevitable is a financial reorganization. Because that's, it's not an ideological thing. It's a practical thing. There's only so far you can carry the system that we have. And I think we've pretty much carried it as far as it goes. Is that right? Is that what you think? I mean, you're not one of those people that thinks that this can go on for another 10, 20 years. No, I don't. I think demographics embedded into this situation. Is that the primary driver in your view? Well, it's a combination of things. I mean, you have, it's certainly a catalyst. I mean, it's a catalyst that cannot be avoided. The population is aging, 75 million baby boomers are just naturally retiring. They're going to give up power (61/96)
because they're just getting old. This administration is probably the last baby boomer administration. I don't know. Maybe, maybe we've got one more round of Trump. I doubt, I don't know. But I think there's a generational change that's coming. I think that the promises, not I think, I believe that promises that have been made and commitments that have been made through its social security system and the Medicare and Medicaid system are not unfundable, unmeatable. They're just not. The United States has obligations with like that 7% of GDP or something like that. There's just no way to do this. Well, most of these obligations are owned by baby boomers. So, or is the default going to happen on their watch? Absolutely. So, they're going to have, at some point, they're going to have to be sacrificed effectively for the system to transition. Absolutely. Absolutely. And if they don't want to be sacrificed, they will be sacrificed by the next generation because it's unfunded system, right? (62/96)
So, it's pay as you go. So, it's the younger people that have to fulfill these obligations. And once baby boomers are no longer in control, why would the younger generation keep paying these people who left them with this situation? So, the pathway for you is still the political machinery. You think that ultimately it's going to be a situation? No. I don't know. What I'm saying is, it's, I don't know how it ends. Sure. I don't know how, I don't know when it ends. Right. What I'm saying is, you know, there's a concept is in life insurance, has unpredictable inevitability. Like when a life insurance is written, it is inevitable that there will be a claim if the policies is paid continuously, right? But it's unpredictable as to the timing and the reason for demise or why it happens or whatever. Right. But it's definitely, it's happening. It's a certain. So, I think that financially, every organization of our economic, financial and monetary affairs is a certainty, is an inevitability. We (63/96)
cannot continue to borrow money from or print money from nowhere and pay for everything because if this was the way of the world, then work is not necessary, value creation is not necessary. We could just print whatever we want and live with it and it would be wonderful. But that's not the way where the world works. We just, it's just not. So, therefore at some point we have to stop printing money out of nowhere and start earning it. So, I haven't really thought this out clearly, but there are three primary though, maybe four ways in which I could imagine that the system goes. One is political, like you described for example, Donald Trump in 2016, he was elected in 2016. If Donald Trump had been a competent wielder of power, we could have been in a much more dangerous situation. So, I think that the country was actually at a place where it may, I think we may be in a place where the country is prepared to elect an authoritarian leader, someone who's, who they're willing to give power (64/96)
to. I don't know that if someone were to basically say, you know, American people, I've sent the army into Washington to guard the Capitol building and guard our senators because I think blah, blah, blah. I'm actually not convinced that the electorate would rise up against that, that the people who elected, I think the people who elected whoever would say to do that would actually support it. Well, Hitler was elected and Putin is elected and he's being reelected. Now, he's not a Hitler by any means, but he's an authoritarian leader for sure. Sure. And so, like, I don't think we're far from that, right? So, that's one option. Another option is we get a socialist type candidate, a populist who just enacts insane spending programs. So, that's one way in which the system could sort of move to a different phase. Another one is financial, like we talked about just now, a bit, which is that the system itself could collapse the financial system. The dollar could rapidly devalue, etc., etc. A (65/96)
third is geopolitical. In other words, that rather than collapse from within the system that the United States supports, would collapse from without. And again, I'm using the word collapse and I really need to find a better word to use. Maybe, again, dissolve. Change, change. Dramatic change. A sort of rapid loss of confidence in the system. Yeah. And that's something that we're, again, we see evidence of that already. The international order is changing dramatically. Most of us, myself included, were shocked. Shocked, again, maybe not the right word because it wasn't unimaginable that the US would completely screw up the withdrawal from Afghanistan in such an unnecessary way. But we've seen this incompetence before. But nonetheless, it, again, it's another example, just like when Donald Trump and Erdogan had their little spat and he sent them some letter. It was a joke. It was ridiculous. And it was another example, another piece of evidence that the international order that's been (66/96)
held together by the United States since the end of the Cold War, but really since World War II is coming apart. So there's that. And then there's maybe the fourth one, which is much more difficult to describe and understand, but something that I think you spoke to a little bit here and that other many Sovietologists have spoken to, which is what goes on in the psyche of the body politic. Because I think that's something that we've, I mean, I've talked about that in terms of nihilism, specifically financial or market nihilism, but it's just nihilism more broadly, the devaluation of values, the glaring disconnect between what you've been told is true, what you believe to be true, and the actual evidence of your daily lived existence and what you see. I mean, 2008 for me, Simon was like the quintessential example of that, watching the government take over the controls, take over the treasury, and just completely bill itself out. And they couldn't even do themselves. It wasn't until a few (67/96)
years ago that they actually managed to put together some funding for 9-11 first responders to bring us back to 9-11. Look, everything you're describing is potentially on the table simultaneously or in some conjunction. It's very difficult to say what the catalyst is, but economic affairs are much more factual than political affairs. In politics and ideology, you can carry things for a long time, but what is their tangible connection to people's lives? Well, the tangible connection to people's lives is their refrigerator. And whether there's food in that refrigerator or not, that's the ultimate tangible connection. That's where the rubber meets the road. Can they retire, did therefore, a 1K suddenly become 101K? That's the connection. That's where the confidence comes from or lack thereof comes from for a lot of people. I mean, well, one could argue that we have a long way to go before people starve in the United States. There are all sorts of ways in which we've been able to forestall (68/96)
that. But you mentioned 401Ks. I mean, is that, again, because so much millions, tens of millions of Americans have their savings in the stock market, and the stock market's been held up for all this time. I mean, is that in your view one way in which the forces of populism could be unleashed? What is a confidence game? A confidence game is some sort of a usually financial arrangement that is based on confidence of the participants in the soundness of this arrangement, but is financially and economically unsound in reality. Right? Okay. So if we have a financial system and a monetary system and an economic system that is unsound fundamentally, but is sustained through confidence of the participants, then we are in a confidence game, like Bernie Madoff's confidence game. So Bernie Madoff's clients thought they were rich for a couple of decades because they got a statement that showed some numbers on it. Right? And they thought they were rich and they lived like they were rich. And then (69/96)
one day, it turned out they hadn't been rich in a very long time. They just thought they were rich. And so what I'm saying is that I believe that the economic system that we have and the financial system that we have are being held up by confidence and not by substance. That is not to say that everything is bad and everything is fake and nothing is real. But on a levered basis, it doesn't take a big percentage of quote unquote bezel to turn out to be not real for the entire thing to have to be recapitalized. That's just what leverage that's how it works. Right? So look at statistics. I mean, just look at what people are, how people in the financial markets are talking about things. They say that the net worth of Americans has never been higher. What does that mean? Well, that simply means that the markets have never been higher. Right? They say that the company's valuations are very high. What is valuation? Valuation is taking earnings and multiplying them by some number. What about (70/96)
the earnings themselves that they're being multiplied by some number? Where did they come from? Well, if the government is running trillions of dollars of deficit, what does that really mean? What it means is that the government is printing money that it is giving to people or to its own departments that are turning around and spending this money into the economy, which is turning up as revenues of these companies, which then get multiplied to show valuation. So do you see where the pyramid scheme comes in? Of course. And the deficit. So this is a circular thinking. This is a completely circular thinking. The markets are high. Yeah, the valuations are high, but the earnings are high. The earnings are high on the back of what? The earnings are high on the back of spending. What is being spent? Non-existent money is being spent, conjured out of nowhere. So the real danger here, what I see, the real danger and the real problem is the whole house of cards unravels in the sense that we find (71/96)
out that the government cannot keep printing this money without massive devaluation of currency, continuously. This is how hyperinflations occur. I'm not predicting it. I'm just saying that's the technology of a hyperinflation. Hyperinflation is not inflation. Hyperinflation is the loss of confidence in the currency. That's what happens. So this is a faith-based initiative, essentially, that's not based on substance. It's based on faith. And my point is that the baby boomers who are now retiring and who are transitioning from being savers to being dissavers, from contributing to the stock market every two weeks from their paychecks to taking out of the stock market every month to pay their bills, from buying houses to downsizing and selling houses. So this massive rabbit that's been traveling through this economic python is heading towards the exit. The poop shoot. And that is, it's inevitable. It's just inevitable. And then we're saying that the millennials are going to step in their (72/96)
place eventually at some point. But by any measure of wealth, accumulation, salaries and all that, they're not there yet. They're not ready to take that man. And this is the whole world has that problem. Yeah. So Simon, let's shift the conversation to what you do, how you occupy your time, because it speaks to, I think, a practical question of what do we do? I had a great episode how long ago, I can't quite remember, maybe nine months ago or a year ago, probably longer. Everything in the pandemic feels like a wormhole. But the guest was Margaret Heffernan. And she has a great line in her book. I can't remember now the name of the book, but it's something to the effect of you can't predict the future, but you can prepare. And I think that that's absolutely correct. I mean, I tried to do that a little bit here in this conversation, I suppose, though obviously we were talking about in terms of contingencies and possibilities that we didn't state it explicitly, but you can only prepare. (73/96)
You can't predict. You don't know what tomorrow's going to look like. And to that effect, you and I have talked about this before, the system, the dollar-based international financial system, within the rules of that system, the risk-free collateral has been US treasuries. Yes. But if you agree, as you and I do, that the system itself is unsustainable in its current manifestation, then in order to find the equivalent of a US Treasury security or the closest thing to it, you can't do it based on the rules of the system. You have to look outside of the system. So to that effect, I'm curious how you approach. First of all, is your concern finding a safe haven asset? How do you think about it? Do you think about, in terms of portfolio construction, some amount that you want to have in safety? What do you consider to be a safe asset? What do you look for? What attributes? And then to what degree do diversify into some kind of yield-generating asset? I'm curious how you think about it (74/96)
investing as an individual. Granted, giving the fact that I already understand how TBR works, the Bullion Reserve, and I want you to talk about that. Well, I'm not in the business of investing anymore. I used to be. That's the business I used to be in, but when I concluded or came to some of the conclusions that I shared with you today, just like I did in the Soviet Union, I said, well, it's not a game I want to keep playing, and I want to start building something else, somewhere else, as opposed to continuing to double down on what I believe is unsustainable and therefore will end at some point. And so I went looking for essentially substances or assets or ideas along the lines that you're talking about right now. So let's say if there is no US dollar, or if the US dollar is suspect or US dollar becomes, for whatever reason, undesirable or devalues, or the US treasuries are subject to restructuring or redenomination, or because of the currency value, their value declines, what is it (75/96)
that will be considered risk-free in that environment? Because we know from practice that there's a crisis. Demand for safety and for assets, a place to park purchasing power or to, you know, place purchasing power away from risk is overwhelming and compelling and massive. And in the last 40 years or 50 years, that was expressed through demand for US dollar and US treasuries. So if you, for example, pause it for a minute, that for a moment that's not the place to go, then the question is where is the place to go? So prior to the dollar taking that place, the place to go was gold. And I concluded based on my examination that that is still the place to go. People don't have to agree with me. They don't need to agree with me. Well, what is it about gold? Because this is such a difficult thing to analyze because it doesn't yield a cash flow. And the reason why it's, it commands such a high premium. So how do you assign value to it? How do you think about it? Why are you so confident that (76/96)
gold is a good bet as a safe haven asset in the type of environment that we're moving into? Well, I mean, it's not about gold. First of all, gold is something that emerged out of the free markets. Nobody appointed gold to be what it is for all the thousands of years that it was what it was. It is something that emerged from a free market, not only from a particular free market, from numerous free markets through time and space. The Chinese empire used gold, the Incas used gold, the Roman empire, the Egyptian empire and every empire. Okay. And these empires are separated by time, space, and many of them didn't, civilizations, many of them had no idea about each other. And so they all somehow converged to the same substance. And I think the point of that is that, or at least my analysis of that, is that gold as a commodity has some physical properties that no other commodity has. It's lasting, it's non-reactive, it's very rare, whatever. I mean, we can talk about that. That's all in the (77/96)
books. Anybody can look that up. The most important thing about gold, I think, in the financial sphere is gold doesn't have, it's not a human project. See, financial assets, all financial assets, and even digital assets, they're in somehow connected with human projects, meaning humans promise to do something, or they have incentives to do something, and they need to continue to do that something in order for this asset to be valuable. See, gold is a physical substance. It's a molecular structure. No human needs to do anything for it to be what it is. It's not connected to anyone or anything, meaning a coin, a gold coin, like let's say a Bitcoin. I mean, this is not a knock on Bitcoin or digital assets or anything. I'm just explaining what I'm trying to say. Distributed ledger technology, digital, cryptocurrencies, digital assets, there has to be networks, there has to be mining, there has to be transaction validation, there needs to be software and hardware, there need to be wallets, (78/96)
hard wallets and soft wallets. There needs to be an app store where those wallets can be updated and where there can be re-upped and so forth and so on. That is not to say that this is all disappearing tomorrow or anything, but this is all a human project. There are incentives that need to remain in place for the mining, for example, which is a transaction validation function, to be performing that function and for that function to continue to be worthwhile for the people to be performing it. It is assumed in the crypto community, for example, that this is forever so. We don't know whether it's forever so. It's only been around for 12 years. It's only been around for 10 years, right? Gold is a substance that doesn't have any effect. There is no network. There is no project. There is no cyber space. Nothing needs to be happening anywhere. People use it in caves and they can continue to use it. So when you ask me, what is safety? What is liquidity? The question is, what is liquidity? So (79/96)
the bottom line to your question is when people are looking for an impeachable liquid asset that has no counterparty, meaning it's not anybody's promise to keep doing something or do something or anything. What is it that's the most easily negotiable, universally globally recognized and negotiable asset other than the US dollar and US treasury? And I would submit to you that in practical reality today, it still remains gold. There is not a town in this world where pretty much any civilization exists where you cannot negotiate a piece of gold, be it in a jewelry store or at a pawn shop or at a market or somewhere where you can find a person who would say, I have no idea what this is. It's interesting. No, I completely agree with you. A lot of big corners will take issue with this, but they're not right. They're wrong. Well, it's reality. It's not my opinion. No, right. But I was specifically going to make a point, which is that big one is ultimately, so to speak to your point, gold is (80/96)
an asset that is not simultaneously someone else's liability. Yes. Big coiners will say that applies to Bitcoin as well. It does not because Bitcoin is a liability to the Bitcoin network. The Bitcoin network is more highly entropic than gold is. Yes, you have to pay storage costs for gold if you decide to custody it, but you don't need to custody gold and gold on its own doesn't require any energy in order to survive. Anything. Gold can be in your pocket or in your software. Right. Yes, you can deposit it with a depository with custodians, but listen, people have been depositing gold with custodians for millennia and it works. But okay, fine, but you don't have to do that. You don't have to do that. You have to do that with digital assets. Right. But I want to clarify something though to understand it because, again, these are difficult assets to think about or to value in sort of rational, intellectual terms. Ultimately, does your trust in gold as a safe haven asset ultimately rest (81/96)
upon the thousands of years of history of gold as something that people have valued? In other words, at the end of the day, we can try and develop frameworks for understanding why gold is valuable. But ultimately, this is one of those situations where people have found it valuable for thousands and thousands and thousands and thousands of years and the entire world is a market for it. It pervades the literature and the culture and that in periods of crisis, in periods of uncertainty, in periods of a confidence crisis, people search for a sure thing. And for you, time and again, gold has proven to be this thing even now in this much more technological world where people spend more and more time in the cloud, et cetera, et cetera. And tons of millennials refer to gold as not a barbarous relic, but rather a rock, just a rock, that this is ultimately that sort of the gravity of the value of this asset as it's been expressed for thousands of years will re-express itself whether you like it (82/96)
or not. So what you're saying, the real question you're asking, is it an accident or is it just a matter of tradition that gold is valued or used in a way that it's been valued and used? And what I try to allude to is that it is not a matter of tradition. It is a matter of rational practical choice made by multiple civilizations in various circumstances separated by time and place. It has certain chemical properties that make it superior to all other substances. It's a combination of its rarity. It's the fact that it's non-reactive. It's the fact that it's dense. It's a lot of physical properties that make it stand out, among other things. And it is no one's liability. So one king, so when you think in terms of bigger picture than an individual, why is Russia and China, why are Russia and China and Turkey and some other countries have central banks, have been heavy accumulators of gold? It's because gold is independent from the financial system and for sovereign to have reserves (83/96)
denominated in a currency that is dependent on other sovereigns, poses problems. Maybe Americans don't care or haven't cared to date that their safe havens, which is treasuries and dollars, have only value at the pleasure of the government of the United States because government in their personal experience has not overtly abrogated those obligations and promises. But in many other countries, it happened in their government and for sovereigns, the need for independence is palpable. So look at what the United States had done with the US dollar in the international arena. The United States has used the US dollar and its control over the global financial system as through sanctions as a political tool. So if you're Russian government or Chinese government, casting no dispersions on either, and by the way, no matter what we accuse them of having done, but what we think of their ideology, no one has ever said they're stupid. They're not. They're rational actors in their own interests, (84/96)
whether we like those interests or not, or understand why they think things the way they do. So why are they accumulating and using gold reserves as a tool to gain independence? Because the United States has used financial system as a pressure point against them. Well, why don't people with savings extend that idea to, well, the United States may use the dollar or the treasuries as a pressure point against people who have savings? Because maybe, like what's happening in China now, they're saying rich people need to share. Everybody, we need to share your wealth because there are a lot of poor people. Everybody needs to be good. So this billionaire thing, they said to each according to his needs. So the value of independence, the value of freedom, you and I just had a political discussion of freedom. Freedom is not important to most people until it palpably or lack of it, palpably affects them. They take it for granted. So people take safety in financial affairs, perhaps for granted. (85/96)
They take promises made to them for granted. Whereas in an environment where all bets are off, what is out there that is universal, valuable, negotiable? What is it? I mean, silver, yes, definitely silver, but silver is much less valuable than gold. You really physically need a major amount of silver even for a fairly small amount of money. It's very heavy. I mean, try to get $10,000, $20,000 worth of silver and try to carry it around. It's like 30, 40 pounds. You can't. And these days, it's not that much money anymore. So what else is there? Of course, it could be your business. It could be some property. It could be different things. Yeah. No, it's a really interesting thing for me. I guess the reason why I mentioned this point about the challenge of valuing it a number of times is that I own gold and I own a good amount of it. And while I can articulate to my satisfaction a reason for owning it, the way that I can articulate to my satisfaction a reason for why I did this or I (86/96)
believe that, it's a way of falling back on what I've known to be true my entire life and that in a world that feels so different than what it was when I was growing up and we've talked here about change, it's kind of the ultimate bet on meter version, I suppose. It's a bet that, yeah, things have changed a lot, but there are certain things that don't change that much. So in closing, Simon, I'd love for you to talk to me in my audience a little bit about what the Bullion Reserve is, what you do there, and why you created this business to begin with. Very simple. I mean, I felt that gold has been, well, first of all, I came to the conclusion that I felt gold would be a safe haven, as it has been, not because of the historical patterns, but because historical patterns are, people are rational, many generations of people have made rational choices about this, and they have concluded that this is a counterparty free neutral, independent item, which is feasible from a practical standpoint, (87/96)
which doesn't rely on anybody in which they can entrust with a placeholder for value. When you say it doesn't produce any income, so neither $200 bills produce any income unless they are deposited and you take a counterparty risk of it being paid back. And of course, $100 bill itself has counterparty risk in that the United States may demonetize it. So nobody can demonetize gold. You can say that gold is this or that, but there are 200 other countries where they may have a different opinion about that and billions of other people. So it's no single person or countries or a group of countries control. So when I came to that conclusion, then my question was, if the purpose of owning gold is to create a reserve asset, which is why central banks own gold, it's part of their currency reserves. And by the way, the thing about not predicting the future but being prepared for it. That's also very important by the way. I mean, that's a huge that's Pericles. This is from 700 BC. Yes. So this is (88/96)
2700 years ago. This man said it. It's universal wisdom, which again, in credit bubbles, it's not true because people feel like their sky is the limit and there is no reversal and every reversal will be fixed by grandpa or daddy or whoever, you know, the big guy. And therefore I can do silly things, but they'll be excused. They'll be covered. But in the world where sometimes paybacks a bitch, as they say, you have to have plan B essentially. So gold is unimpeachable store of value. That's a plan B. Well, then the question is, how do you own it in a form that doesn't compromise those properties, which you're seeking, which is lack of counterparty risk or minimizing counterparty risk accessible to market so that you can monetize it or mobilize it? Because if it's sitting in the basement, you know, buried under concrete, and then you're driven from your house and the basement is in one place and you're in a different place. I mean, that doesn't help very much. You know, it's not with you. (89/96)
So how do you store it? How do you manage it? How do you make sure it's compliant with all the laws? How do you make sure that you have access to liquidity? How make sure you have access to multiple sources of liquidity in different locations? And what if there's need to move it? And what if there's a need to do this or that or the other? It's like with any logistical challenges. I mean, how do intelligence agencies deal with that? Well, they have safe houses in different countries in different places with money placed there and with people on the ground who can host an agent and help them and so forth. They're framed with networks, you know, local networks, not electronic networks, human networks, you know, of relationships on the ground. So when I approached this subject, I thought in the same way, I said, okay, fine. So it's a physical item. How do you own a physical item in a way that maximizes its unique or specific properties that would become extremely valuable only in certain (90/96)
circumstances, potentially. Okay. And it's those circumstances when it becomes extremely valuable, when it would be the most difficult time to actually operate and navigate. So in other words, how do you have liquidity in an asset that's valuable, that has those particular qualities? How do you have access to liquidity? How do you make sure that you can mobilize the asset? Or how can you maximize your chances of success? So if you're designing a contingency plan, the idea is you don't know what's going to happen. Otherwise, it wouldn't be a contingency. It wouldn't be a surprise, right? So if you don't know what's going to happen, what are the elements of planning? Not a plan, because you can't have a firm plan, you don't know what's going to happen. So what are the elements of planning? What are the capabilities? What are the facilities? What are the relationships that you would want to call upon or may need to call upon in a difficult situation? It's not a mystery. I mean, there, (91/96)
it's, you know, if you sit and think about it for two minutes, you'll come up with all that. You need access to, you know, people in the supply chain, many multiple people, they need, those people need to be comfortable dealing with you. There needs to be trust. There needs to be a relationship. There needs to be some history. I mean, all those normal things, there's nothing difficult about. So what I realized is there were, there were not readily available solutions like that, that would be independent from the financial system, based on human relationships, as opposed to institutional relationships and no relationships, which is like apps and the digital framework, that would be not 100% mess up proof, but that would maximize your chances and options and ways of handling adversity under unpredictable circumstances. And so that's really what I do. I mean, I've created a basically a service. It's not a business. It's a professional service that essentially tries to put in place or has (92/96)
tried to put in place and put in place infrastructure and relationships and access to potentially necessary goods and services in different parts of the world in order to maximize chances of success in ability to monetize and mobilize this resource, even when it becomes necessary. That's as simple as I can express it. So if someone hears this and they want to learn more about it, Simon, how can they do that? Is there a website? Just go to the website, bullionreserve.com. And if they have any, if they have any questions, they can contact you or contact the company. Absolutely. Absolutely. All right. Well, look, Simon, this was great connecting with you. You know, you and I, like I said, the listeners at the top, it's, we almost didn't record this. I almost didn't hit the record button at the beginning because we've known each other for a long time. We're friends. I consider you a friend. And so I didn't hit the record button because I was just, I didn't... Or just chat. You were just (93/96)
chatting. But it's great to see you. I wish you the very best and thank you for taking the time to speak with me today. Thank you for having me. And thank you to everyone listening out there. You know, every so often, I make a point to remind you that if you haven't reviewed Hidden Forces on Apple Podcasts yet, even if it isn't the platform you usually use to listen on, that it would mean the world to me if you took just a few seconds of your time right now to rate the show. You don't even need to write a review. Just click on the hopefully five-star rating that you think we deserve for the work that we do every week. And I say we because this is a team effort. It isn't just my guests like Simon who take time out of their busy schedule to speak with me, but also my editor, my phenomenal, phenomenal editor and unsung heroes to Llanos who has been with me since day one. And our latest edition, Kate, who manages the Hidden Forces social media accounts, as well as many other people who (94/96)
help make this show possible with their contributions, either on the artwork, the website, the music track, the music track. Shout out to Sam Williams who has developed all our music, including the latest track that so many of you have emailed me about to say that you love it. All of these folks have a hand in making this show possible. So please, it would mean so much to me if you did that, if you took a moment to rate the show. And if you have a few extra minutes to spare to write a one, two, whatever sentences review of what you love about Hidden Forces, it makes an enormous difference to the podcast visibility. And it plays a huge role in attracting you guests. So with that, I hope you all have a great end of your week and see you all Monday. For more information about this week's episode of Hidden Forces or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode (95/96)
transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at HiddenForcePod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (96/96)
This is the full transcription of podcast 'Hidden Forces'.
The Future of Freedom, Governance, and the Networked State #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
The Hidden Forces podcast features long-form conversations broken into two parts, the second hour of which is made available to our premium subscribers, along with transcripts and notes to each conversation. For more information about how to access the episode over times, transcripts, and rundowns, head over to patreon.com. You can also sign up to our mailing list at hiddenforces.io, follow us on twitter, at hiddenforcespod, and leave us a review on Apple Podcasts. And with that, please enjoy this week's episode. What's up everybody? Before introducing today's episode, I'd like to take a moment to reflect on what has been an extraordinary year. I don't know if anyone else has this experience, but I struggle to remember what it was like to actually live a normal life. I haven't forgotten it, but I've lost that feeling of what it was like to go to the movies, to go to a bar, or to even strike up a conversation with a stranger. It's that quality of social dynamism and liveliness that (1/97)
started to fade. And boy, do I miss it. I think that if I were in a different place in my life, if I were alone, or if I didn't have such a fulfilling job, that I could have easily fallen into depression during this time. And I know that many of you are struggling with feelings of depression and anxiety right now. It is absolutely normal. I want you to know that this show and this community is about more than just sharing interesting philosophical ideas or heady intellectual topics. And while I do love reading some of your geekier emails, don't get me wrong, I love it. I also want you to know that I appreciate and read every single one of the more personal emails and messages that I get from those of you who find companionship in these podcasts and who are otherwise struggling or having a very difficult time with these uniquely isolating circumstances that we all find ourselves in today. I hope you continue to share your feelings and thoughts with me. I read them all, even if I can't (2/97)
respond to every single one of you. We all have ideas in our heads of what the holidays are supposed to be like. And this year, they're probably going to be the furthest thing from that. And that's okay. Life is full of surprises, ups and downs, some good, some bad. But the only thing that we can do is to keep moving forward. And that's what I intend to do with this show in the new year. So I want to wish all of you a happy end to your holiday season and a happy and hopefully much healthier 2021 for all of us. Now, turning to this week's episode, where you're about to hear is a conversation between me and the hosts of the Bankless Podcast, David Hoffman and Ryan Adams, who invited me on a couple of weeks ago to share my thoughts on where we find ourselves economically, politically, socioculturally, and of course, to talk about Bitcoin, Ethereum, and the larger explosion of interest that we've been witnessing in cryptocurrencies and decentralized finance. Since my episode with Roland (3/97)
Gray aired, we've seen further announcements about new regulatory proposals, including the new FinCEN Know Your Customer regs on self-hosted wallets and the huge securities fraud lawsuit filed by the SEC against Ripple. How that company was able to operate in the fashion that it has for all of these years without approaching the SEC is remarkable. But again, I do think that we are in a new pro-regulatory regime. And I think many of the players in FinTech are going to have to rethink their relationships to the government and to regulators in the years to come. As part of my effort to anticipate this transition, I've put together a couple of episodes in the new year that I haven't recorded yet, but which will deal directly with these issues. The first one should air next week, and that's going to be a more conceptual foundation-building episode dealing with some of what was discussed on the podcast that you're about to hear, namely this notion of a networked state or a digital state. (4/97)
David and Ryan seem to feel that code can supplant legal structures as an operating framework for society. And while I certainly agree that smart contracts can automate agreements, I don't believe that self-executing software can or should supplant our legal systems. I also think that it is naive and dangerous, quite frankly, to synonymize open-source software with liberal democracy. And you will notice that many of the folks pushing this idea in the public domain are very wealthy, powerful members of this new baronial elite with their network of thought leaders who all seem to share this perspective that governments are bankrupt, both politically and morally, and it's up to the entrepreneurs and technologists to build a better model for governance in the 21st century. This reminds me so much of the internationalist movement of the early 1900s. And I think this is going to become one of the main philosophical dividing lines separating these elites from the larger public, who is going (5/97)
to demand stricter and more pervasive regulations of these industries and their owners and operators. It's going to be very interesting to watch. And I am very much looking forward to thinking and speaking publicly about it, because I think many people are struggling to articulate what's happening, and I'm going to do my very best to try and make sense of all of it. So, with all of that out of the way, I want to encourage all of you to check out the Bankless Podcast at podcast.banklesshq.com. And in particular, an episode David and Ryan recently did with investor and thought leader Bellagy, who is very well known in the space and who I think expresses some of these views about the network state pretty articulately. So, that's a great episode to listen to if you want to get that perspective. They also recently had Rowan Gray on after he appeared on Hidden Forces, so make sure to check that episode out as well. All right, so without any further ado, please enjoy my conversation on the (6/97)
Bankless Podcast with hosts David Hoffman and Ryan Adams. Bankless Nation, we are so excited to introduce our next guest. Dimitri Kofinas is the host of the Hidden Forces Podcast. This is one of my favorite podcasts because it's a podcast that gives you an edge by teaching you not just what's going on, but how to think critically about the systems of power that structure our world. It's something we touch on in Bankless as well. Of course, Dimitri would describe himself as crypto curious, maybe crypto adjacent, but he really understands the nature of the industry while he's staying on the periphery. And we wanted to get his take as someone who is crypto curious, crypto adjacent, and who is synthesized and absorbed so much of the Hidden Forces that are going on in the world today. Dimitri, it's fantastic to have you. How are you doing? I'm great, guys. Thank you very much for having me on the podcast. Well, we are so excited. And this has been, I think, a really interesting year to be (7/97)
the host of a podcast like Hidden Forces, the type that you do. I'm going to start with this question. What's it been like to be a podcaster trying to find truth in the chaos of the year 2020? It has been very satisfying and exciting and fun, I must say. I think one of the great benefits of having a podcast like this is that when something strikes my curiosity, I get to, as a function of my job, investigate it and then bring on people who I would normally not have access to if I didn't have a podcast like this to speak to me to try to help me make sense of whatever it is that's creating confusion in me and in society. Yeah, absolutely. But has it been a hard of year to find truth? Have you found? Or have you been able to figure out the, find the signal and the noise here? So that's a very complicated, interesting question on many levels. I think we are struggling today to come to a social consensus view of what we even mean when we talk about truth. When I think about truth, I think on (8/97)
an ontological level, I don't think that any of us can ascertain what the truth is or what reality is at bottom, but we attempt to approximate it. We try to get close to it through things like empirical science or epistemology. And I think that these are part of the tools that I use to think critically about the systems of power that structure our world. And I do that starting with questioning assumptions. And those assumptions are what most people consider to be the truth, consensus thinking. So for me, it's actually been quite satisfying because when people's assumptions are suddenly being confronted as perhaps being wrong in such a jarring way, like we've been seeing in recent years, as we're going through this radical period of change, it really, I think, opens the door of a podcast like mine to step in and really help people think critically about those issues and those problems. Dmitri, the name of your podcast is Hidden Forces. And so I want to talk about what that means. The (9/97)
through line of your podcast seems to be surrounding so many different domains of knowledge, domains of information. What are the things that really grab your attention and that you fit into the through line of Hidden Forces? And why did you call it Hidden Forces in the first place? You know, I think I understood subconsciously why I did. And I began to articulate it early on, but I've gone through a long period with the podcast where I didn't have much time to think about all that. And I've gotten more clear on it recently. I think the idea of Hidden Forces, again, to go back to this idea that there are systems of power that create structure in our world. And that structure is oftentimes in the form of a narrative. There are things that we generally come to believe. And the reason why I think it's so important to challenge those narratives, and this is something I learned from investing, which is that in order to make money, it's not enough to just be right about the future. You also (10/97)
need to have a view that is different from the consensus view. Dmitry, I think the way Andreessen Horowitz describes this is you have to be contrarian, but right. Yeah, exactly. Well, Howard Marks says, who's also been on my podcast before, and I strongly recommend for your listeners to hear that episode. He has like, you know, all these little funny quips, and I think one of his quips is it's not enough to be a contrarian. You also have to be right. And it's true, but in order to be right, you have to be able to think critically. And that means knowing how to ask the right questions. It means knowing how to assess evidence. It means knowing how to evaluate arguments with the ultimate goal of coming to a conclusion and forming a judgment that you feel confident enough about that you can then rely on that judgment and that conclusion to make decisions and decisions that are materially important. Because oftentimes, your conclusions will be contradicted, or you will, if you purchase (11/97)
Apple at, you know, I don't know what it's trading at today, but you know, you purchase it at X and it falls 20%, that could shake you out of your position. Likewise, if you're on a panel or you're being interviewed and your views are challenged and you don't understand why you hold, why you believe what you believe, and you don't have conviction. And that's something else that Howard Marx talks about. It isn't just to be right. It isn't just to have a different view. You have to have conviction, because you'll get stopped out of your position. Literally and metaphorically, if you don't have conviction, and that's the epistemic component of hidden forces. It's, you know, not only what do I know, but how do I know what I know? How can I justify what I know to myself? Because what you'll often find is that people who hold beliefs and then have those beliefs challenged, yes, if you're investing in a market, you may very well and oftentimes will sell out of your position. But in the rest (12/97)
of the world, a bigger picture, what you find is that people will tend to become more wedded to their beliefs. They will clutch the cross. And the reason that people do that is because they can't bear the uncertainty. And that's because people need certainty. They need models and frameworks to structure reality, because reality is in its bare naked essence, chaotic. Or at least it appears chaotic to human beings. And we spent our entire lives doing that. And then, again, that brings us back to this point about power and structure, which is that we all need structure. We all have biases. We all have stereotypes. We all have frameworks and theories that we use to make sense of the world. But when you don't think critically, you're relying on other people's structures and other people's theories and frameworks and narratives to explain the world. And so you empower others at the expense of yourself. And that's where critical thinking is so important, because being able to think (13/97)
critically, and I think that's something that I try to do on Hidden Forces, and I think by extension, I try to help other people do, when you can think critically, you can come to your own determination. And that's empowering. And I think that is, for me, ultimately why these subjects and this approach is something that I've developed over the years, because at a young age, I found it, I'm a very competitive guy. I've competitive physically. I was a wrestler in high school. I did mixed martial arts in college and afterwards. And I loved competition. I love to know that I could hold my own. And early on in my life, I found that I had beliefs, but those beliefs were beliefs I couldn't justify. And I didn't like the experience of having my hat handed to me in an argument, because I didn't understand or didn't know why I believed what I believed. It's bad in an argument. It's even worse having your hat handed to you in a market when you've had on something and you're completely wrong. (14/97)
Yeah, for sure. It's an awful experience. And I think it really helps, even if you're wrong, and I've been wrong plenty, and I'll continue to be wrong plenty of times, understanding or having some idea why I was wrong and being able to make changes so that I can be a little better next time makes all the difference for me. And I think at a network level, that is what moves society forward. That's empiricism. That's progress. We have a lot of beliefs in the Bankless podcast and the Bankless program. And there's so much in there about thinking critically that I think a lot of our listeners can start to figure out why we wanted to get you onto the Bankless podcast in the first place. Because a lot of what crypto is in its current stage and form is belief about the future version of finance and the future version of economics. And I'm reminded of a podcast we did with Ben Hunt a long time ago where he talked about in his entire newsletter, Epsilon Theory, is based off of his theory of (15/97)
Epsilon where you have the alpha and the beta of markets. And that's just the raw facts, right? The raw fundamentals, the numbers on the spreadsheets, et cetera. But the Epsilon is the perception of the masses, right? The viewpoint of the people. And that can change. And that's one of the reasons, that's one of the things that we are seeing nowadays. At least that's from the perspective of Bankless and from to the outside world. We're seeing so much shift right now. And some of this has to do with crypto and some of it definitely does not. We're seeing shifts in perception as to central banks and their relationship with money. We're seeing shifts in perception in our trust or distrust in institutions. And there's just a seemingly large number of undercurrents that seem to be shifting the perceptions of everyone, right? And some of those shifts have to do with people like Paul Tudor Jones, reviewing and reorienting their perceptions about what Bitcoin is. Micro strategy is a big topic (16/97)
of conversation. And so, Dmitri, before we get into the topic of crypto and how things are shifting towards crypto, I kind of want to talk about what you see as shifting in the world. To me, Hidden Forces as a podcast has this stream of consciousness about it, right? Like it's a thought process. And your decisions to bring on a new guest or a new piece of content, to me, represents your belief that this is an important piece of subject matter because it represents a shift in people's mentality. What would you ascribe to be the big paradigm shifts of people's thoughts in 2020? Sure. So, by the way, you guys and your audience will be happy to know that I'm going to be bringing on two people who I think your audience will be very interested to hear from to speak directly about the Stable Act. And that's going to be, I think, a very exciting episode. I'm going to be recording that next week. But... Oh, Dmitri, do you have any teases on who the guests are? Oh, man. Well, I want to. Let's (17/97)
just say that the one person is, there's no one better that could speak about the Stable Act than one of the people that's going to be on the show. And the other person is someone whose business is very well known and is going to be deeply impacted by any kind of regulation of the space and has spoken very thoughtfully about it. So, it's kind of two countervailing opinions. And I'm very excited to do that. What was your question again, Ryan or David? Yeah, so there's just a fundamental... There seems to be many different shifts in how people believe the world to be in 2020. I feel like the legacy of 2020 is like the year that it all changed. But what changed? What are the big undercurrents of the world in 2020 from your perspective? Yeah, I mean, well, I'll just point out one that was recently on my radar and was on all of our radars, which is the 2020 election. And I actually brought on David Shore, who has been called Obama's Nate Silver. He was the guy that built his forecasting (18/97)
engine for the 2012 election, a brilliant kid. And we spent the balance of the two hours talking about this. And really, what did the 2016 and 2020 elections tell us about the electorate? Because there have been very... Again, to bring it back to the point about narratives and Ben Hunt's Epsilon, there is a conventional narrative that has been pushed primarily by leftist media outlets and the Democratic Party about why Donald Trump got elected. But I think for a lot of us that never really felt like it told the whole picture. And I think the election in 2020 kind of bore some of that evidence out. When you look at the fact that young African American men and Hispanics actually voted in greater numbers for Donald Trump in 2020 than they did in 2016, which really doesn't make sense on the face of it. Also, why were the polls so off? And a lot of these speak to what I think is an underlying demarcation, a bifurcation in the electorate separated by class. I think this is really the big (19/97)
story that has been missed because conventional explanations either rely on identity politics based on race, religion, sexuality, different markers of identity, or something that I've actually talked about quite a bit, which has been the wealth gap. But I think what's actually more interesting is something that David talks about and also one of my guests, Michael Lind, had talked about, and we talked about together, which is class. And I think that America is becoming a country that's increasingly breaking apart by class. There are the non-working class, lower educated, more highly mistrustful people living in the Midwest and other parts of the country. And then there are people like, let's say you and me or us who have the skills to be able to perform in a modern open economy. We tend to be perhaps more liberal and we live in coastal cities and we take in this sort of progressive, largely progressive popular culture. Crypto's are really interesting case because you've got these strong (20/97)
strains of libertarianism in Austrian economic thought. But I mean, I think that's really one interesting subject, which is how is our country dividing really? We keep saying in America's never been this divided, but what's dividing us really and what are the dividing lines and how can we wrap our arms around that and can come to an understanding of what that means in order to make more informed decisions for ourselves? And I think one area where that's relevant is, I mentioned it, the Stable Act. The Stable Act is, I think one of the reasons why it's being introduced today is because we're coming into an environment, into a decade where we can expect to see higher levels of progressive legislation and a greater desire to regulate the economy, to regulate society. And that, I think, stems from the failures of the last 30 to 40 years, some of which are market failures, many of which are the failures of government and the failure both to regulate and to regulate properly and over- (21/97)
regulate. So, Dmitri, what you're saying is one thing you've noticed. And by the way, we will get to the Stable Act for the Bangless audience. That is, by the way, some interesting, an interesting bill that was just put before Congress to regulate stablecoins. We want to get Dmitri's opinion on that. But while we're talking about these kind of larger trends, so I think what you're saying, Dmitri, is that we've got now two Americas and those two Americas are divided by class. But possibly that's a symptom of something else. So, you mentioned the wealth gap, so this massive wealth inequality that we haven't seen since when, the 1920s, 1930s. Is that a symptom of something else? I want to bring the topic of central banks in here. So, a lot of the crypto more consensus thought would be that part of the reason for this inequality gap has actually been the mundane printing that has gone on since before 2008, but certainly accelerated after 2008. And those closest to the money spicket, those (22/97)
with stocks and assets, those things inflated and just accelerated the wealth gap that was already in place, just kind of accelerated that trend into the future. What's your take on that thought? The idea of central banks, the idea of modern monetary policy that is continuing to print more money, does that have a role in the 2020 narrative in your mind? Yes, a great question. I think it absolutely does. The central banking story is a really interesting one because for the most part, when we look back at history, it's hard to point to one particular time or period or moment where everything changed. But I think that in the case of central banks, 2008 really was a watershed. It really was unprecedented in an age where everything seems to be unprecedented and that word is so often misused. In this case, it is in fact true. Ballot sheet expansion was more or less a very gradual process for the entire lifetime of the Fed for 100 years almost. But 2008, we saw a dramatic expansion of the (23/97)
balance sheet. I think we also understand why that happened. It wasn't just to arrest a deleveraging, a cataclysmic deflation that was going on in the economy that was driven by reckless decisions in the world's investment banks and large commercial banks and financial system. But it was also because our elite, our elite institutions and our elite individuals, politicians and policymakers, who revolve, use a revolving door between government and the private sector, made a very conscious decision to prioritize themselves and their own assets and their own families at our expense. I think you can think of the 2008 financial crisis as what began as a financial crisis, quickly became an economic crisis and has since become a political crisis. It's become a political crisis because of the choices made by policymakers to print their way out of the problem, to cover up the problem with more and more paper. In that sense, they have deferred it. Because what is a fiat-denominated currency other (24/97)
than a liability? A liability of who of the central bank. The central bank credits that fiat money to the banking system in order to deal with in the short term a problem of too much debt and too much leverage. As a result, when the chickens come home to roost, where are they going to roost? They're going to roost back at the issuing institution, which is who the central bank, because it is a liability to the central bank. That brings us back into a larger narrative that I think is foundational to crypto, which is that cryptocurrency solves the problem of trust in money. We've lost faith in our institutions of money. Do you buy, a banker might say, yeah, but Dimitri, we had no other choice here. Come on. This is really the only way out. Do you buy that argument? That's like saying, I had no other choice. I had to push her onto the train. I had to push her in front of the line because the line would have eaten me. I mean, I get why they would answer that way. I think also, this is where (25/97)
you get into really interesting research around behavioral psychology. They believe it. When Lloyd Blankfein says we're doing God's work, he believes it. He's not just saying that. There is probably some level of, but people go to great lengths to convince themselves of things. Someone who talks about this, and I think talked about it on my show as well, is the great short seller, Jim Chenos, who famously helped really bring down Enron. When you look at people that perpetuate giant frauds, they will oftentimes come to very complex rationales to explain why they're actually not bad people. Central banks as a religious institution is an interesting concept to think about. Money as a religion is an interesting concept to think about as well. We often in the crypto space think of money as a mean that's socially propagated contract between all of us where we agree certain things are money and other things are not, which is an interesting subject, I think. I've been reading a lot of Ray (26/97)
Dalio lately as well. You talked about central banks and bankers and the wealthy class choosing themselves over other members of society as part of this. Ray Dalio would probably argue, yeah, this is all part of the rise and decline cycle of a nation state, of an empire. Recently, he put out an article this week that said the US is at stage five. It was like, you know, how cancer progresses in stages like one through five, but we're at stage five. Reading Dalio these days, I don't know if you've done this much, Dmitri, but it's very sobering because he's looking through history and he's presenting evidence or reasons why the US is possibly in decline. This is just monetary reserve currency is the last thing to go. In the next stage is stage six, where he talks about revolution and civil war. I'm not sure that I'm ready to fully commit on Dalio's worldview or thesis. No, I'm to be fair. It's all probabilistic for him too. But what's your thought on this? Does all of this wealth gap (27/97)
inequality and kind of the divide that you're talking about certainly makes for a more volatile 2020s, but how does it shake out? I know you've been talking a lot about the future of the US and how other geopolitical powers play into that. Is this kind of an empire in decline in your mind? Is the nation state experiment not working out so well these days? Interesting question. Does Dalio say that the nation state is in decline? Is that his thesis? Not so much. That would be a bit more of a bankless philosophy. I just wanted to fact check you guys. He doesn't say that, but he would say. Yeah, right. Well, we connect the dots there to be fair. What Dalio would say is possibly the America is in decline. The Western empire, if you will, is kind of on the end cycle of its 300-year go of things. Yeah, I have probably a complicated series of answers there, not fully thought through. One is, I don't think that the nation state is in decline. If anything, this is going to sound controversial. I (28/97)
think that there's never been a more bullish time for the nation state. When is it really advantageous to have a government? I don't know if you guys are familiar with Thomas Hobbes. Most famously wrote Leviathan. You've spoken about it quite frequently on the podcast. Perfect. Thomas Hobbes was supposedly a very thin, frail guy. I think he wore glasses. He was scared. He was a guy that was very concerned about a world of violent anarchy, of war of all against all. For Thomas Hobbes, a strong national state, and this I think gets to another point, which is what has been the appeal of authoritarianism, a strong nation state is vital. It is more important than individual liberties, because individual liberties, you can only have them if you have a state. If you live in an anarchy, this is the, I'm really summarizing, kind of butchering up his thesis. I think that we're moving into a more chaotic world. In that type of a universe, a strong, competent national government, or the hope even, (29/97)
or the need for a strong national government supersedes any sort of lack of trust in its competence and its record. So despite the fact that elites and institutions have lost a lot of trust in recent decades, that doesn't negate the fact that we're heading into a period of time where we need them more than ever. So I think that, yeah, I would actually make the opposite point about nation states. There was one other point you made about- The US specifically, I'm curious. About the US, right. Is it declining relative to, well, the US has been declining, right? I think that part and parcel of this is the decline or the disaggregation of the American-led international order, American hegemony, American power and primacy, which was really the defining ethos of the rise of neoliberalism and American empire in the 1990s. That's when I grew up. I graduated high school in 2000. So I literally went through my entire childhood and early adolescence, living a completely different world. Granted, I (30/97)
did live through the Cold War as in the last, the first decade of my life, but I didn't fully remember it very well. I really started to become politically of age in the, maybe the George H. W. Bush administration. I had this vision, this memory of seeing a girl crying on Time Magazine, hugging her husband or boyfriend who was going off to fight in the Persian Gulf. But I was rudely awakened to what has now become the second half of my life in the 2001 terrorist attacks. The Bush administration attempted to resolve that problem to address it by what? By doubling down on American empire. That went terribly wrong. And we've been living, I think the two biggest events of the 20th century have been not so much the terrorist attacks, but rather our response to them. And that primarily means our misadventure in Iraq and all the blood and treasure that it's cost us. And the 2008 crisis and our response to it. And the 2008 crisis was in some ways a response to the 9-11 attacks and the Bush (31/97)
administration's war in Iraq, right? Because the Greenspan administration dropped rates in the face of the collapsing Nasdaq bubble and the subsequent terrorist attacks. I also wonder if our response to COVID in 2020 will be another one of those defining events. I guess that remains to be seen. No, that's a really interesting, so when you say our response to COVID, do you mean our monetary response? I mean all of it. Yeah. And I mean, it sort of gets into you another question about, that you made about strong national government and authoritarianism. I don't know, David, if you have a thought on that. Yeah. Dmitry, you talked about Thomas Hobbes' Leviathan. And we've used the Leviathan metaphor to ascribe meaning to what's going on in the world of crypto and specifically Ethereum, where Thomas Hobbes, the belief of Leviathan is that you need a strong centralized government in order to keep the body of a nation composed. And we extend that metaphor to Ethereum, where Ethereum is a (32/97)
protocol, but it operates as a strong, as in you can't do anything against the rules of Ethereum by nature. And it is the thing that keeps the community, economy, ecosystem of Ethereum composed. And in a world where we are losing trust in institutions, Ethereum offers, and all the protocols on Ethereum offers a place for that trust to migrate to, which is something fundamentally different about the 2020 financial crisis versus the 2008 financial crisis. Because in 2008, we didn't really have an opportunity to opt out. And you also talked about how you are particularly bullish on the power of the nation state. And specifically right now, as a time where the zeitgeist seems to be a pro-regulation, because it's we haven't had regulation in the last 30 years, not anything meaningful. And so now maybe you alluded to how now might be the time to introduce stronger regulation because we haven't been doing that. To me, and I'm pretty sure Ryan too, when we hear that, we hear more (33/97)
authoritarianism, because if we want to have more regulation, more control, it's not the right time to have more control when there is an option to exit out of a system. And that exiting means cryptocurrencies, right? Using different infrastructure, different institutions, institutions run and operated by code to opt out of perhaps an authoritarian government, a government that is very happy on the trigger of regulation. And the perception shifts, the fundamental shifts in people's outlook upon the world seems to resonate with this. At least maybe that's our bias here on the bankless program. But that's kind of like our underlying theses that we wanted to get your take on. Well, when you say opt out, what do you mean? So there's parallels to Ethereum and a nation state, right? They're not completely right, because roads are not going to be built by Ethereum and taxes aren't going to be collected by Ethereum. However, there's increasingly more and more places for you to primarily (34/97)
deposit your capital and wealth. And what a nation state is in its most essence form is a system of organizing and then also taxing wealth. A nation state is a property rights management system, in addition to many other things. And that's primarily the role of Bitcoin and Ethereum. These are property rights management systems. And so it's reducing the power or responsibility of the nation state. If people perceive that Ethereum is a better property rights management system than the nation state, people might opt into Ethereum because Ethereum doesn't over-regulate them. Ethereum doesn't peer into, like doesn't ask them to download a COVID contact tracing application on their phone. It doesn't ask them to do all of these things that they might not want to do. And to get even more concrete on that, things you can opt out of right now are obviously a nation state monetary policy. So you can buy Bitcoin and Ethereum rather than a very issuance happy system. You can buy Ethereum and stake (35/97)
it as a bond rather than T-Builds. You can use Ethereum as banking infrastructure rather than Wells Fargo and JP Morgan. You can register a capital pool on Ethereum and it's globally accessible and available and permissionless to anyone rather than registering a Delaware LLC. So it's not taking everything that the nation state does, but it is becoming an institution and unbundling possibly some of the services that the nation state provides. And by the way, maybe the nation state isn't the most efficient way to do these things. Nation states are notoriously expensive from a security and from a tax perspective. So the idea is that some of these things could be unbundled. But the alternative view, which the world seems to be moving in, is I think exactly, as you said, more authoritarian state-controlled governments. It's this crypto world view that offers kind of the alternative at least in our minds. What are your thoughts on that? Just in general, I'm super curious. Sure. I guess a few (36/97)
points. Number one, I think one of the most core characteristics of a nation state is its claim to the legal use of force. And that came to me when you, I think it was, I don't remember if it was Ryan or David, we're talking about property rights management because I think that what Ethereum does is not property rights management. I think it's property rights accounting and accounting in general. I think what's really unique and special about these open public ledgers is that they are sort of scribes of the historical record. And you can do a lot with that. That's extremely important. And that speaks to the point about trust. But ultimately, it's physical force, the ability to enforce physically, that is the basis of power. And even if the Ethereum ledger says that you own something, that doesn't prevent me from going and physically taking it from you in the world because we all live in the physical world. So I think that drawing too strong of an analogy between these communities like (37/97)
Ethereum and Bitcoin and nation states is fundamentally wrong. I want to get to your second point in a second, but just a quick thought on that. I think you're absolutely right that violence at its core is the thing that we gave up to governments. That's the Thomas Hobbes argument, essentially. It's like we give the Leviathan the power of violence, and therefore we are able to socially collaborate better and coordinate better as human individuals. But that doesn't have to be the case. So when we graduate above violence, there are things that societies put together like protocols, like laws, like the Constitution. So we're not cavemen running around, hitting each other and stealing our things, and we're not just war tribes, essentially. We have protocols and structures that define how we do commerce, that define what our unit of money is. And crypto's answer to that might be a little bit, well, in the crypto world, code is law. So we do have a law system and a set of protocols. That (38/97)
means we don't have to resort to violence. And there's this defensive aspect of cryptography that we've talked about before, which gives asymmetric power to the defender. So if I have private keys, and you don't know I have a set of private keys, so assume that privacy is in the mix here, Dmitri, then there's no way for you to crack my cryptography and steal that from me. So what I would say is that those laws are backed up by the use of force. Not on Ethereum. Right, but Ethereum exists within a legal framework. So whatever money you have on the Ethereum ledger is in a practical sense, a claim on assets in the real world. So the claim, the ownership of property on Ethereum doesn't always have claims in real world assets. And some of the most valuable assets on Ethereum are specifically not found in the real world, notably Ether itself, the native currency of Ethereum. Right, but what I'm saying is that the only reason that those assets have value is because you live in a physical (39/97)
world with physical things and physical needs and physical governments that can physically take those things or physically protect them. So one of those things, the ledger, exists within a physical world and governments which have physical force have primacy over those assets. And the reason that we, the argument, and I understand that there are anarchic philosophies, anarchism is a philosophy of organization, I think anarchism, I think works at small scale. I don't know, I don't see how it could work at a large scale. It hasn't worked historically. But the reason that we empower governments and we give them the legitimacy to use force is in order to protect, among other things, life and property and liberty. So I don't believe that you can have a world, and this actually gets to a fundamental philosophical question, which is can you have a world that exists solely off of math, off of a cryptographic ledger and smart contract enforcement? And I don't think that you can, because that (40/97)
doesn't stop anyone from coming to your house and killing you or taking your house from you and squatting in it. No smart contract is going to prevent that. Right, yes. And so there is inevitably, and this is one of the main reasons why we wanted to get you on the podcast, because Ryan and Arya are inherently bullish on the concept of a math driven world. But just to your point, a math driven world doesn't employ a police force. It doesn't employ an army that protects from other nation states. However, there does seem to be a balance that could be stricken where, you know, in theory, a nation state could do whatever they want, right, because they have a monopoly on violence. However, we've seen nation states, you know, overreach against the will of the people. And that is inherently destabilizing to a nation state. And I would say especially a nation state like America, where we are founded on principles of freedom and self sovereignty. The freedom and self sovereignty of being able to (41/97)
transact on a permissionless ledger is seemingly completely aligned with the values of what makes an American, right? And one of the, and it seems to be that America slowly over time, not to the whole world, but to select parts seems to be kind of exporting that values, the values of freedom and self sovereignty. And so what Ryan and I think really protect property rights management on Ethereum is the desire and will of the people, which seem to be shifting away from offering legitimacy to our legacy institutions, because we don't trust these things anymore, especially after, you know, the nation states failed us during COVID, especially, and then began to perhaps also fail us by, you know, printing a bunch of money to benefit a few people rather than the many. And so people, what the thesis is, is people are removing their, removing legitimacy from the nation state and offering it to trustless institutions on Ethereum. And a nation state can only go so far against the will of the (42/97)
people that it has domain over before they start to resist and fight back. And I think that the resistance of the people, because the people inherently are- I don't know how much the people in North Korea are resisting. You know what I mean? Like I think that that's also, there are a lot of assumptions there baked in there that I would question, you know? And also, I think we have a lot further to fall than a lot of those other countries. And you can stay in an authoritarian, you know, totalitarian regime for quite a long time before you eventually rebel. If you ever rebel at all, you know, that's one of the interesting things about looking at history. It's an incomplete data set, you know? So there are a lot of assumptions baked in there that I'm not fully on board with, you know? I think these systems, these platforms, these ledgers, these networks can be important and have been important contributors. I think Bitcoin is a classic example. Bitcoin, more than any other protocol, (43/97)
decentralized protocol, has had a meaningful impact on society insofar as it is, it has presented a huge challenge to fiat currencies, not so much materially, but ideologically, in the same way that gold plays a role. And it's really caused a lot of people to begin to question the viability of fiat money. At the same time, there are strong forces that compel societies to organize around fiat money because it empowers the government. And there are periods in time where people want and demand stronger government. And I think we are heading into one of those periods of time. And it's not the first time that we've been in this in the United States, that we've gone through a period like this. These are cyclical processes. And so I don't think that my hope for cryptocurrency and for platforms like Ethereum and Bitcoin is that they can survive, that they can survive the regulation, that they can work constructively with regulators who will regulate them to formulate regulations that don't (44/97)
cripple the industry, that allow the industry to innovate and create value and solve problems without getting overburdened. That's my hope. But I don't see it as a kind of thing where we're going to escape into Ethereum and that we're going to live on the cloud or on the decentralized cloud. I don't think that's realistic. And I think interestingly enough, when I listen to a lot of people in the community talk about this, I think that view is partly informed by what feels like a paradigm shifting moment. I think a lot of people see how digitized the society has become. They look at the advancements made in virtual reality, in gaming, and now with the pandemic and this sort of remote work situation. And I think they overextrapolate and think that that somehow then means that we really don't need to live in a physical world. The contours of the state are not just less relevant but irrelevant. And I think that's fundamentally incorrect, is my view. So, Dimitri, is that what you think (45/97)
accounts for the major rise of Bitcoin and other cryptocurrencies in terms of market cap? It's kind of this store of value, gold alternative type of thesis. Is that what you're attributed to? Yeah, I think that Bitcoin has found a really good niche as a, quote, digital gold. And that's partly, I think, as a result of the failure to live up to its original vision, which was as a senseless peer-to-peer money. Because that really was an amazing story and was very compelling to people like me. And that is one of the things that first got me attracted to crypto courage in the first place. It was the hope that really this was a way to opt out, that we would be able to opt out of fiat money. It's obviously proven much more complicated than that. And I know that there are a layer or two solutions that are being implemented or being developed. But to my knowledge, those are still a ways away and it's not clear that they'll ever be really viable in so far as sustaining the kind of security (46/97)
promises that Bitcoin initially promised while at the same time enabling the kind of speed and processing capability that you would need in order to operate at scale. But I think the digital gold narrative is a powerful one. But the thing with digital gold is like gold, for example, is a Ponzi scheme. It's a pyramid scheme. Largely, not entirely, because there are fundamental uses for gold. It can be used in electronics. It's used as jewelry, which is not really a Ponzi scheme. There's, I think, underlying attraction to that. But fundamentally, for the most part, most of gold's value is Ponzi value. It's based on a conviction that what I buy it at, the price I buy it at, will be lower than what I can sell it to you for. That it's going to keep going up over time and that's why I buy it. Otherwise, people wouldn't buy gold. And Bitcoin, people buy Bitcoin for the same reason, primarily. Most people buy Bitcoin because they have an expectation or hope that its value will continue to (47/97)
rise. And what's interesting about the Bitcoin community, and I'm not talking about traders and sharks that come in and out that trade on volume and buy and sell, and I think it's got a strong to a point that either you or Ryan or David made earlier about religion, it's got a strong religious fervor. And one of the important sort of doctrinal forces in Bitcoin is the notion that you should hodl and you hold on, hold on until the rapture, until the apocalypse, until you're brought to heaven, you're given your 40 virgins. And I think that is, again, also, for me, that's not a particularly compelling vision. And I don't know how sustainable it is. So, I guess, I don't know if I'm really answering the question. I might be meandering now, but it's kind of a way of me saying that I think for Bitcoin to graduate, it's got to become more than just this, for lack of a better word, pyramid scheme. And I don't know how you guys feel about that. I have a couple of comments there. So, one is, I (48/97)
think that's a super interesting way of characterizing it. Your comment about this peer-to-peer cash thing being the original vision for Bitcoin, like I completely agree, right? But we also think on Banklist that that vision in the wider crypto is not dead. In fact, it can live in places like Ethereum where you have Layer 2 and you have the ability to create stable coins and this sort of thing, and you have scalability of kind of the base layer infrastructure. But maybe we can get back to that. I'd love to go into more detail on your description of Bitcoin as a Ponzi scheme and as gold as a Ponzi scheme. I'm going to get so in trouble for saying. No, actually, so would you be surprised to know? So would you be surprised to know that I and I don't want to speak for David, but I probably agree with you. I might change the word Ponzi scheme to Ponzi game, which is kind of what it is, maybe a pyramid game type of mechanism. But I guess my counter question to you, Dimitri, is like, isn't (49/97)
that what money is in general? Peter Teal calls money the bubble that never pops. What is money? You've all, Harari in his book, Sapiens, calls money a shared myth. That's what it is. It's a shared meme that we all... Totally. What do we want? What do we need as money? Well, I want to have the money that you think is money and that the rest of the world thinks is money. And there are some monies that are in different stages of development and growth. There are monies that are new and have small networks and not everyone trusts. And so if you choose to buy those monies, you're kind of speculating that that money will be thought of as money by the rest of the world. Maybe that's a bit more what Bitcoin is. And then when that happens at the nation state level, with something like gold, you get things called the gold standard in the 1800s, where nation states were playing the Ponzi game, if you will, of saying like, well, England has just switched to the gold standard. So we better do it. (50/97)
We don't want to be like China and the last one's left on the silver standard, do we? So that's why the more fundamental question is, well, when you think about it more deeply, Dmitri, isn't money just a Ponzi game? And importantly, the distinction between scheme and game. Scheme alludes to somebody who's going to pull the rug. Whereas game is something that everyone chooses to opt into and to play more or less implicitly or perhaps explicitly, understanding that this is a game to be played. And when everyone plays the game, well, that's just money. It no longer becomes a game. It graduates. So I have a lot of interesting thoughts about this, where to start. So I've heard this discussed often in crypto. It's a really fascinating approach to trying to bootstrap money, which is basically saying, hey, look, money is just a myth. The dollar is just a myth. We just generally believe in it. It's a consensus narrative. I would argue that that's not entirely correct, because I think fiat money (51/97)
is not entirely a myth. It is actually the power of the state to enforce it as money, which makes it money. And then I think that there are myths on top of it that give it value, or give it much more value than that. But let's talk about money as a sort of communal, non-enforced consensus. Yes, it is mythology. And I think what I see in the crypto community, which is interesting, is this kind of wink-nod thing, like, hey, we all know this is bullshit, but my bullshit is better than your bullshit. And so we're all just going to pump our bullshit here. And then eventually, because we're so religiously fervent, we're such devotees that we're going to convert more and more people into our faith. And once we get enough people, then you're going to get the FOMO. I don't want to be left out the gates of heaven. I don't want to be on scorched earth. And this is very much the ideology. What fascinates me about crypto, among other things, that Bitcoin actually specifically, is the extent to (52/97)
which this is true. I noticed recently that Saifah Dean, I didn't know this. He was a carnivore, I didn't know what that was either, actually, to be honest. But I saw that he had, apparently, someone who was a follower of his had adopted a carnivore diet, and he developed some sort of bowel disorder, which was a result of the fact that he was not getting enough fiber, which is like like you shouldn't be just eating meat. Maybe some people with extremely short intestines, but for the most part, human beings need to eat, you know, we're omnivores anyway. And so, you know, he tweeted at Saifah Dean and Saifah Dean was like, no, you idiot, basically, you're not doing it right. You're not eating enough meat. You weren't, you know, he found some way in which this person was not dedicated enough to this discipline. And what's interesting to me is that this carnivore diet that I discovered was actually something that was spreading generally in crypto. And I think that, you know, it might just (53/97)
be sort of coincidental, but I do think that there is a strong adherence. The culture adheres to very basic ideologies. I saw this in the case of a prominent podcaster who, when he first came into Bitcoin, sort of adopted Austrian economics and tried to figure out how to make Austrian economic theory work with his conception of the world, and he was having difficulty doing that. And the reason he was having difficulty doing that is because Austrian economics is not a sufficient explanation for the world and for economics, which is, again, this is the point about critical thinking. But I think that what you are seeing overall in Bitcoin in order to boot strap this mythology is you're seeing a strong adherence to ideology that feels very religious. And that's the overall mechanism in the community to get the value to a place in the event that it's just digital gold and the event that we can't really create sufficiently robust layer two solutions to offset the need for, you know, fiat (54/97)
money and if fiat governments can actually enforce the value of their currencies to get the value to a place where it can actually be, it can graduate from being a game to being the real thing. Well, my first question on that is, is it working? I mean, we have public to our Jones, right? Yeah, yeah. We have publicly traded companies adding to their balance sheet. We have the block, the BlackRock CEO, eight trillion, in terms of assets under management, say there might be something to this. Larry Fink, Larry Fink. So guys, this is actually the more interesting part of the discussion. I did an interview, I mentioned I had Jim Chenos on my show not long ago, and when we headed into the overtime, someone texted me a tweet that shared a tweet by Ray Dalio, and it was something like, I think I might have missed something about Bitcoin. I laughed so hard when I read that, the Jim Chenos. Did you read all the replies of all the people in crypto saying, here's what you missed? Sure, sure, sure, (55/97)
sure. Let me bring it up for you, Ray. And by the way, come on my podcast so we can talk about it. Yeah, sure, man. Well, Paul Tudor Jones, an interesting character, a really smart guy, open-minded guy. I think it would be interesting to see if Stanley Drucken-Miller gets converted. Those two guys are very close. Ray Dalio is much more of an institutionalist than those two guys. I think, yeah, so to get to the larger point, I think it's fascinating to see this. This is where we go back to the question about, I said at the very top of the show, when I had Howard Mokson, he said, it's not enough just to be contrairred, you also have to be right, and you also have to have conviction. And I think that what you see in these cases for someone like Ray Dalio tweeting, I might have missed something, is my convictions are shaking, and as the price goes higher, they shake more. It's like that scene, I'm a huge nerd. I used to watch among so many nerdy sci-fi things. I used to watch Star Trek. (56/97)
And in Star Trek 6, when Sulu, Commander Sulu was now captain, and he actually was captain of the Excelsior. I think the Excelsior was the name of the ship. I think it was the Excelsior, and he was flying into assist Captain Kirk, who was fighting the Klingons, and the ship was just rattling, and it was rattling, and it was about to come apart. And I think that's what it feels like for people who lack conviction or whose conviction begins to get challenged, because all of our convictions become challenged as the price moves against us. And I think that that's what Bitcoin has that's extremely powerful, besides its community, which is ultimately, and the platform, the network, and the math behind it, and the cryptography, is also the price. As much as I hate the casino culture, vibe, that grows around Bitcoin as the price escalates, I cannot deny that the single most important thing for driving adoption and for making it really graduate is the price. The higher it goes, and eventually, (57/97)
if it could just reach escape velocity in that price and convert enough people, then the people that are making the laws are going to regulate it in a way that's beneficial to holders of crypto. So the pyramid game works. So I'll just say this one more thing. This is a thing that makes Bitcoin unique, theoretically, if it succeeds. It is the first attempt to institutionalize a Ponzi scheme. It is the first time in which the Ponzi scheme doesn't end, and it just becomes the new de facto reality, the new de facto standard. This is the explicit strategy that many of the deepest Bitcoin extremists verbalize. They understand that number go up is Bitcoin's best marketing tool, and that also, Bitcoiners can be anyone, and that can include people in government, because there is an incentive to hop on the ship and then to regulate Bitcoin into existence, into Bitcoin as an infrastructure stitched into the world, because they are bag holders that are incentivized to also contribute to the Ponzi. (58/97)
Here's the thing. If that is Bitcoin's best, if price go up, it's best marketing feature. You know what its second best is to me, Demetra? I'd like your thought on this, because this comes full circle to our conversation about central banks and authoritarian governments. The second best is when a friend of mine receives a check from the government for a few thousand dollars, that's helicopter dropped to him, essentially. Unconditional. He says, wait a second, where does money really come from? I thought this stuff was scarce. You mean they could just print money at any point in time? Of course, crypto has a meme for this, money printer go burr. Money works if people, fiat money in particular, works when people don't think about it too hard. But people are thinking about it now. Yeah, when you're airdropping thousands of dollars to them, when you have modern monetary theory, that's crypto's second best tool. Well, here's my question to you guys. When did both of you first come to this (59/97)
realization, and your mythology around fiat currency broke? It's a long, long process, I would say. There's never any one particular aha moment. I got into crypto in the middle of 2017, and my learning about crypto hasn't stopped. So I can't actually pin it down. But I would say sometime between 2017 and 2019, my ideas have largely formulated around this thesis. It also starts, I think for a lot of people, start for me this way is, oh, it's worth a shot. It's like, probabilistically, will this thing become global money? What's the probability of that? And what's the price right now? And what's the total market cap if it succeeds? Maybe a lesser version of that is, what's the total potential market cap of the gold market or the nation's, is it worth a bet? That's where a lot of people start, I think, Dimitri. And that's kind of where I started with things. I think that, yeah, actually moving us away. I'm taking over the interview. I don't want to do that. We love this conversation. I (60/97)
don't want to do that. I'm moving us away now, if that's all right, from the initial question, which is, when did you disabuse yourself of this mythology, to the earlier observation about China using Bitcoin or other countries using Bitcoin, and how that relates possibly to gold? I think that's where Bitcoin's opportunity to actually become digital gold is, because it's not enough simply to go up, if there's a consensus among global governments, and this is why Bitcoin actually can do better, even though I said I'm bullish on governments in this world, which I am, I think also the same type of a world, the multipolar world, is actually bullish for an independent monetary standard. Totally agree. So you get it. No one nation has the ability to impose that standard or the network effect to impose that standard. And there are political incentives and rationales by competing nations to adopt an independent standard. Because with adopting an independent standard, what you also do is you get (61/97)
an influx of capital. So if the United States decides to ban Bitcoin within its borders, and a lot of people own a lot of Bitcoin, they may decide, you know what, forget it, I'm just going to move to China. I don't care if it's not, it doesn't have all the bells and whistles, but I'll just, I'd rather be in China and I could be rich because I've got all my capital on the blockchain. I don't have any of it here. So I think that's also a plus for Bitcoin and for Ethereum, perhaps. Yeah, one way we've used to describe that concept is basically the world, in a world of multiple sovereign powers, it has to embrace the most credibly neutral monetary policies and monetary tools and even blockchain tools. And by credibly neutral, it just means the ones that none of the their competing rival nation states can actually control. So it's kind of the reason why we're very bullish on governance light type of protocols, where you can't really turn the dials and no one has complete control over it. (62/97)
It's kind of like TCPIP, right? That's the underlying protocol of the internet. And everybody uses it. And they use it because the US doesn't have control over it, China doesn't have control over it. It's just a dumb communication protocol. That's kind of what we need for monetary standards. And even financial standards like Ethereum is something that is outside of the nation state apparatus, can't be controlled by a single nation state. But Ryan, you will agree that despite those standards, China has been able to exert its influence and exert complete control over the internet within its physical dominion. Totally agree. Yep. Not complete control. Well, so there is a different, I think you'd agree with this, David. There's a Chinese internet. There's a Western internet. There's like multiple internet. But David, if they want to turn China into North Korea, they can do it. They're allowing enough internet to suit their interests. If they want it to ban it entirely, they could do it (63/97)
because it comes with costs doing that. And the interesting thing about that though is what's the check on China for Western democracies? It's to promote a more free internet. That's kind of the way you can challenge the authoritarian vision of the internet. At least I hope that's going to be the case or else we have multiple competing authoritarian governments and not a lot of freedom of the people. Well, I would say what I would actually say is I kind of flip that on its head. I don't think, because the way you phrase that presumes that the goal, a non-authoritarian government's goal is to thwart an authoritarian government. But I actually think that the goal is simply to defeat the other government regardless of its ideology. And so I think, unfortunately, I think the opposite is true. The more totalitarian governments exist, the fewer rights that individuals have in different parts of the world, the less incentive the United States and Western liberal democracies have to uphold (64/97)
their previous standard of liberty. It becomes a race to the bottom. And we've already seen that. We've seen that here in the US. So is that where the US is headed in your mind? I think, yeah. So that's like one of my primary fears. This is the double-edged sword of government. I've gone through multiple stages of personal development. When I was younger, during the Bush years, I really adopted a strong progressive view of the world and a progressive understanding of why we had financial crises, why we were developing large gaps in our levels of wealth inequality, et cetera, et cetera. And I pointed to deregulation and the whole period of the late 70s or 80s, 90s. But then the financial crisis happened and I was like, wait, no, never mind. I had it backwards. It's these guys that are the problem. They're stealing all our money. And our currencies are pure shit. And I adopted a lot of these other alternative ideologies. I've come to a much more middle of the road approach. I think that (65/97)
you have to look at these things with nuance. And so there's a double-edged sword with government. We need the government to impose, for example, I believe strongly in this, environmental regulations. Of course, they can go way overboard and often do or impose the wrong types of regulations. But I think we want to have national parks. We want to be able to protect the sea, the air, because these are places where companies and firms externalize costs because they don't have a price in the marketplace. But at the same time, governments can and do often act in very aggressive, dangerous ways. And Edward Snowden and Glenn Greenwald are well aware of that. So I do worry about that, guys. And I think that as we disassociate more and more from the physical world, that also I feel like becomes even more dangerous because in some ways, we enter this dreamscape metaverse. And in that world, I think people can quickly find themselves enslaved without knowing it. Yeah, there's no bill of rights (66/97)
yet for the metaverses there. No. And the tools that operate in this world are very good at their coercive tools. They guide us and steer us and prod us in directions outside of our conscious awareness. I mean, that's how these tech platforms operate. That's how Facebook makes its money. And they're becoming better and better at that. And I do really worry about how our democracy can survive our systems of government, which depend on and assume human agency. How can they survive in such a world? And the answer is they cannot survive in such a world. And so in order for us to survive and for them to survive, before we get to that full expression or to the critical threshold, we need people to use, among other things, regulation to rein in, in this specific example, these tech companies and their use of these business models in order to protect the viability of the systems of government that can check their power in the first place. And I know that that can be a controversial opinion to (67/97)
take in the crypto community because so many people really are wedded to very narrow models of explaining the world, and they're not prepared to leave those models because it's scary to them. And that's exactly why we wanted to get you on to this podcast to have that conversation. Because in Bankless, we beat the drum on a very few number of very specific theses. And getting somebody's perspective from the outside is really, really important to check ourselves. We want somebody to come check ourselves. And you've definitely done that on the podcast thus far. And I want to get that conversation continued into the world of DeFi. You had Vance Spencer from Framework on the Hidden Forces podcast. And it was one of my favorite podcast episodes that you did. And it was insanely well researched. And I kind of want to ask about the feedback that you got from your audience about that episode. If there was anything there that was surprising to you or or just the overall the nature of the (68/97)
response from that podcast. And then also want to turn to what your take is on DeFi. Like what is the value proposition of DeFi? What does DeFi mean to you? And how do you kind of fit it as a model into your head? Yeah, I think that there was a positive response among, there was no negative response. There was a positive response, I think among people who primarily weren't familiar or weren't particularly, they might have been familiar. I mean, in a lot of cases, people that own Ethereum and might own some of these different ERC-20 tokens, like SNX, for example, they don't actually understand the underlying technology or they understand the business models or how they work. So I think in those cases, they were very happy and excited that I covered it. You know, when I wrote my, the intro that I did for that show was not my first intro. My first intro was actually pretty negative. But I felt like after I wrote it, I was like, well, this is kind of shitty. It doesn't, because I felt like (69/97)
it didn't accurately represent my respect for, you know, what they were trying to do and by kind of focusing on everything I thought that was kind of incomplete and half-baked about it. And in that sense, I thought maybe it's a little too cynical too. I often try and check my cynicism. I think that there's promise in all of this stuff, but I think that it's the hype it wakes, exceeds the promise. And I think that DeFi is, you know, a perfect example of that. I think that it's primarily used for gambling. I think SNX is a great example of that. It's a derivatives platform. And the advantage is that you can gamble unencumbered by regulation and you can innovate unencumbered by regulation. But what is it used for? Primarily, it's used for gambling. And there are huge risks embedded in that. When I look at what's going on in DeFi, I feel like people are just recreating the traditional financial system with all the same problems. I don't actually see something... The innovation that happens (70/97)
in DeFi is all user-based. It's all about like the consumer experience. That's what the people mean when they talk about innovation in DeFi. I don't see innovation in terms of making a more robust, safer financial system that can help expand. I mean, is the issue even that we don't have... I'm often confused about this because, you know, even if they could expand credit, is that the problem that we're dealing with right now, that we don't have enough credit? I mean, again, I think Bitcoin solves a, or potentially solves a real problem in the immediate term, despite its shortcomings as a peer-to-peer currency, in that it has been a good store of value. And in the world we're living in today, people need a place to store their money because winter is coming. And so I don't mean to like shit on DeFi. And that was what I felt I was kind of doing in my initial intro to it. But I do think that it's got a long ways to go before it can prove its value. And I think a lot of the rhetoric and (71/97)
high-minded rhetoric around it doesn't meet the litmus test for the bullshit indicator. I have a few thoughts on that, Demetri. So like, one, I think you've got a really interesting and good take in many ways on DeFi as it is today. One thought I had is when you're describing kind of the speculation, I don't think David or I would deny that there is rampant speculation in DeFi. There absolutely is. And there's always been rampant speculation and even something like Bitcoin and Ether, of course. The nature of the industry. It's the nature of the industry, but not just the industry of all industries as they grow up. I mean, this was the nature of the 1990s Internet. This is the nature of settling and going out west on the frontier. Why did people move from the Eastern elite coast? Because people without a lot of opportunity on the East Coast and they wanted to go find gold. So they set off on the Oregon Trail West. It's the nature of railroad. Carleta Perez is an economist who kind of (72/97)
talks about this is when new industries are getting born, there's this period of rampant speculation. Everybody outside of the industry, it gives many people a bad taste in their mouth as it's being developed because they look at it and they see all this speculation, they don't see the real promise. But through a series of boom, bust cycles that promise is slowly realized and the economy is built up. And there are some interesting things that you can do right now that aren't speculative in nature in DeFi that you couldn't do previously. So I think of an Ethereum address, for instance, it's like a bank account that no one can shut down. So how do you get a bank account in the U.S.? Or how do you get a bank account if you are in a country like Argentina or Venezuela? There's a massive amount of unbanked people. Well, if you can just have an internet connection and create an ETH address, well, now you have a bank account that's plugged into this global financial system, which is the (73/97)
Ethereum ledger, essentially. You can do all sorts of things. You can trade stablecoins, for instance. You can move money from one place to another. If you don't have access to a good money source, you can trade from different assets. You can get exposure to the S&P 500 if you want. You can start to program against the system without asking anyone's permission. So it becomes a sort of internet of money where it's completely permissionless and open and available to the world, especially a world that doesn't have a strong, robust banking system. So it remains to be seen. I think it's a little early, and I bet you would take that view too, that it's a little early in DeFi's cycle, but that maybe the speculation that we see that's kind of rampant now that turns some folks off, that's not going to be the final state. In the end, the internet produced a lot of value for the world, but there was a period of time where it was just like, oh my god, this is what Yahoo stock is, really? Just (74/97)
banner ads and very little revenue and being propelled by these bubble companies. Looks like a scam, right? What's your take on that? Yeah. So first of all, I mean, I generally agree with your framing of the boom bus cycle, of the business cycle, but I would take issue with your interpretation of the internet and the railroads as being analogous to what we're seeing today in DeFi, because the primary use case of the railroads was not trading railroad stock, and the primary use case of the internet was certainly not trading internet stocks. Now, there were underlying businesses that were creating real value first that people were experiencing before they began to become excited about the value of the companies that provided the services. Remember those industries were explicitly a recreation of money and value, which is what sets this industry apart and perhaps why there's so much outstrized speculation. Yes, that is a very good point, but I guess two observations. Ethereum has (75/97)
graduated beyond being money. It's supposed to be a smart contract platform engine, a touring complete global computer. And I think a lot of that rhetoric, again, does not match up to what the use cases are, which is they are highly speculative, and it's not clear to me how all the money that's pouring into DeFi is going to, maybe it's because I'm not plugged in enough, and that's perfectly possible, because although I do deep dives when I have guys like Vance and Michael on, or when I have Vitalicon, I spend most of my time on the periphery, and I'll circle in, I'll dive in, I'll come back out. So maybe that's why I'm not really seeing the roadmap. And because I'm also focused, and I went through a long period of fiery baptism of trying to really understand the limitations of Ethereum, the limitations of Bitcoin. But I would also kind of ask a larger question, and this is where I've, I think, become somewhat disenchanted with the crypto ecosystem, which is that I initially came into (76/97)
it because I had this sort of starry-eyed view of it, and I was, I'm a bit of a romantic in general, and I was drawn in by these sort of romantic visions and ideas, and I adopted a lot of them early on. But what I would ask is, what is the problem that cryptocurrencies, that DeFi, that Bitcoin, fundamentally as an ecosystem, what are the fundamental problems, or the fundamental problem that they seek to solve, and what are the fundamental problems that society faces? Because I don't know that those two things actually coincide. I do think that Bitcoin's initial observation that we need to have a form of money that is independent of governments, or that isn't co-opted by governments who have the ability to use it towards their own ends is important. But that's just become everything, and that's just not enough for me. Right. It wasn't enough for me either, but like, how I would answer what problem does this solve in general crypto, it's disintermediating banks, basically. It's a self- (77/97)
sovereign. So if Bitcoin is a self-sovereign store value, Ether is an Ethereum is a self-sovereign store value plus banking system, plus money system. But we know that that's not true, because as we know now, these systems are going to require multiple layer solutions in order to operate. So what are you doing if not creating an entirely new financial system that looks just like the old one? What's the difference between DeFi at scale and the modern banking system, other than one settles on Ethereum and the other settles using a system of clearing houses operated and controlled by a central bank? So, and the through line here is what in one of the first conversations that we had is that there's this paradigm shift in people's perceptions in the world, right? We are distrusting institutions. We are distrusting our banks like the central bank has lost its closed, the emperor no longer wears clothes. We distrust our government. And with the fundamental problem for me that DeFi and (78/97)
Ethereum and Bitcoin that they all provide for the world is a new place to deposit your trust. And so there is trust that is lost in the legacy world. And now it doesn't know where to go. But Bitcoin and Ethereum and all these DeFi protocols, while they may seem like speculative toys now, every single DeFi protocol that we've interviewed on the Bankless Podcast and even the ones that we haven't, the common problem that they're always trying to get right with their protocol is the removal of trust. And while we call Bitcoin and Ethereum as like these property rights management systems or these ledgers, what they really are are trustless institutions. They are trust coordination layers in a world where we are losing our trust in our previous institutions because of the generalized mismanagement by messy humans. We are gaining trust in these protocols that operate by code. And to me, that is the fundamental truth of what this industry is solving is the trust issue, which is an issue as (79/97)
old as humanity itself. And that's why I think there's so much speculation and gambling going on is because while I don't think a lot of the people participating in these markets explicitly understand this to be like a trust revolution, people still know. People still know about the potential upside of a new money like Bitcoin or a new property rights management system, trustless institution like Ethereum. And Dmitri, if all of that sounds a bit too abstract for you, right? Here's a few things that could be interesting. One is I would encourage you, at some point, maybe you get some holiday time or something, go download a mobile app called Argent, which is basically a Venmo type of experience on a decentralized finance protocols where there's no intermediary involved. That's one thing you could do. And another DM me and I'll send you some dyes so you can play with it. Okay. Well, there you go, David. If you send me money, I'll do it. I'll send you money. I'll send you money. I'll say (80/97)
if you don't mind magical internet money, we call it money. I don't know. But the second thing I think would really pique your interest is if at some point you get an opportunity to talk to Hayden Adams, no relation to Ryan John Adams myself. But he helped develop a protocol on Ethereum called Uniswap. And the reason I think that Uniswap was interesting is because in 18 months, you know, like, you know, the Coinbase story, obviously, a large crypto bank developed on top of Ether and Bitcoin allows people to speculate, right? It allows people to trade, right? Uniswap was built on $120,000, I think even less than that, on a grant by one developer, his first development project. He coded a automated market maker, embedded in code, put it in, put it on Ethereum. And recently, it started doing more volume than Coinbase. So a team of like now it's more than one developer, it's like 10 developers, just outcompeted and a thousand plus person institutional company, just with code on Ethereum. (81/97)
So like, there is also a massive efficiency gain story that we, I think we'll see coming to the table in crypto and Ethereum, it's just encapsulated in that way, what all it does is match buyers and sellers in a liquidity pool through an algorithm. And it turns out that's more efficient than, you know, the 12 stories of JP Morgan building or even a Coinbase. That's kind of the power of DeFi to me. So those two things are some things to make it maybe more concrete for you as you continue the exploration of this space. No, and I'm familiar with Uniswap. I studied it a bit in preparation for my conversation with Manson Michael. And I do think that decentralized exchanges are one of a number of promising use cases. Like again, I don't mean to suggest that there isn't promise here. And I don't mean to suggest that crypto is not an important evolution in the progression of the internet. And hopefully a much bigger evolution than I even think at this very moment. Because as I said, I've gone (82/97)
through different stages of sort of thinking about how far this can go and how big the promise is. But I do think again, my point simply is to say that what I often find when I dig into a lot of these projects is that the hype is vastly exceeds the underlying reality. And that's been the case the entire time. Could you can be convinced that that's actually a feature, not a bug? You know, that kind of opens up another can of worms, which is that if it's a feature, then again, it brings us back to it being a Ponzi scheme. David, we almost had him. Look, Dmitry, David's going to send you money. So if nothing else, it'll be useful to get money from your podcast or friends. I'm very happy to do it under the guise that it is for the purposes of learning as opposed to you paying me for coming on your podcast, which is... Of course. Of course. You know, a funny story I'll tell you guys real quick. I had a guest who came on the podcast, Tom Burgess, and he's a journalist for the FT, or he was a (83/97)
journalist for the FT. He may still be, but he's written two different books, the most recent one of which was called Cliptopia, and it was about the world of dirty money. And at the very end, he said, you know, I won't tell your listeners that you promised to pay me a very large sum for appearing on your podcast. And we both laughed. And then I got a very long email from a listener who was very disappointed to hear that I pay my guests. Oh no. I was like, wait, I was like, you have to be kidding. Was this not not the most obvious thing in the world that this was a joke? Well, I mean, there's 10,000 listeners. A few people are going to miss the joke. Just to be clear, like, you know, we're joking here. Absolutely. All right, Dmitri, one more subject we want to cover, which is your take on the stable act itself. So maybe for folks that don't know, would you be able to summarize that and then give us your thoughts? Sure. So I did read through it. It's highly legalistic. I'm not a lawyer. (84/97)
I hate contracts. They drive me nuts. So I did pull out some interesting, you know, observations. But I think that the one that stuck out the most was actually not necessarily even in the agreement explicitly so much as it was. What's something that one of the authors of the bill said on Twitter, which was that at the end of the day, note operators are responsible for what transactions get processed on the network. And I thought that was very interesting. And I thought it was actually also accurate in the sense that if the government does want to regulate at all costs, let's say, Ethereum or Bitcoin, legally, they can make the argument, and they can make the argument to hold responsible the node operators in the same way that Napster held the government or whoever it was that was, I guess it would be the government, held responsible the computers that were doing the file sharing of music on Napster and the selective prosecution that came along with that. I thought that was one of the (85/97)
really interesting kind of points, but I can't claim to be an expert on the wording of the regulation. But as I said, I am, as a result of that, this is how my process works, as a result of my piqued curiosity, I have brought on, invited on just the person to speak with me for two hours on this, and I look forward to doing that next week. Yeah, and I think folks should tune into that. It's super interesting. I guess, you know, maybe I don't want to speak for the crypto community, but the take from most in the crypto community is this is a really ill-conceived bill that is not actually even achieving its stated purpose. And I think part of the stated purpose, of course, of this bill, and by the way, it's just a draft bill. So, you know, the chances of this actually making it through and kind of becoming law, maybe your guess could comment on that when you have them on, Dmitri, but they seem kind of small to me. But the purported purpose is to, is consumer protection, basically, and (86/97)
specifically low income folks, modern income folks, people who are possibly minorities. I think this has been part of the argument. Very interesting because this group of people has had trouble facing discrimination with the banking apparatus in the US. But as far as, like, we are aware, most people who use stablecoins, to be honest, Dmitri, are crypto geeks like us, you know? They're not the... Yeah, I also don't think that, like, quote, low income folks, whatever they mean by that, because, you know, there's a lot of, like, verbiage that's super popular within democratic circles. And I know this is being put forward by a strongly progressive democratic congresswoman or senator. I don't think this is the primary concern of low income folks. So, I think, you know, I'll keep an open mind. And this isn't even the primary point of the discussion that I'm going to have. But, you know, I wouldn't ascribe too much value to the claims that this is why this regulation is passed. So, then the (87/97)
question the crypto community is asking, so if not that, then why? Like, so why? Is it because lawmakers aren't quite understanding, like, this technology? Is it because they're trying to get ahead of something? Is it because there's some... Like, because part of the bill, as I understand it, is that anyone who issues a stablecoin, be that a DeFi protocol, or be that a group like Coinbase or, you know, center consortium that has USDC, they have to become a bank. They have to have a bank charter in which to do that, which, again, weird because the stated purpose is to get members of the vulnerable population in America outside of the yoke of banks, weird to make any stablecoin issuers be a bank. But that aside, what do you think is the purpose of this thing? Well, I really don't... I mean, I have to be honest, I'd be purely speculating. I don't know what the purpose is, and that's a great question. It's when I want to ask my guest, but I wouldn't go so far as to say that the authors of (88/97)
this bill don't understand crypto. I actually think that Rohan Gray, for instance, seems to be quite knowledgeable, actually. You know, I've read some of his thoughts. He's also a strong advocate of MMT, which is a school of thought that I've investigated. I've put some level of attention to over the years, and I've struggled to really find any... I mean, I think it has an interesting descriptive component to it, but as a prescriptive ideology, I think it's deeply flawed and highly political. But in that sense, what is economics? It's a political science. It's not a physical science. So there are political objectives, you know. And I think this bill is probably part of a larger ideological effort to put strict regulations around money and finance. I don't think it's just about crypto. This bill may just be about crypto, but I think that the people working on it and the people introducing it are interested in much larger, much broader financial regulations, and this is just the tip of (89/97)
the iceberg. It draws out maybe this sort of the question we could kind of end with here, is do you think that crypto and the nation state are on some sort of inevitable collision course? Interesting. Crypto and the nation state. I would say, yeah, maybe to a degree, yes. I think also crypto and people, the masses are on a collision course, guys. You know, the gold standard was deeply unpopular in the late 1800s. It was not something that the mass of people wanted. They saw particularly those who owed money, debt holders. Of course, people who owed money also primarily farmers in the Midwest. Exactly. But ultimately, what gold really was was an expression of power vested in the hands of the people who owned it and the people who trafficked in it. And I do think that as crypto becomes bigger, the value of the currency becomes greater, the price increases, and more and more of the world's value accrues to the public ledgers like Ethereum and Bitcoin, the more ire discontent and will (90/97)
arise from the masses of people who simply don't own any of it. And I think also the difficulty of governments to operate the types of programs that they will need to operate in order to assuage the voters who are pissed off at them primarily, will compel them to regulate it. And I think this is the kind of interesting nexus and complicated stew that ultimately independent crypto organizations and think tanks will have to navigate. And I think to the extent to which the Bitcoin and the Ethereum community and other cryptocurrencies will be able to be successful in this environment will depend on the richness and competence of their intellectual communities and the ways in which they can organize to lobby against this type of regulation. And I think there are a lot of really brilliant people in Bitcoin and in Ethereum. I actually think, again, this is just my perspective from where I stand, I think there are distinctly two different cultures in Bitcoin and Ethereum. I think that Ethereum (91/97)
has much more of a builder mentality. It certainly is not as ideologically right wing as Bitcoin. Certainly. And I don't think it's as philosophical as Bitcoin. And I think the Bitcoin community has a stronger strain of cultural philosophers. And I think that actually bodes well for the entire crypto industry because I think a lot of those people are best positioned to try and make the case. But I think, of course, there will be people from all different walks of life who will get involved. I think that's the best hope for the industry to be able to mount an offensive, to be able to work constructively with regulators because absent that, the industry is going to have the shit regulator out of it and it could regulate out of existence. Dmitri, it's been a fantastic time having you on the Bankless Podcast. And we really value your very secular and unbiased opinions about the space. We think about a lot of the same things. And yet we think about them differently. And getting that diverse (92/97)
perspective onto the Bankless Pod is exactly what we wanted to get done today in this episode. And I think we did just that. So thank you for your time. And also, I'm just a longtime fan of the Hidden Forces Podcast. It is in my regular rotation. So I can't recommend it enough to the listeners of Bankless who want to listen to similar content that we talk about here on the Bankless Pod, but maybe from an outside of crypto perspective, yet that is still talking about some of the very similar narratives and powers that are shaking the world around. It's one of my favorite podcasts. So Dmitri, thank you for just your overall, your contributions to the world of information about finance and markets and the world. And also, thank you for coming and giving us some of your time here on the Bankless Pod. Thank you, David. I really appreciate that. It makes me happy to hear that. I always love to hear from people like you. It's great when listeners have podcasts, but I love hearing from fans (93/97)
and listeners of the show. It makes me so happy. I love to know that it's having an impact on people's lives and feeding their curiosity. So thank you. And thank you for having me on the program. I had a great time. Absolutely. Guys, I anticipate that Dmitri will have some crypto folks while he tracks this hidden force that is cryptocurrency on his podcast in the future. So make sure you subscribe. That would be action number one. And Dmitri, what's the best way for folks to subscribe to Hidden Forces? Yes. So you can listen to the regular podcast just like every other podcast through any of the major podcast platforms. But in addition to that, we offer a premium subscription service that includes what I call over times, where we keep the conversation going for up to another hour. And those are oftentimes the best part of the conversation. You also get access to the transcript of each episode, as well as to my rundowns, which are these elaborate show documents that I put together ahead (94/97)
of each and every episode full of notes, images, charts, they're basically my brain on a page. And you can find all of that at patreon.com. slash hidden forces. And you can also subscribe to our mailing list at hiddenforces.io. And you can also write us a review on Apple podcasts. I love reading positive reviews, only positive reviews. I don't want to read negative reviews. So if you have a negative review, do not write one. But if you have a positive one, yes, go to Apple podcasts and write a review of Hidden Forces. Yeah, absolutely, guys. Encourage you to do those things. And of course, Dmitri is going to have some stable act type of episodes coming up. So stay tuned for those. Number three, we should ask for the same thing. Look, if you just want to support Bankless, you know what to do. Go on Apple iTunes, give us a five star reviews. I think Dmitri said it best. Don't write anything negative. We're just like the positive ones. We're gonna add that to our pitch for now on to (95/97)
Dmitri. Thank you so much for joining us. As always, risks and disclaimers. None of this was financial advice. Crypto is risky. So is Ether. So is Bitcoin. So is DeFi. You could lose what you put in. But we're headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the Bankless journey. Thanks a lot. Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at (96/97)
hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (97/97)
This is the full transcription of podcast 'Hidden Forces'.
Monetary Revolution Innovation in the Age of Financial Repression Nic Carter #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? This conversation you're about to hear was recorded last Friday, April 17th, and released on the premium subscriber feed last Monday. And I'm releasing it now for regular listeners of the podcast. I'm going to take lessons from how I did this episode and try to apply them to all of the stuff that I put out. Because I really did like the tone and looseness of the conversation. And I think that's because I wasn't going off some rigid rundown or template. It's the Grant Williams approach. So it worked. I took a lesson out of Grant's playbook. And by the way, shout out to Grant, who is back on the podcast Airways with his new podcast, eponymously named the Grant Williams podcast, rocketing up the charts on Apple Podcast with its gorgeous jacket art. Tomorrow, as usual, there's going to be another weekly episode released. We're back on a regular schedule until further notice. I know I released a bunch of extra episodes last month when markets were going haywire. But (1/97)
for now, we're back on schedule. So enjoy and please, if you're a fan of the show and you have not reviewed us yet on Apple Podcast, please take a moment to do that now. I know I've said this many times, it's part of the pre-roll, but it really does help other people find the show. And you can do it straight from your phone as you're listening to the podcast. I'm not normally an advocate of multitasking. I think we could all benefit from a little more focus. But in this case, you're doing me and other potential listeners a great service. So please, if you haven't done it yet, there's never going to be a better time than right now. And with that, please enjoy this special release of my premium episode with Castle Island Ventures partner, Nick Carter. What's up, everybody? What you're about to hear is an experiment in conversation, something I didn't prepare for that I recorded with Nick Carter on Friday, April 17th. Nick is a partner at Castle Island Ventures, a Cambridge, (2/97)
Massachusetts-based venture fund focused on seed stage investments in public blockchain startups. He's also the co-founder and chairman of Coinmetrics, a blockchain analytics company. And he's a regular columnist at CoinDesk, where he writes thoughtfully about the political economy and issues concerning Bitcoin and the cryptocurrency market. Nick's been on the show before. He was my guest on episode 97. He's thoughtful. He's interesting to talk to. And I like him. So he was one of a few people that I felt comfortable bringing on to shoot the shit about the world, about markets, Bitcoin, whatever. I've wanted to do more episodes like this, especially lately, since so many people are cooped up in their homes. But it's also because it's a lot of work for me to produce a regular episode. So much goes into it. So I like the idea of doing more casual type stuff, where I bring on one or more guests and we talk about whatever's topical or just riff on stuff that's in the news or on our minds. (3/97)
This fits that description. Neither of us prepped for this conversation. I literally emailed Nick earlier in the day and proposed that we do something. And later that afternoon, we hopped on a call and we did it. And it turned out to be a great conversation. I mean, it's, you'll notice we're more relaxed. It's more conversational. And we cover so many interesting topics. I'm really happy with how it turned out. And I'm really happy with how the subscription model has turned out. Just today, we surpassed a thousand premium subscribers. And I cannot tell you guys how happy I am that we stuck to this model. The last 15 days alone, we've added over 150 new subs, which means that not only have all of you continued to support the production of this podcast during what has been an enormously difficult period, but that even more people are signing up and they are doing it in record numbers. So that says to me that we are doing something right. If you like what you're about to hear, then I want (4/97)
to hear from you. I want you to tweet at me, comment on the Patreon post, write a podcast review. However, you want to express your feelings and thoughts about the program and this model of relying on each and every one of us to fund the continued evolution of this podcast. I encourage you to share the episode and to encourage others to subscribe to the premium content. This is the model for an audience like ours. And the more people who subscribe, the more resources I have to take this podcast to the next level. And with that, please enjoy this experiment in conversation with my guest, Nick Carter. Nick Carter, welcome to the inaugural episode of the overtime feed. All right, happy to be here. And thanks for inviting me back on. Yeah. I mean, I make it sound like it's some official feed, but well, I mean, it is the overtime feed, but I tried the last few days. And it's not the first time I've tried doing this to just sit in front of the microphone and talk and kind of give my thoughts (5/97)
about what I think's been going on or what I think is interesting. And I can talk for a while, but I can never, I never know how to end it. I never know how to stop. And at the end, I was like, yeah, maybe I just need to invite some people on who I think are interesting or have interesting views and we can just talk instead. Well, here I am. And, you know, I have opinions. Where are you at, man? You're in Boston, right? No, I left Boston. I fled. Yeah. So I live in downtown Boston. I, you know, I kind of figured Boston would be the epicenter of a lot of this stuff. And it sort of has been because of the college students. Yeah. They had this big biotech conference, which would cause a bit of a crisis. And I just didn't want to be in a densely packed urban area. So I'm in, in the suburbs of DC right now, which is much more pleasant. All right. That's, that's where you're from, Virginia, right? Or something like that. Well, it's, yeah, where I'm from is complicated. But yeah, this is (6/97)
where I've spent most of my life. Right. You, because if our memory serves, you did your bachelor's degree in Edinburgh. Masters, yeah. Masters degree. My undergrad was just up the road at St Andrews in Scotland. And one of the degrees was in philosophy and the other one was in foreign affairs. So undergrad was joint philosophy and IR. And then master's was in finance. Oh, that's interesting. So what was it exactly in finance? I, because I don't remember this. It was like a very quantitative course. It was called MSC finance. So involved lots of data. That was actually when I got the idea to start coin metrics. So that's where coin metrics began. So remind our listeners a little bit because people, even though this is a bit of a conversation, just so listeners that are coming. First of all, when was it when you were on originally on Hidden Forces? Would have been summer of last year, maybe. Was it? Was it that? Let's see here. Looks about right. I don't know if I remember correctly. (7/97)
Yeah, sounds about right. Yeah. So that was mostly about Bitcoin. You had a Pura Shard on the show before. I did. Who's blocked me on Twitter months ago. That's a shame. I'll never block you. Don't worry. I know. I know. I told him I don't negotiate with terrorists. No, I don't know if he blocked me after I said that or if he'd already blocked me and someone asked me what happened and I said I don't negotiate with terrorists. But no, I know. I know. It's fine. It's weird because he was on the show and there's no good reason to block me other than, I mean, I'm not even an anti Bitcoin person. Yeah. I mean, you always struck me as pretty crypto proximate. You know. Crypto proximate. I'm not sympathetic to the objectives. So. Listen, man, I mean, speaking frankly, I just like talking to people who have interesting things to say and I mean, in terms of like ideologically speaking, I used to be an ideological person. I think ideologies are ways of being intellectually lazy and there was a (8/97)
time when I was, I think intellectually lazy. But you know, I think the reality is that there's no condition in which I relying on a template is the ideal way to go through life. I do think that, right, you know, again, if like, if that's what you've got, that's what you've got. And then there are some templates that are better than others, but you know, at some point you got to break with that and you have to start introducing new stuff in. But yeah, you were a phenomenal guest unsurprisingly. I knew you were going to be. Yeah. No, I mean, you're going to be great. Hey, you were smacking between Raul Paul, who's always popular anywhere he goes. He's like one of those guys that just blows up your feed and David Webb, which is also a great episode. So and you were, yeah, surrounded by a bunch of, well, we were on a roll at that time. Yeah. So yeah, that was a great episode. I mean, I so much enjoyed talking with you. And so tell our audience a little bit about who you are just to give (9/97)
them a refresher. Yeah. So the episode was good because you know, I tried to make the case for Bitcoin or the existence of Bitcoin without being too dogmatic about it, you know, so I find myself fighting with the Bitcoiners a lot, even though I consider myself one. But yeah, more generally, you know, professionally, I'm a VC. So I work for a venture fund. We do early stage startup investments for the most part within the crypto industry, although that means we're investing in equity, not in tokens. I generally take a really dim view of investing in tokens, especially the you know, the more speculative stuff, which some of which resembles unregistered securities. I'm also the co-founder of a blockchain analytics startup called Coin Metrics, which just raises series A. And the objective there is to demystify the usage of blockchains so that normal folks could get a better understanding of what's going on on them. And I think of it a little bit like taking satellite pictures of Walmart (10/97)
parking lots so that you can infer information about the economy. You know, that's the thing I really like about public blockchains is that they are pretty transparent. And if you do a little bit of work, you can figure out what the key features of them are. You can find that macroeconomic data, although we're still in the discovery phase. So that's what I spend most of my time doing. And I also write about, for the most part, you know, the political economy of blockchains, people describe them as these totally amoral, you know, these automatons which just take inputs and produce outputs in a really, you know, mechanistic way. And that's true to a degree. That's certainly part of the teleology of public blockchains like Bitcoin. That's what they're meant to do. But they don't always do that. There is a degree of subjectivity and human oversight and governance. And I'm pretty interested in that because folks in the crypto industry have a habit of trying to hide the fact that there is (11/97)
human discretion in these systems because they really want to draw a strong contrast with these existing financial system. And I'm interested in the truth as opposed to taking a side, even though I am on one side, clearly. So I try and do a little bit to expose the fact that, yes, there is human discretion. They're not fully decentralized. I'm sympathetic to some of those skeptical schools of thought. So what's it been like to be in the Bitcoin community these days? Like how have people in crypto, Bitcoin, I don't know how much they differentiate amongst themselves. I've kind of, I mean, the Bitcoin community has become a more prominent community in the media. Like for example, Bitcoin podcasts have become the dominant form of podcasts and like a lot of the crypto stuff that was there early on in like 2017 when I sort of got into the space, a lot of those are just really dropped off the map. It's quite remarkable. One in particular I'm thinking of that was like very, very popular. I (12/97)
don't hear much about it anymore. So I don't know how those two communities mix, but how has that overall community dealt with or interpreted what's been going on in the broader economy these days? Well, the probably number one thing that's happened is this feature of Bitcoin that was the case historically is not the case today and it's caused a lot of anxiety and gnashing of teeth and that's, I'm referring to the correlation between Bitcoin and traditional financial assets. So from 2010 when Bitcoin first got a market price to January 2020, Bitcoin was completely uncorrelated from virtually any financial asset you can think of in terms of its return profile. And its correlation with the S&P 500 never entered any meaningful positive zone. And that was touted as a really great attribute to have. It's like, oh, maybe this thing is a really powerful portfolio diversifier. However, in mid-March when there was this rush to liquidity, there was this really sudden sell-off in financial (13/97)
assets, Bitcoin and crypto as a whole was not exempt from that and sold off really, really rapidly at the same time. And those correlations rose to levels they'd never been before and stayed there. So Bitcoin has kind of moved in lockstep with the S&P 500 for the last couple of months, which is really shocking actually. And it has defanged one of the bullish narratives for Bitcoin, which is that it's a really excellent portfolio diversifier. Maybe it's even a safe haven. So that is not the case. And there's some consternation over that. I did feel that it was a bit of a poison chalice or it was a risky narrative to spin because you can't stop an asset becoming more correlated, especially as it becomes more financialized, which it has been. So to some degree, it was to be expected that the correlations would rise over time. But yeah, so one of Bitcoin's key narratives has been dented really thoroughly. So even though Bitcoin is right now, we're like pretty ardent that there's like some (14/97)
extreme monetary mischief going on, you know, out there in the hands of central banks. Bitcoin itself has had a bit of a narrative setback for sure. And I would say that's actually caused a lot of people that might otherwise have had a position to reconsider it. So it's being pulled in two directions right now. So the Bitcoin community is heavily influenced by the Austrian school. There are people like you who are more nuanced, but I think this has probably played a role in a lot of the confusion in the community, it seems to me, around what you call monetary mischief, i.e., for shorthand, the printing of money or the expansion of the Fed balance sheet and the creation of federal reserve liabilities and the expansion of the monetary base and the lack of immediate inflation. Where is the community in terms of its intellectual development when it comes to economics? Yeah, as you say, it's heavily Austrian in nature and monetarist, you know. So inflation is everywhere and always a (15/97)
monetary phenomenon, right? Uh-huh. And there is certainly a bit of confusion as to why apparently there has been no inflation in response to this extreme monetary issuance. But of course, you know, the denominator is changing as well. There has been a deflationary shock and also there has been a rush for dollars globally as most debts are dollar denominated. So it's not that eminently surprising that there hasn't been inflation because I guess the deflationary impulse, you know, very much outweighs the issuance. There's definitely a feeling that inflation may yet recur if we enter a political regime where entitlements grow and barriers to that spending disappear over time. You know, maybe the economy recovers, but the extremely high rate of spending stays high. That would be the circumstance that I think where it is plausible that we could get a reprise of inflation. But yeah, the fact that we haven't had any has also definitely been a source of certainly confusion or sort of (16/97)
amazement in the Bitcoin community. You know, to be fair, I don't think there's any one school of thought that really does a perfectly good job of explaining where we are from a monetary perspective right now. It seems like the MMT school maybe has the upper hand. Sictoral balance, view of money. Yeah, there's no apparent consensus right now over what's going to happen. You can be fully monetized the debt. Yeah, that's a bizarre. I mean, I actually literally tweeted out today. See if I can find exactly what it was. I was reading through the Financial Times. I contacted you this morning sometime to see if you wanted to come on and you said sure. And then I was like, let me take a cursory look at the news headlines and see if there's anything interesting out there. And there was an article by the Financial Times highlighting, it was an interview or some sort of feature of Stephanie Kelton, who is kind of the face of modern monetary theory, who is out with a new book. It's coming out (17/97)
sometime, I think this summer. Good timing. Yeah, maybe. I mean, I think it would have done well if it came out last year also. I don't know, what do you think would be a good time for MMT? Because that is an interesting question. What sort of external environment would be most habitable for MMT? But I tweeted out, I read it and I tweeted out, let's all get prefrontal lobotomies. And I can't say that it was a well thought out thing. But what I think I meant was just basically like, when I read MMT, like there are parts that make sense and then there are other parts that make zero sense. Like the example being replacing open market operations and reverse repos with the IRS and taxes. So, IE, if you want to reduce the money supply, just raise taxes as opposed to conduct monetary policy. It's like obsessive compulsive, kind of hyper focused and missing the bigger picture. That's how I interpret MMT. But I'm curious when you think would be a good time for MMT because it seems, for me, MMT (18/97)
is a political thing, first of all. It's really not an attempt to understand the economy. Well, I think it's misunderstood. I'm not an MMT fan by any means. I think there's a descriptive element and then the prescriptive element. Yeah. And the descriptive element actually find to be somewhat compelling. It's certainly a curious inversion of many concepts that I thought were true and that I learned in my undergrad, you know, economics classes. The fact that it's loans that create deposits in banks, for instance, and that taxes are a tool to check inflation. It's very interesting to me and it seems to me like we're in this curious half measure world right now where we've gone from a world of ostensive fiscal restraint and a monetary authority that was unwilling to fully monetize the debt. And now we're in this in-between space where in reaction to this staggering crisis and a leader who is politically not too beholden to the old school of conservatism and two parties that aren't really (19/97)
interested in fiscal conservatism. We've entered this MMT proximate regime. We're not fully there yet. You know, the Fed isn't directly financing the economy. You know, there's still this notion of federal debt and so on. And there's still a theory about being repaid at some point. But if you look at the Bank of England, for instance, England is financing their expenditures with monetary issuance now. Obviously, you know, Japan has been doing somewhat related experiment for a long time. It does seem to me that we might as well just go to the logical conclusion here because I don't think there's a way back realistically. I don't think we're ever going to have a politician able to reimpose fiscal conservatism. It seems like a quaint idea. And now we have a lot of pundits wondering, well, if this was possible, if we could have untethered issuance like this without apparent inflationary effects, why weren't we doing it before? Like what social programs went unfinanced because we had this (20/97)
excessive conservatism? That seems to me to be the current orthodox view. So I have a lot of thoughts about that. I completely agree that there is a prescriptive component of MMT and there is a descriptive. And the descriptive component is, I think, great. And then it offers a much better view of how a monetary system operates than Austrian theory does because Austrian theory is so much based on a gold-backed monetary system, which is not what we have today. So I think in that sense, I agree. I don't agree though with the idea that taxes can be a viable mechanism by which to reduce inflation. That seems, you know, just asinine. It's like you're going from like airplane to going by camel. Like, you know, I mean, how does that work as a better way to do it? Right? I mean, it's already imperfect. Inflation is a nonlinear phenomenon, which actually gets me to point number two, but it's a nonlinear phenomenon. So by the time you see it, the genie is already out of the bottle, you know, (21/97)
potentially. So it's bad enough, the mechanisms that you would use today to try to kind of stop inflation on our heels, but the idea that you're going to raise taxes and taxes are also so political. That's another aspect as well, which is MMT doesn't seem to take into account. Or maybe they do. I don't know. There's only so much of it I can take, but the freedom of action changes when you cohabitate Treasury and the Fed, or if people think have the impression that you can, that your scale of action is much different. If people think that you can do more, they'll expect for you to do more. And I think that kind of makes it harder for you to curb inflation if you're going to hurt people. Yeah. But inflation is nonlinear. That's the other thing. And you don't see it until you see it. And then once you see it, then you're in a whole new paradigm. You know, then you're in 1970s. Yeah. Yeah. And then it's like it's too late almost. Yeah. And that's probably my critique of MMT, which I didn't (22/97)
mention before, is I believe that there's political constraints to it, like very real political constraints. And if you normalize the notion of monetary issuance as a way to finance the economy, then people are probably going to rebel a little bit at the notion of taxes, because they might at that point, and you see it in the crypto community for sure, people will say, well, why do we have taxes if you can just pay the budget by printing dollars? And it seems like such a strange, like juvenile objection, but I think it's true. You still have to maintain a sense of authority and order to the system. And if you become completely untethered, then it sort of falls apart. And as you say, the other thing is if you open up the Overton window or like the design space of the government as this ultimate tinkerer, which is omniscient and omnipotent and can finance virtually anything, you're always going to get a demand to finance endless entitlements, spending, stimulus, infrastructure, or (23/97)
whatever, even when it's not strictly warranted. And so I think you just enter this terminal cycle of massive expenditure. And I'd say we're in it in terms of you look at the size of the government spending relative to GDP. It seems to be growing virtually every year. And you depart from having a genuine capitalist economy. And you have something that looks more socialist, not to say that pejoratively, but just the scope of government expenditure and its influence on the economy grows, which I think has this zombifying effect on society, which is really my issue with bailouts, is that effectively you have the government determining what the allocative outcomes are and not the free market. Yeah, I'm kind of thing that I focused on of all the things that you said was this. I tend to describe what our economy is. I guess it depends on how we define terms. Like, is a capitalist economy a economy that has to be strictly free market in every single way? Well, then of course we're not a (24/97)
capitalist economy. Is a socialist economy an economy that's socialistic in every single way? I.e. because the Soviet Union wasn't really communist, it was socialist. I mean, the way I learned what communism is in a strict economic sense, it wasn't communism, it was socialism. It was the state owning the means of production. And there were capitalist elements too. Like you had entrepreneurial black market capitalism, right? Sure, sure, sure. I mean, again, yeah. So there were elements of capitalism within the society, but the structure of the official structure of the economy was socialistic. The pockets of capitalism were the exception to the rule. They sort of manifested as a result of imperfections in the application of the model. But like, what we have today, it keeps moving in a direction of, again, I don't think it would be even be correct. This is one of those things where we're needing new word to describe what we're seeing because what we've been seeing, and it's something (25/97)
that I've been talking about recently more and more. The first time I've talked about it, but it's been coming back to me because we're in another one of these cycles. The last time we were in one of these cycles was 2008, where there are these, I think you've been writing about this as well. You have these bailouts of the largest corporations, of the preferred interests in the society. And we've had these cycles now a number of times. And I'm curious to hear what your take is on this. I think that what we're really seeing at a top level is that we've seen an accumulation of wealth in a denser proportion of the population, a smaller number of people accumulating more and more of the wealth due to many reasons, regulatory, taxes, technology, globalization. There are lots of factors. And monetary policy has played a role, but it's one of those interesting things where it's also, is it the dog wagging the tail or is it the tail wagging the dog? Because the growth of the wealth gap and the (26/97)
accumulation of wealth in smaller and smaller hands, the only way that that can happen and has happened is through debt finance. The only way that you can manage that is by the expansion of private sector debt. The expansion of private sector debt can only go on for so long without having to lower interest rates because the burden of the debt becomes onerous. And so in order to make it carryable, you've got to lower interest rates. And the lowering of interest rates and the expansion of debt causes asset prices to rise. It's upward pressure on asset prices. And eventually it becomes harder and harder for people on the sort of outskirts of the wealthy or the savings class, right? If we think about this as sort of the debtors and savers, the savings class, the people on the outside begin to be unable to hold on. It's almost like the centrifuge is flying around and they're getting flung off and they're getting flung off into the side of the debtors. And eventually all of these people, the (27/97)
only way that they're able to actually save anything is by putting it to the stock market, which is exactly what's happened. So increasingly the vast majority of society has to move into the stock market if they can put their money anywhere, if they have any savings. And so now you turn savers into speculators and all of these speculators that are invested in the stock market. And the stock market has gone from being a financial utility to what Ben Hunt calls a political utility to now being a political liability. And every time the stock market goes down, it is a fucking crisis because if the stock market collapses, people's entire life savings are wiped out because that's where people save their money now. And on top of that, there are a lot of other factors because the entire economy has not become conditioned on the idea that stocks always go up. And the authorities are invested in this process. But I don't know, that's my general sort of point of where we're going. So you get to (28/97)
this point where the government effectively has to own the entire market because if the market collapses or asset prices drop, that sort of collapses an increasingly core assumption of market participants, which is that the markets will not go down and that the authorities will not allow them to go down. So allowing them to go down would wreck the economy. And I couldn't agree more. This is why I'm so glad you had Mike Greenon who explained the particular mechanisms through which the stock market became a savings device and how Congress encouraged that to occur with specific regulation. I learned a lot in that episode. I mean, I'd had an intuition that from the 80s, I would say onwards, America got progressively more financialized, but it was really eye-opening to see how specifically employers were encouraged to funnel their employees into 401Ks and treat the stock market like a savings device. I think the outcome of all this is that you have managers, directors of public (29/97)
corporations, the largest corporations, can hold the economy hostage in a sense. They can really, they're in a very strong negotiating position relative to policymakers here. They know that pensions need, they have a required rate of return of 6% to 8%. They know that American savers own 401Ks. They don't own CDs or cash. They've been forced through the shadow inflation, in my opinion, far and excessive CPI. They've been forced to hold financial assets, as you say, to become speculators. Then on top of that, you have this cult of passive investing, thanks to this really warped version of what Bogle was preaching, where people looked at historical models of stock return from the 1880s to present and decided that there was premium of equities was 5%, plus inflation. We had this guaranteed return of 7% real, 9% nominal over the last 100 years, and that you were guaranteed to achieve this return regardless of your starting position, as long as you held equities for long enough. I just (30/97)
think that's totally nonsense. I think we're going to find out over the next decade as we have this unwinding of leverage that that's not true. Your starting position matters. The valuations matter. When you buy a security, you're buying a claim on cash flows and the amount of cash flows that you're purchasing per unit of price, I guess, that actually matters. You can't just blindly pile into the asset. As Mike Green said, since we have this rotation into public equity, it structurally became a bigger part of the American saver of their portfolio. It also just returns and it encouraged people to pursue this strategy. You have the parabola gets steeper and steeper as people reevaluate their expectations based on the prior performance. That's where we are today. His insights on passive, for me, they've moved the needle more than anything else that I've learned in the last so many years. I compare them to reading Shoshana Zuboff spoke on surveillance capitalism and having her on the show (31/97)
in terms of what that did for me as far as data privacy and surveillance and differentiating between technology and the logic, the economic logic that animates the technology. It did the equivalent of that, but for finance. I think logic attracts the position itself to capitalize also on a meltup, which may well come prior to any meltdown. It's against about this idea of flows. The flows are dominating increasingly the price movements and that nothing else matters. What simply matters is, do I have cash? If so, then buy. Yeah. I think we might be in the midst of a meltup right now. Obviously, you contrast the performance of financial assets with the apparent reality and there's a huge contrast. Some people are outraged by this. They say, how dare the stock market go up? But to me, it's just a sign of the time. If we're reflating this bubble, probably we have some ways to go, but I'm still of the school of thought, especially in my discipline where your entry price really matters. We (32/97)
can't afford the venture math doesn't work. If you're overpaying, you just fundamentally can't achieve the IRR that LPs expect if you're massively overpaying. From our point of view, we're very sensitive to valuations. Sorry about that. That's my dog. All right. We're very sensitive to pricing. I think public equity investors should be as well, but you really rarely hear people talk about PE ratios anymore. It's a much more automatic thing. As you say, I got my paycheck, so I'm going to put it into the stock market. What do you think the interesting story is? What do you think people will be talking about in the fall? I think it'll still be the lingering effects of the virus. I doubt it's going to be a short-term snap back to normalcy. It's an important, obviously a great point that you're making because there's a huge chunk of the economy that needs to things to be normal in order to function, and not just the airlines. I use Greece as a classic example because they've done a (33/97)
phenomenal job of containing the spread, which is essential for Greece, not only because it has an impaired hospital system as a legacy of its recent prolonged crisis, but also because it's a tourist economy that depends on people not being afraid to go there because they're going to catch coronavirus. I think 25% of Greece's economy is tourism. That's enormous, but the problem is if people aren't going anywhere, then there's no tourism economy. How long can Greece as a country, as a sort of paradigmatic example, exist without going into economic collapse and political chaos in this environment? Yeah, it's not a good thing to be that exposed to tourism, obviously, when a tale event like this comes around. I am optimistic that our technological tools will give us some solutions here, whether it's an effective treatment, a vaccine faster than we expected, extremely accurate sensing, warning, maybe more sophistication in the tracing. I'm partial to biology, Srinivasan school of thought, (34/97)
that we're going to get red zones and green zones. We'll get areas where policymakers are fundamentally better or more prepared to take extreme measures to stamp out incidents of the virus locally. To preserve that advantage, they'll want to close their local borders or keep them extremely regimented. I think it'll happen on a state-by-state basis, probably in the US, maybe even city-by-city basis. Definitely going to happen on a country-by-country basis. Unfortunately, I think travel is going to be very much impaired for the foreseeable future. There's definitely even a more extreme version of that take where we look back on the period 1990 to 2020 and think that was a historical aberration in terms of being able to travel in a truly unencumbered way globally, because the Soviet Union prevented free travel. China was closed for a long time. Maybe that was the last time we had truly globalized travel. That's such an interesting point, because I thought about it from the economic point (35/97)
of view that airfare became very cheap over a prolonged period of time. This crisis might potentially put a cap on that, but you're making another really great point, which is the opening up of the Soviet Union, especially the Soviet Union. People could travel to China in the 80s. They probably needed some special visas or something. People could also travel to the Soviet Union, though. I think it was harder to go to the Soviet Union than it was to go to China, correct? China was only meaningfully opened in 71, right? Oh, yeah. If I'm getting that right. Then the Soviet Union was much later in 89. Obviously, there was a lot of chaos. You probably didn't want to be in the form of Soviet Union for a while there. Yeah, I'm sure you were a bit broader. Probably at least until 92. I actually wrote my undergrad thesis on the Nagorno-Karabakh conflict between Armenia and Azerbaijan. That was a really bloody conflict that actually helped catalyze the collapse of the Soviet Union. People don't (36/97)
know that really. That was one of the first nationalist movements and that kicked off all these other local nationalist movements in those Soviet nations, I guess. And the Caucasus and the Balkans? Yeah, and Georgia had their kind of irredentist movement. The Baltics were early. Then you had Central Asia. You had Ukraine. It was like this cascade. The final stages of the Soviet Union are so interesting. Nobody really expected it to collapse. The US policy, the diplomacy, the elite in the US, they didn't really have this expectation. And then in the 90s, it was like the decade of jubilation because the US became this unipolar hegemon. But it wasn't like they could really take the credit for the collapse of the Soviet Union. In a sense, they were taken by surprise as well. Yeah. I mean, Bush famously learned about it on CNN. I had a professor who told us a story about how he was in Berlin right before the fall of the wall and he was having a conversation with a East German and he had (37/97)
said, all you Americans, it's fine. The wall will be here forever. And within a few months, it was down. Yeah, people don't appreciate how rapidly fragile systems can fail. I don't think it's likely to happen, but we're seeing states reasserting themselves relative to the federal government. That's happening right now as we speak. And I think it's entirely possible that maybe the Chinese regime isn't as... They don't have such an iron grip on power that we think they do. There certainly are regional tensions, especially between the core and the periphery in China. The world is looking now like it's becoming a multipolar balance of power once again, but it's an eminently plausible to me that we have a new spate of vulcanization and the virus is obviously a very potent catalyst for that in terms of being an accelerant for the localization of the world. Supply chains, absolutely too. Supply chains, yeah, of course. I mean, Europe is the one place where it seems most likely to happen. Of (38/97)
course, it could happen in China. If it happened in China, it would be like an atom bomb going off. The level of tectonic resistance there or pressure buckling is so much greater or maybe in the Middle East between Saudi Arabia and Iran. But Europe is... On the one hand, it's interesting because I wouldn't describe it as fragile. You could easily describe it as fragile, but there are a lot of strong bonds between the nations in Europe that make it difficult to break this apart. I mean, Macron, the big article on the FT today I haven't written for me now was, Macron warns of EU unraveling unless it embraces financial solidarity. Obviously, the French citizens don't want to fund the budgets of Southern European states, although France's finances aren't as great as Germany's or some of the other nations in Europe. You know, I think there is a deep historical commitment to the European project. And I wonder if the Europeans can find a way to hold some semblance of the project together for (39/97)
diplomatic and defense geopolitical reasons and maybe unbuckle some of the monetary components that make it so difficult, make it so unworkable. You know? I mean, I don't know. Yeah. Tough one. There's this, obviously, this very popular theory that financial interconnectedness brings political stability, which is going to be tested now. Yeah. One of the most popular empirical theories from international relations is this democratic peace theory, which has the implicit component of free markets, institutional interrelationships. Yeah, democracy's never going to war. And there's the humorous corollary, which is no two countries with the McDonald's have ever been to war with each other. And then you look at the fact that the UK's biggest trade partner before World War I was Germany, and you think, well, it's still possible. And you look at the incredible interconnectedness between the US and China, and you see that relationship unraveling. Yeah. 100%. So the thing about democracy's never (40/97)
going to war, first of all, democracy's themselves, the greatest democracy in the country, the United States has been bombing and going to war with countries for nonstop. So I understand that the theory compares- With other democracies, though, yeah. Right. I understand that the theory compares democracy to democracies, but that doesn't make any sense. I mean, I think what's happening there is democracy has become very popular recently, or maybe it's waning in popularity now, but it had a 100-year bull market. And that coincided with Pax Americana, where America was the sole Hegemon or shared power with the Soviet Union, which that was a stable arrangement. So there just fundamentally wasn't a lot of interstate warfare. There was a lot of intrastate warfare, that's for sure, which that model doesn't really capture. So it might just be, like Taleb would say, you just don't have enough data to come to that conclusion and something like war is fat-tailed. So- Yeah. And the other point you (41/97)
made about the economic interdependencies being, how did you say it? How did you express that? That it is believed to be an inhibitor for conflict, I guess. Yeah. I mean, that was Norman Angel's theory, the Great Illusion before World War I. That didn't work out. But also like it's been, the economic interdependence has been at the core of European expansion and integration. That was one of the principal assumptions underlying EMU's capacity to expand successfully, which was that economic crises would be causes for further integration. And we're seeing that those were assumption dependent and under certain assumptions that worked. So dude, the other thing that we forget about, I'm sure you've contemplated, is that the institutions that we live with today, institutions are created during periods of different psychosocial awakenings. And the European Union is very much a bull market project. Certainly EMU. EMU was a bull market baby. And the latest phases of EU expansion came during (42/97)
either the full flown bull market. I mean, I think the Treaty of Nice was 1999, was it? And then the last treaty was before the 2008 crisis, the Lisbon Treaty. What do you think of that? I think institutions get created or entrenched when there is some power shift and the dominant power now has the bargaining power and the ability to endorse and guarantee an institutional arrangement, which is certainly the case with all the Bretton Woods organizations post-World War II. And the US is very much pulling back from those obligations that is unambiguous. And not only that, they are almost rejecting some of those institutions, which aren't useful to them because their stature within them has been reduced. The WHO is a great example. The US is by far the largest supporter financially of the WHO. And yet it seems to have been captured or infiltrated. I don't know the right word exactly by Chinese interests. Look at the popular discourses it relates to the UN. Americans for the most part hate (43/97)
that they have financial obligations to these entities, which they feel are not yielding them meaningful benefits. And it may be the case that these aren't providing the returns in terms of soft power that America expects. And I think this next decade is going to bring us the decline of importance in these Bretton Woods organizations. That much is very clear to me, both through their own defanging, through the US pulling back, and through potentially China creating viable alternatives. Well, you saw that China expelled the New York Times reporters, I think the Washington Post, a bunch of major... That's one more escalation. Or one more... The Cold War was all about building avenues of conversation or a contact or discussion to be able to reach the other side. What we're doing is we're stripping those away one by one. It's quite concerning, dude. It's very dramatic. It also means that we have no ability to fact check their numbers on the virus, for instance. I think the next hammer to (44/97)
fall is capital markets relationships between the US and China being severed. What does that mean for you? We have a mostly US LP base, so it doesn't affect us per se, but it seems to be coming. I think it will occur, actually. And I'm not sure the US is ready because the US investors have always had this view that they can profit from Chinese growth. For the most part, that's been wrong. They've been exploited in a number of ways. These companies treated American capital markets like piggy banks. They broke into an arcade and just stole all the toys instead of playing the game you were meant to. It's highly exploitative. We see endless accounting frauds. You see really weak governance. And it's like there's a new high-profile accounting fraud every week now, luck and coffee just being the most recent one. Is there ticker L and K or something? Yeah, something like that. That was a super high growth, really exciting Chinese company. It's like the Starbucks of China. It turns out that (45/97)
hundreds of millions of revenue was just fabricated. The other thing we see is converse when Chinese investors take meaningful shares in American companies. They use that for political leverage. We've seen a ton of controversy over that in the last six months, which maybe people have forgotten a little bit. But large American media tech companies being co-opted or being muzzled or being censored due to the existence of Chinese folks maybe covertly doing the bidding of the CCP, but definitely exporting CCP kind of values, which had a really disastrous collision with the US. I think ultimately there will be a political demand to sever capital markets relationships between these two countries. And US investors are going to have to just come to terms with the fact that no, they can't participate in Chinese growth. They can't profit from it. That was always an impossible dream. It was never going to be allowed. I think it's going to be obviously really disruptive when it does occur. (46/97)
There'll be a lot of gnashing of teeth, a lot of really upset investors. We talked for listeners who are interested. We talked about this, both aspects of these stories with a number of guests, but specifically I'm thinking of Kyle Bass. I remember what episode that was. I'm trying to find it right now. The other one was with Anne Stevenson Yang, who's come on twice. That's kind of the China hustle or these companies that have used US capital markets to take out enormous amounts of money and who will, many of them will default on those loans. Of course, China also owns a huge amount of US debt and they could begin to sell that. Public debt. Yeah, there's certainly the currency competition element here, although I think the dollar is just so fundamentally dominant globally that there's no risk currently to the internationalization of the renminbi or something. Yeah, for sure. It's funny how that was like a big story in 2008, 2009, 2007. Peter Schiff is a good example of someone who (47/97)
talked, I don't know about internationalization of the renminbi, but he's actually a good example of this point about not to call out Peter, but he's a very strict Austrian and he's had a very US-centric focus on the value of the dollar and just looking at it as a one-to-one equation. Like you mentioned, Milton Friedman's quote inflation is anywhere and always a monetary phenomenon and except it's not one, two, there are other people's monetary policy matters also. And it's just monetary policy. It's also the credibility of financial markets, the breadth, depth, and regulatory framework of those markets. The outstanding liabilities denominated in the currency, which is being printed, all of those factors matter. Yeah, and if there's anything we've learned is that the one universally safe asset in the eyes of investors is the dollar or treasuries. And there's plenty of countries that would love for there to be an alternative to SWIFT or to the kind of New York-centric correspondent (48/97)
banking system and to those US-administered financial rails, especially because they politicized them like crazy. They use them for partisan or political objectives, military objectives even, but there just really is no alternative. So difficult to bootstrap an alternative because money is the ultimate network effect. So I don't foresee that changing anytime soon. And you're right. I mean, people talk about inflation, US individuals having to bear the cost of inflation, but it's this rapacious foreign demand for dollars, which means that in theory, we can have really extreme levels of issuance and our debt can still be considered attractive. I believe that there are limits to that. Might even be reaching those limits soon. You know, there's actually an intersection with crypto here. Something people haven't really noticed is tokenized dollars that circulate on public blockchains, kind of public blockchain infrastructure for the most part, Ethereum. Those have swelled in size from about (49/97)
$4 billion at the start of the year to $8.5 billion. So increasingly crypto is a rails to give people access to tokenized dollar IOUs, which they can hold outside the banking system. So you even see it in the crypto industry, this insatiable demand for dollars, in particular unencumbered, kind of offshore crypto euro dollars. Yeah, that basically the stable coins are kind of an intermediary for getting access to dollars. They're treated like dollars. I've even seen capital markets transactions settling in stable coins on the weekend. You can settle an M&A transaction on the weekend now. So what's going on in that market? What are the prospects for some of those coins? Well, you know, the coins like Bitcoin and Ethereum, they're going to follow their own cycle. You're throwing Bitcoin in there as well because Bitcoin is also used as an intermediary. Yeah, so Bitcoin is both a bridge currency because there's exchanges worldwide, right? So there's remittances that occur through the medium (50/97)
of Bitcoin, but they settle on Bitcoin, but they're fiat to fiat remittances, which is interesting. And then both Bitcoin and Ethereum, those networks are used to settle fiat tokens, which move on those rails on top of them. For the most part, they happen on Ethereum. And the biggest one is called Tether, which has kind of got a questionable track record in terms of being fully reserved. So unlike banks, these stable coins are meant to be fully collateralized. So it's like full reserve banking. In some cases, they're not, which causes a lot of gnashing of teeth and upset individuals. But it's definitely an underappreciated feature of the crypto industry, and it's probably the number one phenomenon in terms of the way it's going to be disruptive. What it means is for the first time, really, you can get access to a digital form of physical banknote offshore, overseas, just through having a smartphone, just by holding a private public key pair. And without interfacing with any financial (51/97)
institution, you can buy these things on the open market, and there are crypto exchanges in virtually every country. So what it means is if you would normally have to save in your local inflationary currency, you can now get access to what is relatively speaking a hard currency in the dollar, and you can save it outside of your bank, so it's very hard for the government to seize or interfere with. So my guess is this is going to accelerate this process of dollarization in the developing world, especially if you have sovereign defaults. We're seeing dollarization in Venezuela right now. It wasn't happening for a long time, and then they had a power cut in Caracas, and the only thing that people had to transact with was dollar bills because you don't really transact in Bolivars because inflation outpaced their ability to print new denominations. So people used digital banking rails exclusively, and then there was a big power cut in Caracas, which was typically insulated from power cuts, (52/97)
and people switched to using their stashes of physical dollars, which they had laying around. And that was the catalyst for it becoming decriminalized to use dollars, and that's what really kicked off the latest bit of dollarization. So it's happening right now. Let me ask you something else, Nick. This is a random pivot, but I started listening to a podcast recently that I hadn't heard before. I was familiar with the host. It's Eric Weinstein's podcast, The Portal. Are you familiar with it? Yeah, of course. Have you been listening to it? I listened to one with Peter Thiel. That was great. Yeah. That was amazing. It was a good one. I think that was the first episode. It was the first episode. Have you heard anything else from his podcast? No, because I find it to be a bit long-winded. Yeah. Well, it's... He is very, very, very smart. I mean, he is very intellectual. I'm always wary of this kind of general larger idea of a counterweight intellectual class. It's almost like there's one (53/97)
that's being replaced by another, but it really is very good. One of the things that he talks about in that episode with Peter Thiel, and he talks about it in another one, so there's a reason I'm bringing it up, is it talks about this idea of embedded growth obligations. I'd never heard this before, but it reminded me of a conversation that I had with Jeffrey West, and that was episode 19. Jeffrey West was the founder of the high-energy physics group at Los Alamos, and our conversation had to do with comparing scaling dynamics and limitations in socioeconomic versus physical systems. The one system scales quadratically, the other system scales allometrically. I don't know that one. Allometric scaling is this type of scaling that you see in economies of scale. When you add the incremental car to the production line, your costs don't go up linearly, they go up sub-linearly. Your costs decline per unit, and it's a measure of efficiency. One example of that in the physical world is that an (54/97)
elephant is a much more efficient accumulation of cells than is a muskrat or a fly. That's also why elephants have much slower metabolisms than say mice. Whereas socioeconomic systems scale exponentially. So to bring it back, this thing of embedded growth obligations, because what Weinstein talks about when he mentions this is that our societies are structured with an expectation of a growth rate that depends on conditions which are no longer in place or no longer hold. So our expectations for growth are out of line with what our economies can provide. This is similar to what we talked about in that episode with Jeffrey West, which is that we have socioeconomic systems that demand X amount of growth that need it to go back to my conversation with Mike Green. We have underlying economy that can only provide so much, and ecosystems that can only provide so much over X amount of time. There's this fundamental incongruity. I feel like anyone who's remotely thought about these things, and I (55/97)
see it expressed in a lot of these Netflix documentaries, which is why I feel like this virus feels like we're living through bird box or something. Not anymore, now it's become normal. Now it's normal for me to get the boxes from the delivery and then wipe them down and do that whole thing. But it feels like all of us know that there's something ... I'm curious what you think of this, but it feels like there's something fundamentally broken in the way in which we prioritize goods, labor, capital, and resources in our economy. Yeah. I fully agree. I think probably first encountered this concept on your podcast or it became clear to me. Just the very fact of pensions, they have a literal embedded growth obligation that's encoded into their mandate. That's people's savings. When it becomes clear and they're not going to meet that, that means a meaningful fraction of the population, their long-term prospects in terms of retirement have been cut in half or whatever it is. That's obviously (56/97)
part of the cult of passive investment, this Ponzi-like view that the stock market can just naturally provide a return. Then if you go back to first principles, you try and decompose that return into its constituent parts, it comes from population growth and productivity growth. We're looking into the face of declining population potentially or we need to have really high rates of immigration, for instance, to keep it up. It doesn't look like productivity is growing all that fast. You wonder where the return on capital comes from. Increasingly, in the last couple of decades, it's just come from financial engineering instead of fundamental actual growth. You look at asset prices today, you try and rent an apartment or buy a house in an attractive urban area. It seems totally inaccessible to people starting their careers. I think it causes this widespread sense of hopelessness. I think people feel it intuitively, even though maybe they haven't intellectually grasped it yet, this fact (57/97)
that we're staring at this prolonged phase of potentially degrowth and we're not equipped to deal with that. I think this is why we have these really progressive movements demanding more and more entitlements from the government because people feel that they won't be able to procure them for themselves through their careers. They're asking the government to provide all of these things which previously they would potentially have been able to acquire on their own. I do fundamentally believe that we're looking at a couple of decades of just fundamentally shrinkage in terms of our aggregate output. I don't know if America is actually capable of dealing with that massive political unrest. Japan went through it and Japan is very... Still going through it. We might look at Japan and say, wow, what they pulled off is actually amazing relative to what could have happened. Maybe they did it in the most elegant way possible, even though Japan, from an economic perspective, looks catastrophic, (58/97)
relatively speaking. Maybe they did it in just about the best way. I don't know if I'm as optimistic for the Japanification of the US. I know it's a different country, but there are a lot of weird social practices there that seem to have evolved during the last few decades. I wonder how much all these weird sexual practices, not the panty-smelling stuff. I don't know if you're familiar with that. There's a whole thing there. No, I mean the disinterest of younger generations in sex, although that tells to the case of South Korea. But that's got to be related. If you biologically perceive that your prospects are less, you're going to have a less desire to procreate. I don't know which way the causality goes per se. People say people with the worst prospects just structurally try not to have children or it's this lack of children which causes society to have worse prospects in the aggregate. Who knows? Maybe they're jointly determined. But I certainly buy that that demographic transition (59/97)
is probably maybe in part due to the fact that they're staring at this prolonged phase of degrowth. Maybe it's a positive feedback loop. You can certainly see why there's this huge emphasis on immigration in the US, not to get into a hot button topic, but it's because growth must be sustained at all costs. That is another really interesting topic because it's another example where there's a huge camp of ideologues on the left who have approached this issue assuming that anyone who's against immigration or wants to put curbs on immigration must be coming at it from a bigoted point of view. I'm hoping and it seems to me that many of these categorical impulses have subsided and maybe in some cases sort of temporarily sought refuge in the last few years because they were really getting out of control and it wasn't doing us much good, but we still have an extremely polarized society and our media organizations are out of control. When I say media, I'm always talking about like the TV (60/97)
stations. They're out of control, man. They're just a fucking joke. I haven't watched TV seriously. I don't think I've ever consciously chosen to tune into TV news. It's just such an alien concept to me. It's just so poisonous. It started with Fox News and it's just become everything. Now it's become CNN, it's become SMSNBC and they've all taken the same tact. I want to ask you one more question because again, this is a new podcast for me. I had a conversation with Eric Weinstein a few days ago and he recommended a certain number of episodes to listen to and I basically binged listening to them. I thought about afterwards what the interesting points that he talked about were because it felt like there were a lot of intersections with hidden forces. There was one other one that I thought a bit about and I think it's an interesting one to bring up because when I look at the Bitcoin crypto community, it's almost like a mirror to myself 10 years ago. I would never have called myself (61/97)
libertarian but I really came to default, sympathize with or identify with a lot of libertarian or anarchic principles because I had just understandably lost faith in the government. My experience with the government, my entire adult life has been killing people and taking my money. In the years since, especially with this show, I've come to appreciate or take the view that there is a role, an important role for government and one of those places where I feel that's the case is in the sciences. I did two episodes that stand to mind for me or that come to mind that deal with this. I'm bringing this up because this is something that Eric talks about in a sense. Him and Peter Teal talk about this. They talk about how something went wrong between 1968 and 1973 between the moon landings and the oil embargo. You know what happened, bang in the middle. Right, I do. For sure. But see, that's also another interesting point because again, the libertarians, libertarian people, gold bugs, (62/97)
bitcoiners and artists, I think they ascribe a tremendous amount of responsibility to the monetary story. I think it's important and I used to ascribe a lot of value to that too. But again, I think it's more complicated. But yes, 71 and 73, he closed the gold window. Have you seen that video on YouTube, Nick? We're going to find it right now where Nixon closes the gold window and there's a guy talking over and guy laughing or talking over. There's a guy talking over. Have you seen that video? I haven't. I haven't. Oh man, I wish I could find it without. Don't never forget that it was meant to be a temporary suspension. I know exactly. It was while he was stopping the speculators. Yeah, of course. It's funny because I put this in here. I don't want to start playing videos without it actually. But there's this funny video where he's speaking and there's a guy, he's like, those damn speculators. Then Nixon's like, he keeps talking. He's like, wait, what? Wait, what? He's getting screwed? (63/97)
It's funny because a video just came up underneath that of one of my old guests on Capitol account. It's actually an episode from his called Doug Casey on Christ's Investing Political Risk and Benign Anarchy. But I did an episode with Bill Janeway on the innovation economy and I did one other one with Safi Bacall. And also another one actually with Jimmy Sony where we talked about Claude Shannon and inevitably, it was actually the history of information theory and a sort of bio of Claude Shannon. And that of course gets into conversations about Bell Labs and then of our Bush and the war effort. And a lot of good came out of US government investments. And I really have bought into Bill Janeway's thesis around government playing an essential role in the early stages of the innovation cycle where risk is fraught and where the private sector is understandably unwilling to invest because a properly functioning private sector wants to invest efficiently. And so they're really great at (64/97)
extracting value from a foundational technology. But it's not clear to me that the private sector can do a better job. Just a total private sector as we conceptualize it can do a better job creating foundational technologies like the internet protocols, for example. Can do a better job than a society which coordinates public funds towards that purpose so that you could have wasteful spending because that's what science is. What do you think of that? Yeah, I buy the theory. I think you need a patron of some sort that is willing to fund R&D for the sake of it as opposed to R&D which is meant to be productized within a meaningful period of time. Whether it's the government, it's the patron or like a Rockefeller or Carnegie type. For instance, we have a microcosm of this situation in Bitcoin because people are always wondering how we're going to pay the core developers that build the system, that do the research, work on interesting dimensions in cryptography. And lots of people say, well, (65/97)
there's a failure to tragedy the commons because this is infrastructure that benefits everyone and yet there's no obvious entity which can fund it. So then you'd say, okay, well then that's a little microcosm for the regular old economy. But then in Bitcoin, you do have patrons. You have entities that just are irrationally committed to the security and the longevity of the protocol which fund this open source work. So you have patrons in that space. And whether it's the government that's the patron more generally or you have a environment which lends itself to patronage. So I would say to some degree that's what Silicon Valley is. I think Silicon Valley, I don't think it's purely capitalistic. I think there is a degree of wasteful expenditure in a good way in that you have all sorts of interesting experiments which get funded just because there's so much capital in that environment. There's so many rich, former entrepreneurs which are willing to be angel investors and so on. I think (66/97)
that's part of the reason some of these experiments happen. You just have such a high frequency of collisions and so much capital and founders floating around. That's why there really are network effects for these capital centers. But yeah, I mean, that's definitely a critique that folks like Teal have of the VC model that we don't have fundamental breakthroughs. Bakewaters or Austrians would ascribe it to monetary policy. That sounds wacky, but that's certainly held up as the reason that we all have a short time prep phones now. I don't know if you can strictly speaking plan to have a highly innovative society. It seems like the conditions just have to be right. It's not like, for instance, Israel decided to be super accomplished in cybersecurity and defense technology. I think they developed those competency out of necessity because there is constantly a threat of war. They had to pull themselves up by their bootstraps and build an advanced society just to survive. Totally. Yeah, it (67/97)
might be the case that the last truly good and beautiful military plane in the US, in my opinion, was the SR-71 Blackbird. Are we going to get something? Would that be built today? Of course not. Because partially that was built just for the sheer amazement of a vehicle that could go Mach 3 and outrun a service to air missile just to display dominance of the Soviet Union. So it could fly over the Soviet Union with complete impunity. Would we do something like that today? Of course not. We would have an appropriations committee and say, what's our ROI on this? Amazing. I think we would develop anything like that today, unfortunately. What an amazing... Everything is... Yeah, I read this book Skunk Works recently, which is about the development of that plane. Why does that word sound familiar? The book Skunk Works was the name... Skunk Works was the name? Yeah, but so that was the name of the lab, the secret lab at Lockheed Martin. And then that became a general word, meaning a secret (68/97)
R&D lab. Wow. So that was the book Skunk Works 759 five-star reviews. Yeah, highly... Wow. Yeah, add mine into the mix. It's really great. Wow. That looks amazing. We don't have Skunk Works's anymore. That was division of Lockheed that got like carte blanche to develop stealth technology, planes like the SR-71, which required a whole bunch of new techniques because it was built out of titanium alloys, which nobody knew how to build things with, needed new advancements and engines. It was just impossible. They built it with slide rules. They didn't even really have computers at that time. So this plane was used to not just... Well, I don't know that it was used over Cuba to take those spy satellites, but no, because that would have been... It was. It was developed after... Well, it was developed after the Cuban Missile Crisis, wasn't it? No, it overfitted. Wasn't it developed in the late 60s? It was developed, I believe... No, 1964. You know what you're right. It was before it was first (69/97)
flight. I'm looking right now. It was the U-2 spy plan, which got those photos in Cuba. That's right. Yeah. So the U-2 had its strategy was just to fly super high and avoid the surface to air missiles and avoid big fighters. And then the SR-71 strategy was to be able to outrun everything else in the sky. Freaking amazing. So if you shot a missile at this thing, it would just accelerate and that's it. Amazing. How quickly, because they did obviously reconnaissance over the USSR. So where would it leave from? And could it do a full flight without mid-air refueling or did it need mid-air refueling? No, it was very expensive. It did need mid-air refueling. So they would use it over Korea or China and they would have two refuelings on one flight. They might take off from the Philippines, refuel right away after takeoff and then do a sortie. Wow, man. It was an amazing time in aviation. It really was. And we don't have anything like that. The pilots, like the U-2 pilots, they had to use (70/97)
sextants to navigate. So stars to navigate their planes because they couldn't have radio because the Soviets would have intercepted that. So they'd do these like nine to 12 hour journeys solo over the Soviet Union taking pictures, flying at 80,000 feet, navigating by the stars. And they'd be out of gas when they got out of the Soviet Union. They'd landed some remote airfield in Iraq or Kazakhstan or something. And if they were off by a couple of degrees, they would crash land in Pakistan or something. It was just an amazing time. God. Even by today's standards, the Blackbird looks futuristic. I'm just staring at its gorgeous engines. It's a wonder. It really is a marvel. And there's one at the Advarhazi Air and Space Museum in Rustin, Virginia, where I go as often as I can. And it's just the most beautiful plane from the front. The profile is amazing. And you know who put an end to the program was Dick Cheney in the 90s. He said it wasn't worth it and we could just rely on satellites. (71/97)
I was right. Probably. It's a shame because it's just an object of wonder. But this is a really ... So I thought about this after I ... Because I really liked that episode with Peter Thiel and Eric Weinstein. I was really taken in by it. And I thought about when he said that, when he made the point about something between 1968 or 69 and 73, I thought about Space Odyssey 2001. And 2001 Space Odyssey, I think was 1968, right? Space Odyssey. That sounds right. 2001. I mean, that is one of my favorite, if not my favorite movie ever made. Have you seen the movie? Of course, yeah. Yeah, I don't know how you feel about it. It's beautiful. Yeah, dude, incredible. And this was made at the very end of that period. And what was the expectation that by 2001 we would have commercial flights to the moon? Yeah. Right? And it was really beautifully done. And it's understandable that we had this idea. And to the point that Janeway's made before, and Weinstein said something analogous, which was that if (72/97)
you walk into a modern room today and you take out all the screens, it's hard to tell whether you're here or in 1973. What are the major breakthroughs? What are the major advances? And it makes you wonder, if we were able to come together as a ... And this is the argument, this is an example of why the sort of mindless economic orthodoxy arguments for globalization, they're like lobotomized arguments. They don't take in the whole panoply because they don't consider that there are larger things at stake. So, it's much harder to advance sort of society-wide agendas that aren't purely economically driven if you have an international conglomerate sort of society. As opposed to having nationalistic societies with much more tightly knitted social fabrics, you can come to greater social consensus. It's why the Danes were able to create such a well-working welfare state until the 70s or whatever. Yeah. So, imagine what we would be able to create, wherever we'd be able to go if we could (73/97)
mobilize national resources towards some non-efficient end because we thought about the long term. Do we want to? I mean, the Bostrom and the Future of Humanity Institute. Yeah. I think asteroids are one of their top existential risks. Asteroid impacts. Is it worth it? It seems to me maybe it is to devote resources to ... That's a global problem. But there are things that I think certainly rich people on the planet would be willing to invest in, right? Yeah. And symbolically, I think it matters as well. Sure, man. 100%. To have this feeling of progress, whereas right now we effectively have a feeling of regression. And if you don't have these totems- Which stagnation? Yeah. If you're a significance in your achievement, I think it's easy to become disillusioned as a society. And what we've seen over the last three, four decades is it's much more convenient to pay McKinsey to tell you to outsource your supply chain than it is to invest in R&D or local staff or local factories. And now we (74/97)
have this super fragile, very homogenized, global world which can't tolerate any shocks whatsoever and where we haven't had any fundamental investment in R&D. So this is one reason ... I'm not to bring it back to crypto, but this is one reason I'm attracted to Bitcoin is because it's this highly collaborative, very opinionated edifice which probably shouldn't exist, probably should have failed a number of times over. And the fact that it's open source and voluntary and it brings a lot of people together in pursuit of a single objective, it reminds me of those great projects of your pyramids and all these other really difficult edifices that were constructed for the sake of it almost. And it gives you something to look forward to and it restores a small sense of wonder to the world. I think we need a lot more of that if we're going to be able to get through this next phase. Amen. Let me ask you something, in closing, because you just really got my heart, set my heart aflutter with this (75/97)
Skunkworks book and this conversation, man. A book I've mentioned a few times on the show is Gene Kranz's Failure is Not an Option. I went through this phase where Gene Kranz was the head of mission control during a number of mercury missions and all the way to Apollo 13 famously. He was played by Ed Harris in Apollo 13. Amazing book. Also, I went through this phase where I read a lot of these books from that era. I also read this book that I really loved by Roger Mudd. Roger Mudd is no longer alive. He was in the running to take over the CBS Evening News Desk after Cronkite. He lost it to Rather and then he transferred over and I think he was at NBC and he headed the NBC Evening News for a period of time. And I heard that as an audiobook and also read it, but I heard as an audiobook. He has this gruff news voice. And it started with his time working at like a Dallas newspaper in the 50s, I think, or 40, 50s. And the news people back then were all blue collar. I also read Barbara (76/97)
Walters' memoir. Amazing. And I kind of sometimes, I worry about this thing where we look back at the past and we eulogize it and that can't be right. Right? There's nothing much wrong with that period. And we also, the thing we don't think about as the terror of living in an age of uncertainty around nuclear warfare, the immense levels of segregation and racism in all of the country, but the segregation particularly in the Jim Crow South. There are lots of things that were really bad about the country. But I think it's interesting and I don't know what it is if it's just because now we got through it and we know we did all these things back then. It feels like it's more than that, right? It feels like America was really great. And people I know that lived that are old enough to remember the time, both Americans and people in Europe. Europeans used to love Americans. They used to love Americans. They wanted to be like America. If you look at old Greek movies, they used to do the (77/97)
American accent. They would do the American accent. They would try to say words like Americans or America was the great country. And that's what we can't take as the humiliation if not living up to that track record. Is that what it is? Do you think? Is that what we're dealing with? I mean, look at the British spirit as well. They went from having the largest empire the world has ever seen to shrinking back to being one relatively small island with a few tiny protectorates. And that's totally reflected in the British spirit as a Brit, someone who's lived in Britain. That's totally part of the British esteem. And I would forecast that Americans are going to go through the exact same transformation. It's totally humiliating to be a former empire. Totally. And we're at that crossroads right now. But we haven't reached that point yet though. No, we're still the global superpower. Right. That's increasingly being questioned. And literally it's changing on a monthly basis now. Alliances are (78/97)
being renegotiated. China's asserting themselves. Our institutional grip is declining. The Soviets went through something like that, very traumatic. But do you think that we're ... Something I mentioned in an episode, and it wasn't just with them, but I titled it Market Nihilism, the episode I did with where I had Grant Williams and Ben Hunt together. And I don't know, man, I can't shake this feeling that there's an increase in nihilism. Maybe it's because I feel it in myself a little bit too. And you know where I feel it also, Nick? I feel it with this virus. There's like a part of me that's kind of like, just burn it all down. I get that feeling sometimes. Do you ever get that feeling? Of course. If you're a young male in the year 2020, that's probably your default feeling. So interesting. Yeah. You're a young male in the society and decline, I think, where your best prospects come if there's collapse. They've been word for it. It's a collapseitarian, right? That's so interesting. (79/97)
Why do you think that zombie movies were so prevalent in pop culture? That's the thing you had to look forward to as a shake-up in hierarchies. You know, the ... I have a friend who is younger than you. I'm 38. You're 28? Yeah, they're abouts. He is like, I think 25. And he's very kind of curious kid. And he sends me all sorts of interesting items or memes or trending topics or perspectives that come from his community of young men or boys that inhabit a lot of the online forums on Reddit or Twitter or wherever. And it is really fascinating, man. I mean, the classic example is like the okay boomer or the boomer meme. But you know, I think for people like my parents' generation, they have no clue about this. They don't understand how serious it is, how serious it's gotten, right? The inequity. Because they're boomers. They're the beneficiaries of this currently stratified society, which is people may not be looking at those charts of the Jenny coefficient and which demographic cohort (80/97)
holds which financial assets, but they feel it. And secretly they yearn for a collapse, which is why the reflation of the bubble is making people so angry, myself included, because it is robbing society of a chance to reset. And if we don't get it now, we're going to get a jubilee or something politically shake up. I think there's basically a law here where society doesn't let that stratification be remediated in some way or another. That's the stuff the revolutions are made of. Dude, it's so true. I don't know what form it will take if it will work. But I mean, Bitcoin is an indictment of the modern financial system and the failure of government. When I say Bitcoin, let me rephrase that. The force behind Bitcoin, the incredible force behind the Bitcoin project, the determination by so many people to circumvent the modern financial system that is supported by the United States government, by governments all over the world, and which is a public-private partnership between the (81/97)
government and the key financial intermediaries and institutions. This is exactly what it is. It is there to serve. It's a protest. Exactly. It's a nonviolent protest. That's precisely what it is. It's a political project. It's technological, but it's mostly political. So give me some books. Before we end this conversation, give me some books that you like. You just recommended a fantastic one that I'm going to order. Is this author still alive? This guy, Ben Rich, looks like he's been dead for years. He looks like he wrote this in 1984. He looks like he wrote this one. Yeah. He was the second guy that ran the scump works behind Kelly Johnson. Dude, this guy's alive. He's still alive. He was born in 1925. He's still alive. Yeah, it was a great book. Wow. Highly recommended. Man, these guys, bro, like my grandfather, man, who fought in World War II. Let me see. What else am I reading right now? I have a personal interest in the Caucasus and the Georgia, Armenia, and Azerbaijan. So this (82/97)
is great history of the Caucasus that I'm reading by Thomas DeWall. Not that that's of general interest. That's interesting. Thomas DeWall. How do you spell his last name? DeWall, D-E-S-P-A-S-W-A-A-L. W-A-A-A-L. And it's the most fascinating part of ... Black Garden. Yeah, that's right. Black Garden is Nagorno-Karabakh. Also, the Caucasus. The little translation. The Caucasus is an introduction. Have you read Mark Mazower? I know, have I? He wrote an introduction to the Balkans. He's a Balkan historian. He's written Salonika, City of Ghosts, which was a history of the ... In part, the Jewish exodus from the Saloniki, which was a Greek cosmopolitan city during World War II because of the Nazi invasion. That's interesting. Yeah. I mean, the conflict between Armenia and Azerbaijan is one of the things that brought down the Soviet Union. That's me. These were nationalist enclaves, which had been dormant since effectively Stalin actually redistricted them. And you had this simmering (83/97)
resentment, which grew and grew, but it couldn't express itself as illegal to protest. And then in 1989, people got mad enough. They actually started doing pogroms and killing each other in large numbers. And this simmering nationalistic sentiment exploded, started a civil war, and that catalyzed every other little ethnic unit in the Soviet Union to say, well, if they can do it, we can do it too. It's a great case study in how systems look stable, but they're becoming increasingly unstable over time. That's fascinating, man. What are the books you recommend? I like to write a lot, as you know, and I'm reading this great book about writing by one of my favorite writers, Murakami. How do you spell that? It's spelled the way it sounds. Murakami, the K. So, Haruki Murakami, yeah. He's a fiction author. The Wyandup Bird Chronicle. Yeah, the Wyandup Bird. Yeah, that's one of his books. So, the one I'm reading is ostensibly a book about running, but it's really about writing. So, it's about (84/97)
how the rigor of being a runner, a serious runner, enabled him to become a much better writer. What I talk about when I talk about running. Yeah, so it's a really great book both about writing and about running, both of which I do. So, it's perfect. And he lived in Cambridge, where I'm based most of the time. So. Cambridge, Massachusetts. Yeah. Yeah. Dude, give me one more. Give me one more book. This is great. Let me see. What else do I have on my bookshelf right now? This is so different than what I've been reading lately. Although the book on the caucuses would be something that I used to read a lot of history and I loved it, but it's so hard to do anything other than read stuff that's relevant to the shows these days. Yeah. I mean, I don't know if your listener base would like this recommendation, but I would just finish rereading Bronze Age Mindset, which is a really popular book these days on probably on the right, I would say. Really? What is this? Bronze Age Mindset by Bronze (85/97)
Age Pervert? Yeah, it's by Bronze Age Pervert. The book right after it is The Pussy by Delicious Tacos. Also great book. Also great book. So, Bronze Age Mindset is basically written in this strange patois, like this sling and the author is pseudonymous, obviously. It's just about philosophy and life and it's basically an indictment of modern culture, modern life. So, you might say it's neo-reactionary, but it's just a kind of a rambling book, but also weirdly very compelling. It says this, so interesting. The Atlantic name this author has possibly Steve Bannon's contact in the White House. Yeah, I think that was a joke, but yeah, it's all related. It's a pretty interesting entertaining read. When I was getting inspired recently, I was, because I've been going a little crazy here. I don't know who you're cooped up with, but I'm cooped up with a lot of people. My girlfriend, my sister, her boyfriend, my parents, but it's fine. When I say cooped up, we're all in the same house and it's (86/97)
actually nice. We're in a super rural area and I went for a drive and I was feeling kind of ambitious and I had some space, which rarely happens. I was like, I really want to spend more time studying the progressive period, really the beginning of the progressive era with what was going on in the Midwestern farm regions and then all the way through until the coming of FDR. There doesn't seem like there are that many books. There were less than I thought, but I downloaded this one and I didn't get to read much more than a few hours worth of it, but it was Richard Hofstetter's The Age of Reform, which is a history of the progressive movement. But that's the fascinating, because I think it's relevant to kind of where we are today. That's where we're going. That's what Chamath said. He said that in his note. Chamath is the guy that social capital. Yeah, he wrote the best investor letter. He says, we're in the Gilded Age. We're in the Robber Baron Age and we're going to move into the (87/97)
Progressive Age now and it's not going to be a peaceful transition, but that's where we're going. And I totally buy that. Yes, unless, what if we could have moved into the Progressive Era in Germany? Dude, what I'm talking about, obviously the rise of Hitler's Germany. Yeah, well, maybe we're in the Weimar Republic in the early stages now. Yeah, because that was also to go back to Weinstein. Probably the most interesting thing from that conversation was Weinstein and Teal talking about the history of the Jews in Germany and what was lost with the exodus or extermination of millions of Jewish citizens from Germany. Some of the most intellectually vibrant, culturally and artistically gifted members of the community. And he had this great scene that Weinstein talks about where he's in a restaurant in Germany in like the 80s or the 90s or something and he couldn't talk about it. And he couldn't communicate with the staff and then he wanted a fork and he threw out the Yiddish word for fork (88/97)
and the waiter brought him a fork. And he's like, it was this weird moment of kind of like feeling like, yeah, this is where somehow belong here, but not really. And something I never thought about, right? Which is like, what Germany could have been, right? If it hadn't gone insane. Not just Germany, Poland, virtually all of their Jewish population was eradicated. Yeah, yeah, and Austria. I mean, but I just mean Germany and Austria because it was the sort of the epicenter of intellectual thought. If you wanted to be a great philosopher in the early 1900s or an intellectual, you had to speak German. I mean, it's similar in some ways to China's cultural revolution. What could China have been if they didn't purge their entire intellectual class? Jesus, man. You know, you think about the setback that is for a society, your entire urban elite intellectual and academic class all purged in the space of a few years. Man, unreal. Yeah, I hope we don't have one here, you know, but there's (89/97)
certainly plenty of anti-intellectualism to go around. There is though. I don't know. There are people that try to compare us to Nazi Germany because they see Trump as Hitler, which I think is totally unjustified and almost hilarious. We also don't have the ability to mobilize on a mass scale. That's just not in the DNA of the country. America is more individualist by degree. So it resists large scale political movements. That's so interesting. No, it's totally. It would soon a fragment, you know, then enter one of these political manias. Now, totally. And if anything, it's got quite the opposite problem. It's not blaming. It has no clear enemy other than the actual dominant majority, which is the white man. That's been the sort of the major narrative, identity narrative of focus. I have no idea how this came out for listeners, but it was interesting talking to you, man. Yeah, thanks for having me back on. Yeah, dude. This is great. Yeah, it was fun talking. I'm envious of your reading (90/97)
list, Nick. I was getting to the end of my teller there. I was running out of books on my nightstand. I didn't bring that many books with me from Boston. Well, I mean, like, you know, the cool thing is that you're in a space. When I say a space, I mean headspace, where you have a lot of space to write and reflect. You have one focus. And when I say one focus, I mean, you know, you're focused on crypto economics, but it's all part of, you know, some kind of working through ideas. As opposed to me where there was a time where I was in that space, but now I just kind of every week I have to focus on someone else's ideas. Right. And it doesn't give me the time. And that's valuable, but at some point I've got to stop that because I miss... Yeah, because you can't go deep in anything specifically. Yeah. Yeah. Or I can't go deep in a way that feels authentic. Like, I can try to go as deep as I can for the benefit of others and for my own learning. But I can never integrate that back into the (91/97)
larger whole and come up with something, you know, unique insight that's mine, you know? You know, I was just thinking about this because people keep pushing me to write a book, but I actually also feel the same thing because, you know, my obligation is to like the daily needs of our startups and our portfolio. I think it might be those like public equity investors that have a lot of time to reflect on history. Maybe everyone thinks everyone... You mean the macro guys? Yeah, yeah, because you read their notes, it's always about history. I'm always so envious of them. Because they're always trying to figure out what the world is going to look like. Yeah. That's how they are. Where we are in history, like, you know, you read the Howard Marks stuff, it's all historical references. Totally. But maybe that's like just this universal feeling that everybody else has more time than you. No, no, no, I think it's true. I mean, because I used to have so much more time. My life used to be (92/97)
structured in a very different way. But that's fine. I mean, like, I'm happy with what my life is now. Like, I like getting to do this. You know, I wanted this. You know, I constructed my life this way. It's a great privilege to get a chance to talk to folks like you or all sorts of other people that come on the show and to be exposed to your different perspectives, you know, which is why, you know, to go back to something we talked about at the beginning, you know, I genuinely... Like, the thing for me that matters is having open, honest conversations from a place of good faith. And because there's so much to gain for me. And I think for listeners, dude, like I told you, by the time this episode airs or this, you know, overtime thing goes out, we'll have and we're at 995 paid subscribers right now. So it might be a thousand. You know, it's working. You know, the experiment is working. People really want it. And even, you know, like everyone does sponsors, but, you know, I haven't gone (93/97)
that route. And I've been so inspired by the willingness and even enthusiasm of everyday people to literally buy into this model, you know? Yeah. It's very unique. Yeah, you could have, you know, landed some extremely fat sponsorship deals, but this way is much more independent. It's much better. Yeah. I don't want to have to do that. I don't understand why some people do it. I see some people who I know have a lot of money and they still do sponsors. And I almost think, I don't know why they do it. I think it's just mechanical for some people. They just do it because it's mechanical because there's got to be, like, you know, no, a lot of people don't need to make that extra money. And it also like cheapens the content because then you just have to produce output, you know, and you're not doing it for the sake of the interview itself. You're doing it to fill a slot. Yeah. Yeah. The worst is when they're doing it, they're interrupting, like if we're talking and all of a sudden it's (94/97)
like, I gave me the, like Castro oil, you know? But like, you know, the last thing I wanted to do is put someone else's words in my mouth. Yeah. You know? But I understand that, you know, I totally get that everyone's got different needs and I get it. And I think there are ways to do it that, you know, aren't bad, you know? Like the classic example, like audible.com, audible, audio that speaks to you wherever you are and just go right back, you know? Or I mean, if I had an audible as a sponsor and it was right at the top of the show, it's not a big deal. But I'd really rather not, you know? They're one of the few sponsors where I actually went out and bought the product after, you know, they sponsored some YouTube videos that I was watching. So I guess it's working. Totally. Actually, there was only one sponsor that I had considered having on as a sponsor, I think. Yeah. Because I also thought about Masterclass, but I was like, yeah. It was the great courses because I really liked the (95/97)
great courses, but my proposal to them, they wanted to do a strict kind of regular sponsorship model. Right. And then they said, look, I have listened to so many of your lectures. Let me bring on some of the authors that I really like and let me do a full episode with them. And, you know, we can give a percentage off to anyone who buys that lecture and you can give me a piece of that, you know? Yeah. And I'll be an enthusiastic supporter because I like the product, but, you know, and I get it, they have their own things. Anyway, Nick, we've recorded for almost two hours. So thanks, man. It was great having you on. I'll send this to my editor who is going to, he doesn't have much else to do right now because he's cooped up at home. Yeah. So I'll probably be happy to work through this. Well, thank you for... And we'll get it out as soon as possible. Thanks for having me on again. It's a pleasure. Hopefully we can do it again sometime. Yeah, man. It's great having you on. Okay. Peace. (96/97)
Today's episode of Hidden Forces was recorded in New York City. For more information about this week's episode or if you want easy access to related programming, visit our website at hiddenforces.io and subscribe to our free email list. If you want access to overtime segments, episode transcripts and show rundowns full of links and detailed information related to each and every episode, check out our premium subscription available through the Hidden Forces website or through our Patreon page at patreon.com slash Hidden Forces. This episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. Join the conversation at Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dk at hiddenforces.io. As always, thanks for listening. We'll see you next week. (97/97)
This is the full transcription of podcast 'Hidden Forces'.
Jim Rickards Can Complexity Science, Bayesian Inference Theory, and History Help Predict the Next Financial Crisis #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? Welcome to another episode of Hidden Forces with me, Dmitri Kofinas. Today I have New York Times bestselling author Jim Rickards on the program. His books include The Death of Money, Currency Wars, The New Case for Gold, and The Road to Ruin. He is the editor of the Strategic Intelligence Newsletter and a member of the advisory board of the Center for Financial Economics at Johns Hopkins. He's an advisor to the Department of Defense and the US intelligence community on international economics and financial threats and served as a facilitator of the first ever financial war games conducted by the Pentagon. In this episode, we cover financial history stretching back to some of the earliest economic philosophers and we explore the deregulation of the financial system from Bretton Woods through the financial panics in Asia in the late 1990s and the financial crisis of 2008. We also address one of the greatest weaknesses of modern economics, namely the desperate need (1/98)
for better modeling and what complexity theory, Bayesian analysis, and behavioral psychology can tell us about our world. We end with projections about the future and why Jim believes the next crisis is bigger, runs deeper, and is much closer than most of us might imagine. Here's our conversation. Jim Rickards, thank you so much for being in studio with us. It's great to be here, Dmitri. It's very exciting. So I realized when I was preparing for this interview today that I have not interviewed you myself before. You were not on my radio program ever, correct? Right. It was on your TV program quite a bit. You were the producer and on air, but usually my interviews were with Lauren. Lauren, exactly. So that's the first time you interviewed me. Yeah. I had intended to look into my email. I didn't look, but I think I reached out to you in October or something like that when I was building my show list. So you were one of the early guests, I think in November, and you had come on and we (2/98)
were talking about currency wars, which was your first book. And now I've got your fourth book in front of me, and I told you I wanted to wait until I do this until we were talking. Look at how I annotated the shit out of you. That is the real deal, Dmitri. You've got more than the real deal, man. Stickies, liner notes. Is that Cyprus 2012-2013, Bailin versus Bailout, FSB, Brisbane, G20. You did a deep dive. It's funny, when you do interviews, I've done quite a few interviews about the book. You can tell within 30 seconds if the person has read the book or not. And I don't, people are busy and I don't expect every anchor to be able to read some. Oh, man, I read it. I read it. Look at this. Look at this. You've got a crazy thing. You've got your own equations. You don't even need mine. That's cool. I loved it. I loved it. I loved it. Well, you know, we're in sync. I mean, we're in sync with a lot of stuff. There's a lot of stuff in here that we're in sync with, and it's interesting (3/98)
because I've had a couple of other guests on the program who, one in particular, I'm thinking of who I just interviewed right before you, and he, there's a community of people, and this guy's a theologian philosopher, but there's a community of people that understand the market, understand the finance, understand the economy in a way that is similar. And it has, if anything, it's contingent on not having learned conventional economics because we're going to get into that because I'm with you all the way on your modeling. I consider having a PhD in economics from a major university. An intellectual disability. You ought to get like your own parking space for that. But it really, it stands in the way of understanding how the economy actually works. You go back to the 19th century and the 18th century and look at the classical economists, people who really figured it out. You know, Adam Smith, even before that, David Hume, John Stuart Mill, David Ricardo, they did not have PhDs in (4/98)
economics. They didn't even, it wasn't even called economics. It was called political economy if it was even taught. But they were lawyers, they were journalists, they were philosophers, they were mathematicians, they were people who had good intellectual skills and analytic skills, but also had a lot of common sense. And they had a very good read on the economy. Not sure if things move on and I'm all for models. I'm for models that work. I'm not in favor of models that don't work. But even as late as the 1930s, 1940s, we had people like Joseph Schumpeter who had a very good understanding of business cycles, but that all got lost. It all went off the rails. I think right in 1947 when Paul Samuelson invented neokinzenism, I like to say, I love John Maynard Keynes, but I don't like Keynesians. I think Keynes himself was a pragmatist and was interested in what worked, not in dogma, but all the things done in his name, if he were alive today, he'd be spinning in his grave. That's typical (5/98)
though, the people that come, the eons, the ones that attach to a particular person, they then develop philosophies around them, use their statuaries, credibility. So listen, okay, I'm trying to think how, or I did think I should have thought, how I want to do... Okay, so this is how we're going to start. I've been out of the loop. I brought myself a little bit back into the loop. I stay in touch with what's happening in the world, but this is something where I want to recap because I've been looking at the conversations that the media are having and what I'm seeing is pretty much the same. And I looked at total debt, the best figures I could find from the BIS, debt to GDP numbers, total debt numbers. All those things are in worse condition there than we were before. Consolidation in the financial system, worse. Complexity in the financial system, worse. And the central banks still being at very low, near zero interest rates, and also being the only game in town. That still being the (6/98)
meme, mimetic structure of conversation in the financial press remains the central banks. I guess, bring us up to speed on where we are. And also, if you want, why don't we talk about also how we got here because I read your book and it sounds to me like you really start the clock around the disintegration of Bretton Woods. That's how I think of it at least. But why don't you just kind of... Let's go. Why don't you just take us by the hand here? Well, I love economic history in addition to doing up to date 21st century economic analysis. I find history is a big input. And you can pick your points. You can look at 1914, which was the end of the classic gold standard. You could look at 1944, creation of Bretton Woods. You can look at 1971, 73 period, pretty much the end of Bretton Woods, the King-dollar period. You can... In my new book, The Road to Rowan, I actually have... I talk about history and I just quote a bit of history in my first book, Currency Wars, but I actually have a (7/98)
sequence of financial collapses, a sequence of three starting in 1998. That was the Russia, Asia, long-term capital management crisis. I look at 1998, I then come forward 10 years to 2008. Talk about that. And then I come forward 10 years again to 2018. Now, 2018 is obviously a literary device. I'm not saying that on January 1st, 2018, the world is coming to an end. I'm not saying that. The only thing is that that 10-year tempo is a realistic way to think about the periodicity of financial crisis, but I also make the point that the next crisis is coming. It'll be worse than 2008. It could happen tomorrow. I'm not saying it's going to happen tomorrow. What I'm saying is it could happen tomorrow. And if it's something you're concerned about, and investors, and anyone with any wealth to protect or any citizen should be concerned about it, what are you waiting for? You need to start thinking about it and preparing for it now. So whether it's 2018, 2019, or tomorrow morning, it could be any (8/98)
of the above. It doesn't matter. What matters is it's coming. It's going to be worse. The reaction function is going to be different, and that's what I talk about in the book. So, yeah, any of those are useful starting points. They all mean there's totally different things. All right, let's start with the Asian financial crisis and Russia, the Russian crisis and LTCM. And then we'll get into your predictions about 2018 because I want to talk about some of the models that you use to make your projections. Sure. Well, 1998, just for the listeners to recap a little bit, first of all, that crisis came to a head in September of 1998, but it started in June 1997. And that's a very important point because when it starts, you don't know where it's going. Now, complexity theorists would say, I have a pretty good idea where it's going because of the scale of the system, because of the interconnectedness. Once that first domino falls, it's easy to predict all the other dominoes are going to fall. (9/98)
You don't need a crystal ball or a time machine. You just have to understand the dynamics of the system, the array of actors or agents in the system to make some very good forecasts. But most people are not doing that. So in June 1997, the central bank of Thailand depagued the Thai bot from the dollar. So they had to peg to the dollar, and people looked at that and said, well, I can borrow dollars and invest in Thailand and get a higher return. It's a carry trade. Carry trade. And what do you worry about in a carry trade? Well, you worry about short-term rates in the short position going up. So short-term US dollar rates. So that was not a concern at the time. And you also worry about the exchange rate. But here you had the central bank of Thailand saying it's pegged, and you can always get your money out at a fixed rate. So people were doing golf courses and hotels and resorts and other kinds of investment, et cetera, in Thailand like crazy. And then all of a sudden, people started to (10/98)
get their money out. The reserve position drained. Central bank blew a whistle. Time out and broke the peg. And the panic that ensued in Thailand was a direct result of the fear of the initial boom as a result of the stability that was created by the peg and the environment and the overinvestment in Thailand caused a lot of anxiety around malinvestment and potential losses. Correct. There was a loss of confidence there. People wanted their money out. And now the point is, that was a crisis in Thailand. And maybe if you were an investor in Thailand, you got your money locked in or the value of your golf resort went down, et cetera. But nobody at the time thought that this would get to the point where global markets were hours away from a complete shutdown. And that's where we were on September 29, 1998. Now the reason I know that is history. But I was the lead general counsel for long-term capital management. That was the hedge fund that got caught up in it the following year. I (11/98)
negotiated that bailout. I was in the room with the officials in the Federal Reserve and the Treasury and other government agencies, as well as the heads of the 14 biggest banks on Wall Street and a whole thundering herd of lawyers when we did that bailout. So I know how bad it was. But no one thought that at the time in June 1997. So what happened after that? It then spread to Indonesia. People said, well, if Thailand's a problem, maybe Indonesia's a problem. Get my money out there. Malaysia, South Korea. So it began to do, this is what they call contagion or spillovers. Domino's falling, if you want to think of it that way. It began to spread throughout Asia. And the old expression in the time of Vesas, when there's blood in the streets, well, sadly, tragically, there was literally blood in the streets. People were killed in demonstrations in Indonesia and Korea. So Korea, it led to the collapse of the Soharto government in Indonesia, which had been there for decades. But then by (12/98)
December, it seemed to calm down a little bit. We went into the winter and it almost looked like it was over. And I was, my colleagues at Long Trump Capital were saying, is this a good time to invest in Indonesia because things have kind of fallen off the cliff. But by April of 1998, so now we're almost a year from the original devaluation, it started to reemerge again. And then it reemerged with a vengeance in Russia in August 1998. Russia defaulted on their internal debt, their external debt and devalued the currency. And the IMF, once, they're just a huge shock. And then that caused liquidity crisis to spread widen, spreads widen. And the IMF and people in the international monetary system were looking at the sequence, again, and now it's the dominoes. So they said Thailand, Indonesia, Malaysia was in it, Korea, Russia, and they thought Brazil was going to be next. Brazil looked like the next domino to fall. And the IMF started to build a firewall around Brazil, get ready for an (13/98)
emergency, liquidity, rejection, et cetera, conditionality and all that. But up popped long-term capital. Nobody thought a hedge fund, they were looking at a row of country dominoes. Nobody thought that there was a hedge fund domino in there where there was. And then that became the eye of the storm. By September 1998, we were looking at, and that was bailed out by Wall Street. Although I should put the word bail out in quotation marks, Wall Street didn't bail out long-term capital. They bailed out themselves. What they did is they came up with about $4 billion all cash. They bought the balance sheet, from then on they owned it, and then they didn't orderly unwind instead of a disorderly unwind. And they actually made, they got all their money back with a slave profit. The losses were on the prior investors, including the partners at LTCM, which is appropriate. They ran the fund. They should have suffered the losses. That was actually a fair result. But Wall Street wasn't doing anybody (14/98)
any favors. They were bailing themselves out. But that deal went through. It closed and life went on. In fact, after that, the Fed cut interest rates twice. The stock market rallied late 1998, 1999. That was the dot-com boom, if you will call it. There was no economic recession. And that was right after a Greenspan had had to walk back as a rational, exuberant, exuberant comment. Well, he made that in 1996, and then by 1998 it was kind of like, well, whatever, and it's going to do what it's going to do. That is an interesting sidelight, by the way, to meet you, because it has to do with the Fed's reaction function to bubbles. That was actually the origin of the Fed saying, we're not in the business of popping bubbles. We're in the business of cleaning up after the bubbles pop. And Greenspan did that in 2000. The dot-com bubble did pop in 2000. The NASDAQ fell 80%. And other markets fell by comparable amounts, not quite 80%. But then Greenspan cut interest rates in the early 2000s, kept (15/98)
rates low, too low for too long, really set us up for the next crisis, but that was yet to come. But he sort of validated the theory that the Fed didn't have to pop bubbles. They could clean them up after the fact. I talk about that in my book as well, that the theory is flawed, because it has to do with the difference between leverage bubbles and unleverage bubbles. The stock market boom in 2000, the dot-com bubble, was not leveraged. Then we might have had a little margin of money in there, but basically it was equity and it was not a lot of leverage. 2008, on the other hand, was leveraged 20 to one or more. And when you pop that bubble, you get a very different result than when you pop an equity bubble, because there's not enough money to go around. There's not enough equity to pay off all the creditors, and you get a liquidity crisis in the global panic, which is what we saw. But coming back to 1998, so that deal went through. The world did not come crashing down, but it almost (16/98)
did. We were just hours away from closing every stock and buy market in the world. Can you explain to our listeners a little bit, so for people to understand that, and two points, I actually want to say something. LTCM was using a Gaussian distribution in their model for trading, which is an important point that will circle back around when we speak about predictive modeling. Gaussian distributions are normal distributions. The idea that if you have a certain number of events that are out of the norm, you can keep betting that you're going to get back into the average. And they were doubling down, tripling down that things were going to recur. It's a bell curve. It's mean reverting. It's called a Gaussian distribution, or a normal distribution. It's got a couple different names, but that's exactly right. And the problem with that, first of all, it's not true. It's empirically not true. We don't have to debate it. If you look at it. It's true in the case of people's height, in the case (17/98)
of heights of people, but not in the case of market prices. There are some things that are normally distributed, height, weight, IQ. They are a bunch of things that accord coin tosses. You start tossing coins and getting heads or tails. And you don't know what the next one's going to be, but if you do it a thousand times, you're going to come really close to 500 heads and 500 tails. It might be 498 heads and 502 tails, but it's going to be somewhere around there. That's normally distributed. You're getting to something important with that example, because each previous coin toss does not affect the future coin toss unless you're saying there's something I have to reexamine my model, which is the Bayesian theory. Well, correct. Bayes is a tool to do predictive analytics when you don't have a lot of information, but it's not really tied to normal distribution per se. It's a tool. But going to your point, and this is attributed to Markov, that when you have something, a draw of cards out (18/98)
of a deck or a spin of a roulette wheel or a coin toss or a roll of the dice subject to however many faces or combinations are in a pair of dice or heads and tails on a pair of coins or whatever the combinations are on roulette, the next turn of the wheel, the next roll of the dice is not predictable, but over a long enough sample, you can be highly certain that you're going to get a certain distribution. If you're in markets, you can bet and lose, double your bet, lose again, double your bet again, lose again, double your bet, and then win. You're going to win eventually if you have a normal distribution subject to two conditions. Number one, you better not run out of capital. That's what happened to long-term capital management. The fact is the trades that long-term capital management lost money on, those trades ended up making money. In fact, there was always a high probability that they would, but it doesn't mean you can't lose all your money in the meantime. You can lose all your (19/98)
money waiting to make the money. That's all that happened as the Wall Street stepped into the shoes of long-term capital investors and they did in fact make the money about a year later. You could see that coming, but you didn't know when. So the first condition is you need very deep pockets and then you need to be able to keep playing the game. And that's what happened to the Hunt Brothers in 1980, the regulators, the Commodity Futures Trading Commission, the exchange is called a timeout. It said, game over. Well, if the game is over when you're down and you don't get to make the next bet, that's another way to lose. You can be right, but you have to be solvent. Right. So those are the problems with, it's called a martingale by the way. That's the name for doubling down, doubling down, doubling down. Eventually you will win subject to those conditions which we mentioned, which is it's not game over and you have enough money. But that's not even how markets work. In other words, if (20/98)
market, but the problem is, A, people think markets do work that way. That normal distribution is the basis for Wall Street risk management to this day. Value at risk is, which is the main tool, that's the main tool, is based on that. Which is what's still being used to measure bank capital. Correct. Well, what they do is they look at your balance sheet and then they say, they stress test it and say, what's the worst that could happen? And with a certain probability and if that is highly remote and you have enough capital to get through it, then you're good to go. That's completely flawed. The people doing those tests, misapprehend the statistical properties of risk. They actually don't know the worst that could happen. The worst that can happen, complexity theorists would say, tell me the scale of the system. And I will tell you that the worst that could happen is an exponential function of scale. That, by the way, is not just a theory. That's actually, there's a lot of math and a lot (21/98)
of empirics to back that up. Dmitry, when you look at the time series of prices, what's more empirical than saying, give me a ticker, whether it's second by second, minute by minute, hour by hour, pick your periodicity, tell me how prices move, graph it out. What is the shape of that curve without what's called a degree distribution? Well, I'm sorry, it's not a belcher. It just isn't. This whole, everything about risk management, everything about banking regulation, everything about trading is based on a false premise. It is a curve. There is a degree distribution, but it's something called a power curve. And the debate between a power curve and a bell curve is not some dry academic debate about the shapes of two curves, because those curves represent completely different dynamics. The curves are just representations of a degree distribution. It's the degree distribution that is the underlying risk in the system, and those dynamics are completely different. It should come as no (22/98)
surprise that central banks blunder time and time again. Yeah. I mean, you're really nailing something, which is that on a fundamental basis, the models and the methodologies that have been developed for in the economics profession and in financial markets simply don't match up with reality. And of course, what is a model? A model is an approximation of reality. They are not near approximations of reality. And with respect to what you were saying, they're effectively talking about these extreme fat tail events. So the reason that we consider them fat tails is because we're thinking about normal distributions, which is what they are not functioning within. The other thing I wanted to say when we were talking about the Gaussian model is about, how could an event like long-term capital management, a $3 billion fund, something like that, how is that going to collapse global markets? And what that brings us back to is a fundamental fact, which was the issue with Lehman, which is that (23/98)
financial markets function on a matter of confidence. And fundamentally, that is what allows markets to function because they're leveraged. No one has... We're not functioning off of a capital that is there, that is available to be pulled at any moment. And that's what a classic bank run is. But today we're talking about, I mean, the runs that we've experienced don't happen at retail banking. They happen in investment bank. They happen in derivatives markets. Right. Well, the thing with long-term capital, you mentioned, I mean, the total losses there were just under $4 billion. It was about $3.6 billion. And that's the amount that Wall Street put in to prop up the balance sheet. But that wasn't the issue. The issue wasn't, gee, would Wall Street lose $3.6 billion? That firm was on balance sheet. So on balance sheet was leveraged $20 to $1 at the beginning of the crisis. Now, toward the end of the crisis, it was leveraged $100 to $1. You hear that number a lot. But the reason it went to (24/98)
$100 to $1 was not because we were adding positions. It was because the capital was shrinking. You were dividing the denominator or the fraction was shrinking. So of course, you're going to get a higher leverage ratio. So it started out at $20 to $1 on balance sheet at the end when the bailout was closing. It was closer to $100 to $1. But that doesn't tell the whole story because the off balance sheet was $1.3 trillion. So imagine $1.3 trillion of derivatives poised on a $3 billion sliver of capital. Now you get the idea. Now we're talking $300 to $1 or more. So that was really the problem. And just to give a very simple example, long-term capital was very well known for trading, fixed income, derivatives, arbitrage. You have arbitraging, government bond markets against futures, government bond markets against options. They had a lot of counter parties in these derivative positions that they were using to net their risk. Correct. About 70 major counter parties, probably most of the the (25/98)
trades were concentrated in about 40 names. But these were all the biggest banks in the world. But just so the idea that LTCM was big in fixed income and fixed income derivatives and arbitrage, everybody knew that. But what they didn't know was that long-term capital was the biggest risk arbitrageor in the world. Risk arbitrage is betting on stock takeovers. So Company A is going to buy Company B for a certain dollar amount per share. And that's announced. And it's called risk arbitrage. You look at that and say, well, okay, Company B is that stock's below the takeover price. So if I buy that, if I short Company A, I go long Company B, I own the spread. I wait for the takeover to go through the price it converges. I unwind. I make a profit. You know, if it happens, of course, nothing's risk-free. But the idea is I'm taking a little bit of risk to make a lot of profit in that deal. What's the risk? Well, the risk is that the deal doesn't go through. The risk is the deal busts. And (26/98)
instead of converging, those prices move back in opposite directions. And the target company stock collapses and you lose my sets of risk. And smart people have developed models and ways of thinking about companies and talking to management and doing a lot of fundamental bottom-up research to figure out that risk. Long-term capital didn't do that. They did a couple of things. They just kept betting. And they said, look, we know a certain percentage of these trades are going to bust. But if we do enough of them in enough size and do it persistently, we will, in fact, make money because on average, you do. So that was kind of going back to what we said earlier about average distribution. Average sample size. And the Martin Gale. But the other thing we did, we'd never owned a share of stock. We did it in derivative form. We had a, what's called a total return equity basket with Bear Stearns, which was our prime broker. So we would literally just call up and say, we were in every big risk (27/98)
arbitrage deal of the day. You go back to the late 1998, what were the big deals? WorldCom, MCI, Citigroup, Travelers, Lockheed, Boeing. These were the big deals of the time. We were in every single one up to 4.9% because beyond that, you had to make a public disclosure. And we didn't want to do that. So we kept ourselves at 4.9%. But these were giant deals. And we did all in derivative form. So we would just call Bear Stearns and say, hey, put a million shares of Lockheed short and the basket. Boom, there it is. Well, Bear Stearns was doing that trade with us in derivative form. They would have to go out into the market and buy the Lockheed. And that was that they were short to us in the basket. They'd have to go along the actual shares and then they would have a hedge position. They would make a profit. Well, picture that setup. Now imagine LTCM disappears. We filed for bankruptcy in the Cayman Islands. Boom, we're gone. All of a sudden, Bear Stearns is long billions of dollars of (28/98)
Lockheed stock that they got to dump. And that was the problem. All the Wall Street counterparties would have had to dump all the stock that they owned because they thought they had a hedge position because long-term capital, they were short to long-term capital. Well, try dumping $15 billion worth of stock. That's what we had, $15 billion. And I'll never forget Peter Fisher, who was head of open market operations at the Federal Reserve Bank of New York at the time. Bill McDonough was the president, but he sent Peter Fisher up and Gary Gensler, who was assistant secretary of the Treasury at the time, came up to visit us in Greenwich at Long-Term Capital Management. This was before it was really big in the headlines. We actually called them and said, Houston, we have a problem. We didn't expect a bailout. We didn't ask for a bailout. We were kind of incredulous. Like, well, why should you bail out a hedge fund? We thought we were just being good corporate citizens. Like, there's a (29/98)
problem here. You're the regulators. You ought to know what it is. So they came up. It was on a Sunday and Gary Gensler, Peter Fisher, Peter's assistant, Dino Koss, John Meriwether and I sat down in a room for five hours. And we just turned pages. We had pronounced and we just went through position by position by position. At the end of it, Peter's face was white and he looked at us and he said, we knew you guys would take down the bond market, but we didn't know you would take down the stock market, too. They had no idea about the 15 billion of equity position. So it would have shut every market in the world if the bailout didn't go through. That's how close we came. So we survived that. Life went on. Stock market reached new highs and you had the dot-com collapse. Then, so come forward to 2007. Actually, earlier in 2005, 2006, I could see the same thing happening again. I was giving lectures. My books were not at the time, but I was a regular finance lecturer at the Kellogg School at (30/98)
Northwestern. I gave a lecture at the Applied Physics Laboratory, actually, because a lot of the models I use are from physics. Salamos. That came later. This was actually the Applied Physics Laboratory down in Laurel, Maryland. But I was out there warning. Now, I didn't say, gee, it's going to be mortgages. It's going to be the spring of 2007. I wasn't that specific, but I didn't have to be. I could see the instability in the system. I could see a greater collapse was coming. I was warning about that based on system dynamics. You didn't have to hang it. Could have been mortgages. Could have been something else. It didn't matter is that the system was unstable. That's what I was saying, having lived through it the first time and having done quite a bit of research in complexity theory, physics, graph theory, network theory, applied mathematics, Bayesian statistics, et cetera. In the meantime, I kind of mastered all that to the point where I could understand capital markets differently (31/98)
than everyone had done before long-term capital. So what should have happened after long-term capital? When you say, when you look at what went wrong, what should you have done? Well, you should have banned derivatives. Most derivatives, not 100%. Maybe the old style, Chicago futures, heavily margined. Watts very carefully, well-risked. Maybe they're okay. Let's actually, for those listeners who are not fully familiar with this, when you say banned derivatives or put regulations around derivatives, what you're essentially saying is derivatives are good so long as, and what is the derivative? A derivative is essentially a bet. It's a bet. It's a bet. It's a bet on an underlying asset that you don't have to own. Correct. It would be like, if you and I went to the racetrack and there were real horses and a real betting window and we put up real money and we made a bet, okay, people understand that. But what if we were in some bar 5000 miles away and I just said, hey, Dmitri, let's make a (32/98)
side bet. We're not going to go to the racetrack, the paramutual window. We're just going to make a bet. And then I take your bet and sell it to somebody else and she sells it to somebody else and so on. So you can see that there's a lot of bets out of one race and nobody put up any money after the first one. We got a lot of debts to settle if anything unexpected happens in that bet. Well, that's all derivatives are. They're side bets on a market. So we kind of understand stock markets and bond markets. These are just side bets. But the problem is you can't see them. They're non-transparent and there's no limit on the leverage. And they're over the counter. And they're over the counter by and large. And that's what causes the instability. And just to now remember in 2007, by the way, interesting because I talked about the 98 crisis then my next crisis I talk about in the road to ruin is 2008. But very similarly to 1998, which really started in 1997, the 2008 crisis started in 2007. Now (33/98)
everyone remembers September 15th, that was the day Lehman Brothers filed for bankruptcy. So everyone looks at that says that was ground zero in the crisis. But that actually started in the spring of 2007 over a year before when the first signal, I mean some insiders saw this, people like Kyle Bass and others, anyone saw the movie The Big Short knows that there were people who were onto this. But as far as the general public or average investors are concerned, the first clue was on the spring of 2007 HSBC. And because the public company announced that its earnings, they lowered their earnings expectations and they specifically said, we're losing some money and mortgages here. What an amazing time. Well, that was an alarm. And then at the end of July, there were two Bear Stearns hedge funds that actually went out of business. There wasn't Bear Stearns itself. That happened in March 2008, but these two funds went out of business. Then Sock, Jens, Societation, et al. Suspended money (34/98)
market redemptions. That was a shot across the bow. And then of course, we had the famous rant with Jim Cramer and Aaron Burnett on CNBC. Cramer was screaming, they know nothing, they know nothing. And he was right. It was absolutely right. The Fed was completely clueless. Well, that's when it started. But think about the fact that you had some signals in the spring and summer of 2007. Then you had some real stress. And then by September of 2007, member Hank Paulson, Secretary of the Treasury came up with the Super Civ, you know, Civ SIV, a special investment vehicle. These were these off balance sheet structures that Citibank and others that come up with for their credit card receivables to keep them off the balance sheet of the bank. And they were funded with commercial paper. Commercial paper started drying up. It looked like they were going to implode. And Paulson had a roll up strategy. He said, let's take all the civs, you know, you're all in trouble and roll them up and do what (35/98)
I call the Super Civ. And we'll wrap some kind of guarantee around it and make that problem go away. And then what happened? But the other thing they did. It's so difficult remembering all this stuff. It's painful, isn't it? It's painful. It's painful. We've got any, please continue. Because one of the things I want to get to before we're done with this interview is I want to ask what your perception is about where we are today in terms of that type of complexity. But that's why, thanks to Dimitri. But that's why the history is so important. Because if you had learned the lessons in 1998, which we didn't, but if you had learned those lessons, we never would have had 2008. But the problem with 2008 is we didn't learn any lessons either. Where things are just as bad. And we'll come to that. Why this next collapse is going to be worse than the next, than the last one. But so December 2008. So now, sorry, 2007, this is still 2007, Hank Paulson gets on the phone and calls all the major (36/98)
sovereign wealth funds. Adia, Abu Dhabi Investment Authority, Temasek, and Singapore, Kuwait Investment Authority, Prince Al-Wid, all the big money in the world. And says, you got to, the US banking system's on sale. And you got to bail it out and you can get some great bargains here. So remember Abu Dhabi bought just under 10% of Citigroup and they did it with an option structure. And they announced it was $35 a share. Citigroup had been 50 by the way, close to 50. They said it was $35 a share, but they had a bunch of bells and whistles and high dividends and options in there. If you adjust it for all that, it was closer to $24 a share. They're still overpaying for it. Well, we went to two. Eight months later, it was $2 a share. But my point is by December, we were feeling good. It was like, hey, crisis is over. Sovereign wealth funds bailed out the banks. They look like Warren Buffett buying Solomon Brothers in 1991. And it was all good. What wasn't all good. It was exactly like that (37/98)
hiatus member in 1997, 1998. It looked like it calmed down by the winter, but by the spring, it came back again. March 2008, Bear Stearns goes out. June, July 2008, Fannie and Freddie go out. Then of course, September, Lehman. I remember talking about this in the book in August. What a time. Yeah. What a time. But I was sitting there watching this like, I've seen this movie. I had lived through it with Long Term Capital. I know that the scale of the system is so big that these are slow motion crises. It's not like two cars hitting each other. It ends up that way, but it's like, actually, imagine two cars hitting each other, but you're watching it in slow motion. And you're like, whoa, those cars are going to hit each other. Oh my God. They're heading right for each other. This is going to be really bad. That's how I felt in late 2007, 2008 watching this. But just to illustrate that point, so it's August 2008. We're in the middle of the presidential election campaign. And it's McCain (38/98)
versus Obama, Obama's first term. And I was on the economic advisory board for the McCain campaign. So briefly, it was a very short service. So I get invited onto the call. So John Taylor and Marty Felstein, all these big names, they're all on the call and I'm on the call and I'm listening. And these guys are high-fiving because it was right after the Fannie, Freddie bailout and Congress passed legislation to solve the Fannie, Freddie. And they're high-fiving like, thank goodness the crisis is over. Now we can talk about Iraq because McCain really wanted to run on the Iraq war, being a war hero, war veteran, all that. I said, now we can talk about Iraq. We don't have to talk about this financial crisis because it's over. And I said, just by the time I waited and then time came, I said, hi, Jim Rickerson. I said, this crisis is not over. I said, you are not going to make it to election day without major financial crisis. This is just Domino's following the last dominant. So here's what (39/98)
you do. Write the speech right now because you won't have time when this happens. Give it four points. It doesn't even matter what they are. You always have four points because it sounds good. I said, when the crisis hits, put the candidate on the steps of the treasure with a microphone and say, my fellow Americans, we're in a crisis. Here's my four point plan to deal with the crisis. I said, people will be so reassured, you'll be elected president. Well, here's what happened. I got people who said, who's this nut? I got left off the call. I was not invited back. And then of course a month later, that's exactly what happened. We had the Lehman Brothers crisis. And if you recall what happened then, McCain ran around like a chicken with his head cut off. No, he ran back to Washington. He suspended his campaign. And then he barged his way into the Roosevelt room, wanted to meet with the president. Well, Bush, 43, he couldn't very well meet with McCain without meeting with Obama. He was a (40/98)
Republican, of course, but he had to be balanced. So he invites McCain and Obama into the Roosevelt room and for this economic summit or whatever it was. Well, Obama didn't actually know any more than McCain, but Obama was smart enough to keep his mouth shut and just look very cool. McCain looked scary. Obama looked cool. If you look, that's when the polls reversed. McCain was leading the polls up until Lehman weekend. It flipped. Go to a real clear politics poll of polls for that data is available for September 1998. And you'll see, sorry, September 2008, you'll see that the polls reversed that weekend. So it pretty much cost McCain the presidency that he was not prepared. McCain campaign has always contended that indeed. Yeah. It wasn't Sarah Pell. Sarah Pell was a sideshow. It was the crisis that took him out, but he was warned. And so then, of course, we go through the 2000. And I want one more footnote on 2008 to meet you because I know you want to talk about the next crisis and (41/98)
so do I. No, this is great though. I do want to go through this because this is important. So when the crisis started in 2007, even into 2008, even when it got bad with Bear Stearns and Marsh 2008, it was looking a little bit hairy, you had really smart people. And I would say like Ben Stein, who is the economist and lawyer, market commentator, but others that, and they said something along the following lines. There were $1 trillion of subprime and alt-A mortgages. I mean, everyone knew that the problem was in mortgages and housing values were going down. And that was the number. There were approximately $1 trillion of subprime, what's called alt-A. Alt-A are kind of funky, not very good mortgages, just not as bad as subprime. So $1 trillion was the number. Historically, default rates, even in a bad recession, seldom got above 5%. Usually 2%, 3%, 4%, 5% was really extreme. So what Ben Stein and others said, okay, let's get crazy. Let's assume 20% defaults. Nobody thought it would be (42/98)
that bad. Let's assume 20% defaults. They said, they did the math, they said, okay, you got a trillion of mortgages. Let's assume 20% defaults, which was crazy. That's $200 billion of losses, which in real terms was not larger than the losses of the SNL crisis in the 1980s. They didn't take into account the derivatives market. That's exactly right. In the 80s, we survived that. They said, 200 billion is a lot of money, but we'll survive. What they didn't know is that there were $6 trillion in derivatives. And you take a 20% hickey on $6 trillion. Now you're talking $1.2 trillion of losses. That's enough to wipe out a lot of banks, which is exactly what happened. So it was the non-transparency, the opaqueness, the blindness of what could happen in derivatives market that caused people to be too confident about what was going on in mortgages. And the over-the-counter derivatives market was estimated at roughly $700 trillion at that time. That's about right. It's getting close to a (43/98)
quadrillion. It's actually, interestingly, it's actually starting to come down a little bit. There are other problems, but some of these, I mean, when I say now, it's very recent on the last couple of years or so, according to the BIS. But you have the time, approximate number was about $700 trillion, which is not that far from one quadrillion. All right. So 2008 happened. We had the government fiscal bailout, which was the Hank Paulson Bazooka. We had the massive liquidity, not just the Federal Reserve, but across the world, central banks. The EU, ECB had the LTROs. They'd had their equivalent of quantitative easing. We had QE1, QE2, Operation Twist, QE3. Was Twist 3, anyway? Well, we had plenty. So we've passed all these sort of years, right? Twist was throwing a bone to a hungry dog. When QE2 was over, the market looked at the pens and said, what else you got for us? And they weren't ready to do QE3. They said, well, here's Operation Twist. I keep you guys happy. But that was a (44/98)
little bone between QE2 and QE3. Actually, Twist seemed like it would do more harm than good in retrospect. Even at the time, it seems to me. Yeah. Well, it's all harmful. Yeah, it's all harmful, but it's like particularly stupid because it made it so difficult to even more difficult to unwind it if you're going to be going to suppress the long end of the curve. All right. So not to get, not to recount all those inter-years, but all right. So tell us now sort of, let's continue. Why don't you just keep going with where you work? Well, as I said, we didn't learn any lessons after 1998. In fact, we doubled down. I mean, they repealed Glass. 1999, they repealed Glass-Stigl. That was one of the, Glass-Stigl had worked almost flawlessly for 80 years from 1933 or 34 to 1999. Glass-Stigl separation of commercial from, I mean, retail banking from investment banks. Correct. I said 80 years. It was about 65 years. But you go back to the 1920s. What was going on in the 1920s? Well, commercial (45/98)
banks were originating garbage loans, securitizing them and selling them to their customers. So in 1929, a stock market crash, a lot of retail lost a lot of money. We went to the Great Depression and Congress had hearings. And they looked at this and said, oh, you guys originated garbage loans and sold them to your customers. You can't do that anymore. They passed Glass-Stigl. And Glass-Stigl said, from now on, you can take deposits and make loans, and that's a commercial bank where you can underwrite in self-securities. That's an investment bank, but you cannot do both. There's an inherent conflict of interest. You cannot do both. Well, that worked extremely well for about 65 years. Why the Congress in 1999 thought they were smarter than the Congress in 1933, I'll never know, except that the Congress in 1999 was a lot more corrupt. You had sort of the devil's bargain. You had Phil Graham, Senator on the Republican side, and Bill Clinton, President on the Democratic side. You also had (46/98)
Robert Rubin, former Goldman and Citigroup chairman. Sure. I think he might have moved on by 1999. I think Larry Summers was Secretary of the Treasury. Was he? Maybe a talent of Rubin's role as Secretary of the Treasury. Rubin was certainly a player. You're absolutely right. But the point is they repealed it. So what happened next? Banks originated garbage, loan securitized them, sold them to their customers. And it was an exact replay of the 1920s. Why should we be surprised that 10 years later you blew up the system again? It had already happened, and they fixed it, and then they unfixed it, and it happened again. What kind of learning is that? And this is the problem with public policy. It's short-term. It's corrupt. It's a matter of prevailing self-interest and special interests. No one's looking after the taxpayer or the everyday citizen or everyday investor. Well, that's why I personally focus so much on Bretton Woods, because that was sort of the architecture, the global (47/98)
financial architecture. And once that big piece of it was taken out, once we went off the, essentially, not the gold standard, but not the classical gold standard, but effective. Right. Once we went off of that, it changed the game for everything. And that's when the calls for deregulation began. Then late 70s, all through 80s and 90s, we had a lot of financial deregulation. In my opinion, studying the history, I think what should have happened was deregulation followed by re-regulation. I mean, a rethinking of the system. If you're going to go off of Bretton Woods, you have to accommodate for this new reality. Right. And then, of course, when Bretton Woods failed, and it was in state, everyone goes back to August 15, 1971, which is the night that Richard Nixon said that we are, he actually used the word temporary, that video. Shut the gold window. YouTube, you can find it, but he said, we are temporarily suspending the conversion of dollars into gold by our foreign trading partners. (48/98)
And actually there were- Prevent it to protect us from American people from the speculators. Well, right, exactly. He used the word speculators. They spent the weekend at Camp David, and there were about five people who were very close to the president who were there. I've actually spoken personally to two of them, Kenneth Dam, who was a lawyer in the White House at the time, but later Deputy Secretary of the Treasury, and Paul Volcker, of course, who at the time was Deputy Secretary of Treasury for International, later Chairman of the Federal Reserve. So the others were, you know, Zarathar Burns. Burns was there. Chairman of the Fed, John Connolly, Secretary of the Treasury, and the president. So I spoke to kind of two of the five people in the room, and they, not surprisingly, they told me that they all thought this was temporary. They thought it was a timeout. There was a run on the bank, except the bank is Fort Knox. The French. So there was the French, yeah, the French, but the (49/98)
Swiss and the Spanish were right behind them. The only people who were playing ball with this were the Japanese and the Germans. Always. Because, well, they needed the nuclear umbrella. They were relying on military protection, so they played ball because they were dependent on us militarily. And then the Brits didn't mess up the system because they had a worse problem than we did. There were a lot of sterling claims out there that couldn't be converted to gold. But, yeah, the French, the Spanish, the Italians, to some extent, the Swiss, it was just a run on the bank, except the bank was Fort Knox. The gold was flying off the shelves. In 1950, the United States had 20,000 tons of gold. By 1970, we had 9,000 tons of gold. And we said, where did that 11,000 tons go? Well, it went to our trading partners. But the pace was accelerating. We would have been out of gold within a year or two at the most. And Nixon knew that. But what he thought they were doing was shutting the window (50/98)
temporarily, exactly like a circle breaker on the stock exchange. Capital control. Right. Then we would have another Bretton Woods type of meeting, which they actually did at the Smithsonian in December 1971. We would devalue the dollar against gold, which they did. They said, let's make it, at the time, $42 an ounce. And then we'll reopen the window at the new value. Well, the problem is they never reopened. They did everything I said, but they never reopened the window because countries went to floating exchange rates under the, obviously, malign, and this guy had influenced Milton Friedman, who thought that was a good idea. He was a proponent of it. Turns out, not such a good idea. But we've been essentially unanchored ever since. And we've had one crisis after another ever since, whether it's the 87, stock market went down 22% in one day on October 19, 1987. From today's levels, Dmitri, that would be the equivalent of 5,000 points on the Dow Jones in one day. Not 500. If the stock (51/98)
market went down 500 points, it's all you'd hear about. Imagine 5,000 points in one day. That equivalent percentage terms is what happened on October 19, 1987. That's really the kind of, to me, that's the beginning point of the modern age of complexity. It's always been complex, but actually going into critical state dynamics. You said at the beginning of our discussion, things are more complex. The way I would think about it is that the whole system's always complex, but it's more critical. As critical as a technical term, it describes the situation in complexity when you're ready to detonate an atomic bomb. You're at the threshold. You're at the critical threshold where things are going to blow up. For example, let's say I've got a 35-pound block of uranium-235 in its shape like a cube, and it's sitting in front of me. Well, it's complex. I mean, it's radioactive. There's stuff going on. Neutrons are firing off and releasing electrons and it's creating energy. But it's radioactive. (52/98)
It's complex, but it's not in the critical state. Now, I take the 35 pounds. It's in a stable dynamic state. Dynamic stability? You'd call it? It's, I would say it's non-critical. Non-critical. I would say it's complex and dynamic, but not critical. I'm being technical only because I don't speak of these things in generic terms. I like to use the actual physics scientific terms that apply. That's why you'll never hear me unless someone brings it up. I never use the phrase black swan. Because black swan is one of those things where it's kind of content free. And it seems to have met him, read his book, a great book. I think he did a really, really good job of demolishing the bell curve, which we talked about. But then he kind of threw up his hands and said, statistics don't work. You can't model it. It's not normally distributed. I'm a philosopher. That's sort of the distinction between chaos and complexity. Well, it's really the distinction between demolishing a paradigm, but not (53/98)
building a new one. I would say Taleb did a very good job of discrediting the old paradigm. But he didn't replace it with anything. He just said, you kind of can't model this. Just get long volatility and wait for the end of the world. So that's fine. It's not his job to save the world. But I was never satisfied with that. I felt, well, okay, I agree 100% that the old paradigm of normal distribution is wrong. I mean, it's empirically wrong. But I wanted to figure out what worked, what would work. And I found it in physics. I just had to, I didn't invent the science of complexity. It was invented in 1960. But all I had to do was take the math and theory and import it into capital markets and to get very good results. Because it's apparent, readily apparent, the many who ask the question that capital markets are complex systems. And so you can use complexity science to understand them. But coming back to this issue of the critical state. So I've got my 35 pound block of uranium. It's (54/98)
radioactive. It's complex. It's dynamic, but it's not critical. Now I take it and I shape one part of it. I engineer it into something about the size of a grapefruit. And I take the rest, I engineer it into something that looks kind of like a baseball bat. And I take the grapefruit and the baseball bat and I put them in a tube and I fire it together with high explosives and boom. Now I've got an explosion. I can kill 300,000 people. That's an atomic bomb. Now the point is, it's the same 35 pounds of uranium. It's the same 35 pounds of uranium. But by engineering it, you cause it to go into the critical state. So when I look at capital markets, the scale of the system, the amount of derivatives, the quadrillion dollars we talked about earlier, that's the uranium. But then the question I ask myself is, are we bending it, shaping it, or is it bending and shaping itself? Because there is this concept of self-organized criticality, which is you do it yourself, to the point where we're about (55/98)
to collapse. And sadly, the answer is yes. And it doesn't have to be that complex because you brought up the, it doesn't have to be that ornate because you brought up LTCM as an example or Lehman or whatever. You have these critical points where a small change creates a nonlinear result. You can have a completely critical event in the market. All right, so that's where we are today. Why don't we talk about that, talk about Ice IX, Global Balans, sort of everything that you project in your book about where we're headed. Great. Well, we went through the last- We did a deep dive. Did a deep dive on 1998 and 2008. So let's talk about 2018. Let's do it. With a warning that it could be tomorrow. And that's the point I make. So we didn't learn lessons in 1998. We got 2008. We did not learn lessons in 2008. So we're going to have another crisis. We have not done what we need to do. We are, I mentioned, banning most derivatives. That would be a good start. Breaking up the big banks. J.P. (56/98)
Morgan, today, when I started banking, it, five of the biggest banks in the world are today, J.P. Morgan. It was the old J.P. Morgan, Chase Manhattan, Chemical Bank, Manufacturers Hanover. These are all, suddenly, an ancient history lesson. But these were all big banks in the 70s and early 80s. And they've all been rolled into one bank. And many, many more, by the way. There were a lot of small banks. There was National City, which was also a bigger bank then. But then rolled into- Yeah, it merged with First National Bank and became First National City Bank. And then it became City Bank. And yeah, so these big banks are bigger than they were in 2008. So what did we hear about in 2008? Too big to fail, too big to fail. Well, all the banks that were too big to fail are bigger. They're more concentrated. Those five biggest banks have a larger percentage of the total banking assets. They're more interconnected. The derivatives books are bigger. And so, well, so what? Who cares? I mean, is (57/98)
it in consolidation, a merger? Except it goes exactly against the premise of Dodd-Frank, which was to create a financial institution that could be more easily wound down. Well, that will not survive the next crisis. The thing about Dodd-Frank is everyone said, and I know Senator Dodd and Eddie Silverman, who is his chief establishment, I know people actually put this together. And they said, we have ended too big to fail because we have this resolution authority and living wills and all that. And my answer is you haven't ended too big to fail. You have institutionalized too big to fail. You have made too big to fail a way of life because you've given yourself the false assurance that you can deal with it. And based on that false assurance, you've allowed the big banks to get bigger. You know what, there's an old saying. There are a couple of different versions of it. One of Napoleon's generals said, no plan of battle survives the first shot or the first contact with the enemy. I think (58/98)
the boxer, Mike Tyson, said it. He said, no boxing plan survives the first punch in the face. In other words, you can make all your living wills and all your resolution plans and all that. But I promise you, they will not survive a crisis because in a crisis, people do crazy things. I mean, look, and I'm not going to mention names, but I've seen people, you know, had nervous breakdowns passed out, carried out on stretchers. I can't say no when I die. Well, people did die actually in Asia, but people break down. I mean, the thing about extreme stress, don't forget the human aspect of it. It's like Shakespeare. It can either bring out the best in you or it can bring out the worst in you. So you get all, you get frauds. You get people not answering the phones. You get people closing, locking the door. Trimming out the window. I say, oh, wait a second. The plan says you're supposed to do an orderly liquidation. You're supposed to send this money over. And it's like, sorry, nobody home. (59/98)
That's the reality they're going to face. They're just kidding themselves. And it's an excuse to make the big banks bigger and rich. It's why Jamie Dimon's a billionaire, but everyone else is at risk. So the people sort of in the know, the people in the financial institutions at the top, you know, people in government, certain corners of the world understand essentially that the system is in a critical state. Correct. And here's what's different. So I talked about these three crises, 98, 2008 and 2018. The next one, just in 1998, Wall Street bailed out a hedge fund. In 2008, the central banks bailed out Wall Street. In 2018, who's going to bail out the central banks? In other words, each crisis gets bigger than the one before. Each bailout gets bigger than the one before. We are now at the point where the scale of the collapse will exceed the capacity of the central banks to deal with it. Just, I mean, just to kind of illustrate, I don't like to make claims without, you know, kind of (60/98)
backing up the data. What did the Federal Reserve do to save the world in 2008? Well, we know they printed almost $4 trillion of new money that before the crisis, the Federal Reserve balance sheet was a better... Under a trillion. It was $800 billion, that's right. And today it's over $4 trillion. So they've almost, they have quadrupled the size of their balance sheet. Well, we know they did that, but they did so much more. They guaranteed every money market fund in America. They guaranteed every bank deposit in America, regardless of size. There was a $250,000 FDIC insurance limit. The Fed said, forget it, whatever you got, $1 million done, guaranteed. Money market funds, the Fed had no obligation to bail out, done, guaranteed. They did $10 trillion of swaps with the European Central Bank. And what was going on there? Well, the European banks themselves had been issuing dollar-denominated commercial paper, and that was being bought by money market funds to get a little higher yield. (61/98)
Well, when the run on the money market funds, U.S. investors said, I want my money back. They started pulling their money out of the money market funds. The money market funds had to sell the commercial paper or not roll it over. Well, all of a sudden, the European banks couldn't roll over their commercial paper liabilities because the money market funds didn't want it. They started to go and sell them, but here's the problem. That was dollar-denominated. They turned to their central bank and said, bail us out. Well, the European central bank can print euros, but it can't print dollars. Where was it going to get the dollars to provide the dollar liquidity because they had dollar liabilities? Well, the answer is the Fed was air printed up $10 trillion. The European central bank printed up $10 trillion of euros, and they swapped. And the Fed got the euros, and the European central bank got the dollars, and then they could use that to bail out their banks. There was tremendous at the (62/98)
time, and this is where a lot of the people that were expecting inflation got it wrong, there was tremendous upward pressure on the dollar because of those counterparty liabilities. In the interest of time, I don't want to divert you because I really want to get to this. You laid out this aspect very methodically about how you are modeling the future based on everything we just discussed, what your projections are, what do you think? Right. Well, my point is the Fed took their balance sheet, maybe $100 billion to $4 trillion. And they took interest rates to zero. If in the meantime, they had normalized interest rates, so they were 2.5% today, and they had normalized the balance sheet, so it was back down to $800 billion today sitting here in 2017. I would have said, nice job, guys. You bailed out the world, you saved the world, and you normalized your balance sheet. That didn't happen. They didn't normalize. The balance sheet is still over $4 trillion. Interest rates are still close to (63/98)
zero. So whatever they did with respect to 2008, they haven't got back to normal. So what are they going to do when the next crisis hits? Are they going to take the balance sheet to $8 trillion? $12 trillion? Now, there are modern monetary theorists, people like Stephanie Kelton. They're crazy. The MMTers, I mean, as a working theory, it's one thing as a theory to understand financial markets, but the practical sort of suggestions that MMTers give, I've never been on board with. Well, yeah, I wouldn't say they're crazy. I would just say. I would say I disagree. Yeah, I don't mean they're crazy. I mean, the ideas are nuts for me. I've met me too. I mean, I've met a lot of them, and they're very nice people. Professor Kelton is very perfectly pleasant. I had Kelton on a old show. Richard Duncan and their bunch. Richard's awesome. They're all nice people, but wonderful guy. I completely disagree. The idea that you can just go to $8 trillion, $12 trillion, at infinite end, there's no limit (64/98)
is not true for two reasons. Number one, there'll be political resistance. I mean, there's already, I mean, right now today with the Republican Congress and the Republican and the White House are the first time in a long time. They're talking about audit the Fed, abolish the Fed. I don't think it's going to happen, but there's talk about that. But the idea that the Fed could just double down and go to $8 trillion, I think is nonsense. Number two, apart from the political resistance, there's an invisible confidence boundary. It kind of gets back to my uranium example. There's a point of which people just wake up and say, you know what? I'm out of here. This thing is on fire. I'm running out, and a lot of people are right behind me. I don't trust it anymore. You can't tell me that you can print out an infinitum and that that's not going to destroy the dollar. So I'm getting out of dollars. What does the collapse of the dollar mean? It means that people don't want dollars. You might get (65/98)
them because somebody owes you a paycheck or you're a writer, you get a royalty, dividends, whatever. You might get dollars, but you don't want them. You immediately dump them for land, fine art, gold, silver, water, natural resources, Bitcoin, something else. So I don't recommend Bitcoin, but yeah, a lot of people are going into it, but something else other than dollars. That's what I mean by the collapse of the dollar, which almost happened by the way in 1977. People don't remember, but back in 1977, the dollar was so unwanted that the treasury issued bonds, treasury bonds, denominated in Swiss francs. They were called the Carter bonds, but nobody wanted to. For Carter, man. For Jimmy Carter. The treasury borrowed money in Swiss, they were US Treasury Securities in Swiss francs. People say, I'll take the Swiss franc. I don't know what it's going to be worth in dollars, but I don't care because I have more confidence in francs than dollars. So that's how bad it was. It'll get that bad (66/98)
again. But my point is, we are now at the point where the next crisis will be exponentially larger than the last. And that's what complexity theory teaches us that the worst thing that can happen in a complex system is not a linear function of scale. It's an exponential function of scale. And all that means is that if you triple the system, you don't triple the risk. You increase it by 10, 100. Some factor, it's theoretical. You have to actually compute the factor, but it's a large multiple of the actual scale of the system. Well, if they barely hung on the last time, if they don't have the capacity to double down again, and if the next crisis is going to be worse for the reason I just mentioned, what are they going to do? Well, they're going to do two things that are different. And this is, even people who think maybe there's a crisis coming or maybe the system is unstable, which it is, even if you get that far. And most people aren't there. But if you do, people don't can't take the (67/98)
next step, which is to correctly assess the reaction function. So first of all, the liquidity is not going to come from the central bank because banks, because they're tapped to everything I said about the Fed. Everyone else is worse. The People's Bank of China printed more money than the Fed. The People's Bank of China and China's liability situation is off the charts. I can be a pretty severe critic of what's going on in the US, but China's worse. Cedar, European Central Bank, Bank of England, Bank of Japan, they're all in the same boat. So they're tapped out. They can't... So where's the liquidity going to come from? Well, there's only one clean balance sheet left in the world. And that's the International Monetary Fund, the IMF. Right now, by the way, the Fed is leveraged about $110 to one, a little bit higher, $110 to one, $110 of liabilities for every dollar of capital. And on a mark-to-market basis, they are occasionally insolvent. You have to update the math all the time (68/98)
because obviously, right now with the yields higher, they could be... Well, they certainly aren't much closer to insolvency, if not actually insolvent. And I've had this discussion with members of the board of governors who said, so what? Why do central banks have to be solvent? Right. That's the MMT argument also. That's an illusion. I agree with that. So the central banks from insolvent were close to it. They're tapped out. They're leveraged $113 to one or more, but the IMF has only leveraged $3 to one. So they have scope. They have capacity to expand their balance sheet, and they can. They work like a central bank and they can print money. A lot of people don't know that. Their form of money is called the special drawing writer, the SDR for short. You say SDR to most people. They think it's strawberry daiquiri on the rocks, but it's the special drawing. Is that an acronym for strawberry daiquiri? Well, maybe there's now, but the point being... And it's not complicated. I mean, (69/98)
international monetary economists, the relatively few who actually understand what we're talking about right now, Dmitri, can't explain this in many cases, but it's actually quite simple. The Fed has a printing press. They can print dollars. The European Central Bank has a printing press. They can print euros. The IMF has a printing press. They can print SDRs and hand them out. The only difference is they hand them out to countries, not to individuals. So you and I will not have SDRs in our pockets. It's not what we call in Philadelphia walking around money, but it'll go to countries and then can be swapped for other forms of currencies used to pay bills, highly inflationary. It's just money coming out of thin air. And that's where the liquidity will come from. It can't come from anywhere else. It's not coming from Mars. It's not coming from the dark side of the moon. There's only one clean balance. She's the IMF. But here's my point. That will not be instantaneous. By the way, a lot (70/98)
of people don't know that the SDRs, when did they invent those? They actually invented it in 1969. Been around for a long time. The last time they were issued was August 2009 in the last crisis. I read that in your book and I remembered it very well. And I also remember a speech that John Lipsky gave at the CFR, the deputy IMF. And I remember Geithner going to Copenhagen and the global warming. So I remember all of that. I remember my intent was up big time. I mean, the stuff that you write about in this book, I corroborated it based on my own memory. But go ahead. I interrupted you there. The point is that the crisis reached a absolute fever pitch. Again, we said September 15, 2008. That was when Lehman filed for bankruptcy. But the IMF issued the SDRs in August and September 2009. In other words, it took them 11 months to get those SDRs out the door. Not exactly a fire brigade that shows up at the fire in two seconds. That's because it's a multi-lateral institution. They got an (71/98)
executive committee. They got to talk about it. They got to take a vote, et cetera. Even if you did it on a crash basis, you turned to Christine Lagarde, who's the head of the IMF, and said, you know, Madam Lagarde, the world is burning down. We need the fire truck now. We can't wait nine months. It's got to take them at least three months. I just can't picture the IMF getting trillions of SDRs out the door in less than three months. So what are we going to do in the three or four or five months between the crisis and the SDRs when the central banks can't save us and there's no money? What they're going to do is lock down the system. They're going to say you can't have your money. So in 1998, the whole world went with their money back. The Fed printed it and handed it out. 2008, the world went with their money back. They printed it and handed it out. In 2018, if not sooner, the world's going to want their money back. Once again, they're not going to get it. They're going to shut down (72/98)
the system. They're going to close banks, close exchanges, close money market funds. And you know, I say things like that. People roll their eyes going, you're crazy. You know, we're talking about... It's Cyprus. It's all, well, it's Cyprus. It's Greece. It's India. It's Venezuela. It's happening all over the world. And it's what's called a bail-in. You're exactly right. But all the laws have been changed since 2008. So relatively few people know this. But you know, the problem in 2008 started... Well, started with mortgages, but then when the liquidity crisis hit, the ground zero was the money market funds. That's what caused Bernanke and Paulson to walk over to the White House and say, Mr. President, you gotta fix this. But at the time, you could call your money market fund, sell your units, get the money wired to your bank account, access it the next day. Money market funds legally did not have the capacity to suspend redemptions. Now, hedge funds have always had that. I've read (73/98)
hundreds of hedge fund offering documents. I've never seen one that didn't have a suspension clause. But by law, you couldn't do it in money market funds. That changed. It changed last year. And now, money market funds legally can suspend redemptions. You can call them up and your broker will say, sorry, house closed. You can't get your money. We'll get back to you. They're not stealing your money. They're just telling you you can't have it. They'll close the bank, so reprogram the ATMs, and ATM will give you, say, $300 a day for gas and groceries. You have that right now in Greece. Right. And say, well, what do you need more than $300 for? We'll get back to you. And so forth. And then the problem, I call this ICE 9 to tribute to Kurt Vonnegut, who wrote a great novel, short novel. Everyone should read it. It's hilarious, among other things. In the early 60s, called Katz Kradle. And Katz Kradle was written around the time of the Cuban missile crisis. And a lot of people were concerned (74/98)
about, you know, Doomsday and the end of the world and Doomsday machines and all that. And so his metaphor, he had a mad scientist named Hanukkah, who invented a molecule, polymorph of the water molecule called ICE 9. And it resembled H2O in every respect, except for two. It had a boiling point of 114 degrees Fahrenheit, which meant that it was frozen at room temperature. And the other characteristic was if a molecule of ICE 9 came in contact with a molecule of water, the water turned to ICE 9. So he created this thing. He put in these little vials and gave it to us three kids. And then the plot of the thing is, what are the kids doing with the vials? And, but if you opened it and poured the ice nine into water, that water would freeze in a stream, a lake, an estuary, the ocean, the whole planet would freeze and all earth on life would die. That was the Doomsday machine. So I take that metaphor, ICE 9, well, that was his novel, and I use it as a metaphor to describe the financial (75/98)
system. So what's going to happen when they shut down money market funds? Or everyone's going to go to the bank? Well, you're going to have to shut down the banks, then they'll sell their stocks, we're going to have to shut down the stock exchange and so forth. In other words, the minute you shut down any part of the financial system in a financial crisis, the pressure immediately moves to a different part. And then you have to shut that down too. So sequentially, it's exactly like ice nine molecules turning water into more ice nine, and the entire system will freeze. So that's, that's the reaction function. People are not ready for that. They're not prepared for that. Of course, one way to prepare is get out of the digital system and get some physical gold, physical silver, land, fine art, things that they can't freeze, they can't hack, they can't erase, that will retain value. That's one solution. And, you know, and get ready for this. And then, you know, sure, the IMF will be (76/98)
deliberating and getting ready to print a bunch of SDRs, but you won't be able to get your money in the meantime. How do you see that resolving? Because the biggest problem, it's very, relatively speaking, it's much easier to freeze a financial system than it is to unfreeze it. Correct. Well, a couple of things. Number one, you won't be able to unfreeze it until you're printing the SDRs. And we're talking trillions of SDRs, because that's what it will take. But that's going to require, you know, a vote of the executive committee of the IMF, and you're going to negative the governance of the IMF. What's, how does the IMF work? Well, for big things, and this would, you know, an issuance of trillions of dollars, trillions of SDRs or trillions equivalent of SDRs. By the way, for those who may not know, right now, an SDR is worth about a dollar 40. It fluctuates, but right now, one SDR is worth a dollar 40. So 10 trillion SDRs would be 14 trillion dollars equivalent. Something on that order (77/98)
magnitude is what they're going to need to do. But for big things, you need an 85% vote. What that means is that if you control 16%, you can block it. You can't make something happen, but you can prevent something from happening. Guess who is the only country in the world with 16%? The United States. So the United States, by itself, can block any IMF action just by voting no, and that means all the other members together cannot get to 85%. Well, something very interesting is happening this year. The IMF operates on what they call quotas or voice, but just votes, you know, what's your percentage vote? And they reset it every five years based on relative shares of the global economy. Well, this is one of those years. 2017 is a synchronial reset year in terms of IMF voice. And the BRICS are looking at this and saying we don't have our fair share. The BRICS combined are about 22% of global GDP, but they only have about, well, right now it's 14.8% of the vote. So they're saying, hey, we got (78/98)
14.8%, but we're actually 22% of global GDP. We need more votes. The IMF agreed at the annual meeting last fall, the IMF, and before that at the G20 meeting, G20 is really the de facto board of directors of the IMF, the G20 meeting in Hangzhou, China on September 4th, and then followed up at the IMF annual meeting in October, agreed. I said, yeah, BRICS, you're right. You need to get a larger voice. Well, they're not going to get 22%, but even if they got 2%, that would tip them over from 14.9 to more than 16, which means that if the BRICS hang together and they're pretty cohesive and pretty well organized, they have veto power too. So what that means is that when you have to go for a vote to issue the SDRs to save the world, the BRICS are going to be able to sit there and we say no unless you give us what we want. Which is? What do they want? Well, they want the end of the dollar as a global reserve currency. So from then forward, it doesn't mean dollars disappear. What it does mean (79/98)
is that from then forward, the SDR is the benchmark global reserve currency. Oil gets priced in SDRs. Major financial institutions report their finances in SDRs. The IMF has done their balance sheet in SDRs since the SDR was invented. Certain countries are switching to SDRs, getting away from dollars. I ran actually recently announced that they're going to start accounting for things in SDRs. So this is already happening, but this will bring it all to a head. So the sequence will be financial collapse worse than anything we've seen before, incapacity of the central banks to deal with it, a bailout coming from the IMF, but three, four, five months away. And in the meantime, ice nine locked down. You can't get your money. This is plain as can be. You can absolutely see it coming. Timing is like an earthquake. You know, you study the San Andreas Fault, you know, there's going to be a huge earthquake. You know, it's a center for earthquakes. Do you know exactly when? No, you don't, but (80/98)
you're probably smart enough not to build your house on the San Andreas Fault. And that's what I tell investors. I don't, yeah, it's funny, sometimes the feedback I get from investors, they're like, yeah, Jim, I hear you. You know, I agree with all this. I get it. But call me three o'clock the day before it happens and I'll sell my stocks and buy some gold and it'll be all good. And I say, I'm not going to know. I'm not going to know. I mean, I might see it coming, the indications and warnings might, my Geiger counter might start to, you know, a click a little louder. So I think I will see it evolving. I already see it now, but do I know the exact hour and day? No, I don't. But what I say to investors is, well, if you agree it's coming, what are you waiting for? Get ready now. You're talking about a solution that's coming from a very centrally organized model, which is a very industrial type of system of organization politically and economically, a legacy of the industrial economy. (81/98)
Today we have a much more decentralized economy. And I wonder, especially given the fact that here, you're on the one hand, you have, which is very much, these are the forces of globalization. This is the globalism. And yet we have politics in Europe and the United States, which are populist, which are inward turning, which are moving away from these types of the type of consensus that's required for the type of solution you're describing. So my question is, do you foresee this solution being implementable, either in a sufficient time scale where it doesn't cause massive dislocations that are problematic, significantly problematic, or that it's even implementable at all? Well, it's a really good question, Dimitri. Let me approach it from kind of opposite ends of the spectrum. The first thing you said is that these forces of anti-globalization, nationalism, populism seem to be pulling away from what is, in my view, at least an overly centralized system. Now, it is true that more (82/98)
centralization might facilitate decision making, but it also makes the problem worse and knows it is the problem. And my analogy here is the Fed, they're always, I talked to a lot of members of the Fed, they're always patting themselves on the back about saving the world after 2008. I was like, yeah, but you lit the fire. You're like a fire department. You're an arsonist with a fire truck. You light the fire and then you show up in your fire truck and you want pats on the back for being first responders. I was like, what about the fact that you're the arsonist? And so the centralization that you talked about is actually the problem. And so I couldn't agree more. So decentralization is the answer. Again, very simple. I use metaphors, but it's important for the listeners to understand that the metaphors are not just metaphors. They are, it's the same mathematics, the same complex dynamic systems. And I would look at the avalanches. I call the snowflake in the avalanche. So you're in the (83/98)
mountains, it's snowing day after day, the snow is piling up, it's windswept. An expert can look at that and say, you know what? That's snowpack is completely unstable. It's going to come down. It's going to kill any skiers under it. It's going to bury a village. And sadly, we've had fatalities in buried villages, you know, just in the last couple of years, these things do happen in the real world. You can see it's going to happen, but you don't know when. And then one snowflake comes along and it disturbs a few others, lands the wrong way, creates a shoot, creates a slide, creates momentum. All of a sudden the whole thing rips loose and the avalanche comes down and buries the village below. First of all, who do you blame? Do you blame the snowflake or do you blame the instability of the system? I would say look at the system because You're the villagers. Well, they're the victims. So they're the taxpayers and the investors. But I would say if it wasn't one snowflake, it would have (84/98)
been another. If it wasn't today, it'll be tomorrow. So don't blame the snowflake, blame the instability of the system as a whole. But in the real world, what do ski resorts do about this? Well, you go up to Aspen Highlands at, you know, seven o'clock in the morning and the ski patrol was up on the ridgeline and the Y-ball setting off dynamite and shooting off cannons. And of course they do this all over the world. What are they doing? They're descaling the system. They're causing, they're causing little avalanches so you don't get the big out of control. Like controlled porc fires. That's the, exactly. That's the equivalent of breaking up JP Morgan. Breaking up JP Morgan into five banks or 10 banks preferably so that if any one of them fails, it's like, hey, too bad for the stockholders, but you know, you're not taking down the system. That would be an example of setting off dynamite charges to cause a small avalanche so you don't have the big out of control one. We're not doing that. (85/98)
And in fact, we're doing the opposite. We're just, we got snow, we got snow blowers building up more snow. That also relies on, I'm sorry to interrupt that, that also relies on, I mean, what you're describing of course is a solution to us, to centralization being caused by, I mean being, a solution to centralization being proposed by a central sort of system. Do you have any faith in the innovations happening in financial technologies, distributed, non-linear, peer-to-peer technologies in finance that can do a sort of end run around this if not in the United States and maybe in certain developing countries that have less centrally organized governments that are more disorganized? Not really. I mean, in theory, a very widely distributed financial system where we didn't have big banks, we just had a bunch of websites and crowd sourcing and I could put loans on display and people who were interested in investing them could fund that and the borrow where we get the money. I mean, that's, (86/98)
you know, lending, you know, lending, lending club and so-fie and there are a bunch of others like that. I was, first of all, they're tiny compared to the financial market, so good technology, they've got these sky-high stock models, fine for them, but they're really small and what they're discovering in that model is what bankers have known for 500 years, which is you have to do your credit homework. As you can, there are two solutions to credit risk. One is do it well. So I started my career at Citibank, we went through, I walked in the door with a law degree and I got a second law degree while I was there, but I had to take credit training just like every other junior officer at Citibank. We had credit in our DNA, it got drilled into us. That went away probably about the late 80s, 90s. The reason was securitization. If I make a five-year loan and I can wrap it in a security and sell it to some sucker, why do I care if it goes bad? I just want to get it out the door. So (87/98)
securitization was the end of credit. When I was a banker, you put a loan on the books, you had to keep it there. In those days, people didn't change jobs every six months. You thought you were going to be around when the loan paid off and if it didn't, that was going to affect your career. We took it pretty seriously, but that's all gone. That's ancient history. So the credit culture is gone, but the other solution is whether I want to mention which is do it well or do securitization, get it off your books, hand the hot potato off to the next guy. What these peer-to-peer lenders are discovering is they didn't do a lot of credit risk. They just put term sheets out there and let investors, crowdfunding, and if I had a little more sophisticated than that, but those defaults are starting to pick up. They're starting to see losses come through and those business models are being called into question. There's no escaping the credit risk. You can hand it off to the next guy, but someone's (88/98)
going to take the loss and they're small. So for all those reasons, but even if you gave it, even if you extrapolate it, they said, hey, come on, Jim, it starts out small, but look at Amazon and look at Google and maybe it started out small and now they're big. And isn't that a solution? My answer is we're not going to get there. If that evolution took 10, we're not going to make it 10 years. If it took them 10 years to be a significant, decentralized, theoretically more stable arm of the financial system, we don't have that much time. All right. So we're going to wrap this up, but let me ask you one last question. Do you think, given the policies of this administration, the rhetoric of this administration, do you expect that we might finally get the long-awaited inflation that central banks have wanted? Is that something that you think we're going to see with the Trump administration? I think we will. And here's why. You go back to, well, in 2008, it's a good place to start with all (89/98)
that with QE1, QE2, QE3, trillions of dollars of money printing. We talked about all that. And a lot of people, particularly the Austrian economists and a lot of observers, we're going to get the inflation. Here comes the inflation. They're printing all this money. Money printing equals inflation. And the answer is no, it doesn't. You need two things to get inflation. To me, it's like a ham and cheese sandwich. You can't make it with the ham. You need the ham and the cheese. Money printing is part of it. Yes, the money printing does have inflationary potential. But the other part is velocity. That's the turnover of money. It's like, you can print all the money in the world, but it's just sitting there in the banks, which it is, and not being loaned, not being borrowed, not being spent, not turning over. You don't have the velocity of money you need to actually cause the inflation. So you need the ham and the cheese. You need the money printing and the velocity. We have the money (90/98)
printing big time. Velocity is plunging. That's the fiscal spend side. Well, it's not, it's the turnover. So, for example, let's say I, you know, we're in New York. Let's say I take a taxi home and I tip the taxi driver and the taxi driver goes to a gas station and buys some gas. And the gas lean a station owner takes the money out of the till and buys a... Ignacio knows all about that from Buenos Aires because they were sitting with the radios in the cafes, right? Yeah. And you, you know, the gas station guy buys a nice present for his wife. Well, in that example, my dollar has velocity of three, right? We had a taxi tip, a gasoline tank and some flowers for the wife. So we had velocity of three. What if I stay home and watch TV? My money has velocity of zero because I'm not spending it. So I like to remind people, oh, well, if I'd print a $4 trillion, that's true, but 4 trillion times zero is zero. In other words, if you don't have velocity, you don't have an economy. Guess what's (91/98)
happening to velocity? It's plunging. Has been since 1998, interestingly, same year as the long-term capital management crisis. It was not a specific function of the 2008 crisis. It's been plunging since 1998. So you can understand monetary policy for the last 10 years as a desperate struggle between increasing money supply and decreasing velocity. So you're multiplying a larger number by a smaller number and getting the same result. And that's why the economy has been so punked. That's why the GDP growth isn't what it should be, even in nominal terms. You're loading the slingshot. Go ahead. We're loading the slingshot. Having said that, what will it take to change? Because velocity is psychological. So freaking scary, Jim. I got to say something, man. I got to say something. Honestly, I haven't spoken to anyone about this in so long. I hope our audience is able to appreciate what we're describing here, which is a system that, as we said, is complex. It has many moving parts, and you (92/98)
have authorities and expectations about authority trying to push on one part of the system and literally it's like throwing all your weight into a punch and missing, and then you're flying out of the arena. I mean, we're so unprepared for those nonlinear effects of our actions. Anyway, continue. Well, I agree with that completely. But my point is, we're not guessing. You can see it coming. We have the equations and the metrics and the experience and the history and the psychology that actually figured this out. It's just that the people in charge are not doing it that way. They're using these obsolete equilibrium models and value at risk, which are just wrong. But coming back to this psychological change, so I'll wrap up here because I know we have to finish up to misery. Right now, as we speak, President Trump owns the Federal Reserve, owns it. He is looking at the greatest transformation of the Federal Reserve, at least since 1952, which was the end of the Treasury Accord of (93/98)
financial repression, and maybe going all the way back to 1913 when Woodrow Wilson signed the Federal Reserve Act and got to pick the original governors. Right now today, there are three vacancies, two empty seats, and one dantorilogist, who's resigning in the effect of April. So call that three. So there are three empty seats right there. There's actually one Republican on the board right now, Jay Powell. You don't hear much about Jay Powell. That's because he's outnumbered by the Democrats. But you stick three Republicans on the board. All of a sudden, Jay is going to have some friends to play with in the sandbox. You're going to have four Republicans. There are only seven seats on the board. So you're going to have a majority of four Republicans by the spring, and it gets worse for the doves, or at least for those who think they're in charge, because Janet Yellen's term is up January 28th. Now, Trump's already said, he's not at the end of January. Trump's already said he's not going (94/98)
to be a pointer. I think we can take him in his word. Well, if her term is up at the end of January, which it is, he's got to announce the new chairman by December at the latest because you got to go through a confirmation process and hearings and all that. He might announce it even sooner. The minute he announces it, she's the lame duck. It's like pulling the rug off of him under. So there's five, like three vacancies. Jay's already a Republican, and Yellen says there's five. Stan Fisher's term is up in June 2018, which is only 14 months away, or so. So the point is, you're going to get six, and there are only seven seats. Poor little brainer is like, she's going to think she showed up at the wrong boardroom. So the point being, Trump is going to get three, four, five, six out of seven seats very, very quickly, three of them immediately. And so the board's going to do whatever Trump wants. So as an analyst, all you have to do is ask yourself, what does Trump want? Well, you already (95/98)
told us. He wants a cheaper dollar. He thinks the Chinese and the Germans and the Japanese are manipulating the current. This is currency wars, by the way. Not my first book. He's accused them all of currency manipulation to weaken their currencies. So he wants a cheap dollar. And Steve Mnunchin, who just got, who is the new Treasury Secretary, said the same thing. Well, if you want a cheap dollar, you're not going to raise rates. That makes the dollar stronger. So I would expect these appointments to be dovish. It doesn't mean they're going to cut rates tomorrow, but they're going to be nowhere to raise them. I think finally, you'll see the change in psychology. The message will sink and people go, hey, President Trump means business. He controls the board. We're going to get a weaker dollar. That's inflationary. I'm out of here. Get me some gold. Get me some silver, et cetera. Then we'll see the psychology change. And the thing about change psychology, it's really, really, really (96/98)
hard to change it. But once you do, it's equally hard to change it back. And so now inflation won't go from 1.5% to 3%. It'll go to 9%. It will be back to the 70s. So back to the future. Same exact issue about lowering the slingshot. So pretty much the only thing then that would throw a wrench in that model is extraneous factors that can affect the longevity of the administration, stuff like the recent sort of fights between the Trump administration and the intelligence community. But we'll see. Jim, thank you so much for coming on. I didn't know how I wanted to structure this because every time in the past when you've been on my show, we've always talked about current events. I really wanted to do a big breakdown. But I hope to have you on again before too long. And I want to try and do it at a time when it's most sort of relevant to the time period. But man, thank you so much. Thank you so much. It's great seeing you. Thank you. And that was my conversation with Jim Rickards. I want (97/98)
to thank Jim for being on the program. Today's episode was produced by me and edited by Connor Lynch. Sound engineering was Ignacio Lecumberri. For more episodes, you can check out our website at hiddenforcespod.com. Join the conversation on Facebook, Twitter and Instagram at Hidden Forces Pod or send me an email at dkathiddenforcespod.com. Thanks for listening. We'll see you next week. (98/98)
This is the full transcription of podcast 'Hidden Forces'.
Wealth Preservation During a Fourth Turning Russell Napier #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. What you're about to hear is the third episode in a podcast series hosted by me and my co-host, Grant Williams, titled The Hundred Year Pivot. In it, we speak with some of the smartest and most plugged in people we know to help position ourselves, our organizations, our families, and our portfolios for the once-in-a-century economic, political, and geopolitical reordering that we believe is currently underway. In today's conversation, Grant and I speak with economic historian, author of the Solid Ground Newsletter, and keeper of the Library of Mistakes, Russell Napier, about the end of the economic, monetary, and global trading and security order that has been the biggest driver of global growth for the last 30 (1/99)
years. The consequences of the changes we discuss for economic and national security, social cohesion, investment, and wealth preservation are nothing short of tectonic. Among other things, we discuss the Trump administration's economic and trade strategy, efforts to isolate China, the creation of new monetary systems and the search for new safe assets, the realignment of global power, the escalating risk of war with China, and how investors can seek to anticipate and position themselves for the accelerating repatriation of capital flows, the onset of capital controls, and a prolonged, potentially multi-decade period of financial repression where wealth preservation will take precedence over making money and chasing outsized financial returns. If you want early access to the episodes in this series, go to hiddenforces.io slash subscribe and join our premium feed so you can listen to these conversations when they first publish using your favorite podcast app just like you're listening (2/99)
to this episode right now. And with that, please enjoy this incredibly timely and important conversation with our guest, Russell Napier. Welcome, everybody, to the third episode of the 100-year pivot. Joining me for another fascinating conversation, my good friend and co-host, Demetri Kofinas. Demetri, how are you, my friend? I'm doing great, Grant. How are you doing? I'm doing just dandy. You know, when we started this, you and I, we were just kind of kicking around this idea. And there were two people who just jumped to the top of the list of places to start with this because I think it was, as we said in the initial introduction podcast that we did about this, they were the two that kind of kickstarted us down two slightly different roads but on this journey individually and they've kind of brought us back together. Neil Howe, obviously, we've spoken to already and the second of those two is our mutual friend, Russell Napier, who's about to be joining us. This is another (3/99)
conversation I'm really excited for to come at it from this slightly different lens. Yeah, no, I'm super stoked, man. We actually batted some additional names around for people that we think would be great to have on the podcast and on this series and I'm so stoked by the list. Yeah, yeah. I mean, we've got some commitments already and it's going to be terrific. It's going to be epic. It's going to be epic. I think so. It's going to be so, so great. I think so. And I'm curious, you know, I don't know about you but the response I've had in my inbox from my subscribers has been one of, it feels like genuine excitement. People are like, I'm so glad you're doing this, you two together. This is going to be great. I love where you're taking it and I'm curious to see where it goes and it does seem to be some real excitement about this. Same thing happened to me but you know, it's funny because I feel the same kind of excitement that they feel. It feels like a, I don't know, this is not the (4/99)
best analogy but like it feels like the playoff series is like the playoffs are coming and you know, I have something really to look forward to and this is just something so different than what I've been doing for the last seven or eight years with the show. It creates a new dynamic that's very exciting. Like I said to you, there are people that I put on our list of people to speak to that I've spoken to, I've loved speaking with, whose work has been really influential to me and who I haven't had any desire to speak with again. Yeah. Because I'm like, all right, we pretty much said everything and now it changes everything. And having you on this journey, it's just exciting. I'm super stoked just like the audience. Well, listen, we're super stoked today for a reason because we've got to, as I say, I meet your friend Russell Napier join us. You know, with Russell, this whole idea of financial oppression and national capitalism, it's been so interesting to watch it kind of slow burn into (5/99)
people's psyche and recognize it. And there's a lot of people that I've come across who have been talking about it. And then when you say, you know, that's exactly what Russell Napier has been talking about for a couple of years now. Like, wait, what? I need to read that stuff. And then their eyes open and they're like, oh man, I'm not alone. And it's this feeling, you know, that you and I had when we did our original podcast that kind of was the genesis of this. That feeling of unease and searching for either kindred spirits or advice or confirmation or challenges or whatever it may be. There's so much going on and we're just searching for some way through it, which as I said, I'm excited to do. And who better to help us on that journey than Russell? Yeah, Russell had the most complete framework. I've been saying this for some time. The most complete framework that I felt was the most compelling to explain the changes that were underway. And I think the first big confirmation (6/99)
signpost, in my opinion, was the recent move in the Euro Dollar exchange rate. And I remember being at a conference with Russell not long before that happened, right before it happened. And he was just giving his usual speech, sort of his worldview, his framework. And what's most amazing about it is, I think, just how on point it has been, which makes him such a great guest to bring on early on in this series that we're doing. Well, the talk of the which, I see him. He's just popped in. So why don't we bring him into the conversation? Russell, mate, great to see you. Thank you so much for doing this with us. We're both incredibly excited to talk to you. Thanks Grant. The world is changing. There's never been a better time to have a chat about why it's changing and how it's changing. Amen. I mean, you know, Dmitry and I have talked about this in previous episodes of this podcast, how your framework of national capitalism and financial repression has been a great sounding board for us. (7/99)
It's played out remarkably similarly to how you said it would for a few years now. And as this world gets crazier and more stuff happens, as I was saying to you off mic, you know, for me, it's been a great place to go back to, to anchor myself in terms of, OK, how does this deviate from or adhere to what Russell said, just so I know where we are in the process? A great place to start would be to kind of give us the bare bones of that, flesh out your overall thesis. And I think it'll resonate with people. And then we can maybe Dmitry and I can cover a little wonder with you on little side routes from it. Yeah, I think it's helpful in any situation to try and split the disease from the symptom. And I think what's happening at the minute is there's a lot of symptom about and people are getting carried away with the symptom. You know, it's like coming out in spots. That's ever happened to you as a teenager. Otherwise, they don't come out on a straight line. It's very difficult. So let's (8/99)
try and get to what the disease is before we discuss perhaps some of the symptoms. So it's the global imbalances. And actually, everybody knows what they are. It's just that they can't see that these symptoms are related to it. So let's run through a series of those global imbalances. Total non-financial debt to GDP in the developed world is the highest level ever recorded in human history. That's a hell of an imbalance. So there's number one. Number two, we have wealth inequality, particularly in the developed world. Well, sorry, it's more politically acute in the developed world. Everybody knows about that one as well. We also have trade imbalances, which tend to be getting a lot of the headlines today, but people forget that a trade imbalance in our world of the free movement of capital is also a capital imbalance because all trade balances have to be financed one way or the other. And at the core of all that, I believe we have China. Now, before anybody gets too excited, I'm not (9/99)
accusing China of any grand designs here. It's just been a product of that exchange rate they chose many years ago. And it has driven these imbalances. And those imbalances now have to be unwind. And that's the disease. It's how we unwind those imbalances. Now, we have a politician who's keen to unwind them in Donald Trump. He claims that the thing he's most concerned about is the impact on blue-collar America from those imbalances. And that has shown up in the trade account, but presumably in the wealth distribution as well. But we see it everywhere else that these imbalances have to be unwind. So now we are trying to work out how they're unwind, what the consequences are for asset prices. And I think if we stick with the unwinding of that, and some of that may well feed into generational changes as well, then we're roughly on the right track for wealth preservation. And maybe we can tell the difference between the symptom and the disease. Yeah, it's fascinating to me because this, (10/99)
for a while now, and I think you were probably one of the earliest people that put little pebbles in the back of my empty head rattling around thinking about this. This idea of, let's call it redistribution, not in the communist way, but this idea of getting a leveling of so many things has, to me, been the ultimate place where this has to go. There has to be a squaring of account. There has to be a more equal balance. It's never going to be fair because the world just isn't fair, but there has to be some attempt to redistribute this wealth and redistribute all those things you talked about. And I guess for me, the issue that has been in my mind as I think about this has been, is there a way to do that without pain, which I quickly came to the conclusion there wasn't? And if you want to disavow me, I'd love to hear it. And then it's the question of, what's the least painful way to it? And that's where I kind of get stuck because the pain is going to be severe. It's going to be the kind (11/99)
of pain that we haven't witnessed in a generation and a half. And so, first of all, am I right in thinking about it that way? And if so, how do you think about the best way, the most efficient way, and the least painful way to redistribute that and make sure that pain goes in the least painful way possible? In terms of all those rebalancing, and I think this is something we have to come back to around the deal just with at the minute, the greatest pain that could affect all of us, our children and our grandchildren, is conflict with China. So the one that we have to hope and pray that is avoided is that one. Now, let's talk about the more mundane pain, which is economic pain. I'm going to push back just a little bit, Grant. It depends what perspective you look at. Now, my career, your career, Dmitri, we look at the focus of people who have savings. That's what we do. And for those people, pain is the right word because we've done this before. Well, let's take the war out. So we did it (12/99)
from 1945, really up until the 1970s. And if one was an owner of savers, the pain didn't start in the 1970s. It started a long time before that. One thinks in particular of the owners of British government bonds and just how much money they lost in real terms in the 50s and the 60s. However, the 50s and the 60s was not a bad time to be a blue-collar worker. It was a relatively good time to be a blue-collar worker. Now, a lot of that was based in America on consumerism in Europe, on rebuilding Europe. The French, by the way, call that the tront glorieus, the 30 glorieus years. Well, it wasn't 30 glorieus years if you were an owner of capital. Your bond, particularly the French bond values, were destroyed in the three to four years after World War II. But you didn't make any money lending money to the government. And corporates were pretty well controlled and constrained in terms of profitability with various regulations. So that's obviously a financial repression, but it's really, (13/99)
really important to point out that for much of blue-collar people living under a financial repression without savings, it wasn't that bad. And for younger people, it wasn't that bad because by definition they tend not to have a lot of savings. So yeah, it depends where you start in this. I really like a wonderful interview with Evelyn Waugh, which I came across on the BBC iPlayer. He was one of the richest men in England before the Second World War because he was incredibly successful. Author interviewed, I think in the early 1960s, he was asked what happened to all the wealth because he was pleading poverty, whether that was true or not, I don't know. And he was said, no matter in this country, he referred to the United Kingdom, no matter in this country has made any money honestly since the end of the war. And in a financial repression, it's regulatory arbitrage. That's what we call it in our business, regulatory arbitrage. It's a euphemism for something else. But the whole, his (14/99)
whole point was that if you were just a standard saver buying standard savings products, then you absolutely felt pain. And if you made money in that world, you were, you had a different skill set. I won't go through some of the British archetypes of that era because most people who are not British won't understand the concept of the spiv and other things. But you know, it's a different way to make money, but it's very difficult if what you do is buy portfolio assets and hope that that's going to pay for your retirement. So, paying indeed for the saver, I'm more hopeful that it's not paying for the worker, if you like. If it's paying for both grant, then it's a different type of pain. I think it's a social fracture. Right. And I think there is potentially a way that this isn't a social fracture, but I can't work out the way where this is positive for savers. So I have a question, Russell. One of the things that you've been very good at is pointing out how what you call the non-system, (15/99)
which was the system that emerged organically from the de facto end of Bretton Woods in the early 1970s, is coming to an end. And I'm curious, one, to ask you whether or not you feel like the events of the last maybe three months or so confirm that hypothesis on your part. And the second question is, to what degree does policy making actually matter here? Because it does feel, and this is a thing that's also useful about Neil House framework, it does feel that some of this is just almost inevitable, the forces are secular. And so one of the questions that I have been wrestling with, and I know that a lot of our listeners have been wrestling with as well, is not only does the strategy matter, what is the strategy, and is there such a thing as the optimal strategy, or is most of this just going to be the forces that are secular that are driving it? Yeah, I think it's a great question. And I think at any time in history, you look back and you say a politician taking policy decisions. It's (16/99)
rare that any historian concludes that that happened in isolation, that it wasn't the product of other great forces. In other words, it was a symptom and not the cause. I think that's exactly what we'll do with the Trump administration. We won't look back and say Trump caused any of this. We'll say that other things caused Trump. So in some ways, the other things are driving policy. It's not policy driving these other things. And one of the mistakes I think we can make as investors is to assume that the politicians are making the decisions rather than being driven to those decisions by circumstances. So I think that's absolutely right, which is why when we began the conversation, I began with the imbalances. As long as we keep coming back to the imbalances, it may be even possible to predict the Trump administration, because ultimately, that's what's going to drive them through this. Just in terms of what it is and why it's ending, I think it's really been the decision by China in 94 (17/99)
to link its currency to the dollar and then a basket, which was followed by many other emerging markets who really had no option by 1998, but to do the same thing. That created a massive flow of newly created bank reserves in the emerging markets, in particular China. It created a flow of purchasing of debt securities of the developed world, which pushed those to unrealistic levels relative to growth of the economy, widened the gap between the discount rate and the growth rate. Consequences, well, leverage went up because it makes a lot of sense to borrow money when the discount rate is disconnected from the growth rate. Asset prices go up for the same reason. And in China in particular, a lot of that excess money creation, which in any normal economy would have ended up in consumption, transmitted through the banking system, gets into investment instead and turns up as even more higher exports at lower prices and even bigger and bigger and bigger imbalances. That's the non-system, (18/99)
Dmitri. The reason I had to run through that is if you attack trade very clearly, you're attacking that system. That's exactly what you're doing. You're trying to end those imbalances. I think it's always difficult to work out exactly what's happening in the Trump administration, but I don't think they fully thought through the consequences for capital. The Secretary of the Treasury is a smart man. He probably did. I'm not sure everybody did. But the idea that trade wars aren't capital wars is the problem. Yes, the system's breaking down, but Grant and I have been at the sharp end of this for a long time. Capital moves a hell of a lot quicker than trade. That's what a Trump has done. He started those hairs running. If the capital runs, yes, it affects the occurrenter count eventually. It makes it adjust. But those hairs are running. I guess one of the key questions is, could they be stopped? Can they be stopped? Or is this running now and it can't be stopped? So yes, it's coming to an (19/99)
end. Yes, the Trump administration is speeding it up, but perhaps not in ways it fully understands because it'll happen quicker through capital than trade. So Russell, I feel like the narrative for what we've seen the last few months with a movement of capital out of US capital markets and into Europe, as has been reflected in the Euro-US dollar exchange rate, has largely focused on anticipated fiscal spending out of European capital, especially out of Germany associated with the Bundestag's recent vote to amend the constitutional debt break and the European Commission's own language on accommodating increased defense expenditures within the stability and growth pact. It hasn't necessarily been government-driven efforts to repatriate capital in order to shore up domestic currency exchange rates and depressed bond yields that you've talked quite a bit about. How and when do you see this next phase of forced repatriation happening? Yes, I do agree with that. At this stage, it hasn't been (20/99)
compelled. The repatriation of capital has not been compelled. It's been through free choice for one reason and that's the reason that you mentioned, which is a massive change in Germany, which really will change the future of Europe in good ways and bad ways. We can come back to that. I think a second one, Dmitri, is the Trump administration's policy, which is to say, I am a bad partner. I am an uncertain partner. I am an unreliable partner. That is my opening negotiating position. When you do that, you tend to lose capital. It's not just been about Germany. It's been about the withdrawal of capital and the initial data seems to suggest that the Japanese have been particularly big sellers. It's not just about uncertainty breaking out in Europe in regards to property rights and other rights in America. It's happening in other places. I think those two things are underway. The interesting thing about this is that on the whole, bond yields in Europe have tended to come down in response (21/99)
to this. The need, Dmitri, for a compelled capital repatriation, if you like, is particularly acute if these bond yields go up. That's not been the first impact. I'm not saying it isn't going to be an impact. I think it is going to be an impact. The first impact is for those bond yields to come down. The need for French government, German government to get really upset and say, my goodness, we've got to do something about the bond market is not currently there. It will be there, but it's not currently there. I think that's the sequence that we've gone through. I would say a large part of this capital repatriation at the minute has been the great success the Trump administration has had in frightening away capital. Rather than the lure of the great German economic boom to come, the German government's just downgraded its own economic forecast despite its change in fiscal policy. Absolutely both of those. But let's not underestimate the power of Donald J. Trump in frightening capital (22/99)
from his shores. Russell, I'm glad you bring this up because this has been one of the most notable features of the last month or so, amidst all the tariff turmoil. Again, you're coming back to being a practitioner at this for a long time. It's very hard to remember any instances where we had dollar down, stocks down, bonds down, US treasury bonds down, and I'll throw gold up significantly into that mix. I think when we talk about this framework of yours of financial oppression and national capitalism, that's a sea change in how the world is organized and the means by which the kind of riverbanks of capital are altered and manipulated to try and make sure it flows to the places it needs to go according to those who are trying to steer it. And that, to me, these little things represent big, big, big changes. The first big change for me was what we saw happening in gold before all this happened. We saw something happening in gold which suggested that things had changed and this moving (23/99)
gold was not speculative. It wasn't the normal stuff we see in the gold market. This was a steady accumulation of gold. Since 2013, I think net foreign official holdings of treasuries have actually gone sideways or declined slightly over the last 10 years, which is surprising. But we've seen also a massive increase in holdings in the Cayman Islands. And it looks for all the world as there's been a move to put official holdings in places where they could be much more easily sold without scaring the horses. And so if we think about these really big changes happening, I'm curious as to your thoughts about what surprising alignment in capital flight in the month of April is telling you about where we are in this process. Yeah. So as you say, these relationships are breaking down between lots of financial assets. I think that what that tells you very simply is we're in a period of structural change, hardly a surprise. So I'm not sure why everyone's so shocked that suddenly these (24/99)
relationships break down. And on top of that, there's a bigger structural change. Is that for the first time in my lifetime, people are questioning property rights in America. You probably know, I run this little, I'm involved in a little festival in Wales called The Weekend of Mistakes. And it's for members of the public. And we talked about this. And the first question from the floor, from a pensioner, a well-informed pensioner, I should say. I don't think this guy had been a coal minor grant, but a well-informed pensioner is, will my property be safe in America? Yeah. Now, in my lifetime, I'm not really aware that we've ever had to ask that question before. And that a even well-informed pensioner in Wales is asking that question, tells you something about why these relationships may be breaking down. Because we've lived in a world where we constantly talk about return on capital, and suddenly people were talking about return of capital. Now, that I'm not that concerned about (25/99)
property rights in America. I think the constitution will hold. It's been a fairly firm constitution. FDR did certain things that were probably anti-the constitution. They didn't actually survive. So I'm positive that property rights survive in America, but those questions will continue to be asked. And a level of the issue of property rights is the free movement of capital, which is something else which is now being asked. And as more and more of those questions get asked, and they are the right questions in whatever form they're going to be, all of these relationships begin to break down. And it's not the first time. You know, we have been here before. I mean, I'm thinking of the late 1960s. Imagine having a 60-40 equity bond portfolio in 1968. And it had done beautifully all the way from... Well, not beautifully, but it had done... American one anyway had done okay from the end of World War II. And then all the relationships started breaking down. It was a why are all the (26/99)
relationships breaking down? Well, the global monetary system was breaking down. All the imbalances up until that point, as kind of forecast by Robert Triffin, were all beginning to break down. And none of it should be a surprise. So I don't think any of this should be a surprise. Of course, the real problem is that when old relationships break down, it's incredibly difficult to work out what the new relationships will be. And I think the real problem here is that we have lots of machines managing money. And those machines are using the relationships over the last 30 to 40 years, which is that old system. So you get really, really high volatility. If you've programmed machines to trade off 40 years of data on the belief that that's the long term, well, it wasn't the long term. It was one form of monetary system that comes to an end. And they kind of do come to an end every 30 or 40 years. And I'm saying, you know, we've already said, you know, we lost the Bretton Woods 71. Do you know (27/99)
what the system from 71 to 95 has called? It had lots of names, the snake, the Smithsonian, all sorts of things. But we've had one since 1994 now, and it's breaking down. So that's why all those relationships break down. That's why I think a sort of guiding star through this is to always come back to what are the imbalances? And if 10 years from now they have been unwound, what should I own to preserve the purchasing power of my savings through the unwinding rather than get too caught up in the volatility? So Russell, I think one of the ... And I don't know if it's a trap. I don't know if it's actually correct or not. So let me just put that out there. But I think that one of the traps that we can easily fall into is thinking about the global currency that's most commonly used for invoicing and transacting, which is the dollar, as also the primary reserve asset. And I wonder, is it possible, and that maybe this moving gold is also partly to reflect this, is it possible that given the (28/99)
fact that there is no clear alternative to the dollar for the time being, that it remains the primary currency for invoicing and transacting globally as the primary unit of account, but that what we're seeing with gold is a reflection of the loss of faith in US bonds and perhaps even a bit of a loss of faith in US capital markets, and that the world is searching for some kind of reserve asset to diversify out of while continuing to use the dollar for trade, and that this is the sort of dynamic that we're going to be existing in for the foreseeable future until some sort of competitor or perhaps even an international standard brought about by new international institutions or a new consensus around existing ones' forms. So we have to, I think, say, will there be one system going forward or will there be two? It's the first call. My view is there's two. Not everybody agrees with that. Some people think that America and China can come to a settlement. I think there's two. If there's two, (29/99)
the other one I think is going to have to use quite a bit of gold to build credibility. The RMB has been open as a reserve currency, I think, since 2014, certainly for quite a long time. Its accumulation has been very limited. To your point, Demetri, it's been used for trade, but it doesn't seem to have been used as a reserve asset. In fact, not actually used widely for private sector assets either. So if China is going to have its own system, and I don't think there's much point in wasting time now discussing who else might be in it, I think gold's going to form a part of that. So one of the reasons I suspect that gold is doing well is that somebody, whether it's China or others, are preparing for that. In terms of the dollar, one might argue that in a world ex-China, what a word ex-China means is a Cold War with China, a la or Cold War with Russia and the one we ran with Russia before, the dollar would become even more of a reserve currency. This is not to say that gold is negative. (30/99)
I think the private sector in particular would be very interested in accumulating gold, but I don't know if to what extent Scott Besant runs through all of these scenarios, but in a world ex-China, what could it be apart from? The dollar, and the dollar gets shored up. I am sitting in my study looking at my walls here at the decline of Sterling by Catherine Schenck, and I think it's a must read for anybody. It's not everybody's cup of tea, because it's, my wife would say, dense. I like dense, but anyway, our problems with being the reserve currency as well, it's not all an exorbitant privilege in this world of capital repatriation. It became a bit of a burden for the United Kingdom to be the legacy reserve currency. At the end of the war, it was actually bigger than the United States dollar. Maybe we could talk about that as well, but I would say bottom line in terms of that experience for the United Kingdom is that we couldn't allow capital flow out of the country. I think if I was (31/99)
trying to design or imagine how a new system ex-China would be designed, it would not be with the free flow of capital, even if it's anchored on America and the dollar. In terms of where the dollar is in this system, to me, that's important. I think it's not going away. I think it could become more important as we split into two, but I also think perhaps more important for people who listen to this is it's not very clear to me that the free movement of capital within the new system would be allowed as to a stronger word, but not as free as it has been here to for. The dollar stays part of that system, but it's a very different system as the Bretton Woods system was, where the dollar was absolutely king, but actually capital did not move that freely across border. Russell, you mentioned that this is something very interesting. People normally go back to, when they talk about the dollar's primacy, they go back to Bretton Woods and they talk about how post-World War II the dollar was the (32/99)
reserve currency, but the point you make there is absolutely correct about sterling steel being bigger. It really wasn't until, I guess, Suez that the British pound actually met its autoloog, if I'm mixing my metaphors, terribly here. But perhaps you could just give people a little understanding of that path, because I think it's an important one for people to get that you can still have some sort of primacy, but be chipped away and chipped away and chipped away and suddenly find yourself at the point where you're on bended knee and at the whim of another power. Yeah, I'm glad you mentioned, Suez. A lot of people listening to this won't know what the earth we're talking about, but it was a British military venture in Egypt. And the crucial thing there is what America did. America was against this and said specifically to the British, if you go ahead with this, if you continue this, we will sell our sterling reserve assets. Now, there may be other reasons why the British withdrew from (33/99)
that venture, but that was certainly part of it. That, I think, is what we call geo-economics, a threat on reserves. So that threat alone was enough to change the trajectory of British politics. And actually, the British Empire, if you like, I mean, America was against the British Empire. Seems like a pretty wise position with the benefit of hindsight to be against the Empire. But anyway, so that was that. More generally, over the period, the peculiar issue with British reserves is they're mainly held by Britain's former colonies, who had provided ample resources, particularly in forms of commodities during World War II, and a mass of British sterling balances over that period, and then had to be restricted in liquidating those. I think, I mean, certainly Nigeria was a big holder, India was a big holder. It's not the states that you necessarily think that are holders of reserves today. That was just a product of a colony and empire in World War II. And gradually and slowly, they had to (34/99)
negotiate the removal of the reserves. So you can imagine if governments had to negotiate the removal of sterling balances, the private sector had no hope in hell of getting its private balances out. You just couldn't cope with it. And sterling had various devaluations in the late 40s and the late 60s. And of course, they were all blamed upon those famous men who live in Zurich called the Gnomes of Zurich, who was a famous phrase of Harold Wilson. I think Harold Wilson, maybe not. Anyway, that it was the Gnomes of Zurich who were responsible for all these terrible, terrible things. The Gnomes of Zurich, we don't exist today, because we can all move capital freely. So we don't need the Gnomes. And that went on and on. And just to finish on where it kind of finished. And I read that, I mean, I went and I looked at the front page of the Financial Times the day, the UK stock market bottoms, which I think is January 1974. And the headline was, stock market collapses as Nigeria removes final (35/99)
sterling balances. So if you like that retreat, actually fit in relatively nicely with a long-term difficult period for equities. And equities were very, very cheap at the end of World War II. And they did okay for a period. But that was a horrible period of withdrawal of sterling balances. So there's a legacy if you get it. And you just can't let it all go at once. And where we began this conversation is the need of other countries to get that money back now. And how you go about coping with that, and my issue is ultimately, can America allow it to flow freely out? So Russell, I want to bring it back to this conversation about capital controls. And maybe the word order of operations is not quite right. It sounds a bit too mechanistic for what we're describing here. But what are the things that in your view need to happen or are likely to happen before we see capital controls put into place in the United States? Okay. Well, there's some trigger events. And then there's things that (36/99)
happen, which are capital controls, which we don't recognize as capital controls. The obvious trigger, the clear trigger, is a jump in Treasury yields. We're already in a situation where the interest expense of the American government is very high. So it's interesting. That's now called the Liz Trust Moment. That's what it's known as across the planet. So a Liz Trust Moment could indeed do something about that. I would point out that the first port of call is not to stop foreigners selling your bonds. It's to force your locals to buy them. Forcing foreigners not to sell is exceptionally draconian, exceedingly dangerous, and really does undermine the reserve currency status of your dollar. So you see, I link forcing locals to buy your own bonds as a capital control, because invariably what you're asking them to sell is their overseas assets. Now, that's not traditionally called a capital control, which is, you know, for those of us of a certain age, remember it was, you know, a complete (37/99)
ban on movement of capital cross-border. So it would be a rise in bond yields that make it difficult for the government to finance. Clearly, the private sector pays a premium to the government. So if it triggered a private sector debt crisis, because interest rates were rising so highly, then you go to forcing your savings institution to buy, which is effectively a repatriation of capital. And only after all of that, if it's not working, would you then go for the nuclear option, which is to try and restrict foreigners of removing capital from your economy. Now, this is a really interesting point, because there are then two sets of economies in the world, those running large net international investment positions, surpluses and those running deficits. And those running surpluses, and the two that obviously jump off the page, the big ones are Germany and Japan, would not be in a particularly bad situation if they were doing this. But those running particularly large deficits in America, (38/99)
everybody thinks America is the biggest in the world, it is the biggest in the world in numbers, but as a percentage of GDP, actually France is probably just as bad as the United States of America. So you then begin to divide the world up in terms of, if you like, the old form definition of capital controls, who'd have to get to that horrible form first when you stop foreigners taking money out? I think maybe it's France ahead of United States of America, but it wouldn't necessarily be Germany or it wouldn't necessarily be Japan. And foreigners actually have fairly low weightings and portfolio assets in both of those countries. So just one question here, a quick question then, Grant, please feel free to jump in. How do investors and businesses approach managing their cash balances and inventory management in this kind of a world that we're describing? Yeah, it's a great question. And it's all part of de-globalization, isn't it? Because you feel, indeed, to have cash balances in the (39/99)
currency where you're going to spend. And certainly as an investor, I don't feel that at all. Just as well, all my assets would have been in the UK stock market for the last 30 years, if I had, which wouldn't have been a great place to be. So as an investor, I don't feel that. So as a business, I might want to have more domestic cash just in case. And that's part of de-globalization. And in inventory, whether it's the productive capacity or the actual inventory itself, I might want to have that slightly closer to home than I would have had before. So these are questions we've all been asking about trade, but you're asking the right questions. What does it mean practically in terms of cash management? What does it mean in terms of capital flows? And those things happen much more quickly. And I suspect that actually that's already happening. I think perhaps over the last couple of months, one of the things we've witnessed is businesses taking these preemptive actions just in case, (40/99)
because there's no premium. You're not getting a big premium. When you raise the question of return of capital rather than return on capital, you need a hell of a big premium to stop you from doing something. There isn't much of a premium between the various interest rates. So perhaps we're already seeing a retreat of cash for a more mundane purpose. I look at it from an investment perspective, but you've quite rightly raised the issue of cash flow, cash balances, inventories, and maybe that's underway as well. That's what de-globalization is. We seem to think it's about trade, but it has to be about capital and cash. To make you just building on that, it's interesting. I had done a dinner last night with a fascinating guy who wears two hats. He's a hedge fund manager, but he also has a business, a manufacturing business. To hear him talking about the issues he's seeing just with the tariffs and supply chain blockages and the immediate impact that this is having on his business, it's a (41/99)
small technology, but manufacturing technology-based startup. He was apoplectic about this. Another gentleman at the table who does a lot of work in Germany had been in Germany talking to a business, a group of business leaders in Germany. He had with him American financier who may end up with a political role. He said that the Germans were, there was white heat coming out of the Germans, that what they termed economic vandalism of the Trump administration. Dmitri's question is such a great one because the world that we inhabit, when these things happen, we're spending our time thinking about what ought we to do about this? What's going to happen? What should we do? Businesses are thinking about, okay, what do I have to do now? And they're two very, very different courses of action. We can have this moment of inertia where we think, well, maybe we'll just let this play out a bit longer. We've seen yield spike and we saw there was an immediate reaction when the 10-year spiked. So maybe (42/99)
that's what we need to look out for. The businesses from the ground up, they don't have that luxury. They're having to make changes to how they operate right here, right now. So when you think about those two very different forms of impetus to do something, how do you think that might resolve itself? Because it feels to me like it's going to have to come from the bottom up. It's going to have to come from that necessity and those actions that are taken out of need rather than kind of sitting there cross-legged, gazing into the sky wondering what we think might happen and positioning for it. Absolutely. If my negotiating position to the two of you is I am an unreliable partner who cannot be trusted, but I come back to do a deal and say, no, I can be trusted. It doesn't matter. Yeah, you're right. This is the problem. Once you say this uncertainty and you've described it very well about white heat and fuming, the idea that that goes away in 12 months because actually there aren't any (43/99)
tariffs and that's a possibility that there aren't any tariffs or they're exceptionally low. It isn't possible. It isn't going to go away. So that realignment of business, of supply chains, of inventory, of cash balances is permanent, is going to be with us for a long, long time to come. Because those businessmen you spoke to can't, having faced this cliff edge of risk, they aren't going to come back in a year and say, let's face it all over again. And don't worry, it's all going to be fine. And who knows, the next president could be even more dramatic anyway. So profound long-term implications. It is worth saying that when America says it wants a smaller current deficit, it is saying it wants less capital. The two things, in a flexible exchange rate, the two things are mirror images of each other. So it's actually demanding less capital. That is what America is saying. They're saying, stop putting so much money into America. That's what you're saying if you're going to run that (44/99)
position. So our interest is where is it going? That's our interest in the rebalancing. Where is it going? I mean, some guesses at that in terms of Germany and Japan. But what we're doing in this interview is raising the parallel issue, which is not just about financial capital for investment, it's more operational capital as well. And we used to call it French shoring. Janet Yellen used to call it French shoring. And now people think America doesn't have any friends. But it's still, I don't know what we're going to call it now, if we can't call it French shoring. Let's just call it reshoring. So I mean, this is accelerating. I've been writing a lot about people reducing their China risk. And now if you're European, you want to reduce your China risk and your American risk. My goodness, that's reshoring in space. The whole concept that some people seem to believe that because America is an unreliable ally, that China has become a reliable ally. I don't think that meets much of a test (45/99)
here. So Merz, for instance, the new chancellor of Germany, who was very pro-American anti-China, now finds themselves very anti-China and being forced to be somewhat anti-American, that accelerates reshoring, that accelerates the return of capital to home base, whether for operational reasons or for savings reasons. I have a few just thoughts I want to throw out here. Just one at the top is that we're having this conversation discussing, I think, largely so far, the secular forces. And my question is going to end up really focused on the policy questions and policy changes that we earlier identified as not necessarily being the most important things, at least not for the long-term Russell. But I think there's an important question there to ask. But I just want to say, things can change very quickly. And the world changed quite a bit after Russia's invasion of Ukraine in 2022. And I'd love to maybe get your opinion, Russell, on how investors should even factor that into their equation. (46/99)
But my specific question is about the discrepancy that we see in this administration, just like we saw in the previous Trump administration, between the president's official policy statements or whatever you want to call them, whenever he's talking to the media or tweeting. And then what his advisors, like Scott Besant, come out and say. And it was interesting because Scott recently gave a talk where he said that America going it alone does not mean America not cooperating with its allies. And it also requires mutual respect and some other things like that. I remember watching that and being like, wow, that is so far from what the president is saying. And the question is, I think for investors, one of the central questions is, who do I listen to? Do I listen to the president or do I listen to his advisors? Who's actually running the show here? This is about China. So what Scott Besant is saying, and what is becoming evident, I think, more by the day, is that I think it was a wrong (47/99)
policy, but still it's a policy, which was to shock the allies, to persuade them to do a deal on China. I've heard that circulating. I mean, what's the sort of, is there any basis to it? What is the basis to that argument in your view? Well, actually, Scott himself has made quite a few comments along those lines that this is really about the grand imbalance is really in China. There are other. I can't remember that comment the day that Trump said he was going to lift some of these tariffs. Everything went up. And Scott Besant came out and said, we always said this to our allies. It depended how you responded to these things. And China put their tariffs up for the people who didn't. It was to try and shake the allies into a belief that they have to be more aggressive on China. So I think if we go forward a few years, that's where we'll see. So you should listen, I think, to all of them because which one is a friend of China? Wow. Are we going to amend? Are we going to name somebody (48/99)
within the administration who's pushing back on the let's alienate China thing? Because I don't hear that one. People say they've got a hundred and fifty, you know, a thousand different views. Well, the one I haven't heard yet is, you know, well, you curiously hear Donald Trump saying we can do a deal with China. But the terms and conditions on which Donald Trump wants to do a deal with China are effectively China containment. Let's be brutally honest about it. And China's not going to agree to that. And we can get into the details of the exchange rate policy, which I think is particularly problematic between the two nations. Rachel Reeves, the chancellor of the Exchequer of the United Kingdom, is in America at the minute and made a lovely comment yesterday that it was clearly and obvious that there was a gross imbalance in trade in the world and it was with China. And the United Kingdom would be happy to work with you. And this is what you got to do. You rock up in DC, you proclaim (49/99)
that China is the root cause of all this. And there's, I mean, there is some grounds for that. I'm not saying it's fabricated. And that's what I see in Scott Pesant. But I don't see anybody who's going to push back against that. And Marco Rubio, of course, is exceptionally anti-Chinese. And I think it's Navarro, isn't it, as well, who's very anti-Chinese. So to look through the administration, it's always possible to sit down and forecast 30 things the administration's going to do. Ultimately, as a historian, you say there's only a couple that actually matter. In my opinion, all that matters about this Trump administration is where they will be, where America's relationship will be with China in four years when it's over, and where they will force the rest of the world to be by the time the Trump administration has gone. And if we focus on that in the Trump administration, I think the rest, you can't call it noise, it's important that it creates volatility. But it's all about China. (50/99)
Does that mean that China is still, quote, not investable? In my opinion, it's not investable that the prospects of a fully blown Cold War with China are Cold War with Russia, because it's technically a Cold War, because we're not, we're providing ornaments, but not troops. That is where we were probably going to end up with China. And I hope that it isn't going to happen, but the prospects off it remain high. And this administration is pushing that, I think, aggressively. You probably are people listening, this may have heard that the Enola guy left from a small island all those years ago, that was a huge air, floating aircraft carrier, not floating, but anchored aircraft carrier, thankfully, it was just reopened. The Indo-Pac American defense is moving closer to China. This is about China. The Ukraine is about getting American troops and armaments somewhere else, and it's getting them to China. Now, we can all hope that somehow that is all done in a peaceful fashion. But you can't (51/99)
ignore that it's happening, and it is happening, and it's happening pretty quickly. So that is, I think, where we're going to end up. That, to me, makes them uninvestable, because you could end up like Shberbank. So Shberbank trades in Russia, has a value. It's very difficult to turn that into dollars that you might want to spend in your retirement. That is likely where we end up with China. And it can happen by accident. The Gulf of Tonkin incident was, at least it started as an accident, which is a North Vietnamese torpedo boat faring on some American naval vessels. It can start by accident. Two great tectonic ship plates are shifting, and you don't know when and where. My great concern here is all my clients, my professional investors, all know exactly when and where these plates are going to shift. They all know it's going to be Taiwan, and they all know it's not going to be for five years. And that is silly. It really is quite dangerously silly to say that you understand that. It (52/99)
could happen tomorrow morning. So I think Chinese assets remain uninvestable. I really hope I'm wrong about that, but that's everything I see in the Trump administration has one word running through it, and that one word is China. Russell, don't worry. If it does happen tomorrow morning, we'll edit this bit out. Don't worry. We'll have time to do that. So don't fret. But let's stick on China, because as you said at the very beginning of the show, your big fear was that. The thing that could do the most damage was a conflict with China. And also, you highlighted there that Chinese exchange rate policy is also an important financial component to this. So piece those together for us and help us understand and help the listeners understand the problems with China's foreign exchange rate policy. Perhaps the weaknesses and the potential threats it can, the weaknesses it has and the threats it can point in our direction, and then talk about why that conflict with China is the thing that (53/99)
scares you the most. Yeah. So the interesting thing about the Chinese exchange rate policy is it's now very negative for China. And for many, many years, it was actually very positive for China. So people may wonder, why would any country pursue a policy which is so negative for it? I also wonder that. We'll speculate on that in a minute. When you link your currency to somebody else's, you lose control of your domestic monetary policy. Now we have to pause a little bit, because it's not quite true in China because it has capital controls. But you give away a significant flexibility to control the price interest rates and the quantity of money in your own economy. And these are really very, very crucial things for anybody to control, whether they control about independence, central bank or the government. They're really very fundamental. And China has given that away. And what therefore does determine the price and quantity of money is the size of its external surplus, which is not just (54/99)
a trade surplus, but also a capital surplus or a trade deficit or a capital deficit. And to me, it's insane that the world's second biggest economy run by a man who likes to control things has given up control of the thing that really matters. And therefore it seems to be unsustainable. And in holding onto it, he's driven China's total non-financial debt to GDP ratio to 192% of GDP. America is about 150. We go back 15 years, China was half the level of America. So we really not see anything like this for any major economy in human history, debt to GDP to go up that quickly needs to do something about it. We all know how to do anything about it. I mean, you can phone up Tim Geithner, Tim can help him. You print money, you printed a lot of money, but you can't do that with the exchange rate policy. So I think he's going to have to do something about that. I would devalue initially because you be obviously wanting to create a lot more ren them be. That's the whole point and how you go (55/99)
about inflating away your debts. That would look like a grand gross deflation shock. But I think we probably know now that tariffs fall pretty closely behind that when Xi Jinping has to get into that world. And then we get into these really interesting questions about how do you reconstruct one global monetary system after that? Of course, my conclusion is you can't. You'd have to construct two global monetary systems after that. So that's why that exchange rate is so important. And also grant it kind of forces people to take sides. So if I was running Malaysia and the ren them be devalues, it's very tempting for me to devalue the ring it. But the Americans will be very keen for me not to devalue the ring it. And they'll promise me in return great access to American markets, which is I really think what Scott Besant is up to. I think people have got this wrong. I think that's what he's trying to do here. And therefore, if you follow the Chinese currency down, you may be saying, (56/99)
actually, we're in the Chinese block. When I do this talk in Asia, I get a lot of pushback from people who say, I've got a very Anglo-Saxon view on the world. And I think that's an acceptable criticism of it. But my view is that most people choose not to be in the Chinese block. Now, I think if you if you're sitting in Singapore or something, you may come to a different conclusion. But my opinion is most people choose not to be in the Chinese block, whether they're Vietnam, Malaysia, Thailand, Philippines, Taiwan, South Korea, Japan, they choose not to join the Chinese block. So I think you should really get somebody on the discuss Asia. There's a different opinion on who's happy to be in the Chinese block rather than have some, I'm not an Anglo-Saxon as you know, Grant, I'm a Kelt fully signed up. But pride Kelt, well, Anglo-Saxon characteristics, that's put it that way. So yeah, so that's what that movement and the currency means, I think it's very difficult to sit on the fence after (57/99)
that currency moves. You took the words out of my mouth, Russell. My next question was literally going to be after grants about what this means for some of those largest economies and countries that kind of sit somewhere in the middle or in the case of Russia have leaned much more heavily towards China as a result of the fallout with the United States. But I'm going to throw Russia in there too. The countries I'm thinking about are Russia, India, Saudi Arabia, Turkey, and Brazil. Is there a path in which these countries can or some of these countries can kind of walk in between these two currency systems or do they have to choose concretely? And if they do, do you have a view on where they fall? So we have had a non-aligned movement before. This is exactly what happened in the last Cold War. And it wasn't very successful for those who tried it. I think of Indonesia. I lived in Asia. For those of people who know the history of Indonesia and have watched that incredible movie, The Year (58/99)
of Living Dangerously, you know, with the benefit of hindsight. And even at the time, it was quite clear that the CIA toppled the government of Sikarno and replaced them with General Saharto. American intervention in Latin America during the Cold War for people who tried to be independent was not very successful. India perhaps did it, but with dire economic consequences, maybe of their own choice in terms of the sort of nearer approach to economic management. But for those who tried to dance the line, it wasn't very successful. So I'm not saying that they wouldn't try. And it looks like India is trying. I think many people think India is trying. And they've got very, very, very strong cards to play. So why wouldn't they play them? But ultimately, I don't think they go into the, they can stay non-aligned for a very long period of time, despite being a much bigger and much more powerful economy than they ever were from the 50s, 60s and 70s. I think it's exceptionally difficult. So maybe (59/99)
they'll try, but I actually think everybody will ultimately have to choose a side. Brazil really doesn't have an option. I mean, because it's so far away from China. I mean, it's just, you know, there's a seventh fleet to contend with if you want to keep trading with China. So I don't think it's an option. Well, Australia would be an interesting one. Yeah, that's much more of an interesting question. Australia is absolutely fascinating because when the Australians come in to see Scott Besant, just imagine what that conversation is going to be like. He's going to say, stop selling them iron ore. They're saying, you know, every single aircraft carrier that they have is made from Australian iron ore. And we're now sending our ships to defend you from China. And as you know, the Chinese did a stupid thing by putting those ships off the coast of Sydney. Yeah. And he's saying, look, we're going to defend you, but you've got to stop selling them, all the stuff they're making armaments with. (60/99)
Now, we know, granted, you know, there's been a 30-year economic expansion in Australia based upon selling commodities to China. Yeah. And that's the discussion. Yeah. I mean, for Australia, it's really, really, really difficult because to say we're not going to sell it to China, if that's what the Americans ask for, is huge economic ramifications. Now, obviously, Mr. Besant will promise lots of business for America, but still. So Australia is the one, and the Americans are building an air force base in Northern Australia. So the commitments that we're all talking about, isn't it terrible how the Americans are reducing their commitment to defending Asia or to defending Europe, but they are massively ramping up their defenses of... So if they're demanding more of Europe to defend itself, what are they going to demand of their partners in Asia for the higher levels of defense that are coming? And I think you're absolutely right to focus on Australia because that's the most dramatic one (61/99)
of all. But if you see yourself as defended by America and Japan more than any other country in Asia sees itself as defended, maybe Australia comes second. This is why they're in the Quad. The Quad is India, Japan, Australia, and United States of America. The Quad, it's defense-packed in Asia, gives you some idea of who really, really, really realizes that without America, they're a big trouble. Now, what is America going to demand from Japan? What is it going to demand from Australia? And if it goes in with that really hard demand on Australia, I'm really, really scared at that stage because this is where we were in the 30s. We tried to cut Japan off under the League of Nations. This was something short of war. It was supposed to be a good thing, but it forced the hand of Japan to do something pretty barbaric in that stage. So if the Americans force Australia down this path, the prospect that Xi Jinping has to do something slightly more offensive, it gets very, very high indeed. I (62/99)
mean, this makes me think of the Biden administration's policy on export controls. I mean, one of the criticisms is that they weren't tight enough. And the reason when you asked officials in the Biden team why they weren't tight enough is they were worried about escalation. And is this, I mean, I don't know if it's an appropriate question to ask in the sense that I don't know if anyone of us can ask it, but I'm curious, Russell, whether you think walking tight ropes like this is even possible? No, I think the easier answer to that is the risks of accidents go up, as you say. It's above our pay grade. But what we do know is the risk of accidents go up. And as an investor, that increases your risk premium without us having to try and second guess what actually is going to happen. We're just going to say that the risks are up. And part of that risk is Chinese assets become uninvestable. That's part of the risk that if we just make a mistake in this path. So we're going into a high risk (63/99)
strategy where the consequences of mistakes are truly dire. Just one more thing I wanted to throw out here, because I kept thinking as we were talking about this, we were talking about some of these countries like Russia, India, Saudi Arabia, Turkey, Brazil. And what we're really talking about is a reorganization of the global order. We've talked about it in monetary terms, but it also obviously matters in terms of security. And I think what is most underappreciated about American power is American soft power and the credibility, yes, of the American security umbrella and the ability for the U.S. to protect allies, but also the competency and credibility of American leadership in being able to actually lead a new kind of order. And I wonder, I guess the question that I keep asking myself is, does this administration have the ability to do that? Where do we kind of look for information to give us a sense of who's leading that effort, how it's coming together, because what the (64/99)
administration has been very good at is smashing the current order and kind of getting people off their asses. But where do we look for to get a sense of the direction of travel and what that order is going to look like and if the U.S. actually has the credibility and trust to lead it? So I think in any era where you smash things up, it's incredibly difficult to put something new back together again. So even if you pick the 10 greatest statesmen in the history of the United States of America, I think this would be a challenge. It's not as if the Trump administration is uniquely unequipped. I think anybody's uniquely unequipped for this because this isn't real estate. This isn't the art of the deal. There are far too many moving parts here. Some of it's about pride. Some of it's about subjective issues. So I think rather than getting into sort of criticizing individual members of the Trump administration, we could say it doesn't really matter who'd be running America now. It'd be (65/99)
incredibly difficult and a great structural change of this magnitude to try and manage this given the surprising bits of the machine that will be breaking down somewhere else. So you have to keep coming back to what does this mean for investor and it means very high risk even if somewhere a wonderful policy wanders into the White House and suddenly gets authority. I'd still be incredibly nervous that that wonderful policy won't is capable of managing this transmission in a way that's good for savers. Now, maybe they could do a better job at managing it for what's good for our children and grandchildren in terms of military conflict. That's what we would all hope. But in terms of savers, it's just difficult to imagine a somebody who comes along with this wonderful ability to control things. I think investors are putting a lot of faith in Scott Besson to be that guy in the room. He's a smart guy, but is really anybody that smart? Well, that's smart and that capable of steering Trump (66/99)
where he needs to go. That seems to be an intriguing thing about how smart he is. Not just Trump, G. We know less about G, but he may be subject to some of the same right euphemism. Let's call them fragilities, same fragilities as the American president. And if you've got those two facing off, they may be not, maybe they're both geniuses, I don't know. But when you get two characters and then you throw Putin in the middle, you know, this we deal in a word of reason. And there's more than reason going on here. There's vanity, there's pride, there's a lot of other things, and it's not just Trump. It also seems that the Chinese care more than maybe we appreciate about how they're seen and being respected. We've seen examples for example, when I think it was the GM of the Houston Rockets, is an example I've used before, was traveling through China. And when he was in Hong Kong, he made comments about the protests. And this stirred up quite a hornet's nest in Beijing. And this has been a (67/99)
consistent MO. And you can't imagine someone that stirs the pot more than Trump. So again, there, I wonder, he's great at one thing, which is, you know, stirring the pot and changing the dynamic and breaking an unworkable system. But I worry about who's going to be there to pick up the pieces. Yeah, there are too many moving parts. This is not Mano and Mano the way he thinks it is. And we've just seen capital moving that probably he didn't expect. Nobody is that smart, too. This is a 3D chessboard. And the presidents be playing checkers. Russell, let me come back if I can. We've touched on NATO a little earlier on, and America's changed there. And in thinking about investor flows and the point you made about repatriation of capital, it's difficult to argue the logic behind America's change of heart around NATO. You know, the piece I read the other day that said, you know, why should 300 Americans pay to defend 500 million Europeans from 10 million Russians? Which is a fair question. (68/99)
And I think that if you strip out the Trump factor, and you picture a room full of serious people sitting down having a discussion, there is a very easy discussion to be had here that, look, you guys need to start paying your way. And Europe has been able to channel those funds that they've saved from spinning on their own defense into, as I was discussing at dinner last night, you know, free university and universal health care, and all these great things that Europe has that America doesn't. And so you can make a very, very cogent case as to why this is actually the right course of action. Once that happens, however, we're now at the point of a national security imperative. And these countries have to find this money. So when we get to work out how that's going to happen, we get to this capital repatriation, we've already seen some of the larger European, particularly Scandinavian pension funds talk about how they're going to reallocate assets away from the US. I haven't said where, (69/99)
but one can assume that it's going to come home. Japan has, I think, long been looking for an excuse from the government side to pull a few of the big pension funds into the room and say, hey, lads, you know, we need a bit of help back here. We have everything in place here for capital to flow, not just in dribs and drabs, but with an imperative back to Europe, back to Japan. And not only is there the imperative for it to do that now, you're doing it at a point in time where America has never been really so overvalued so consistently against all these markets. Everything has been put in place by this NATO move and some of the other dominos at the top and afterwards to completely realign and reshape capital flows. And I'm not sure that people perhaps recognise just how seismic this potential change we're going through really could be. I'd love to get your thoughts on all that and feel free to push back and call me all the names under the sun. Yeah, so I agree with that. And it'll last (70/99)
15 to 20 years. That's the bit that people don't get. So, you know, we can have that. I mean, that conversation is all over the front page of the papers and, you know, when does it stop? Which week does it stop? When do we get back into the S&P 500? That's the story. Where are the Japanese coming back? But the forces that we've discussed in this so far, I think make it absolutely clear that this is underway for year after year after year after year. And that's what we have to get our heads around as investors. And that's where we started the call. There are imbalances. Those imbalances will not exist in 10 years or 15 years. The question is, how they're unwind? That's how you begin to benefit from them. So, the capital flow has to return. I thought the Asia comment on NATO was really interesting. Prior to the election of Donald Trump, NATO was run by a man called Jens Stoltenberg. And Stoltenberg said, we NATO now have a role to play in the Pacific. It's called the North Atlantic (71/99)
Treaty Organization. But anyway, they have a role to play in the Pacific. So, the head of the organization clearly under great pressure from America already from the Biden administration was already shifting its focus to the Pacific. Now, what does this look like if you're a J? It's very easy for us to keep going on about Trump. But if you're a J, this looks awful. You've got the world aligning to continue. And it wasn't Trump who started this. It was Obama who started the pivot to Asia. Politicians are wonderful at one thing and perhaps only one thing, which is coming up with wonderful names for certain policies, which are not necessarily wonderful. The pivot to Asia in China was China containment, full stop. So, there's a lot to blame Xi Jinping for. I'm no fan of Xi Jinping. But what did you think he was going to do the day you said you were going to pivot to Asia? What did you think he was going to do? So, this NATO thing was already underway. And if NATO was going to have a (72/99)
Pacific focus, it was clearly going to have less of a North Atlantic Treaty focus. So, these things are going to go on for a long time. And the only way out of it is some amazing deal, geopolitical deal really, about who controls the seas around Japan, South Korea, Taiwan, the Philippines and Vietnam. Now, if you think we have an American president prepared to concede all of those things to China, then perhaps there's a deal to be done. My view is that this president can't do it. The next president can't do it. And the president after that can't do it. And that is why this is going to go on for a very long period of time. And once again, people read about this in the papers every day, but then don't ask the obvious question, what does that mean for capital flows? And that's the question we're asking. And it means repatriation of capital flows. And there's some real flashpoints down there. And the biggest flashpoint to me is not Taiwan is Vietnam, which is being put in a shockingly bad (73/99)
position by China's intervention in Cambodia, China's movements around the South China Sea and creation of New Islands down there. And Vietnam could easily, easily purchase American armaments in some size. And he's gone 800-mile border with China. That is the Cuban Missile Crisis. Now, most people tell me the Vietnamese are very clever people. I mean, if anybody needs to play one side against the other and not come down on one side or the other, it's the Vietnamese, but Xi could be forcing them. And that is the Cuban Missile Crisis for China, if American armaments start pouring back into Vietnam. And capital is moving. I mean, people, oh, I've only owned the Magnificent Seven. Well, actually, if only you'd owned Mitsubishi Heavy Industries in Rhinematelle. And that was to do with these great geopolitical shifts. And they're just beginning. That's, keep coming back to the same point. This is just starting. How important is the resolution and the terms of the resolution of the Ukraine (74/99)
war, the Russia-Ukraine war, for bringing more clarity to the subjects that we're talking about today and to maybe stabilizing some of the security dynamics? Yeah, there's a famous quote from President Nixon. Do you remember he said, we're all Keynesians now? Well, we're all geopoliticians now. And that's kind of one of my points, Dmitry, about a slight plug from my course here. Nobody in our industry is in any way qualified for any of this. Because I came in 30 years ago when this was a fairly amateurish industry. And I mean that, frankly, just being deregulated, we'd be buying here. And anybody could get in. Grant and I got in. So anybody could clearly have got in. But subsequent to that, they recruited MBAs and they recruited people with degrees in finance. And they didn't teach any of this stuff in Business Girl. They didn't teach it on the syllabus. So it's a good point, not to turn me into a geopolitical analyst because I'm not. But I am a historian. Historians maybe have (75/99)
something to say about this, even if that's not, it may not be as good as a geopolitician, but it's certainly better than an MBA. Let's put it that way. So I'm afraid that I think the industry is unqualified for this, which is why there's kind of a scramble on now for expertise. So that was a slight aside from the actual question. Settlement of the Ukraine war is not, in my opinion, that important, which is a sound strange. America's shifting to China anyway, full stop. And obviously that shift can probably be a bit quicker if they can reduce their commitments to armaments, going to the Ukraine. But it's happening anyway. It's not going to stop war in the Ukraine, peace in the Ukraine, sorry, in Ukraine. Don't make any difference to the pivot to China, the pivot to Asia. It's going to keep going regardless of where that goes. So there are other reasons why it's important, but keep coming back to the same point. The thing about the Trump administration is China and the Ukraine policy is (76/99)
entirely based around getting something going with China. Now, ideally, you know, people talk about reverse Nixon. I think that's fanciful. I suspect even the Trump administration thinks it's fanciful. It's just more pragmatic than that. Let's kind of shore up what we would have to call in this context the Western Front while we go onto the Eastern Front. And that doesn't change whether there's peace in Ukraine, peace in Ukraine or not peace in Ukraine. I want to hand it over to Grant, if he has any other questions. I just want to mention the course that you were talking about the Russell is the Practical History of Financial Markets course, which is available both online and also in person in Scotland, in Edinburgh, where the Library of Mistakes is. Yeah. And actually coming up in London a couple of weeks, if anybody's interested, just go to Library of Mistakes. You'll find details. We have a handful of places left. It's interesting. We're not full. I would have thought we'd have been (77/99)
full to meet. I thought everybody would be looking at a little bit of financial history, but we are nearly full. Well, hopefully this helps. I know that I was speaking with someone actually two days ago who either bought a ticket already or was going to buy it and was asking whether they should take the online course as well in preparation for it. I said, you can never be too prepared. You can never be too prepared. Grant, why don't you go ahead if you get it. And you can never get too much Russell Napier. Well, listen, Russell, just before we close, perhaps you can just maybe sum up and for the people listening that are trying to navigate their way through this from an investment standpoint, whether they're looking off to their own money and worried about that or their professionals in the industry, if you could just give us a sense of just how to think about this. Are there any tips for how to read the news or how to think about the way these shifts are happening or even just get (78/99)
your mind better set to understand the magnitude of what we're talking about? I think you've done a brilliant job of helping people understand that this is a lot bigger than buying the dip and the volatility we've seen is a microcosm of the long tail volatility we're going to see. Yeah. So don't trade. So you probably know, Grant, I wouldn't give you that advice last year, the year before and the year before that, but it's particularly appropriate when volatility is high that you don't trade, particularly appropriate when we are appeared as structural change and the volatility on the way to the structural change is very difficult to predict. So you really shouldn't be trying to trade this. It's going to be very, very difficult. I think maybe we've learned that over the last two months. The longer term lessons on unwinding the balances are actually fairly straightforward if you've got the guts to do it and then the guts to stick with it. So I would say that preserving wealth now is not (79/99)
about intelligence, it's about courage. And it's the courage to do the following things. If we're going to inflate away our debts, which as we discussed is probably the only political way that isn't incredibly dangerous, don't own bonds full stop. There are some wonderful charts. I'm looking at another book in my library here, which is the History of Interest Rates. And we can look at those all the way back to Genoa for, if you like, bond yields. And they tend to go in 30 to 40 year bear markets and bull markets. And ours began in 2020, 2021. So don't own bonds and you'll be tempted along the way to trade them and own them. And if you're a very smart trader, maybe you should do that. But if you're not a professional trader, you should not try to trade bonds and therefore you shouldn't own them. You see that alone is radical. It's radical. I mean, it's a radical, radical statement. And without mentioning any names, I go to see professional investors who run multi-asset portfolios and (80/99)
say, well, we can't do that. And I say, well, why can't you do that? Well, all our competitors have got 40. So we can't go to zero. So people listening to this will be running their own money. They can make up their own minds. But I think that's a radical thing to do. Another radical thing to do is to try and have your money in a place that isn't going to impose capital controls. So I invest all over the world. I'm particularly invest quite a lot of money in the United Kingdom at the minute, which I think is very cheap and has got lots of things going in its favor, which is very non-consensus opinion. But they happen, those investments happen to be held through Singapore. And if I was concerned that I'd got all that wrong at the press of a button, the cash balances on seal rest in Singapore, which is a country that's highly unlikely to restrict capital outflow because they're battling capital inflow. And there may be a few other places like that. So you have to think about these things (81/99)
that we maybe didn't think before. You might say, well, it'd be terrible if I had all my money in Singapore and I want to retire in America. Well, no, because the American government will always welcome your capital back in. That's not the issue here. So you want to think about that. In the world of capital repatriation, we have to work out one of the two assets in the world, most likely to be liquidated in a capital repatriation, and they're really, really easy, they're the S&P 500 in surgeries. It's really very simple. If you look at any global portfolio in the world really these days, certainly anything in the develop world, anything where there's no restriction, existing restriction on capital controls. So you have to be very concerned about those assets, which is not the same thing as saying you can't buy equities in America, it's just saying you have to be concerned about those assets. Something else, I run the Library of Bistics here in Edinburgh. We had Sir John Kay speak last (82/99)
night on his new book, just looking at the largest companies in the S&P 500. You really don't find a 30-year period where the guys at the end of the 30 years are the same five largest companies that they were at the beginning of the 30 years. That's one of the beauties of America. Actually, we could maybe call that a form of creative destruction, but the likelihood that these guys are going to dominate the next 30 years is really quite unlikely. Although it's absolutely consensus thought that they must do that, it's never actually been accurate, it's never been true. So you've got to be particularly cautious of buying the winners of the old regime. The winners of the new regime are more likely to fall into what we call the value bucket, and it's more likely to fall into investment, fixed asset investment in the developed world and people who compete with China. Now here's the problem. If I was running your portfolio grant, like you meant to say, well, grant, we get no bonds, we got 75% (83/99)
in value stocks, 25% in gold, and you'd say that is the riskiest, most radical approach I have ever heard of, but you'd only say that in comparison to the competitors. I do not believe either of those asset classes is risky. I think you'd be hard pushed to call them risky, but in the context of the current thought and the last 30 years relationships, they're called risky. And at a time of great point I've made to Dmitri before, at a point of great structural change, you don't need to own risky assets. You just need to own risky quantities. And that I think is how we begin to navigate our way through this. Finding active managers who can do that for you as we've discussed previously, Dmitri, is not easy because active managers have one way or another got caught up in momentum. That's the other thing. One of the things we look at in the course is momentum in the stock market actually works. It does work, but it's not going to work in a period of structural change. So to survive, I think, (84/99)
for the last at least 15 years in fund management, you have, most people have got a little bit of momentum in there. And this is not a period to be with guys who are doing the momentum thing. So you need to get to the value thing. And there are active managers out there who can do that. And I think they're licking their lips. I should say that, you know, I know a friend in New York and he only buys American stocks. He's got incredibly cheap stocks in his portfolio. You know, as you know, Grant, Dmitri, their reasons why stocks can be cheap, but they look like reasonable companies. They're just companies that nobody cares about. They tend to be quite small. They tend to be quite illiquid. Something that most people listening to this will know is that most institutional investors, you can't really buy anything under a, I don't know what is it, 50 billion. And there are lots of great companies trading under 50 billion that don't have market cap of 50 billion, that don't really have (85/99)
institutions on the registered equity extent. And therefore, have not seen their valuations distorted. So great opportunities. You know, it's funny, Russell. I don't remember who I was speaking with about this, but we were talking about how if an active manager went to his risk department and said, I want to buy these stocks and these particular quantities, and that was basically replicating the S&P, they tell them you can't do it. It's too risky. And I think, you know, no, it's such an interesting, it's just a great point about quantities. I also want to mention your courses come up a few times. I just wanted to mention as someone I've taken the course, and I actually spoke with someone else recently, not the person I mentioned earlier, who said they had just finished taking it and how transformative it was. So I can't recommend that enough for people listening. Yeah, we'll put all the details of that in the transcript and stuff. You know, Russell, what you said there, this mindset (86/99)
shift, for the last 20 years, people have been talking about which stocks should I buy. And it seems to me that the shift here, if you want to really boil it down based on the timelines we're talking here, it's really not a question of which stock should I buy anymore, it's which companies do I want to own. You know, then thinking like you want to own a ship and something because you're not renting it, you're not going to buy this thing and then flip it for a higher price, you need to put your money in places where you can own things. So it's a really great point. In my first book, there was great statistics for the NYSE on the number of shares, but also the number of shares that turn over in a year. So you can therefore divide one by the other and you can work out at any given point in history, until recently the average holding period of an investor. And in the 50s and 60s, it was eight years. I mean, it was eight years. There were no futures markets to confuse that. It was genuinely (87/99)
eight years. And of course, there were people who made a lot of money in that period of time by just buying and holding good companies in eight years. So looking at a world probably of significant less liquidity, maybe not back to that. But we've got to remember there was a time when that was a normal holding period and what we've seen recently is abnormal. That chart's really fascinating because it includes 1929 in it. And I can't remember. I mean, that sort of liquidity short-term holding period. I mean, I think it was the 1970s before we got back to where we were in 1929. But in 1929, it seemed perfectly normal. And then it was abnormal for decades. Does that also mean that we could see more companies being at the issue dividends? Yeah, absolutely. We have an interesting chat on that for people who want to go on to live in the state's website. We've got a guy called Dan Paris on there talking about dividends and a different way of rewarding investors. It's a great point to me (88/99)
because quite a large percentage of return in that period afterward would also have come from dividends rather than capital depreciation. It's difficult, Grand Point did I, that if we look at US equity valuations, and I think the one that I use anyway as a cyclically adjusted PA is very, very high. It was very high in 1966 as well, not as high as it is today, but very high. And then produced really dire returns after that. But if you'd gone and bought sort of value slash dividend pairs, amazingly, you owned that huge bear market from 66 to 1982, you actually made a positive real return. Because you weren't taking the valuation risk and the dividend was always there to some extent bail you out. And that was calculated on reinvested dividends. So even in a grossly overvalued equity market, as America was in 66, equities were the answer, bizarrely, just not the ones that were in the index. And I think the beautiful thing today is if you look outside America, there are a lot of, even on (89/99)
the index, aggregate level, there's a lot of stock markets that look considerably cheaper than the United States of America. I'll make a bet with you here and hopefully I'll be around to pick up on this eight years from now. We'll get back together and we'll be talking about British exceptionalism. How can I, Dmitri, you'll have to take the other side of that, but I can't do it, obviously. Well, I look forward to that and I think we'll have to record that one in celebration in London. But the point is there's always an exceptionalism somewhere. Somewhere. And it's always bogus. So well, certainly the Japanese one was bogus. The East Asian one was bogus. There was an Irish exceptionalism which turned out to be just as bogus. There was a Greek exceptionalism, Dmitri, as you'll remember as well. There'll be another exceptionalism somewhere. We just kind of work out where the ingredients come together for people to delude themselves that there's another exceptionalism. I'm going to bet on (90/99)
the United Kingdom. Maybe it's grace to me, Dmitri, being through hell and back again, but let's try and work out where the exceptionalism is going to be in 10 years from now and invest in that. I'll go for the UK. If you gentlemen have any submissions, please feel free to make a bid. Yeah, I'm officially timestamping. I'm off those mugger hats to come out, Russell. Well, certainly I've got a mugger hat already. So... Well, listen, Russell, this has been absolutely terrific. We're so grateful to you for doing this and we're grateful to you for the kind of help you've given us in the years leading up to this conversation and giving us the grounding you've given us to help us think about it. Where would you like people... We can send them to libraryofmistakes.com, but is there anywhere else you'd like us to point people to when we sort the transcript out and stuff like that? I'd just say libraryofmistakes.com. Go to the tab that says Lecturers and keep scrolling down. Sometimes people (91/99)
don't and it's just full of lectures on financial history and things I think can be helpful and they can choose from all of that. And if they want to be entertained, I would strongly recommend they go to see my friend Dr. Paul Cosmetatos speaking on the Leith Whiskey Bubble of 1890. Yes, you can have a bubble in absolutely anything if you're so minded. And in Leith, by the way, is the port of Edinburgh. And there was a whiskey bubble there and just to wet people's appetite. It includes core to the whole story are talking parrots. Also, I want to say I'm an enthusiastic subscriber and receiver of... Subscriber to and receiver of the Solid Ground newsletter, which I really love, Russell. It's such a wonderful newsletter. I get excited whenever it comes in. My inbox and it forms a core part of my regular research. And I also want to recommend people check out the libraryofmistakes podcast where they can hear your conversations with experts and people that some of whom they've heard on the (92/99)
show, some of whom were new to me when I heard them. Yeah, we try to do financial history, but we try to do financial history that is germane and pertinent to where we are today and for the future. So it's a slightly different focus, but it is the past as guide to the future. And if that isn't the guide to the future, what is? Yeah, and it's getting more germane by the day the way things are going. So, Russell, more power to you, my friend. Thank you so much for doing this. We will edit this and get it out and share it with the world because the world needs to hear it. So thanks again for giving up the time. Thank you. Exceptional. Thanks so much, Russell. Thank you. Boy, boy, mate. How much fun was that? That was a lot of fun, man. I enjoyed it. It really was. It's funny. Russell said something to us off mic when we finished callings as we were saying goodbye that he said, oh, was this the same stuff we've talked about before? And A, I don't think it was at all. And there was plenty (93/99)
of stuff in there that I haven't spoken to Russell about and I've not heard him talk about. But B, it hits differently now. And I think there's an importance to revisiting these ideas now that people have maybe got rattling around in the back of their heads from conversations they've heard from Russell over the years. There's bits of the puzzle flapping around. But now you can't help but be more focused on it and have applications for what he's saying in the real world that will change the way you look at it. So the way I would agree and the way I would describe what you just said is that we're now living in the world that Russell has been describing for years. Exactly right. Couldn't have put it better myself and in fact, didn't just approve it. But yeah, I mean, that's it, right? It's funny when you go back and you look at some of this stuff and it's funny, I went back and looked at a presentation I gave in 2018 about gold. And someone posted it on Twitter again, what are we, what? (94/99)
Yeah, seven years later and said, you know, this holds up pretty well. And I was, I've been thinking about updating this presentation for a while now. I thought, oh, yeah, I should really do something about that and update it. So I went back and watched it again. And I wouldn't have to change your word of it, you know, from where we are now. And that's very interesting because it was a big theme about gold and the gold standard and what will happen in the world and might push you towards gold being re-monetized. It's fascinating how these cycles turn and where we find ourselves. Yeah, and why it's important to have a view for the long term, you know, and not unless like Russell said, some people are gifted traders. And if that's your thing, if that's your skill, then, you know, make sure you know that that's your skill and best of luck to you. But for most of us, it's to our benefit to try and understand the long term secular forces that are driving outcomes in the world and politics (95/99)
and in markets. Absolutely. And if you believe you're a good trader and you're actually not, you're going to find out very, very quickly because what happens next is not going to be like the by the dip environment we've seen for so long in which through no fault their own, many people have kind of earned their trading chops in very different markets to the ones we're going to see now. And I think, you know, also Russell made that point when he talked about how their periods that bond markets go and they're in bull markets and bear markets. And that's true for all markets. And it's really important to understand that because it's much harder to make money in a bear market than it is to make money in a bull market, unless you're a great trader. Well, and this is the component I think a lot of people don't perhaps understand. People think about making money in all types of market in a bear market, you just try not to lose it. That's the mindset. And that's the kind of shift you have to (96/99)
make. If you're in a real bear market, your mindset is don't lose it. It's hang on to it. It's not, how do I take less risk to make more money? I think Richard Russell did a part of it. Richard Russell said, you know, in a bear market, everybody loses, whoever loses the least is the winner. And that's really the mindset. Right. And I think, you know, and not to keep going on and on here, I'll let you end it here, Grant. But I think you and I've talked about this. I've certainly talked about it with Russell and other people, which is that, you know, investors have gotten very accustomed to post 2008 and especially post 2020 with COVID to buying the dip. And in this concept that markets mean revert and markets quote only go up. And that is going to, I think, be a very difficult framework to disabuse themselves of. And it's going to cost people a lot if they don't have a different framework like the one we're describing and talking about today. Absolutely. Absolutely. Well, my friend, (97/99)
listen, we're two episodes in and so far, this has been a blast. We'll see where we go next. You and I both got our little hit list. We won't tease the names in case we can't get a good list though. It's a great list. Listen, thanks to Russell Napier for joining us. He was magnificent. And please do visit libraryofmistakes.com, watch the videos, take the course, listen to Russell whenever you get the chance, because he's a sage, sage voice in a world full of chaos. And God knows we need as many of those we can get. Amen. All right, my friend, we'll listen. We'll do this again soon. In the meantime, for everybody listening, thank you so much for joining us. If you want to follow either of us on Twitter, Dmitri, where can they find you? At Coffinas with a K, K, O, F is in Frank, I, N, A, S, at Coffinas. And also the Hidden Forces pod. Let's make sure they know where to find that. The Hidden Force pod is at hiddenforces.io. HiddenForces.io. And you can follow me at ttmygh on Twitter and (98/99)
grunt-williams.com. All right, my friend, on we go. Wonderful. See you soon, Grant. (99/99)
This is the full transcription of podcast 'Hidden Forces'.
Narrative Collapse & the Search for New Theories Pippa Malmgren #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetrius Cofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. What you're about to hear is the fourth episode in a podcast series hosted by me and my co-host, Grant Williams, titled The Hundred Year Pivot. In it, we speak with some of the smartest and most plugged in people we know to help position ourselves, our organizations, our families, and our portfolios for the once in a century economic, political, and geopolitical reordering that we believe is currently underway. In today's conversation, Grant and I speak with political economist Pippa Malmgren about the wide range of socio-political, economic, and technological challenges facing societies today. We discuss the ongoing narrative collapse that stems from a loss of faith and trust in our political leaders and (1/99)
institutions, the informational overwhelm and confusion that accompanies technological modernity, the lack of credible voices in media, and the decline of journalistic ethics, and how all of this has led to ever more conspiratorial thinking and the adoption and popularization of alternative narratives and theories of reality, some of which have improved our understanding of the world, while most have left us more confused and less well-equipped to find common ground in pursuit of the public interest. The episodes in this series are published a week ahead of time on both Hidden Forces and Grant Williams' podcast Subscriber Only Feeds. If you want early access to these conversations, go to hiddenforces.io slash subscribe and join our premium feed so you can listen to this episode and other subscriber only content on your mobile device using your favorite podcast app just like you're listening to this episode right now. And with that, please enjoy this thought-provoking and wide-ranging (2/99)
exploration of some of the most important themes and questions facing society today with our guest, Pippa Malingrad. Welcome everybody to another episode in the 100-year pivot. Joining me, as always, on this crazy journey that we've started out on my co-host and good friend, Dmitri Kofinas. Dmitri, how are you my friend? I'm very good, Grant. I enjoy this new style. I think I've said this once before, but this is something that's new for me, kind of coming in largely unprepared for a conversation, then maybe sort of reading a few things and kind of just thinking about it. And I really have enjoyed it. It's in and of itself, it's been a challenge and a personal growth experience for me. Well, you know, it's been interesting for me because you form such brilliant questions and I watch you. It's actually kind of cool to watch them happening in real time. You know, as we're talking a Neil and we're talking a Russell. And no doubt, again, when we talk to our next guest in a minute, I watch (3/99)
you wrestle with these ideas and form questions out. I mean, it's actually a really cool thing. You know, when we first started Real Vision, the very first series of interviews we did was something called V questions. And the V was like for Roman numeral five. And the idea was really simple. I sat on a chair and I had five questions, four market-related questions and one personal question. And the guests came in and it was just them on a chair, black background, one light on them, kind of like a spotlight thing. And I said to them before, I said, right, I'm going to read these five questions to you one at a time. And then I'm not going to say anything else. And I want you to react, think about and respond to each of those questions, be as expansive as you want. If it's a dumb question, tell me to move on. But I'm not going to clarify the question. I'm not going to engage you through a tour. So you just go. And the first one of those we did just we were just trying to try our ideas was (4/99)
with my good mate Dylan Grice. And he came in and he sat on this chair. And I asked him these five questions, there were four of them about where the yen was going and where the dollar might be going on the S&P or whatever it was, four market-related questions. And just watching him hear it, think about it, react to it and then compose an answer. There was something magical in it, you know, and we watched this first one back. And I got hairs in the back of my neck. I was like, man, this is really cool to be able to see the process. And I'm living that again with you as we've talked to Neil and Russell. It's been really fun to watch you do that. Yeah, you know, I really enjoy it. I get very, I get very excited exploring intellectual ideas and the process of clarifying a problem and understanding it better. And maybe another way of thinking of it is like moving the three dimensional object in space and seeing it from different perspectives excites me. You know, like I am sort of in that (5/99)
sense. And I also, I don't know if you do this at all, but I have like a list of interviewers that I think are like the greatest of all time, you know, like who I sort of put at certain levels. And I don't know, did you ever watch Bravo TV? Did you guys have that? I mean, I have seen it at times, but it wasn't something I actively watched. Yeah, there was someone named James Lipton who hosted a program there called Inside the Actors Studio, who I think is the greatest biographical interviewer of all time. But there were also folks like Brian Lamb, who founded C-SPAN and hosted Washington Journal and other programs on that network. Bill Moyers, who hosted multiple shows on PBS. And now you have someone like Peter Robinson over at the Hoover Institute who hosts Uncommon Knowledge and who does, I think, just an exceptional job interviewing. And I feel like you and I are in the category of people who love what we do, which obviously makes us very fun for us and hopefully for the audience. (6/99)
Well, and that curiosity is the most important thing, right? If you're not curious about this stuff, then the interview will be terrible. It just will be, because that it's that curiosity that takes you to these questions that you would never have thought of without listening to what the guest has said the first time. And then suddenly, it's that natural curiosity. So actually, that's really interesting. Let's explore that. And boy, do we have a lot to explore this morning with one of my favorite people in the world, Dr. Pippa Melanchron. She's just magnificent. Yeah, I feel like this is an opportunity. This episode is an opportunity to explore some topics that not I think I know we have both explored on our show. And we've both explored, I don't know if it's sort of like I've hesitated, for example, like UAP stuff, which is stuff that Pippa has written quite a bit about and talked about. It isn't that I've hesitated exactly. It's that I haven't quite know, it's outside of the (7/99)
framework, you know, and I feel like this is an opportunity to explore some topics like that with Pippa. Yeah, I mean, Pippa is someone. And if I could wish one thing for everybody, listen to this, is that they'd all at some point get the chance to meet Pippa and actually just sit down and have a conversation with her because she is the most fascinating person. She's a polymath. She's interested in everything. She's curious about everything. She asks everybody, she can find questions. And it's just such a rollercoaster having a conversation with her, but you always walk away just edified and energized and confused and it's just magical as I'm sure we're about to find out. Yeah, and I was just saying, it's also a practice in keeping an open mind. I really encourage listeners to use this particular episode as an opportunity to sit with maybe even intellectual discomfort at certain ideas or concepts and allow those to kind of flow through them and experience that process of exposure and (8/99)
confrontation, intellectual confrontation and what sort of derives from that from them because I think it can be really enriching. Yeah, that is such a great point. I mean, of all I guess so far, this is the right time to make that point because questions and challenges everything. And it may trigger some people, some of the things she says, but the beautiful thing is when you talk to Pippa, she's questioning it herself and she has this ability to put herself on both sides of every argument and make the argument. And that's the skill that we could all do well to kind of foster. So what do you say? We welcome Pippa and have the conversation. Let's do it. Pippa, my darling, how are you? It's so good to see you. I am so delighted to see you. How are you sweetheart? I'm doing great. And I hadn't realized that you and Demetri haven't actually met. You've exchanged emails, but you haven't actually met. So let me make the formal introduction. Pippa Melancholy and Demetri Cofinas and vice (9/99)
versa. My pleasure. I'm so delighted to meet you. I'm looking forward to this, Pippa. Me too. Demetri and I have just kind of, what we've done essentially is we just each grabbed a shopping bag full of groceries and stepped out of the door and just kind of decided we're going to go for a wander. And we know where we're going to go and what we're going to do. But all the things that we've been thinking about and talking about, they're just really big picture stuff. And we've had conversations with Neil Howe and Russell Napier to start this little journey of ours off, because they were two of the guys that kind of formulated the ideas in the head. But you have always been to me, someone who really thinks about the really big pictures. And every time I see you present, it drives me mad because I walk away thinking, now I've got this to think about. I didn't have that to worry about before I got in there. So in trying to figure out where we go with this, with this particular conversation, (10/99)
I'd love to just get an idea from you, because you've just moved back to the US after what, 20 plus years in the UK? Honestly, it's more like 40. Is it 40? Yeah, because I went when I was like 22. And then I only came back to take the job in the White House. And then I went back to England again. So I'm very Anglo. And we love you for it. You are welcome in England anytime. So let's just get a sense from you as someone who is American to a core but has lived overseas for such a long time and has been part of the US political discussion. Back when you were in the White House, you've just come back to the country. Give us a sense of your feelings both in leaving the UK and the situation there as you observed it from overseas. And now getting back into the middle of it because you're right there in Washington, DC. Just give us a sense of how it feels to you now you're back. Yeah, no, thank you. And just for a little bit more background, I grew up in a family where my dad served Kennedy (11/99)
and Johnson on the Democrat side and then Nixon and Ford on the Republican side. So I grew up in a very bipartisan Washington where the chairman of the Democratic Party, Bob Strauss and the chairman of the Republican Party, Howard Baker, were best friends and played poker illegally every Friday night. And deals got sorted out because they were all very, they had personal relationships. I think this is a critical component of understanding what's happened just as a, I'm going to start with a kind of detail that's really interesting. So why is nobody friends anymore? It's partly because Washington was the center of the money tap that got turned on, particularly after the financial crisis. But it has been really since the Second World War, an ever increasing flow of money, which meant inflation really got a foothold here. So property prices kept going up and up and up and up. And basically all these elected officials could no longer afford to have their families in Washington. So they (12/99)
sent them back to wherever their home state is. And what that meant is their children were no longer going to the same parties together because that's where the congressman senators, the journalists, like everybody in politics would get to know each other was because the kids were friends and the kids were in the same sports teams. And it created rapport and connection. Today, nobody's kids are in school together. And so there's no point of emotional connection. Plus we have these freedom of information act laws, sunshine laws that say if you're going to talk about an official issue with someone involved in that issue, you must have a lawyer present the minute three people are involved in the conversation who is recording what happened. So there's no way to have any private conversations about how are we going to cut a deal here. So I'd add to that as well. One further thing is cameras. When cameras were introduced into Congress, and I don't remember the year C-SPAN started, but that (13/99)
felt like a moment of wonderful transparency. But actually what it's done is turned the Congress into a theater where no one can say anything that is off the party line because it's recorded and all the donors are going to hear it. So suddenly everyone becomes much more glued to the official position of wherever they are on the spectrum and there's less and less flexibility. So against that backdrop of those things, now we have a really hostile environment. So as an example, my dad who recently passed away as you know, I took him to the doctor. The nurse walks in and says, I need to know which way you vote before I'm going to treat you. And we're like, she's kidding, right? And she's clearly not kidding. And my dad who's quick off the mark tries to challenge, he's a bit of a ladies man. He tries to charm her. Totally doesn't work. She wants to know. So he correctly intuits that she is a Democrat. And so he says, well, I worked for presidents, Kennedy and Johnson. She says, oh, fine, we (14/99)
can proceed. And you're like, you couldn't even raise the point that, babe, this is not appropriate for a nurse because there is no more sense of that. People are so angry and so polarized. They're either like hardcore Trumpers or they're hardcore anti-Trumpers. And it's for me, moving back to the US, it's been hard because it's almost impossible to have a conversation with anybody. They're so locked into their preexisting position and no facts, no arguments, no subtlety will shift anyone anywhere. So it's a weird situation. And finally, I'll say, I've been writing about this, describing the situation we have as an American glass most. And we'll get into the whole Trump story. But part of what Trump is doing is exactly like what happened in the Soviet Union when Gorbachev introduced this unveiling of truths. And it was deeply uncomfortable at that time. And of course, it led to the fall of the Soviet Union. But the intelligentsia in the Soviet Union at that time, the apparatchiks, they (15/99)
were very similar to what you hear in the US today, which is there's no problem. I don't know what you're talking about that we have to fix this. I was just with a bunch of Democrats last week at a speech and they're like, there's no problem with the budget, we just have to keep growing. That'll be fine. And you're like, we're spending more on interest payments than the entire defense budget. Plus we got holes galore all over the place. And they're like, no, no, no, no, no, we just are totally fine. We just need to grow. No need for reform or change. So it's at that level, you can't even pierce the veil of, do we have a problem? Yeah, we don't have a problem. Okay, then there's no conversation to be had. So that's a big overview of some of the things that I'm finding. That's a great place to start. There's so many ways we could go. It's interesting that the Democrats are now the pro-growth party. Right? That's a change. I mean, is there a problem? I mean, with your dad's blood being (16/99)
read, if she had to take blood, would that have been a problem for the nurse, do you think? I don't know. It's, you know, I'm still deeply, also deeply unethical. She should be fired for that. I'm stung by that. That's not a joke. We were so shocked. But there's another like element of this, which is, as you said, the Democrats are pro-growth. They're also pro-war. It's super weird. Like, suddenly the Republicans are the anti-war party and the Democrats are like, we have to fight to the bitter end in Ukraine, in addressing Taiwan, like multiple locations. And that's another layer of this. But for me, I've kind of tried to understand, okay, what the heck is going on? And I keep being drawn back into the history of the world since the Second World War. And I think part of how we got here is we gave a huge amount of authority to the community that's all about keeping secrets. And so that's the intelligence world and it's the military defense establishment. And they made a lot of decisions (17/99)
about what would be the right thing to do. And that led us into many wars. And a lot of spending that no one can account for. And I was listening last week to Chinese commentators at the moment, trying to understand how are we going to negotiate to a deal with China, which I think we are. I'm very optimistic that we're going to get to a deal with China. But one of them was saying, you guys were the best economy in the world and you took all the money you made and you spent it on wars and you spent it on stuff that no one can know about. And I would like, yeah, that's true. So the secrecy community, of course, don't want any transparency or any conversation or any reform. And they believe they know better than everyone else because they believe more intelligence than anyone else. But I'm not sure that's actually true anymore in an internet world. What is the truth of a situation maybe more apparent in open source information than it is from all these secret classified sources? And (18/99)
that's partly why Trump is saying we're going to lift the lid on the classification side. So we'll leave the nuclear codes classified, but pretty much everything else, we're going to declassify it. And the whole intelligence community is like, whoa, whoa, whoa, wait, wait, wait, because now they're naked and they got to explain what have you been doing and they're not used to. So there's a kind of a constitutional crisis here about the most powerful element of the US government, which is not accustomed to being accountable or answerable to anybody, including the president. I have a question, people. So as you were talking, I was just thinking about how the real challenge that I face, and I feel like I feel like this is a general problem for people, but it's certainly one that I face in general, is that I have a hard time, an increasingly difficult time making sense of reality and filtering signal from noise. And in some sense, there does seem to be a sense in which we're kind of losing (19/99)
our minds collectively. There are so many different theories out there competing with each other. Some that seem so patently ridiculous like flatter theory, it's an easy one to sort of point to. But then there are other ones where you kind of ask yourself, okay, well, here's this competing theory, but do I really know whether it's true or not? What are the actual sources of my conviction in my previous worldview? So I feel like glass notes is a great example. So maybe it's destalinization if we're reaching for the USSR because of how this administration in particular has kind of made enemies with the quote, deep state. And there's this kind of like narrative around a battle between the Trump administration and the deep state and trying to uproot the previous power structure. Because I feel like one of the things that is really helpful with your writing and your perspective is that you do take sort of non-consensus, I wouldn't say positions, it's more like you kind of play with (20/99)
alternative stories or interpretations of a prevailing narrative. How do you approach trying to assess the underlying drivers of phenomena or of stories? And to the extent that you want to answer it, what do you think is causing this reassessment of what we believe to be true in the world? I love this question. And I remember first listening to Daniel Schmockdenberger, who has such a great name, Schmockdenberger. And of course, he's a philosopher, because to be a philosopher, you have to have a name like that, right? And he's so brilliant. And he talks about sense making and why can't we make sense of things anymore? So this is really a central question. So I'm going to give you several strands of an answer. So one, I think Marshall McLuhan, the Canadian philosopher was correct, that when the volume of information that we have to process to make sense of things becomes too large, there's just too much stuff to take into consideration. We humans can't handle it. We get a headache. And (21/99)
so we stop reading, which is a time consuming process that by definition involves using your eyes to go letter by letter, word by word, line by line, which pushes you into a linear thought process that gets crushed by the weight, you don't have time. So now you start turning to symbols instead of words, because symbols encompass massive amount of information. And what are the symbols, right? People are like, I'm not using symbols. I'm like, give me your phone. Your phone is completely full of emoticons, right? Because it's a compression of information. Brand logos are a compression of information, right? If you see the Starbucks logo, you know exactly what you're talking about. So what people start to do is depend on the symbol. And that is why now the question is not what do you understand, it's are you watching Fox or CNN? That tells you everything. If you're a CNN, you're a Democrat, if you're Fox or Republican, okay, then you only trust that source and you won't take information, (22/99)
you won't bother with information that has the CNN logo anywhere near it or vice versa. So this also stops a linear rational logical thought process. By definition, once you move into symbols, this is about emotion. It's about that you're processing a different part of your brain in an emotional way. So that raises the temperature as well. There's a disciple of McLuhan called Leonard Schlein, who was a brain surgeon from Canada, who wrote a brilliant book called The Alphabet and the Goddess back in the early 70s, I think it was. And he says, whenever in the course of history, we shift from words to symbols or symbols to words, we always go to war. We always go to war. And that's an internal war because the left hemisphere and the right hemisphere of your brain are literally fighting with each other now, right? The one side being rational, logical, linear, and the other being creative, symbol dependent. So you're having a headache in your head as you are struggling with these two ways (23/99)
of sense making. But we also go to war in a battlefield. And he talks about, for example, how is it that the witch trials happened? How is it that humanity turned on the child bearing part of our species? He says, it's never happened in any other species. Why would we do that? And he talks about at that time in history, literacy has been introduced. Everyone's locking into their left brain, the logical, rational, reductive, and who are witches? Those are people who are not logical, rational, reductive. They're not using official medicine. They are relying on ancient wisdoms of homeopathic medicines, for example. And fundamentally, I would throw in as an economist, what you have here now are competing cash flows. And that creates a fight. Right? Think about it this way. If you're dying or your child is dying, you're really ill, who do you go to? In the course of history, you always have two fundamental choices, the establishment, or what is effectively a medicine man or a medicine woman (24/99)
or a shaman or a witch doctor. And the establishment, the Catholic church, right? And you pay your money to the priest and the priest gives you blessings, and that saves your life. Or you go to the witch, right? Or the shaman. Even with the Holy Roman Empire, we had this conflict between official medicine versus ancient wisdom medicine today, NHS. Or, you know, talking to doctors who have left the profession and have alternative views about, for example, vaccines. Huge fight throughout history between these two camps. So this business of rule books for officialdom written, and it's literary, versus symbols of ancient traditions that are not codified. But intuitively, we know they've worked through because grandma saved mom that way, right? So that's one element of it is our brains are being affected by the volume of information that one is required to process. Number one. Number two, the information is then being accompanied by, I would say, a sheepdog. Every one of us, when we wake up (25/99)
in the morning, there is an invisible sheepdog right there with us. And that sheepdog is an algorithm. The algorithm is designed to give you more of what you like. So, you know, Grant, you love sports, I'm sure that you're in boxes full of sports stuff. I'm more in that it's a ball, like, you know, is this, you know, it's not my thing so much. I have to learn this, especially living in America, because it's religion here. But I've never been a massive, I get playing sports, but not watching it on TV. So anyway, my algorithm is not giving me any sports news. And I'm interested in space, for example. And maybe you're not. So I'm like aware all these things are happening in space that are important for geopolitics, they're important for markets. But most people have not clicked on a single space story. So they're like, what is she talking about? I haven't seen any of this in the news. That is because that little sheepdog is corralling us into ever narrower intellectual pens. And narrowing (26/99)
the aperture of the view of the landscape that we get to see. So every day, you have to have an argument with that dog. And you have to train that dog, widen the number of sheep that get to be in your pen. And so that's the second contributing factor to why we can't make sense of anything. And then finally, I will add, and now we'll get into what many will call conspiracy theory, which by the way, is a phrase actually created by the intelligence community to stop people from asking any questions of them. So I was fascinated, you know, I grew up in the Watergate era. And my dad was working for Nixon, it affected, you know, my family life at the time. So I read a lot about Bob Woodward and Carl Bernstein. And I hadn't realized after those two broke the Watergate story, and became so famous for that, Carl Bernstein wrote amazing article in Rolling Stone magazine where he said, I had no idea that all of my fellow journalists were working for the intelligence community. I was surrounded by (27/99)
people who were employed by and paid by the CIA and other intelligence agencies. He clearly is like, what? I thought we were the third estate, I thought we were independent. And today, it was so interesting, I wish I could remember their names, but there were two journalists at Politico recently, last year, who had broken the big story on the Hunter Biden laptop, and they had done massive research, they had huge information, and they kept giving the articles to their bosses, and it kept just sitting in the inbox, and the boss wouldn't publish it. And there was always some excuse or another. And only after they left Politico, they were like, you don't think they didn't want us to write that story? And you're like, you guys are journalists, how can you not work this out? But the answer is, it's very, very difficult and painful to tell yourself, oh, I've been a patsy. I've been used by a system that wants to deliver some information in a certain way, but not other information. In other (28/99)
words, we are living in a curated information environment. Now that changed with the introduction of X. And X is not a curated information environment, and it has allowed alternative voices to pop through. And that is totally discombobulating not only the general public who are like, wait a minute, what? Is that true? Is that not true? It's also discombobulating all those in authority who had control over what the narrative is, and suddenly they don't have control. And that is creating a massive fight that Washington is the epicenter of. So a lot of what you said there really resonates with me. And I'm just trying to think about how to be thoughtful and not to ask too many questions at once. I mean, one of the observations I have is that we're going through a kind of reordering of our frameworks, our collective frameworks as a society, which raise questions about objectivity, whether it even exists. I think a lot of people are questioning that as well. Of course, in the last few years, (29/99)
we've seen a lot of people become introduced to the concept of a simulation or a simulation theory, which actually isn't just about computer simulations. This goes all the way back to Plato's cave or even to Cart's demon. And how do we know what we know? The question of what is real? How do I know that it's real? I also, I feel like there are some significant consequences that we're immediately dealing with. And because we were like the frog in the boiling pot, we may not really be conscious of it on a day to day. And I feel like one of the consequences of this informational reordering, this sort of overflow of information, and the phone as this, I like this term used as a sheepdog, is that we've gone from a much more local existence to a more, I don't know if the term global is quite right, more of an existence determined by our social graph and the curated media streams that we experience. And that, I wonder, it seems, and these are all questions for you people. I'm kind of just (30/99)
trying to get them out in a coherent sense. It feels like it's destabilizing in a way, because we're no longer tied to our local environment. And our political structures were built on such an environment. We've already seen the economy has adjusted much more readily than our political systems to remote work and stuff like this. I also feel like, again, what you've touched on here, I think, which is really interesting, is that we've seen a kind of deterioration and independent thinking. And because, again, it's hard to know what's real, what to focus on. And our concepts and frameworks around subjectivity and objective reality, I think, are under strain. And so I feel like that also opens the door to demagoguery. So I'm curious if you can speak to some of those things, some of the immediate consequences that you feel like, and I would say some of the more immediate perilous or dangerous consequences that stem from this reordering, in your opinion. Yes, I have very strong views on this. (31/99)
I think the way you've posed the question is exactly right. And that's why we're in a kind of Copernican moment where our fundamental understanding about how this universe works is being challenged by new provable facts that the sun is not revolving around us, we're revolving around it. That's a very profound change. And I went back and I looked at that period in history and realized, wow, it took like 100 years before people could actually say, yes, this is the case. That's three generations, it required to get comfortable with this notion. So why are we in that situation today? It's, as you say, the simulation theory is one of them. And by the way, I shared a taxi once because I spoke on a stage with Nick Bostrom, and I tried to have a conversation with him. I was very difficult. He's so brilliant, he just can't talk to a regular person like me. Like I just couldn't get anywhere. I think. Was he too focused on the details and he couldn't sort of zoom out? Well, and I wasn't (32/99)
sufficiently up to speed with his version of simulation theory to be able to really grab him. He reminded me of Alan Greenspan. Alan Greenspan was the same, no chitchat. You had to go straight into like a really gnarly technical problem in order to engage him in a conversation. Very fascinating minds, but difficult to engage with. Elon Musk is like this too. I talked to him once and I remember thinking he is solving 15 incredibly hard problems in his mind while he's talking to me and I am clearly dragging like an anchor on the weight of his mental process. Anyway, it's interesting because our understanding of how the universe works is changing so fast that people are almost having to like look for a handrail to hang on to. So I'll give you some examples of what I mean. One is the introduction of quantum physics and of course the Nobel Prize for that was only awarded last year and we do not have standard theories of physics that are comfortable with the notion of quantum entanglement. (33/99)
And so what we know about how the universe works isn't matching up with what we're finding out at a time when we have ever more sophisticated data gathering devices. And not only that, I would say humanity is adjusting to using prosthetics. So the James Webb telescope, which is now I believe 1.5 million kilometers away, is a prosthetic. It is allowing our eyes to see 1.5 million miles away in the galaxy. And similarly, there's a the most powerful microscope is the Titan cryos. I can't remember how minuscule it allows you to see, but we have a prosthetic to see deep, deep, deep into the subatomic structure of reality now. And what we're finding is we punch into these new frontiers that all of the things we thought were true, not so true. Maybe there's other explanations. And we're not comfortable with this letting go of an old framework, as you say, when we don't have a new one, because we don't have theories yet that fully explain all this weird stuff we're finding. And I would add to (34/99)
that and finish with this thought. I think we are losing our minds because of Renee Descartes. And Renee Descartes introduced this notion of a cartesian split between the soul and the body. And the soul became the responsibility of the church back in the 17th, 18th century when he was writing. And the body became property of the scientists. And we in the West, in Western Europe, in the United States, we believe very firmly there's a split between these two things. So anyone who tries to explore stuff that's not easily quantified, that can't be measured and quantum by definition is heavily in this realm, we ascribe that we go, that's mystical, that's magic, and that's not serious. So we can't study any of that. We only are interested in the things that are measurable. And that cartesian split is breaking down as we punch into the furthest reaches of our universe at the nano scale and at the macro scale into space. And now we have to reunite this left brain and right brain into a whole (35/99)
and think holistically again. Now in Russia, in China, in India, in Africa, they never had a cartesian split. They are perfectly capable of holding information and studying things that don't fit the scientific method. And for this reason, I think they're making faster progress on a lot of science. It helps explain part in part why they're pulling ahead. But for us in the West, to overcome the cartesian split is as profound as the Copernican moment. And I think that is also why we can't reframe or like, how do we even take into account, for example, in politics, how people feel about inflation? We're stuck in the arguing whether there is any inflation. But the fact that people felt it was what overturned the political establishment. And I still talk to people in the markets who are like, there's no inflation. This is all imaginary. We can measure it. And this is how it measures up. And I'm like, okay, maybe, but there are a lot of people who feel they can't fill the fridge, and they're (36/99)
paying a fortune for eggs right now. And we're not giving any credence to that story because we've already decided that stories and antidotes are not important, only measurable facts. That is a cartesian split way of thinking. All right. Okay. So look, everywhere we look, there's this sense of splitting apart, whether it's left and right, whether it's rich and poor, whether it's old and young, everyone's being pulled apart. And because of that, there's this feeling that we don't understand the world anymore. The young can't understand the old, the rich can't understand the poor, the left can't understand right. And so you've got this, the scientific community, which have never, it seems, been pushing forward at greater pace than they are right now, aided by technology and computing power and all this kind of stuff. And they are trying to understand the universe on a subatomic level or an astrophysical level. And they are making this progress, the like of which we've not seen in our (37/99)
lifetimes. And that's only going to increase in both pace and depth. And at the same time, you have the man in the street trying to understand why he can't afford to buy eggs. Right. So you've got, that's another split. And we're being bombarded by all this incredible advancement, all this amazing technology, all these incredible stories. And you can feel people, you know, the UAP stuff that's come up in the last couple of years, you can almost watch in real time, the process that people go through, which is, oh my God, little green men. And then it's, wait a second, that was pretty cool video I saw. And then it's the congressional hearings. And then just at the point where you can grab onto that and go, okay, I'm going to go deep into it like you do. They go to your earlier point. This is all too much. I'm going back to little green men because it's too complicated. I need to fill the fridge. It's tough for me to see away the left and right divide. I can see away back from there. I (38/99)
think it's the way through. And we end up back there. I think the rich and poor divide, there's also a way back there. And that's through because we've been through that before we can get bad. The old and young, again, I feel that there's common ground there in families and communities that will help. But the gap between science and reality, the gap between informational superpowers and computational superpowers and the man in the street is only going to get wider. How do we find a way back from that so that people don't just give up and don't just become so overwhelmed by the incredible progress that they discount it in a world where they can't even trust what their own elected representatives are saying? Yes. And I'd like to separate out this interesting UAP issue and talk a little bit about that. But before I get to that, because it's a great example of this Cartesian split problem, and oh, we're not allowed to study that. By the way, only last week, the former chief medical officer (39/99)
of NASA came out and said, I'm now retired. And I got to tell you, it's all true. And all the astronauts have seen it, but nobody can say it because they'll be thrown off the astronaut squad. How many people do you need of this caliber coming out before you go, something's going on here, which is kind of how I ended up in this subject and really looking at it. But the bigger issue is the loss of compassion. And the feeling, two of the earlier questions as well, that it's not just, I'm right, you're wrong. It's I'm right. And the reason you must be wrong is you're either an idiot or you're evil or both. Right? That's the kind of the core way we're beginning conversations. The idea that I'm wrong, and you may have wisdom and knowledge that I don't yet understand. This is not a very typical position these days. So one is just there's a mindset that is actually not that hard to change. And I've been playing with an idea, which I have not yet written about, and I'm going to test it out on (40/99)
you guys right now. I'm halfway through an article. It's a little out there. But I've been thinking, if we're shifting from, you know, this rational left brain way of thinking into a more holistic and right brain way of thinking, what's the point of connection? What's the mechanism for getting the two sides to communicate better and opening up this possibility of compassion and understanding I am not always right. Maybe I've stuff to learn. And the answer is your heart. And I think actually I want to call it, we have not spent any time on our heart where we're. So we spent a lot of time building hardware and a lot of time building software. And you know I've made up this word shardware, which is a category of product that's both deeply integrated, which cannot be separated. But now I've realized actually none of that works if your heart where is not in the right place. And the heart where is about as a human being, what grace do afford another person who has a completely different (41/99)
point of view than your own. So the reason I know about Daniel Schmockdenberger is because when we had lockdown, I had time on my hands like everybody. And I made a decision, I am going to spend time with communities that are the opposite side of the political spectrum from where I live. And I remember joining an online group that he was part of that was full of the guys who organized the protests against the banks in the city of London, who are throwing paint on paintings and museums, who are locking trucks down, at Hyde Park Corner to protest oil extraction, like those guys. It's basically it was extinction rebellion. Right now I work for George W. Bush, right? And I'm going to hang out with the extinction rebellion folks because I just want to understand like where they're coming from. And you know, I learned a huge amount. I am not an extinction rebellion person. I don't agree that this is the right way to go. However, I learned a lot about the world and how to think about it. And (42/99)
I don't think we do this very much. We don't reach into our discomfort zones. We don't try to go figure out why is this opponent of mine over there? So we're not affording any grace or compassion. And that is a hardware issue in ourselves, which I think we can fix. I think we can spend time. I'll add to that. The more advanced your technology becomes, the more spiritually elevated you must become as well. And that sounds so woo woo. But you know, at one time during the industrial revolution, we were chaining children to the machine so they wouldn't run away. Right? And then somebody with some decent hardware went, um, this is not a good idea. And we stopped chaining children to machines similar with this whole slavery movement. We thought that was okay. And then somebody had a hardware moment. You know, maybe this is not okay. And today, as Peter Teal has pointed out, we have weapon systems that are so fast, that are so destructive that we really have to either be angels or demons. We (43/99)
can't even be halfway. Because if we have any demon element of I got to kill the other guy, we'll kill everybody and ourselves. Right? We don't have limited use stuff anymore. We have smashed the whole thing stuff. So he too says we need spiritual elevation in order to handle the technology we're creating. So I think it is happening. And I do detect that there is this spiritual elevation, particularly amongst young people. My generation think this is all nonsense and can't even have a conversation about it in the main. But the younger people are like, yes, this is the way I have to open my heart. And that will lead me and us to a better place. I think that's right. You know, Pip, this idea of compassion is such an important one. And this is one of the things that I've been kind of thinking about. And I think that's absolutely right. That's what we need. But unfortunately, compassion comes from civility. It's very difficult to have compassion without civility. And civility in the (44/99)
discourse and civility in society has not only crumbled, but to bring us back to what we were talking about earlier with the sheepdog, it's being amplified and reinforced over and over and over again. And I mean, every day, and this is not what I don't click on any of them, but I am constantly fed videos of, you know, fights that break out the airline check in desks and fights that break out on the street here and fights that break out here. And this idea that, you know, the keyboard warriors can control everybody and abuse people. And it almost feels like that's become the default. People are, when given the freedom to behave any way they want, because they're behind a keyboard, they're defaulting to that basic human instinct to hunt and kill as opposed to to be kind and compassionate and civil. And wherever you look now, whether it is starting on the ground on Twitter, or going up to our elected representatives in every country, there's no beacon of compassion, no beacon of civility (45/99)
left, unless you actively go out seeking it, and you will find them, you'll find them in people like you. But you have to be looking for you, you're not going to be served that. And I, I just don't know, as I say, I can see ways through a lot of these things. But it seems that the way back to civility and compassion either goes through a much darker place, or it's impossible. And I'm curious as to, as to how you think about that particular journey. Yeah, and I totally, totally hear you. I think part of it is you have to be the change. You have to be the change. So we have to make a personal decision to enter into that way of thinking. And maybe compassion is not the only word to use, empathy is another important word, which is different from sympathy. Empathy is just the beginning to try to understand how or where somebody else is coming from. I think this also involves some courage. And I've found as, you know, an economist, I've had to draw on my personal courage, much more in the (46/99)
last few years than ever before. So I'll give you a very practical example. The Trump tariff tantrum that's going on. And obviously the headlines are full of, you know, Trump is a disaster and Trump is ruining the world order and da da da da. But when I really look at it and try to separate out the emotional response and look at, okay, but what is the policy? What he is saying on one level is the major American and European corporations were ripping everybody off. They ripped off the American worker and the European worker by moving their operations to China, where they then paid the Chinese worker nothing. And then they charged the consumers in the West a fortune. And this needs to stop. We need to remove this rent seeking corporate world from smashing both the consumer and the creator. So look what's happened since the temper tantrum on the tariffs started. We have all these Chinese workers who've been making, for example, the handbags for the big luxury firms out of Europe. And they (47/99)
are going on Instagram and holding up the handbags and saying, we make these for Gucci and for whoever. And we have incredible craftsmanship and skill, which they do. And why don't you buy directly from us? And by the way, we've got some design ideas of our own that are cool and interesting. And young people like, yeah, I want to work with these creative artists and pay them what is a reasonable wage for them, but not what Gucci is charging us. Right. And suddenly we have connectivity between the creators and the consumers and removing the big brand name corporates. I think that's very interesting. And that is how innovation happens. And I think that's a good outcome of the tariff discussion. And that's the purpose of it. It's not only to raise the income of American workers, though Trump has to position it that way because of his electoral base, but it will also raise the income of the Chinese workers as they build brands that can go global. And they've already done it, by the way. I (48/99)
always use an example of HIER, the company in China that it's such a wonderful story and nobody knows it. So they make fridges that came to the US in, I believe it was 1998, 1999, and said, we're going to make fridges in the US. Right. So when everyone else is leaving the US to make that kind of stuff, they're coming in. People are like, are you guys out of your mind? But the founder says, no, no, no. The American consumer is the most discerning, most sophisticated, and we have to learn how to service that consumer. We need to learn quality control. And he's famous for smashing 72 or 73 of the fridges because they had some minor scratch on it. And his workers were like, oh my God, what are you doing? This is a huge amount of capital that you're destroying. And he's like, quality control. This is not quality control. And it became a Harvard Business School case study, which is worth looking at. And then he came to the US, they started to build, and they got into two sectors because no (49/99)
America was going to buy a Chinese fridge at that time. Right. There was just no way. But two categories, wine fridges. At a time, Americans were buying wine like crazy. No one was selling quiet and elegant ones. So he moved to South Carolina, where they make beautiful furniture, wood panel furniture. So he combined the wood paneling with the quiet fridge, flew off the shelves, and he realized students were on the rise. Everybody's going to college. They all want a little fridge in the dorm for the beer. He makes those. Huge success. And that led to buying General Electric's home appliance division for five and a half billion dollars, which they still run today. Now, could we have more Chinese companies that do this? Yes. I would say we must have more Chinese companies that do this. They cannot raise national incomes if they don't go global. But every time they start to try to go global, we shut them down. Why? We arrest their senior people at the airport. Why? Because we make the (50/99)
argument, oh, you're really an instrument of the state and you're spying. And they say, oh, well, we'll shut down Google and Metta because we think they are too. And now we have two different arguments. Why don't we separate them, which is what Trump is saying, and let's allow commercial competition. And let's have a separate discussion about spy games and figure out rules of the game there instead of disqualifying everyone because we have spy game worries. Now, to say that makes me sound like a trooper, right? And now anybody who's blue is like, gosh, she's crazy. We don't like her. It's hard because you're trying to have the courage to say, actually, there may be sense in this policy approach at a time when everyone else, it's all terrible. So how do you find your heart where and your courage and screw them to the sticking place as Shakespeare said? Can I jump in with a question? But the thing is, the thing is, though, I'm still stuck on the previous part of the conversation because (51/99)
while this is fascinating and interesting, this conversation about what I would describe as a narrative collapse, and I don't know if you agree with that, Pippa, but I feel like that's what we're undergoing. And the reason I think it's important is because it presents a collective action problem. And so all of these other things we're discussing, in my opinion, are downstream from collective action. They can be addressed through collective action. And it's interesting, like we're talking about, I think, yes, that's right, you brought up the Salem witch trials and maybe think of the Middle Ages, and we went through this thousand year dark period in society where we lost, whether we lost the ability to view things more objectively, people can debate whether that's actually true or not. We can get into an ontological debate about the nature of reality and the nobility of reality. But what I think we can certainly agree on is that we lost a shared protocol or Western society lost a shared (52/99)
protocol for thinking, reasoned and scientific inquiry. And what's, I think, both fascinating intellectually, but also sort of really scary is that as we're going through this narrative collapse, and I would say, I would argue that a core part of why we're going through a narrative collapse in America, especially, is a series of traumas, 9-11. And you can see this, you wrote some posts recently where you cited an interview that Tucker Carlson did with a representative of the firefighters in America. And they had a whole section on 9-11. And they brought up, again, the thermite and claims of controlled demolition on the buildings and all sorts of stuff. And there's a whole sort of avenue of discussion there. But the point is, 9-11, the 2003 invasion of Iraq, and a series of traumas that resulted from the mismatch of the narrative, Abu Ghraib, the lies that took us to war, et cetera, and reality. Same thing with the 2008 financial crisis, and same thing again with COVID. And it feels (53/99)
like that social trauma has opened up a portal to reassess everything. And within that chaos, as we mentioned earlier, lots of competing narratives, many of which seem on their face to be patently ridiculous, like Flat Earth Theory, for example, are nonetheless gaining a lot of mindshare. And here's where I'm sort of driving this onto the focal point of a question. It feels like what's really interesting, again, intellectually interesting and also scary is that this narrative collapse is happening at the same time. And you made this really great point about information overwhelm, right? And like, what do you do? You seek for ways to compress information, symbols, or demagogues. We're going through a new technological revolution with AI and LLMs. And what are these systems? They're ways of compressing information. Now, we human beings used to be far more ambidextrous and accustomed to solving a wide range of oftentimes novel problems in physical space, hunting and gathering, building (54/99)
cabins and fixing the leaky roofs. A lot of these skills in our increasingly intermediate and specialized society have slowly dissipated an atrophy for a lot of people on a physical level. And they don't know how all these systems work, like especially in America. We don't know how so many of the systems on which we subsist actually work. We've delegated that authority, which again, is a huge problem we think about the industrialization and trying to reindustrialize. I feel like we're about to have this potentially the same thing happen to our mental aptitude. And it's frightening to me that we're passing through this focal point while we are in a state of mental and emotional trauma. And I don't know how that problem can be addressed. And I'm just curious, again, it's not a great question, but it's kind of like a data dump on you. And I'm curious to what degree that resonates with both of you, by the way, and how responsible members of society who can see this problem can or should (55/99)
respond to it. So if you don't allow me to ask any questions, then I'm going to question everything. That's the situation we're in because we weren't allowed to ask any questions about some of these major events, as you say, trauma events. And when we did manage to get a question in like, were there really weapons of mass destruction in Iraq? No, there weren't. Then your trust begins to fall. And what we're witnessing and what you've described is what has caused a collapse of trust. And so, you know, Richard Feynman, the famous physicist, had this lovely line where he said, I would rather have questions I can't answer than answers I can't question. And we've been in a, well, you can't question the answers kind of environment. For quite a long time, I would really date it to the Second World War again, of narrative control. You know, even, for example, during Vietnam, which again, that's my father's era when he was serving in government at the highest levels. And his best friends, one (56/99)
of his best friends was Daniel Ellsberg, who released the Pentagon Papers. And, you know, Ellsberg was a Marine who did many secret missions for presidents and found out things that were really shocking. But one of them was the generals are lying to you. We are losing in Vietnam and we cannot win this thing. And of course, he was viewed as a total traitor. And that was partly what led to the release of the Pentagon Papers. He's like, I can't fix this situation without the public becoming aware of the true situation on the ground in Vietnam. Once the public understood, then the president changed his view and we got out of Vietnam. But it required someone really questioning. And that was not viewed in a friendly way by the establishment. They wanted the war for reasons we can discuss later. But maybe we're in a parallel situation today, for example, with, I think, with Ukraine. And now I'm going to step into landmine territory. But, you know, let's think about what's the official (57/99)
narrative been. Good guys versus bad guys were the good guys easy. But go back and now we're seeing an unveiling of some truths. We've seen the former head of the CIA come out and say, well, actually, we did build 10 operational stations on the Ukrainian-Russian border in 2014, which kind of implies they had something to do with the Maidan Revolution, which overthrew what would otherwise have been a pro-Russian result in that election process. Do we have a history of overthrowing democracies? Yeah, we do. Because of the post-war focus on, we mustn't allow the communists to be in charge. So you can understand the rationale, but nonetheless, maybe our hands are not entirely clean in the origin. Then there's this whole question of the biolabs. And the official story is, you know, Putin keeps saying, they're biolabs in Ukraine. The US says it's ridiculous. There are no biolabs in Ukraine. Tulsi Gabbard during the election said, but there are, they have addresses like we know they're there, (58/99)
and they were built by American money and by particular contractors that are associated with the intelligence community. And then Senator Kerry says, she's a traitor, right? Just wrong. She's lying. She's a Putin propagandist. Then it turns out that Victoria Nuland testifies to Senator Rubio and the public hearing. And he says, do we have biolabs in Ukraine? And she says, yes. And we have pathogens in them, and we're very worried. What happens if they get hit in this war because then they're loose and humanity will be affected? So we got to get this locked down, which by the way, Tulsi Gabbard again talking about now. And suddenly you start to realize, because I talked to some bio weapons inspectors to try to understand what the hell is happening with the story. It's real, not real. And here's what I got. Well, yes, we have biolabs, but they're not bioweapons labs. So this is semantics now. I'm like, okay, but are they dual use? Well, everything in biology is dual use. So is there a (59/99)
possibility that the Russians could perceive that we were making biological weapons in these labs? Well, yes. And particularly since now we know the origin of COVID is kind of messy too. It turns out we were funding the gain of function research, which is why Bobby Kennedy has just announced no more gain of function research. So what you were told was a crazy idea. It turns out is true. So now we want to continue the war in Ukraine, even though Putin is right, we did have biolabs and they are still there and they still have pathogens and they aren't secure. Okay, do we think it's a good idea to continue this war? Do we think it's not a good idea to continue this war? Now we have a split. I am myself more on the side of let's end the wars because the president like him or not has just been elected on a end the wars platform. This is where the youth of America are. The voters are clear. Nobody wants to go to war. So he's saying, okay, let's cut a deal with all the superpowers. Let's cut (60/99)
a deal over Taiwan, over Gaza and over Ukraine and like settle this. Then I think that is what's in motion. And I'm actually quite optimistic that that is working. But for people who want the war to continue, and who are willing to, for example, go to war over Taiwan, I keep asking the why. Why is that a better way to go than diplomacy? I'm not getting good answers from that side. And I'm frightened because I'm like, is this really just about weapon sales? Like really? Is that what the driver is? I mean, so these are the things that come in answer to your question is if you don't let me ask questions of these answers, that I'm going to question everything. And that's what the public is doing. So there's been, I think, also a loss of trust in quote, expertise. And the United States and Europe have been run for many years by technocrats. We've seen a shift towards populism now, which in some sense is a form of demagoguery. And to use your analogy of symbols and symbolism, leans heavily (61/99)
on symbols and symbolism. There's also been a significant deterioration of the quality of journalistic practices and ethics. And I feel like this, I have not really talked much on my show or thought much about journalistic ethics weirdly. And as you're talking, it's come up quite a bit for me. Because I feel like, again, this metaphor of a shepherd, the algorithm, it's a great example, people need shepherds. And I feel that the lack of credible voices, now, it's a sensitive topic. I get it. Anytime you talk about politics or journalism, you end up falling in the tribal camp. I think at least this is a safe space. I feel like all of us are not very tribal and sort of we understand that that's not where any of us are coming from. But I brought up Tucker Carlson earlier. And I think it's a good example because he had that conversation about 9-11. And when this individual who, going back to the point of expertise, is a firefighter, but has no discernible expertise in explosives that he's (62/99)
put forward, at least, or structural engineering, makes the unequivocal claim that the buildings, all three, the towers, one tower two and building seven, were controlled demolitioned, offers no real evidence for it. Actually, just to interrupt you, I'm so sorry. So let's be clear who we're talking about. Kurt Weldon. Sure, thank you. So Kurt Weldon was the deputy chair of the House Armed Services Committee, so one of our most senior intelligence officers in the country. He was loved by both sides, Republicans and Democrats, but he'd been a lifelong firefighter. And he was very close with that community. And he went up to be at the World Trade Center on 9-11. And it was his mates who went up to whatever the floor was, the 68th or the 70th floor. And he doesn't say in the interview it was a controlled demolition. What he does is he says, the story of what happened doesn't match the acoustics, and it doesn't match the experience of the very skilled firefighters. And we need to ask better (63/99)
questions. And then for me, the killer bit was, he goes on to say, and then we launched the war in Afghanistan on the grounds that Ben Laden was in Afghanistan, but he had four intelligence sources come to him and say, Ben Laden is in Iran, and he's being protected by the Iranians. So we now are sending all these Americans to have their limbs blown off by IEDs looking for someone who we already know isn't there. That's his allegation. And he's angry about the inability to ask any questions about all this. And of course, his daughter, by the way, got raided by the FBI, which created headlines that meant he didn't get reelected. And then it turned out she was never charged with anything. And then there wasn't a story there. So he's coming out 25 years later, and he's angry, and he's informed. And that's just to put it in for... Yeah, yeah. I would encourage people to go listen to it. My recollection was that he was pretty explicit about the claims around thermite that firefighters... And (64/99)
the reason I brought up his firefighter credentials, because that was essentially the basis of his claims around 9-11, he mentioned that fellow firefighters heard explosions, that when they went up at the top of the building, there was hardly a fire, and then it collapsed. And Tucker seemed to not along, and no one questioned this. And I want to bring it up because it's a great example, because it also brings us to... It's not as good an example as the UAP story or the UAP conspiracy, which truly has no good explanation. I mean, that is a great example of where I cannot... And this is... I would love to ask you about this, because I know you write quite a bit about it. The 9-11 example, it's true. You look at building 7 collapse, and it looks like a controlled demolition. By the way, the killer for me was that the BBC reported the collapse of the building 20 minutes before it collapsed, while it's still standing in the background behind the journalist. You're like, what? Yeah, so I (65/99)
bring that up because you watch that, and as a layperson, you're like this. But then if you think that through and you say, okay, what would be required in order to actually have three buildings wired, prepared for a controlled demolition? It would require a very large conspiracy, presumably, and what is the tangible benefit? In other words, what is the cost-benefit analysis that you would run to say you're going to fly planes into buildings? And then, as if that's not sufficient to justify a preemptive military action or a war on terror, you would control demolition. My point is simply to say that I would have felt that for someone like Tucker, and this is true in general, our journalistic centers have deteriorated, I would have expected it, and certainly 10 years ago or 20 years ago, you would have certainly seen more pushback, and you would have asked the person to put forward a competing theory. And I feel like that isn't something that we see much anymore. We just see everyone (66/99)
kind of goes into their camps, especially on the right. I would actually say this is very true of the right. Again, it's not a criticism of the right, or this is not a way of absolving the left for their contributions and sort of doubling down on official narratives and supporting the power structure. But it seems that on the American right, the narrative weavers are very focused on dismantling the narratives, dismantling the institutions, but not really proffering a competing narrative. And I find that to be rather dangerous because it creates that vacuum that we talked about earlier. And in that vacuum, what comes out? Who rises from there to present order to the public? Does that concern you? And then I'd love to, after that, I'd love to really broach a conversation at UAP if we have a chance, because I'm really fascinated by the topic. It's like what I said about science. How do you let go of a paradigm framework that you know isn't correct any longer, but you don't have a new one. (67/99)
You just have a bunch of information that the old one is not right. So you don't have something to swing to. And until we get a new paradigm that comprehensively explains how the universe works from a quantum physics angle that everybody's comfortable with, nobody wants to let go of the framework they're currently hanging onto. What do you think? I mean, so we talked about simulation theory. It might sound ridiculous for me to put it forward, but actually I've put it forward in past on episodes on UAP because actually if you just wanted to just spitball stuff, the simulation hypothesis would actually solve the UAP conundrum. I think that's exactly it. Similarly, it would solve the 9-11 conundrum in this particular case. And I don't know that it's fair to call that a conundrum because I'm not a structural engineer. Maybe if I spoke to one, they would give me a good explanation for why building 7 was able to collapse that it's much more compelling than a broad conspiracy and rigging the (68/99)
building and then for no apparently justifiable reason just collapsing it. How do you make sense of these types of discrepancies or disturbances in the matrix? So I'm, it is in the matrix is the right word. I am studying deeply various forms of simulation theory. I am finding myself drawn into the discoveries in the realm of physics. It is not my natural comfort zone, but it's like you can't make sense of the world if you don't understand how it works. And I remember when I was very young, my mom came in one day and she said, oh, they found the first subatomic particle and they were called quarks at the time. I mean, I must have been 10 or something. And she started crying and she said, they've named them truth and beauty. And she was so moved that we would call these new findings something of such a, you know, beautiful nature. And maybe that for me made me realize, oh, we're connected to this stuff that, you know, we're all kind of stardust, aren't we? And understanding the nature of (69/99)
our stardust is part of what makes us human. Who am I? What am I made of? Where am I? What is this stuff? What is this wall behind me? I know a lot of people don't think about these things, but that's where my brain goes. So I am still studying. I don't have any definitive answers on any of this. I think it's fascinating that so many very brilliant people are struggling and talking to each other about these competing theories. So it's a discovery process. It's uncomfortable because you want an answer, but there isn't an answer yet. We're getting better answers every day, though, because we have better data gathering. We have better instrumentation. We have better supercomputing. We have AI, which is vastly accelerating the process. We now have, you know, the chips that are being created today, you know, this famous story about the new Willow chip from Google, which they say solves a problem that in the past, theoretically would have taken every computer on Earth 10 septillion years to (70/99)
solve, which means a period that's longer than the entire history of our universe. And today, the Willow chip can solve that same problem in five minutes. Now, maybe there's some hyperbole there, but the speed at which we can solve problems is so accelerating that you should be asking, like, wait, how does stuff work exactly? Because we're getting better answers all the time. So I'll just say that I don't have an answer, but I'm now I no longer start with, well, that's ridiculous. I used to start with, like, when I grew up, if you said there was water on the moon, you were certifiably insane. Today, we know there's actually quite a lot of water on the moon and a lot of other stuff too. And there's a proper space race to get to it between particularly the US and China. So you're not certifiably insane. So now I'm more like less inclined to say that's ridiculous. Or if I feel the instinct to say that's ridiculous, I'm like, oh, this is going to be interesting. Let's see. Let's explore. (71/99)
That's how I got into the key thing, which, you know, literally six years ago, I would said, don't be ridiculous. And then some mates of mine from government days said, you need to look at this. And I'm like, what? This is just stupid. And they're like, you need to look at this. And then I started looking and I'm like, holy moly, Congress is passing whistleblower legislation. They don't do this on a whim. We have whistleblowers testifying to Congress. I start digging around and a lot of serious scientists are involved in this. And holy moly, maybe our understanding of reality is not what I thought. That's how I got into it. So, Pip, we'll come back to the UOP stuff. Because I think that there's a whole thing to do there. But before we get to that, and this is one more thing I'd like to kind of insert in, and we're going back to a phrase that you used at the very, very beginning of this conversation that stuck in my head because it brings me back to something, Neil, how it says to us in (72/99)
the first episode of this conversation. So, in that you use the phrase constitutional crisis. And when we spoke to Neil, we talked about the fourth turning, and we talked about how one of the characteristics of a fourth turning is the tearing down of institutions that are no longer fit for purpose and how that's an important part of the process because we then get to rebuild them in a better, more trusted, more useful fashion. And Neil stopped me dead in my tracks when he said, I talked about the IMF and NATO, obviously it was a clear one, the UN. And Neil basically said, what about the US Constitution? And I hadn't thought about that as an institution. But of course, it is the institution that is and defines and has defined the United States of America. And in the last couple of weeks, we've had Donald Trump talk about running for third turn very flippantly. And as I keep saying, he's selling Trump 2028 hats at his merch store and all this kind of stuff, which is off the cuff, but he (73/99)
clung onto it for a few weeks, realizing I'm sure about the press he was getting, but he didn't say that ridiculous. And if his motivation is to get more coverage, it worked. But there's some fundamental damage done by that. And then we have this past week, him saying, I don't even need to uphold the Constitution of the United States. And Steve Diggle and I were talking about this. And as Steve said, he says, it's literally the thing you read out when you hold your hand up is I will uphold and defend the Constitution of the United States of America. So when we talk about constitutional crisis, and we talk about the institution one year shy of a 250th anniversary, how do you assess the state of the Constitution as an institution that defines America? Is it under threat? And how do you think about that? It's very, very interesting, because what you've described is one side of the story. There's also the view that the reason we have all these massive holes in the budget that nobody can (74/99)
explain is also because we've had elements of government who have been doing their own thing without any congressional oversight or having to confer with the president. So, you know, everybody likes to use this term, the deep state. I actually break it a little bit into two categories. I think the deep state is like that British program, yes, minister, right? It's technocrat officials who think they know better, and they run circles around the temporarily elected officials, right? But there's something deeper than the deep state. It might even be like a counter state, which has control over weapon systems and that feel that they can do what they want, like, for example, build biolabs in Ukraine and then deny they've done it and initiate wars on that basis. That is a bigger issue in my mind. And then their inability to explain like, where's the money and what have you been doing with the money? And their view that it's a perfectly okay to have a trillion dollars missing from the defense (75/99)
budget, that that's just an accounting technical issue. It's not waste, fraud or abuse. And their kind of unwillingness to address it. And then you could go to another extreme. I'm sure you've heard of Catherine Austin Fitz, who also was recently on Tucker. She says, this is not one trillion, we're missing 21 trillion. 21 trillion is like another country, right? That's a whole economy. So where is the truth on that? I don't know exactly, but this raises this question of is the deep state really what we're talking about? Or is it something darker? I don't know. And is that a constitutional crisis? So this is where again, the UIP issue comes in. When I started to clock that the secrecy around much of the spending is so great that the president is not informed, not whether they're Democrat or Republican. And if they ask, they are told that it's a need to know basis and they do not need to know. And you're like, that is a constitutional crisis right there. So that to me is like, yeah, (76/99)
exactly why this UAP issue is not just fascinating from the perspective, if we're not alone in this universe, if there is intelligence in this universe, that's obviously a magnificent question for mankind, human kind, as to how to contend with that. But a narrower, more specific question is, it's revealed that there's lots of stuff that goes on that the Congress and the president are not informed about. Now that also is a constitutional crisis. So that's the way I've kind of framed it in my mind. But what does that mean? If the Constitution is in crisis, is it any wonder that Americans are in crisis left and right? Because between that document and the Bill of Rights, that's the very foundation of America. And if you have a foundation that is weak and is potentially vulnerable, as an Englishman that has always admired and loved the United States, I see in America, and I first went to the United States on its 200th anniversary. I was, what was it, nine years old. And I was there in (77/99)
they throw all kinds of nonsense, you know, it'll be a bill on abortion, but it has embedded in it something about, you know, immunity for some corporates from litigation. And honestly, when I worked in the White House, I realized no one has read all of the words in a thousand page piece of legislation, no congressman, no senator. They've read the bit that is relevant to their interests. But who understands this comprehensive picture? A few members of the staff, very, very, very few. And so is there all kinds of nonsense in there that has to do with fundraising and things that are not about the fundamental truths of the Constitution and the Bill of Rights? Yes. So we've got decades and decades of all this noise piled on top. And that has caused the underlying infrastructure of the Constitution to become a little shaky. So I just wonder where is the problem? It's maybe not with the foundation, it's with this stuff we keep adding on top. And look at, for example, even, you know, all (79/99)
codes, building codes, the tax code, everything, it's almost impossible for a regular person to even understand anymore. You have to deploy professionals, employ professionals to get a grip. And that's not how the Constitution was designed. It was designed to be very simple, very elegantly simple. And we've made everything very, very complex. I feel like that, I mean, that speaks to this loss of faith in expertise and in technocrats, because there's a loss of common sense in the operational aptitude of government. It's become operationally dysfunctional. Yes. And I think it's interesting this talk about a constitutional crisis, I think also flows nicely along this idea that we're going through a kind of narrative collapse, which leads to a collapse in identity and a collapse in institutional trust. Because what is a constitution? It's the founding and governing principles of a society. And I feel like we're really questioning a lot of those things. And a lot of the narratives that (80/99)
supported those institutions and practices and principles are dissolving. I'd love to ask you about the UAP story, since it's something that you've covered. And I mentioned in the context of 9-11 and narratives around collapsing controlled demolitions, although it's not a really good example, because the controlled demolition explanation, again, it's not something that I've spent enough time on, but it's not sufficiently compelling to me to sort of be comparable to the dysfunctional experience of trying to understand the UAP story. Because I feel like the UAP story truly confounds my ability to proffer an explanation. And it challenges my most basic understanding of how government works. And I'm framing it this way, because I want this to be a portal for empathy to the audience, perhaps, who also feel this way in how I ask this question. I remember who was a David Grush, who was testifying before Congress, and he was talking about having biologics. Basically, it sounded like alien DNA (81/99)
or non-human DNA or something like that, biological material that is not of this earth. And that contractors, it sounded like he was suggesting private contractors are housing this material, either on behalf of the US government or possibly at one time on behalf of the US government. It's not entirely clear. Again, this gets us into a conversation about shadow networks that sort of operate in parallel to the official constitutional bodies. And it sort of raises questions about where is the power structure really? This gets us to kind of like secret society, almost type stuff. So he's talking about biological material, he's making all these allegations as a whistleblower, but we can't get to the bottom of it. This is the thing I don't understand. So Congress is like, these are the people that are supposed to be the most powerful people in the country. The legislative branch is supposed to be the most powerful branch. And these individuals are elected by the people of the United States. (82/99)
This is the pointed question. Why is it that our elected representatives, including like Harry Reid, who was sort of the center of this disclosure process, how is it possible that allegations that are so life altering and mind altering cannot be investigated and explained in a clear coherent manner? Yes. So you've answered the question in a way. The subject is so mind blowing. It's so challenging to our notions of who we are that there's an element of Congress doesn't want to explore this. They're kind of forced to, but there's this sort of theater going on of not actually pursuing the story, also because that would involve challenging this sort of military industrial complex. Are you touching on the same principle behind the theory for why people on the Warren Commission just kind of went along or people on the 9-11 Commission just went along? Are you basically saying that they're afraid of this sort of like dark power structure that would be able to actually threaten their lives and (83/99)
their families? Well, I think there's an element of that. I think that threats are real. I once sat next to the original writer of House of Cards at a dinner and I turned to him and I said, I think that you kind of lighten it up and dump it down a little because if you wrote what really happens in Washington, people would be terrified. He said, you must be from Washington. I said, I am. He said, you're right because if I wrote what actually goes on, people would freak out. So let's think of House of Cards as the light gentle version of what happens in Washington. Now we can begin with that. People are like, what? House of Cards is outrageous. People are killing each other. You're like, there are a lot of dead bodies in Washington as well. And there are a lot of dead bodies around this UAP question and not all physically dead. Some are character assassinations. You're like, wait, why? What's the big deal? Who cares? It's interesting. And the story that nobody can know because the (84/99)
public's not ready, this huge ontological crisis will happen. I don't think that's actually true. And I also don't think these folks care that humans have an ontological crisis. So there has to be another explanation for this. And I think there are other explanations for this. So we were talking earlier about how it doesn't really make sense to have secrets anymore because the public already knows everything. And the CIA and the intelligence community don't really have that much of an edge over the public internet. So how is it possible that the government could be hiding information that's so revolutionary about aliens, interdimensional beings, non-human intelligence, but the public and everybody else just doesn't have any evidence. Well, they're not hiding it. That's the point. It's coming out all over the place. And now you can look back at history and say, there's been a series of... But I'm saying, why is that the focal point of the investigation, the government as opposed to the (85/99)
phenomenon which should be ever present? No, I love this because I agree with that. And I don't think, look, we've already had the announcements from government that this is real. We've had a White House press conference where they've said, the phenomena is real. We've had Pentagon press conferences, Air Force press conferences. So in their view, they've already told us. Most people missed it because they're not watching it closely enough. And they're like, okay, we're done. We told you it's real. But the next question is, well, what the heck is it? And that's where the cone of silence comes down. And the reality is, what's the history? The history is every individual who's not unofficial, who comes forward and says, I had this weird thing happen. We don't believe them. It's kind of like the Weinstein phenomena where women for decades were saying, I'm having a problem with this guy. And everybody was like, you're imagining it. Why? Because he's so powerful. You don't want to go up (86/99)
against that thing. But now we find out actually, he was systematically being abusive. And that's why he's in jail. Why do we disbelieve? And especially it's a very interesting question, given that our entire legal and justice system relies on the account of witnesses. So now we have so many witnesses, and we say they're all nuts. So that can't be right. So for me, a pivotal moment, in my understanding of this issue was this fellow Ryan Graves, who was not just a Navy pilot, but he was the commander of his squadron, and he was a top gun instructor. And he said, we were going up over Norfolk and San Diego, and every time, not every once in a while, every time we were bumping into these things that were flying at insane speeds, we can't explain that move in ways that defy physics. And what has also come out, but he didn't articulate so much, is that it interferes with the instrumentation of our aircraft, including may messes with the engines. Luckily, our Navy pilots are really good. If (87/99)
your plane starts falling out of the sky, they know how to pick it up again. But he's like, this is dangerous. My people are being put in physical risk. But if you go to the Pentagon, you say, we see these things, they're going to fire you, you're going to be gone. So he cleverly went, okay, we're going to triangulate with FLIR cameras, our most sophisticated cameras, with the targeting cameras, with radar, with infrared, and we're going to triangulate with also multiple sets of very senior pilot eyes, we're going to triangulate. And it turns out, the data all matches up. There's something there. So for the first time, this is nobody's imagination. We have evidence, there's something going on. Then he sits and he goes, okay, I've got these facts, truth, data, but they're still going to fire me. So the only way to put it forward is to present it as a health and safety issue. And to say, look, we've got billions of dollars of equipment at risk, and millions and millions of dollars of (88/99)
pilots at risk, and they can't ignore a health and safety complaint, which is true. So that's how it went forward. And sure enough, Pentagon can't ignore a health and safety complaint. So this is the beginning of it getting traction in our modern era. And since then, we have more and more coming out. The thing is, why are we waiting for government, and particularly the US government, we can all explore this. But now we come back to the Cartesian split, which is scientists are either, they're mainly stuck in what I call scientism, which is, I say, why don't we bring science to this subject? Why don't we bring our best scientific methods to study this? And they're like, no, this is mystical magic. This is crazy. This is not worthy of our attention. So they won't bring the science to the subject. They're being into scientism, which is we already are the answer is it's your nuts. So I think the question is, why are they all in that frame of mind? We devote science to many obscure, remote (89/99)
possibilities. Again, back to we spend a lot of time and science and money on the creation of the COVID virus on this remote possibility that it might be a biological weapon, we needed to be prepared for that. That's a pretty remote thing. We spent a lot of money on that. Why are we spending money on this remote possibility? And by the way, all these black swan super remote events keep happening. So we need to spend more insurance money on understanding these remote possibilities. Anyway, I haven't got a good answer yet from anybody on why we shouldn't study this given the volume of testimony and information that we already have. And then I'll finish if you give me a minute, I'll stop for a second to see where you want to go. But I'll talk a little bit about I stumbled into this. And then I went to my dad, who worked for so many presidents. And I said, dad, you're going to think I've lost my marbles, but I got to tell you, there's this weird thing going on. And to my surprise, he said, (90/99)
yes, and I've been involved with it since 1962. And that led to my father doing a very long elaborate interview with Jesse Michael on his American alchemy about his experience of the subject. And he's probably the most senior person who was directly involved. And what a shock and surprise to me to find my own father was at the center of this. And that's one of the features of the subject, which is so super weird. It's not just that there's this phenomena that you can see with a camera or whatever. It's also that everyone who comes into contact with it seems to also start having weird spiritual experiences, synchronicities, strange stuff. And that's the story all of its own. But it certainly came as a total surprise to me to find that my question out of the blue that seemed insane six years before was answered by my own father. You know, Pip, that is a podcast all of its own. And hopefully at some point along this journey, we will actually have an entire conversation about that. But (91/99)
just to wrap up today's conversation, which has just been fantastic. And you've done it to me again. I've got to get on a plane this afternoon. And I know instead of watching movies and relaxing, I'll be thinking all this stuff. Thank you, as always. But the people listening to this podcast, you are of all the people that I know you are, you seem to be the single best equipped person to be able to take this information in and seek out not just answers, but questions, you know, and that's one of the things you do so brilliantly, you seek out the questions to ask. So perhaps if you wouldn't mind just if you have any tips for people as to how they can be better, because ultimately, everybody needs a much more open mind. But in terms of practical advice as to how you do what you do, because you're just an absolute phenomenon at doing this stuff. And I marvel at it all the time, privately, but publicly, I'd love people to get a sense of how you're able to do the things you do. I am so (92/99)
grateful for your kind words. Thank you so much. You know, sometimes I'm sitting here by myself with my computer thinking, wow, you know, I'm really on the outer edge of possibility right now. Like, and you do start and you are and you are pit, but you go there. You go there and a lot people don't. Yeah. So I think I'll come back to this concept of hardware. And, you know, it's a kind of a software in ourselves. And how do we upgrade our own hardware to be able to deal with this. And so some things I would suggest are whenever you have a really firm, convicted view on something, it becomes very important to challenge yourself and to really explore the opposition and move into that to try to stress test your own ideas. And it's hard, but it will only make your ideas stronger if you go through that process. It's like tempering steel. Throw yourself into the heat of that debate in order to strengthen what you're made of. But you may also find that ideas that you held to be absolutely firm (93/99)
start to break under that pressure and you will end up in a better place if you go through that process. So that's one thing. Another thing is when you look at the news to think about that sheepdog by your side and what is it choosing on your behalf and how could you play tricks with that dog and throw the ball into a different part of the field, make it chase that and bring you back some stories from this other part of the fields, right? And that's a very useful way every day. There's that dog sitting with you. I think as well that back to the heart where the bringing of anger and this sort of fight mentality, how do we park that and instead drop into a more empathy led space just for the purposes of hearing the other side of the conversation. I think we have to open our ears, right? It's that old story, two ears, one mouth. A lot of people are mainly on transmit. Listening is a massive skill in this overwhelming environment. And I have to admit, I think, look, I get paid to talk. And (94/99)
ever since being the chief currency strategist of Bankers Trust, any dinner party I go to, I was like, Peppa, what do you think? It's very easy for me to play that role of I'll give you some answers. But I've realized actually, I prefer being able to drop into listening. I need to be a better listener. And I suspect most of us are better talkers than listeners. Those are a few of the things that I think are so foundational that they will change all the other stuff that we've talked about. If you begin with that, again, you have to be the change yourself. Pip, that was amazing. This has been so much fun. And I'm so glad to give people even a little insight to the conversations you and I have had over the years, because it's a nonstop cavalcade of ideas and stuff. And it's the perfect conversation for this idea of Astymetry. You guys are so great to do this series, really. It's also cool because Grant and I had talked about how one of the things that we were excited about is that we were (95/99)
going to not only interview people that we both had interviewed before and that by interviewing them together, it would inspire us to ask you questions and be excited about the interview. Whereas at least for me, once I interview someone once, most of what I'm excited about, I feel like I already address. But also that we're going to have people on the podcast that each of us hasn't interviewed. So I was trying to do my best not to ask too many questions and take up too much time. But this was very thought provoking for me. And I think that the value I've gotten from reading your work in anticipation of this interview is that it is very gaseous and invites you to think about phenomena in a manner that you haven't necessarily. Back to your point about not having a rigid framework and question your priors and also provides you, in my opinion, some of the stuff that you've written consistently with a different perspective, a different take on something that I feel like you, when I say (96/99)
you, I mean us, we, me, may already feel like I know the answer to. And so I've found that to be very helpful. Oh, I'm so, so delighted. Yeah, we need to drop into less certainty. Yeah, absolutely. And I say talking of that work, just point people in the right direction to read more of it. Because I know after listening to this, there's going to be plenty of people that want to read more of it and understand it better. That's kind. So I write a column on sub-stack called Pippa's Pet and Podcast. I put things up on X, I put things up on LinkedIn, but my place I really write is that and I'm working on a book right now that's drawing my father's wisdom into the picture as well, because we were collaborating on it before he passed away. So that'll come out probably next year. Fantastic. Pip, listen, as always, it's such a joy to talk to you and hopefully I get to see you in person soon. Exactly. We have to figure that out. So wonderful. Thank you guys. Great. Speak with you, Pipa. Well, (97/99)
mate, that was another just terrific conversation. For those you're listening out there that aren't familiar with Pipa's work, do yourselves a favor, go to Substack. That's the best place to find her. It's Dr. Pipa. That's drpippa.substack.com. Pipa's Ben and Pock are subscribed to her work and get the stuff coming in. You'll find her on Twitter at drpippa.em. LinkedIn, I wouldn't have the first clue how to find anybody, but you'll definitely find Pipa on there too. I think she's pretty active on LinkedIn every now and again. Do follow her, because as you just heard, she is someone who will have you thinking about things that you weren't thinking about before. And to the whole point of that conversation, that is perhaps the most important thing we can all do right now. Yeah, I think it's extremely helpful to expose yourself to not only different ideas, but also to speak with people who tend to view the same phenomena from different perspectives, not only because you might be missing (98/99)
something, but because the very act of doing that is clarifying and makes you a better thinker. It's a skill like any other. Yeah, I think it's exactly right. Well, my friend, we will do this again next week and see what that takes us. But in the meantime, everybody out there, thanks for listening to us. We'll see you next time. (99/99)
This is the full transcription of podcast 'Hidden Forces'.
Iran's Role in the Hamas Attacks & Implications for the United States Kamran Bokhari #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and to learn how to think critically about the systems of power shaping our world. The second hour of today's conversation with geopolitical analyst and forecaster, Kamran Bihari, was originally made available to premium subscribers only. I've decided to publish the entire two hours on the Hidden Forces main feed as a public service to those of you who are trying to understand what's happening right now in the Middle East and how it fits into the larger story that we have been telling on this podcast for years. Kamran is the senior director of the Eurasian Security and Prosperity portfolio at the New Lines Institute for Strategy and Policy and has served at the U.S. State Department and as a senior consultant with the World Bank. The subject of today's conversation concerns the escalating (1/99)
violence ignited by last weekend's brutal attacks on Israeli civilians by Hamas and the Israeli Defense Forces' ongoing counter-offensive and bombing of the Gaza Strip. Kamran and I spend the first hour of our conversation discussing the attacks, what we know about the original scope and intention, what role Iran may have played in helping plan the attacks, and whether or not we can expect Hezbollah to open a second front of attack in the north of Israel and other potential pathways of escalation that could open the United States and turn what is currently a war between Israel and Hamas into a larger regional conflict. In the second hour, we expand the scope of our conversation to look at the bigger picture. How do the events transpiring in the Middle East today fit into the story we have been telling on this podcast for years about the fragmentation of the rules-based international order and the emergence of a new multi-polarity where nation states will seek to resolve long-standing (2/99)
border and ethnic disputes by force as everyone jostles to reposition themselves favorably ahead of the emergence of a new status quo. What this means for the future of Israel, Iran, Turkey, China, Russia, and the United States is all part of that discussion. If you want access to all of today's conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at (3/99)
hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy this exceptionally timely and in-depth conversation with my guest, Kamran Bahari. Kamran Bahari, welcome to Hidden Forces. Thank you for having me, Dimitri. No, I was telling you, I really appreciate you making yourself available. We're recording this on Sunday, October 15th, so more than a week since the initial attacks took place in Israel. Before we start today's conversation, I'd love for you to just give us a quick background to who you are, what you do, and what your specialty is. Well, thank you for the opportunity. So essentially, I'm a geopolitical intelligence analyst by occupation. That's sort of my experience, my skill set, my trade craft. I spent a lot of time in the private sector intelligence analysis business. I was with a company called Stratfor for many, many years, for about a dozen years. And then I joined a successor group called Geopolitical Futures. Spent some (4/99)
years there. I have a PhD in political science. I'm Canadian and I'm a co-founder of the New Lines Institute for Strategy and Policy. It's a think tank we established. We worked on it for quite a while back in the 2016-2017 time period, but its current iteration really launched in very early 2019. And we have grown, I used to be the director of analytical development at the New Lines Institute, but recently I took over a new responsibility called Senior Director for the Eurasian Security and Prosperity portfolio. And basically, we're a small boutique think tank in Washington that doesn't do advocacy, unlike different think tanks that advocate for a certain policy outcome. We like to do the intelligence gathering, the analysis, the forecasting, and then distill policy recommendations from that exercise. I mean, obviously we don't want to conflate what ought to happen with what is happening and what will likely happen. We try to be disciplined about that. But yeah, like everybody else, (5/99)
we operate by certain values. We want a better world, but we try not to make that sort of the starting point of the conversation. The question is that if we understand what's really going on, then perhaps we can chart a path towards a better future. But we have to be disciplined, and that's sort of our ethos. Well, that's why I brought you here today, Kamran, because the process that we're going to use to figure out what's going on here and the larger regional implications is very important. So let's start there. Can you summarize for us, as I said, we're a week out from the initial attacks that took place in Israel that started this or that ignited this latest round of violence. Can you summarize for us what we know at this point about the events of this past week and where we find ourselves today? So what we have right now is an unprecedented attack by Hamas and supported by Iran, Hezbollah. I mean, there is a serious uptick in Hamas's offensive capabilities. Between 1987 and 2004, (6/99)
they were known for suicide bombings. The Israelis were able to neutralize that in 2004. And then, you know, they tried their hand in governing and ruling, but by the time they took over Gaza and imposed their rule there in 2007, they were well underway in terms of developing rocket capability. Now that continued from 2008. We've had several wars, 2008 slash 2009, 2012, 2014, 2021. But now this time around, you know, last weekend, about seven days ago, they displayed something that we've not seen before, which is this complex operation involving hundreds of militants that, you know, basically broke through the barrier, staged an operation that went from township to township and killing Israelis and whoever they could find. And basically doing all this, preparing for this kind of operation while, you know, remaining below the Israeli intelligence radar. That's very different. That's a tradecraft that you don't sort of just acquire by looking at YouTube videos, or it's not one of those (7/99)
mail order kits that you get and then you can train your people. That's a specific tradecraft. It requires a lot of planning, preparation, and of course training of people. And to be able to do that and not be detected that you're planning such an operation means that you've gotten help. You've just upped your game. And like I said, you know, this is signature playbook of the Islamic Revolutionary Guards Corps, the Kuds Force, the overseas operations arm of the IRGC. And of course, you know, Iran can't parachute into Gaza, so it needs that medium of Hezbollah. So most likely this stuff was planned and prepared in Lebanon, then they did their training in Gaza, and then they executed it. So now what we have is a new reality. This isn't your normal Gaza war that happens every few years or has been happening since 2008. And it's become an intolerable threat to Israel's national security. And we now have something which is a regional war in the making, unless somehow Iran can be pressured (8/99)
to remain out of it. But everybody has constraints, you know, all the different players have constraints. The Israelis have constraints. Their issue is how do you neutralize Hamas without killing Palestinian civilians? That's a conundrum. Iran has helped Hamas do this. Now if it stands aside and lets Hamas get neutralized and destroyed, then its credibility amongst its proxies in Iraq and Syria and Yemen, they're going to begin to think that, you know, when the going gets tough, do the Iranians just sort of sit back and let the proxies take the hit and secure themselves. So this is a very dangerous situation. In all of this, the Biden administration is trying to, you know, is working that diplomacy machine to try and see if there's a way out of it and minimize the risks of conflagration. So I want to emphasize something that's obvious to both of us, which is that there's so much uncertainty right now. I mean, this is a very fluid situation. And in fact, even the Israelis took some time (9/99)
to assess the scope of the damage that they took with that initial attack. How long to that point, how long did it take for them to actually realize and come to an understanding of how big that attack was and to begin to respond to it? How off guard were they actually caught? I mean, if you look at the fact that so much carnage was possible, that Hamas was able to engage in so much death and destruction before they met resistance from IDF forces and IDF forces swung into action, tells you how off guard they were. I mean, and there are reasons for this. Look, you know, first of all, intelligence agencies, security agencies can't be on like a 24-7, 365 state of red alert for a long period of time. There's exhaustion sets in. So there's that natural element that we need to factor in. And it's not something that there is any good solution for. You can mitigate by, you know, rotating people out and, you know, have a duty clock and whatnot. But at some point, the other side is looking for (10/99)
those chinks in the armor and the opportunities to exploit, and they do find one. So that's number one. Number two is I think that Hamas deliberately sent out signals, deliberately engaged in perception shaping that, hey, we're not interested in another Gaza war. And I think that was misinterpreted by Mossad and IDF. The other thing is that there was a cadence that was set in. If you look at the idea of rocket attacks, there was a cadence, there was a pattern, and the Israelis were not expecting anything else. So if you're Israel and you're looking at this and saying, what is the worst that can happen? Rocket attacks. And so they prepare for that. They were not prepared for this kind of an operation. And therefore, you know, you sort of start to look for things that you are used to in terms of a threat perception, and you don't look for the anomalies. It is quite possible and we'll just have to wait and see, you know, when we learn more when the investigation completes its cycle and we (11/99)
find out that where the balls were dropped. But it is possible. It is, we can't rule out the possibility that it was zero intel. There was some intel. They had to be some intel that was disregarded. There were reports circulating that the Egyptian foreign minister or the president, prime minister, alerted Netanyahu to the imminence of some kind of attack. What do we know about what those reports were? I've seen those reports. I don't have too many details on it as of yet. Netanyahu's office denied it, correct? Yes, they've denied it. But you know, there's also a political imperative to deny such things because it's politically costly. Maybe the intelligence wasn't, we have to understand what the Egyptian imperative here is in actually saying this. So they know that they're going to have to deal with the fallout of this counter offensive that Israel is going to engage in or is engaging in Gaza. And then this is going to be nothing like we've seen before. So it's a regime change (12/99)
essentially and regime chains are messy. The Egyptians want to be sure that their interests are secure, that they're putting pressure on Israel. This is their way of putting pressure on Israel. So we just have to wait and see. But look, there are always signs that are missed. But more importantly, intelligence is a twofold process. There's collection and there's analysis. More often than not, the collection is pretty good. You know, the collection happens electronically. There are human sources, there's satellite imagery, etc., etc. And you just sort of keep collecting. A lot of times what happens is you have more intelligence than you can actually process. And processing is a human activity. And you can't, you know, this is why, you know, I think AI can be a great researcher, but it can't analyze. It needs that human touch. So I think that there's also a tendency to sort of fall in love with our analysis. We all do this. We have a net assessment. We basically say, hey, this is what I (13/99)
know about this actor or this place. I know how it ticks. And I'm pretty confident about my assessment until, you know, something happens and then your net assessment is blown out of the water. But that's another element. But I think that there was also this idea that, hey, Gaza's logic, we understand its rockets. And we have the tools to manage it, but we have a problem in the West Bank. The Palestinian Authority is essentially in meltdown mode. The president Mahmoud Abbas is 87 years old. There's no clear successor. There is bitter factualization. There is massive corruption. We have Jewish settlements there. We're also thinking, you know, and over on this issue, there's a divide amongst the Israelis as well. The far right actors are saying, let's go and annex parts of the West Bank. But then there's pushback from those who don't agree with that. So you have a very messy situation and you're saying, can Hamas exploit this? I actually wrote a piece for Geopolitical Futures on this (14/99)
very issue less than 48 hours before the Hamas attack. I read that. It was great. And I said, this is the reason why this is one of the drivers that is propelling the Saudi Crown Prince, Mohamed bin Salman, to engage in negotiations with the Netanyahu government, despite sort of, you know, all the risks and whatnot, because it's such an important issue. So the Israelis were looking at the West Bank. They thought they had the Gaza under control. They knew what was going to happen, what's the worst can happen, and we can deal with it. So I think all of these factors and Hamas, you know, obviously I mentioned the tradecraft aspect, that's sort of the big, I think, the most important thing that we need to focus on is this new spike in terrorist tradecraft, insurgent tradecraft that was not there before. And so between the two, and they're also looking for sort of these opportunities, they're looking that the Israeli public is divided, the Israeli government is having a problem, it's (15/99)
affecting their military posture. So all of these things basically led them and their Iranian patrons and Hisbullah to say, hey, you know what, this is the moment to pull the trigger. And that's why we're here where we are today. So you've mentioned a number of things that I've wanted to touch on. One is the political backdrop in Israel heading into these attacks. Another one is the relationship between Israel, especially the Netanyahu government, Likud Party, and Hamas, and what they have done to facilitate the position that Hamas now finds itself in because of the political expediency and pitting it against the Palestinian Authority and FATA. So let's start with the political backdrop in Israel. What is that political backdrop for people that aren't familiar with the situation? And how do you feel that that could have contributed to the situation that the idea found itself in, whether it was Saturday morning, I believe, was that the official time that occurred Saturday morning (16/99)
Israel? The early hours of Saturday morning. Yeah. As people were dissipating from a party. So what is the political backdrop in Israel and what is the relevancy of that here? Look, I mean, you have a very unprecedented situation inside Israel. The political divide between the left and the right has always been there. The two things have happened. First on the left, the left weakened. Why did the left weaken? Because the Israeli-Palestinian conflict really intensified since the intra-Palestinian civil war between FATA and Hamas after the 2006 elections. In 2007, you had two de facto Palestinian authorities, Hamas controlling Gaza, FATA, and the officially recognized PA controlling the West Bank. After that, you had the rocket attacks. And the idea that we can actually negotiate, we being the Israelis, can negotiate a settlement with the Palestinians just wasn't there anymore. I mean, that argument could no longer fly. That was the argument of the left. If you remember, as far back as (17/99)
2000, there was an effort on the part of then Prime Minister Ahud Barak. And Yasser Arafat was still alive and he was leading the negotiation mediated by President Bill Clinton. That camp David, the Oslo Accords. Exactly. And so the idea was, hey, can we reach a final status settlement? And so that wasn't possible, but that was the left's position, a two-state solution. On the other hand, the right basically splintered. One of the reasons why the right splintered is that, and this is before the Hamas took over Gaza. This is like we're talking now, 2005. In 2005, you had then Prime Minister Ariel Sharon of Likud, who is a powerful figure. Former general. Former general, a known, if you will, hawk, who decided, you know what, I'm going to do something that no Israeli Prime Minister has done. And I'm going to try and solve this problem. My first step is to go ahead and unilaterally withdraw from Gaza. We don't need to be there. We have neutralized Hamas' suicide bombing capabilities. They (18/99)
seem to want to now be focused on the political mainstream. They're trying to take advantage of the fact that Fatah and the Palestinian Authority is weakening. So this is the best thing to do. That was a very controversial move. I still remember footage from those days where IDF soldiers are literally forcibly removing Jewish settlers who are resisting from Gaza. And that sort of led to a split within the Likud. And obviously Likud has more far-right religious, you know, Orthodox parties that were supporting it back then. They said, hey, this isn't good. So in order to maintain his political majority, Prime Minister Sharon basically created a new party called Khadimah. Taking sort of the pragmatic conservatives, the centrists, center-right people from Likud to this new party and maintaining government. And that was his solution. It seemed to be working fine. Likud seemed to have weakened. They became sort of like, you know, Likud was in disarray. But then what we have is the stroke. (19/99)
Ariel Sharon suffered a stroke and he was leading this effort to create sort of a pragmatic conservative centrist platform that could pursue the kind of things that the traditional left could not. You know, you needed a conservative to sort of say, hey, you know, if I'm doing this, I'm not being soft on the Palestinians. I'm not being soft on Hamas. I know what I'm doing. That entire thing eviscerated with the stroke. And you know, today Khadimah does not exist as a political party. It was very short-lived. That led to the revival of Likud. But Likud and Prime Minister Netanyahu took charge of basically came back and became the leader of Likud and he's dominated that position since then. But what has happened is the weakening of the left and the argument about a two-state solution, the strengthening of Likud and hardening of Likud, it's moved further to the right. It's literally aligning with political parties that are really far right. They are sort of in many ways, you can say that (20/99)
they are, they have a very hawkish attitude towards Palestinians. They think that there shouldn't be a Palestine. They think that they should just take over Gaza, take over the West Bank, and that's the way to move forward. And then this political alliance tried to tinker with the judicial system. And so as long as it was on the Palestinian issue, it was controversial, but it wasn't existential for those who disagree with the political right in Israel. All the opponents of Netanyahu and his right wing alliance mobilized after he tried to go after the judiciary and we've seen protests after protests, including from people who wear the uniform, the IDF, who basically came out and said, this is democratic erosion. This isn't about the Palestinians anymore. This is about Israel. This reality, and you know, when you have this level of political divide inside a country, then your opponents, and in this case Hamas backed by Hezbollah in Iran are watching this very closely and saying, how can (21/99)
we exploit this to our advantage? And I think that that is what happened here. What do we know or understand about the role that Likud played in bolstering the political position of Hamas, Vizavi, the Palestinian Authority that could have a political repercussions for them and for Netanyahu as we sort of go through this conflict now and eventually hopefully find some kind of political resolution? Well, I think that there are two stages of this. So one stage and it isn't just Likud. It was an Israeli policy in general. Mind you, until 1987, there was nothing called Hamas. There was a group called Mujama al-Islamiyyah, which was the name of the group led by the founder of Hamas, Sheikh Ahmad Yassin, who was killed in an Israeli airstrike in 2004 that had been formed right after the Israelis took control of the West Bank and the Gaza Strip. Now, mind you, Hamas, its origins are in Gaza. That's its core turf. The West Bank was far more dominated by Fatah. But in those days, it was the PLO (22/99)
that was pushing for armed struggle. And the predecessor group to Hamas was not only not a militant organization, it was apolitical. In fact, it was encouraged by the Israeli authorities as a counterweight to the PLO back then. So this is kind of what happens with a lot of people will go into this and say, hey, you know, they'll delve into conspiracy theory. But reality is, look, the United States at the time when we were fighting the Soviets, we didn't know there's going to be an al-Qaeda, much less an ISIS, or there will be a 9-11. All we knew was there's a Cold War. The Soviets have breached the containment line that runs from Greece all the way to Pakistan by intervening militarily in Afghanistan. And we had to respond. And so we mobilized fighters and we mobilized fighters who were Islamists. At that point in time in our in history, Islamism was something that academics talked about. Policymakers had very little interest and it wasn't until the Iranian Revolution that happened (23/99)
right about the same time. We were just sort of getting to know what Islamism is, but we thought it was an Iranian phenomenon and it didn't really affect the Sunni world. And we supported the arming of Afghan Islamists and then the mobilization of foreign fighters, massive mobilization. It led to, you know, it forced the Soviets out, but we had unintended consequences. We have jihadism to deal with now. Same thing here. The Israelis did not know. They thought that this Mujammah, Islam, and they knew this was the Palestinian Muslim Brotherhood, but they said, you know, these guys are looking, they're a charity group. They run mosques. They do humanitarian stuff, social work and whatnot. If we're going to counter the PLO, this may be a useful tool. You don't know that, you know, your actions have unintended consequences. And this continued. Mujammah, Islam, continued well into the 80s until the first intifada. And then these guys, now let's call them proto Hamas, they're looking at this (24/99)
and saying, oh my God, the intifada, we didn't plan for this. Our people are, there's an uprising going on. PLO was as surprised by it as well because remember the PLO was not in the territories. It had been pushed to Jordan in the early 70s. Then from there they were pushed into Lebanon and the 1982 invasion pushed them out of Lebanon and they were headquartered in Tunisia far away from the Palestinian territories far away from Israel. So this thing caught both sides, you know, PLO, FATTA by surprise and this proto Hamas. That's when they said, hey, if we don't board this train, it's leaving without us. And that's where they decided that they will not only become political, but they'll adopt armed struggle. And by the way, by that time, if you remember, the PLO had already started to gravitate towards diplomacy and giving up armed struggle negotiations as a path to resolving the Palestinian issue. So as PLO was moving towards negotiations, that armed struggle mantle, there was a (25/99)
vacuum there and Hamas filled it along with the Palestinian Islamic jihad, which is a much smaller faction. And so that's sort of one way of how, you know, Israel inadvertently enabled the rise of Hamas. I think afterwards the Israeli state has been battling Hamas first in terms of trying to eliminate its suicide bombing capability. And since 2008, it's rocket capability. So I don't know if they deliberately empowered. I can't make that argument. But what I can say is that the fact that the Palestinian issue has not been resolved. I mean, we're now what we're about 30 years out from the Oslo Accords. And that's more than a generation. And the fact that despite all that work that was done, there isn't a, you know, we don't have the solution for the Palestinian. There isn't a Palestinian state. Now, mind you that the Palestinian state is not just the inability of the Palestinians and the Israelis to negotiate a settlement. It's also the fact that the Palestinians themselves are divided. (26/99)
And this division emerged right after the first intifada. So I want to be careful when I when I sort of assign blame. So yes, there is a lot of blame on the part of the Israeli right of center spectrum for, you know, really moving away from this two state solution. And the fact and giving creating the conditions that then Hamas, Pij, Hezbollah, Iran exploit and even ISIS, if it could exploit Al Qaeda, if it could exploit. So that's clear that if there had been progress, we would not be here where we are today. And at the same time, I get the Israeli argument as well that who do we negotiate with anymore? And who can we depend on to provide internal security to protect us? If we're going to give autonomy over to the Palestinians, how do we know that we're going to be safe? Exactly. And I mean, the geography is so small. I can't imagine, you know, you have, you know, rocket fire from Hamas in Gaza. Do you want that to happen from the West Bank as well? No. So using empathetic analysis, (27/99)
you know, the Palestinians don't have a land, don't have a state. They are suppressed. They're suffering and their suffering has been going on for a very long time. What do they do? They will turn to whoever when you're suffering, when you're miserable, you'll turn to whoever appears to be, you know, saying, hey, we're going to lead us out of this mess. And it's easy to be duped to buy characters like Hamas. Hamas is exploiting the Palestinian, the genuine, legitimate Palestinian struggle for self-determination for its own ideological agenda. And this is one of the problems that we're having right now is those pro-Palestinian voices that we hear today. They are, you know, unfortunately, and it's tragic that they cannot disaggregate and disentangle Hamas' agenda from what is a genuine, legitimate Palestinian demand for self-determination. Those two have been conflated because people are emotional. People see this and it's, this is the biggest tragedy in all of this is that Hamas just (28/99)
murdered 1200 Israeli citizens and brutally. But we're, you know, in other words, we're in a war because of Hamas' action. It's not, yes, there's an occupation, but the occupation didn't bring us to this war. The occupation was continuing. There was a need for that resolution, but we need to recognize that Hamas, and as you know, a lot of people I know are very emotional and they're unable to sort of say they're disregarding at the very least what Hamas did and saying, well, you know, this happened because of the occupation. So it's a very simplistic argument and it makes the situation worse. It exacerbates tensions. You know, I could speak to you for hours about this part of the conversation and I really appreciate the nuance that you brought to bear here because indeed that is part of the problem. People dig in. I think there's also people on the pro-Palestinian side don't give enough agency to actors on that side of the conflict. And I think put too much responsibility on the (29/99)
Israelis. And I also always emphasize that this is such a difficult problem. You know, a lot of times we're confronted with problems that they don't have a good political solution, but they do have a good theoretical solution. But in the case of the Israeli-Palestinian conflict, even the theoretical solution is absent or it's very difficult to understand what that would be because of also these deep security concerns and the fact that both sides have reasons to be fearful. I do want to add, Dimitri, the one more thing if you allow me. Sure. Right now there is no, if you will, group that is championing or can champion the Palestinian struggle in an effective way. So you have Fatha PLO PNA, which by the way is led by one guy who is 87 years old. And, you know, I can only imagine and I shudder to think what will happen to that landscape once he's no more. And it is ineffective. It does not even control all of Palestinian territory. It is unpopular. But yet it's the internationally (30/99)
recognized authority amongst the Palestinians even now, you know, and not that they're not. And not that anything is wrong with it. This is exactly how the US Secretary of State is supposed to behave is to go and meet a boss because he has to. He's even though he has very little power, he's still the nominal head of the Palestinian authority. But that nominal reality means there's nobody championing that cause effectively. Who is trying to subvert, pervert, hijack that cause is Hamas. So if you're Palestinian, you're caught between a rock and a hard place, you know, the devil and the deep blue sea. So the political vacuum that exists amongst the Palestinians is a key reason why there isn't any movement and we're stuck in this sort of causality loop. Great point. And in fact, I think you mentioned it earlier that the eventuality of Mahmoud Abbas's exit, the fact that he's 87 years old and the political vacuum that that would create was the impetus or one of the impetus is for the (31/99)
Abraham Accords and the desire to, you know, bring a diplomatic solution between Israel and Saudi Arabia that would involve a solution for the Palestinians. This could have been also the reason that we got this attack by Hamas. So let's talk a little bit about that. Let's switch now to a conversation about intentions and what we can theorize about Hamas's intentions. And do we have any sense of whether or not they understood that that first of all, did they know there was a concert going on? Do we know anything about that? And did they expect in your view to have this kind of success or did this kind of, was this a kind of fortuitous slaughter of Israeli civilians that they chanced upon and now they succeeded in ways that they didn't even imagine? So let me start from the strategic intent and then go down to the sort of the tactical performance that we saw. Look, there is no way Hamas did not know that if they do this, then they are plunging the Palestinians into a very, very (32/99)
horrendous situation. The Israeli response will be ferocious. And this isn't just going to be like, oh, we fired some rockets. It went on for a few days or weeks and then there was a truce. They knew that was not going to happen. Yet they did it and they don't really care for them. The more Israel is ferocious in its response, they think it's better off in the long term. They will suffer losses in the short term, but they think it'll create the kind of crisis that could append the regional security architecture that could sort of create such chaos in which they think they will emerge victorious in the end. That's the same logic that Iran applies. And that is the same reason why Iran or sort of the MO of Iran, and that's the same MO of Hezbollah. So I want this to be clear that it's not like they didn't know what they were doing and it's not like, oh, where these are a bunch of, yes, people, the people who carried it out, the recruits, the foot soldiers who are treated like cannon (33/99)
fodder by Hamas. They obviously aren't at that strategic level. They're the guys with the guns. They probably don't even know. In fact, there are reports now that many of them did not know what they were training for. And this is part of the tradecraft that I'm talking about is you keep a thing a secret when you don't even tell your own people too much because you fear that it'll get to the other side and you won't succeed. That's sort of the strategic intent here. Did they think that they were going to be successful to this extent? No. No actor is. Everything, as you were saying earlier, Dmitri, there is the theoretical. So you do this wargaming on the drawing board and you say, hey, this is what could happen. You try to game it out as best as possible, but no battle plan, no attack, no offensive terrorist attack, insurgent attack, you know, conventional armed forces engaging in an operation. Do not know how things will play out once, you know, they pulled a trigger. So I think that (34/99)
there is a strong element of what we call catastrophic success where they have, they weren't expecting to be this good. Not to answer your question. Did they know about the concert that was going on the music festival? I think it was like what, two and a half miles. Very close. Yeah. Yeah. It is quite possible. They knew something about it, but I don't think that they had like a whole lot of granular intelligence. And they must have planned for a certain degree of resistance from Israeli security forces that they, they, they probably knew that these guys are distracted. There is a crisis going on involving the IDF. The focus is on the West Bank. We've been sending false signals. We don't want conflict. Okay. And the security over there, the security cordon or the security, if you will, force structure will not be what, you know, it is in times of, you know, tension. So there's some opportunity we will be able to make headway. The fact that they had paragliders, the fact that they also (35/99)
came via the sea and they, you know, they used bulldozers because look, when you use bulldozers, it makes a lot of noise. It alerts a lot of people. So they had to factor in that once we start this, the other side is going to kick into high gear and we're only going to go so far. So when they were able to go in, I think it became opportunistic. I think these are radicalized individuals who are willing. They know that they're going to. It would have been a suicide mission. It is a suicide mission. You know you're not going to come, you know, if you come out of this alive, you're lucky. So you're going on a suicide mission. You have to have a highly radicalized and conditioned mind for that. And usually these people are very violent. And so when they saw the opportunity, they went on a rampage and nothing makes sense of this. It's inhuman. It's barbaric and savage. But I'm trying to understand the mechanics, the decision making amongst these militants. You know, obviously there must have (36/99)
been some commanders and then followers and whatnot and they were broken up into cells because this is a large area. You can't just sort of go from one town to the other. They had to fan out. And so they looked at this and, you know, their radicalism drove them. They were fed hatred of Israel and Jewish people that they went on a rampage. And unfortunately they were able to do a lot of damage before they were interdicted and forced back. But by that time they've taken hostages. So I think that no one really knows what will happen. Actual kinetic conditions and battle space conditions, you know, shape what you can do and what you cannot do. So let's broaden the scope here. I don't remember exactly what words you used, but it sounded like something along the lines of, we know the Iranians are involved. What do we know about the scope of Iranian involvement here? Because the administration, the Biden administration and the Israeli government have both come out saying that we don't know if (37/99)
the Iranians were involved. Yes, Kirby said that Iranians are complicit in the fact that they've always, they have ties to Hamas, they help fund terrorist operations, etc. But do we know as a fact that they were directly involved in this operation? No, we don't. What is your view on the nature of Iran's involvement here and what is the nature of that knowledge? So that's a great question. As someone who's been studying Iran for a very long time, I can tell you that, and this isn't just Iran. This is sort of the nature of the intelligence and special operations business. You know, there's a report out there that says, at least there's one report, if not more, that the US intelligence detected surprise on the part of Iranian officials when they found out about it. So this was a counter to the Wall Street Journal report of Hamas and Hezbollah guys and even Iranians saying, hey, we were involved. I took it as a deliberate leak to shape perceptions. And so this Washington Post report was, (38/99)
hey, we have administration people saying we have no evidence on the contrary. Everything we know from our intelligence, you know, listening posts is that the Iranian leadership, when they found out about it, they were surprised. And publicly also the Iranians denied it publicly as well. Well, nobody will ever say that we're going to do this. Although the Iranian foreign minister meeting with Hamas leaders in Qatar, you're basically saying without hugging and kissing, there's a video. Exactly. And you know, those those high fives and whatnot, you're basically saying that, yes, we did it. We're just not saying it. Okay. So but anyway, let's go back to that intelligence. Who is being watched? Okay. Whose phone is being tapped? Who is under surveillance? Which leader? Because that matters. There is no way an operation of this kind will be known by Hamani himself. He's two way up there. It's a need to know basis kind of how many is the supreme leader, the supreme leader. Let's even drop (39/99)
down to the president of no, did his defense minister know interior minister know his intelligence minister know? I doubt it. Who knew it's not even the leadership of the IRGC. The IRGC is the Iranian Revolutionary Guard Corps, the Islamic Revolutionary Guards Corps. The elite ideological military force. And mind you, there is a parallel military force, which is more professional, less ideological, the regular armed forces. And they're a much bigger entity than the IRGC. Within the IRGC, we know that the Kuds force, which used to be headed by Soleimani, who the Trump administration took out several years ago. Exactly. Because look, it's like this, you have a corporate entity, you have a government. Who is designated as the interface as the manager in this case Hamas? I mean, this isn't going to be done by the top leadership. So if you're listening to the foreign minister's phone, or you're listening to, you know, someone even high up in the IRGC, chances are you're not, you're only (40/99)
going so deep into that leadership structure. This kind of operation is known by Soleimani's successor Ismail Qani, Brigadier General Ismail Qani, who, because Soleimani was made out to be this larger than life figure. And so he has big shoes to fill. He needs to demonstrate that, hey, this Kuds force, I can lead it. And I'm not sort of like one of the proverbial deputies to Soleimani. So he has to take charge on this. But even he is basically managing the Iraqi Shiite militias, the relationship with the Taliban, which is his experience, which is his expertise while Soleimani was dealing with the Arab world. This guy was dealing with the Eastern Front. There is the Assad regime that needs to be supported. There are Shiite militias that are in Syria that need to be maintained. There is Hezbollah, that relationship needs to be maintained. Hamas, Palestinian Islamic jihad, the Houthis in Yemen. This is all his portfolio. So operationally, he can only know so much. Okay. He has, you know, (41/99)
subordinates who are dealing with the tactical on a day to day basis. So imagine you're sitting in the Supreme National Security Council meeting in Tehran. You have the president, the supreme leader, the IRGC, the regular armed forces, everybody, you know, in that top political and military leadership is there. What are they discussing? Are they discussing a plan to attack Israel? That would be bad tradecraft if they did that because they have to assume that they're being listened into, or at least parts of it. So at that level, they say, yes, we need to support Hamas. How much money do you need? We will authorize it and, you know, off you go. And then it's the Quds Force commander, Qani's job to make it happen. Now, then who's planning this? Who's training? Who's providing that tradecraft? Where is it taking place? So are we listening to the right people when we say that, hey, they were expressed surprise? So I think there's nuance and granularity here that is really, really missed in (42/99)
the conversation. There is another element to this, that the Biden administration has been negotiating with these guys, and they have an interest in whether it's the Biden administration or a Republican administration. When you're in office, you don't want war. Okay. There's already a war. You have Ukraine. Now you have Hamas starting another war and it can get out of hand. You don't want war. So chances are there is a political imperative to sort of say, hey, you know what? Yes, the Iranians are involved, but we don't know. And it's safe to say that we don't know and we'll dig deeper into it. But not right now. Right now we want to be able to make sure this thing doesn't get out of hand. So in all these imperatives, in all these pursuits, the idea, the conversation of who knew when, what, who was involved, that conversation gets muddled. It takes place amongst us analysts and people who are studying this phenomenon and in the conversations that I'm having with you, but it's (43/99)
compartmentalized at the government level, if that makes sense. Sure. I don't know if there will be time in the second hour if this is really a conversation for a whole other podcast to look at and examine and help the audience understand where power resides in Iran, how that power is divided in ways that are very different than in the United States. And also the mission of the Quds Force in spreading revolution throughout the region, I can only imagine the kind of paranoia that must be overtaking the Israeli government at this present time considering the intelligence failures here. And they're sort of at this point questioning everything. Do you think that's kind of where they're at at this moment in time? They don't know what to believe. They don't know the scope of the strategy here. And then to that point, as we're talking about strategy, maybe the next question is, so one question is, I'm curious, just your thoughts on what is going on right now in the cabinet in Israel. And then (44/99)
the other one is, what do you think the strategy here is? If this was something that was directed by Iran, what is the overall strategy? What is the end game here? Okay, those are a bunch of different questions. And so I'm going to go through them one at a time. So I think that if you are Israel, and before this attack happened, your reputation, your self confidence as a very sophisticated intelligence entity, Mossad and the whole community, the whole Israeli intelligence community, IDF, Intel, Shabbat, Shin Bet, all of that was that you are on top of your game. The reason for that is that you even have an overwatch over what the Iranians and the Quds force are doing in Syria, hence the air strikes from time to time. And the introduction of weapons shipments, fighters and whatnot, you keep Iran off base. And on top of that, you have deeply penetrated Iran itself, you know, the elimination of nuclear scientists, the attacks on nuclear facilities. So you're really brimming with (45/99)
confidence. Then all of a sudden this happens. And you say, while we were focusing on these long distance threats. And on the verge of peace of historic peace with Saudi Arabia. Exactly. We took our eye off the ball in Gaza, where we needed to know. In other words, while we had the Iranians penetrated, they circumvented us and found a way to hit us back. And we were caught, you know, With our britches down. Yeah, I mean, basically sleeping on the job if you want to be, you know, blunt about it. So now, obviously, there's not just paranoia, there's a loss of confidence. And why does this matter? This matters because that's so this is the problem with the intelligence services and intelligence failures is that it once there is a failure, then that same entity has to take you out of failure and towards success. So it's a paradoxical situation. An entity that whose intelligence was net assessments you can no longer are not now suspect, you're asking them to say, What will it look like when (46/99)
we go into Gaza? What else do we know about, you know, what the Iranians are up to? You know, I have to assume, Dimitri, that Hamas didn't do this, knowing that it would be hit hard, like never before, without any planning. They have some planning going on. That's what these really need to know right now. What's that planning? And then is Iran going to just sit back and say, Hey, it was nice knowing you. You know, you're on your own guys, you know, know what do they have planned that hence the second front, hence the whole thing about Lebanon, hence the two aircraft carrier groups, the carrier strike groups that are now, you know, I think it was yesterday that the USS Eisenhower left Norfolk for the eastern Mediterranean. There's a reason for all of that because you don't know. And those are sort of the tactical and strategic implications of intelligence failure. So I think at this point, the Israeli cabinet is focused on how do we square this circle? We need those hostages. We need to (47/99)
secure those hostages and get them back safely. We need to destroy Hamas. We need to make sure that there's not a whole lot of Palestinian life that is, you know, lost in the process. That's just going to make it even worse for us. And I mean, if you're Prime Minister Netanyahu, you are now assuming my political career is over. I'm not going to come out of this. He can't assume that he can fix all of this. So he's assuming it's over. Now I just need to not be remembered as the guy who completely, you know, messed things up. I had divided the nation under my watch Israel was attacked by Hamas. Iran has found a loopholes into our system. I will be remembered for this forever. So he's trying to minimize damage to his legacy. And so these are sort of the very human frailties, both in terms of decision making, and quite frankly, capability that are constraining these Israelis. And it leads to making mistakes more because you're under intense pressure. You have the Biden administration (48/99)
saying to you and if I had to guess, you know, the Biden administration is big the conversation that look the readouts will not say this, but the real conversation that's happening is we know you need to go in and destroy Hamas. We support you on that. Make sure that this doesn't get messy. Because if it does, then we're going to have a hard time supporting you. Even today, the president's statement has kind of shifted this morning. He said, we need to care about Palestinian lives and he's getting criticized for that saying, oh, it's, you know, you're late in the game. You should have said this before the air strikes began. What an incredibly insightful analysis. I really love what you had to say about that. Yahoo. It's something that I hadn't even considered. And it's a perspective that I think is just invaluable. I also think when I think about the paranoia and the loss of trust in the intelligence that they're getting, I also think about what risks they're not willing to take in (49/99)
Gaza and will that result in them using air power much more than they would their actual military and how that feeds into the propaganda war, which also gets us into a conversation about the nature of propaganda and media and public relations today versus what it has been in the past, which is just something I think we could touch on in the second hour. I'm going to move us to that part of the conversation and I want to give people a sense of where I want to focus that discussion. I do want to continue this conversation about Iran because I want to understand also the complexity of the threat environment that Israel faces, what it would look like for a second front to open up in the north with Hezbollah and what you imagine the Americans are prepared to do in that situation and how this could really escalate. What are some of the worst case scenarios as well as what are some of the better case scenarios? How could this de-escalate? That's where I'd want to take us in the second hour. (50/99)
For anyone who is new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Kamran, head over to hiddenforces.io. Subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app just like you're listening to this episode right now. Kamran, stick around. We're going to move the second hour of our conversation onto the premium feed. Kamran, welcome back. Thanks for having me. So when we were moving to the second hour, I said that I wanted to really dig into this conversation about Iran because for me, we have the ongoing war with Ukraine. I can't help but feel like at the very least, America's adversaries and those who are looking to reposition (51/99)
themselves in a favorable way as this international rules-based order begins to fragment that they're not seeing these weak points and looking to take advantage of them. And when I think about the situation now unfolding in the Middle East and the fact that the United States has tried so hard to pivot out of the Middle East, having left Afghanistan in a way that was not ideal, let's put it that way. And they're already dealing with an open front in Europe with Ukraine that is making that more difficult, the pivotation more difficult. I can only imagine some of the ways in which this could go really bad if this war spills out and becomes a regional conflict that involves the Iranians. And now the United States has to defend Israel and has to get involved and how that exactly happens. And then you layer on top of that the conversation that we were opening up about media and the fact that there's no longer a singular media ecosystem. The United States is very divided. People are, of (52/99)
course, segmenting into their own camps here once again. So I'm curious, let's start just with Iran. What do you think the strategy here is for the Iranians and how do you think that this plays out, the likely scenarios in which this plays out? So starting points matter in sort of trying to understand what any actor is doing. Obviously, we can say, well, when did it start? Five years ago, 10 years ago, 20 years ago, there are different sort of obviously starting points. But let's look at what's happening in the current moment and try to understand what is the Iranian imperative. The Iranians, from my point of view, are operating from a position of relative weakness, significant relative weakness. The reason I say that is because they have a very bad domestic political economic situation. They are under sanctions. They hoped that with the nuclear deal in 2015 that a lot of their problems are going to be solved without making too many compromises with the United States. Then the Trump (53/99)
administration nixed the nuclear deal and slapped more sanctions than there were even before. And so that's where they are. They're being squeezed from the outside. They have had massive protests since 2017, at least 2016, 2017, culminating in the huge uprising after the killing of the young lady, Masa Amini, who was the hands of the morality police for allegedly not covering up as per law. And we saw year-long protests. Those vulnerabilities are still there. All these vulnerabilities exist for Iran. On top of that, the Iranian regime is reaching an inflection point. I've been writing about this for the past five years that, and I've been saying, Iran is in the throes of evolutionary regime change. Which the process is gaining momentum as time goes on. Why? Because you have an 84-year-old supreme leader who's sort of controlled from a high level the various power centers and factions and whatnot, and this edifice that we call the Islamic Republic of Iran since 1989. That is a long (54/99)
time. The guy who founded this clerical regime, this theocratic sort of Republican hybrid regime, only ruled it for 10 years. You know, Ayatollah Rouh al-Akhmeni, who overthrew the Shah. This is Khaminiz Republic for all intents and purposes. His imprint is all over it. And we have seen new power centers emerge in the country. And we can go into many details, but for the purposes of this conversation, I think, what we have is the clergy weakening. The idea that the doctrine of the will-e-at-faqih, which is that, you know, the doctrine upon which the Islamic Republic is built, that the political system should be overseen by a jurist, by a religious scholar, should be theocratically overseen. Yes, there will be some elected officials here and there, but the clergy has sort of this central position. I think that doctrine is no longer popular. And it's even lost currency amongst its own supporters, given the factionalization. And I'm not talking about the Iranian left or the reformists. (55/99)
I'm talking about a split amongst the conservatives. There are so many factions amongst the conservatives that started out under when we had former president Ahmadinejad, Mahmoud Ahmadinejad, take office. And now we're like, you know, that was 2005 and we're in 2023. We're almost 20 years out from that. In 20 years, there's been a lot of fermentation. The Iranians feel vulnerable. On top of that, they have had a conundrum. And this isn't something that has, you know, just started. It's been going on for a long time. And in fact, it was one of the reasons why they decided to negotiate with the Obama administration, because there's only so much money they have. Okay, they are an oil exporter, you know, and their economy generates a certain amount of revenues. And a large chunk of it goes to foreign policy power projection. It's not easy. It's costly to support Houthis, Iraqi political groups, Shi'ite militias, Hezbollah, Hamas, all these guys. How can Iran do this, continue to do this? (56/99)
And it has made gains. It has really deeply penetrated the Arab world and has created a contiguous sphere of influence from, you know, the Iraqi-Iranian border, the Zagros Mountains, all the way to the eastern Mediterranean. And in recent years, with the Houthis in Yemen, they now have a significant outpost on the southern tip of the Arabian Peninsula, where the Arabian and the Red Sea meet. This cannot continue, and they cannot ignore the domestic political economy at the same time. 70% of all Iranians are young people. They were born well after the revolution. Nobody remembers the revolution. So that revolutionary fervor is gone. So how do you maintain this regime? And you need to balance both foreign policy and domestic political economic prerogatives. They had maxed out, which is why they thought, hey, let's do a nuclear deal, make some compromises, get fresh cash into the system, and then we should be good for, you know, whatever, another decade maybe. And then we'll figure it out (57/99)
later. That didn't happen. So in your view, it wasn't necessarily clear to the Iranians what would come out the other side of that nuclear deal. It wasn't necessarily that they entered into the deal as a way to buy time, but eventually go nuclear and maintain the revolution. There was a genuine sense of we're still figuring things out. Yes, because no actor can be certain about the future. Everybody has their forecast, but it's only so you got to keep updating it in the light of new realities. That's why maintaining constant situational awareness in, you know, intelligence analysis is so important. So they needed to figure it out. They thought that that would be a solution. The estimates were that they were going to get like $150 billion because of the nuclear deal. Let's say it was even half of that. That's a lot of money that could help them improve economic conditions on the home front and continue to push hard in the Arab world. And mind you, there's sort of a historical thing (58/99)
here. And this is what I call geo sectarianism. It's the Shia Sunni sectarianism at a geopolitical scale. It's not religious at this scale. It's more identitarian. And it's about identity camps locked in power struggles. So I've written an essay for, you know, New Line's magazine, which is our New Line's Institute sister organization a few years ago, in which I basically laid out how since the year 1000, when Sunni power in the Middle East was crumbling and we saw the rise of Shiite actors every 500 years, we've seen this phenomenon repeat itself. Why is it 500 years? I don't know. But the historical data shows that, you know, every 500 years or so, you have the rise of Shiite power. It happened because back then the Abbasid Empire, which was the main Sunni Empire in the region, it crumbled, gave rise to independent Sunni polities. The Sunni world was in fragmentation. We saw a few different Shiite entities emerge on the Arabian Peninsula in Mesopotamia in North Africa. And obviously (59/99)
that the Sunnis regained their posture, the Ottomans came in. But then again, 500 years later, you in the early 1500s, you see the rise of the Suflid Empire as, you know, a major rival to the to the Ottomans. And it was a Shiite Empire centered in Iran. 500 years later, roughly in 1979, you see the rise of Islamic Republic of Iran. Now, the Iranians know their history. Okay, they look at this, the Iranian strategists look at this and say, this is an opportunity that's not going to come again. And we have to exploit it to the maximum. Right now, the Sunni world, the Arab world is weak. And our only competitor is Turkey. But this time, unlike in the past, it's us who dominate Syria and Iraq, not the Turks. And we'd like to keep it that way. And therefore, this what I'm saying is this is important for them. And you have to also bear in mind that Iran is an anomaly in the region from a sectarian point of view, and from an ethnic identity point of view. The Middle East is Arab majority. (60/99)
Okay, Sunni Arab majority, there are Christian Arabs, there are Shiite Arabs, but by and large, this is the nature of the region. Whereas Iran is a Persian entity. And even on the level of Muslim religiosity or even Islamism, the political ideology, it's Shia. It has a different flavor. It is a competitor to Al Qaeda and ISIS, in that sense. So they face all these constraints. So this is why I'm saying that they're operating not necessarily from a position of strength. So let's bring it back to where the situation is contemporaneously. In the here and now, you have the Abraham Accords taking off. You have several Arab states signing on to it. And that process was culminating in what would have been a deal between Saudi Arabia and Israel, which you just pointed out earlier in our conversation. This is bad for the Iranians. I mean, if that happened, then it amounts to a massive geopolitical reversal for their interests. And so I think that this is them trying to, through Hezbollah, (61/99)
through Hamas, trying to create a crisis for the Arabs, crisis for the United States, crisis for Israel and Turkey, that basically prevents their position from being weakened. And I think that this is one of the goals that they hope to achieve, because there's always a strategic objective behind all the tactical details of how much money goes to Hamas, what training. And they're all sort of, you know, serving a strategic objective. And this is their strategic objective and forcing a situation where the United States basically does a deal with them. And they want to be able to get out of sanctions. So if they create a crisis, the goal is to create enough of a crisis to get the Americans to say, Okay, guys, what will it take for you to cooperate and knock this off and we not have, you know, the situation get out of hand. This is what they're trying to force. They're trying to force a negotiation. They're trying to bring the Americans to the table. They're trying to bring the Americans to (62/99)
the table. But in the meantime, it's not just a table. In the meantime, that's the short term benefit. They want sanctions respite. But in the long run, this is just like the nuclear issue. Give some concessions. Don't mothball the nuclear issue. Keep the program running. Eventually you'll get to the, you know, you cross the red line and you're going to be a nuclear state. But in the meantime, use it to extract concessions. Same thing here. Create chaos. Eventually this region will become more and more favorable for your foreign policy objectives, because there's going to be so much anarchy, the old order with crumble. Remember, Iran is a revisionist power. It wants to alter the regional security architecture. And I think that even if Iran tomorrow somehow, you know, once this evolutionary regime change evolved, you know, plays itself out and the clerics, it's not so theocratic. It's going to be like China. China had a understanding with the Nixon administration, but it did not become (63/99)
a friend of the United States. It pursued its own independent foreign policy. And I think that's the model that the Iranians have in their mind is we just need to reduce tensions with the West. We need to extract concessions. We don't want to be hostile. There are a lot of people in Iran who don't like the theocracy, who don't want, you know, to be, you know, forcing women to cover up and all this obscurantism that comes with a theocracy. But they are deeply Iranian nationalists. They have a deep sense of history. In other words, they're not going to give up what they see as their geopolitical moment. And even if tomorrow there was another regime, it's not going to. I unless there's a catastrophic conflict along the lines of what happened to Nazi Germany and Germany turned into a democracy afterwards, barring that. I don't think that any regime, however moderate it becomes in Iran, will ever give up on these assets in the region, this fear of influence that Iran has created. Wow. You (64/99)
know, I was thinking towards the end of that answer that I wanted to try to hold your feet to the fire here while we have people listening and ask you if you could come back for an episode dedicated on the history of Iran and your vision for where it's going in the future. Because your knowledge on this is really just it's enviable, but it's I just want to I want to learn from you as much as possible while you're talking. So I don't necessarily want to maybe I'll ask one more question about what the region will look like if we have time towards the end. But I want to circle back to the more immediate question. They want to bring the Americans to the negotiating table. The Israelis right now are bombing Gaza. I don't know if they were again, we're recording this on Sunday. I don't think that they've moved troops. I don't think the IDF has rolled into Gaza yet. It's not clear when and how they're going to do that, the extent of it. Again, it's unclear the scope of American support, the (65/99)
pressure that the Americans are applying on the Israelis. I also wonder to what degree the Americans are applying pressure on the Chinese to the extent that the Chinese have leverage over the Iranians, because the Chinese would obviously be very concerned about the Americans bombing while infrastructure in Iran. How do you see this right now here now, evolving over the next days and weeks, whether it's Hezbollah, whether it is, I don't know. I mean, how do you see it escalating or de-escalating? So it all depends on what happens in Gaza. It all depends. And I mean, notice there's a lot of and again, this goes back to human frailties, bad intelligence, difficult situations to deal with. There's almost sort of like, you know, if you look at the reports from a higher level as to what these Israelis have been doing, hey, evacuate northern part of Gaza. Well, how can that happen? There's one million people, you're forcing them into an even smaller box, you know, than 25 by seven, which is (66/99)
miles by seven miles, which is total. Because the Egyptians don't want them. The Egyptians certainly don't want them. You look at there are certain raids that are conducted by the IDF forces to try and retrieve the hostages. Hamas is saying, well, a certain number of hostages have died because of that. The Israelis are trying different things because they don't. It is difficult. They don't have a game plan. They don't have any good options. You don't have any good options. Yes, if you listen to the noise, the global noise, it is either that Hamas haven't conducted a very savage barbaric attack or look what Israel is doing to the Palestinians yet again. But both those things, those views are sort of taking away from the difficulties that Israel faces. Look, if this was easy, Israel would already have been pushed in. You know, we're now what, more than a week out and there is no ground offensive still yet. As of now, I mean, may happen the next minute. I don't know. But we don't have (67/99)
one. Why? Because it's very, very difficult. And I think it's going to be. And you see the, you know, Secretary Blinken going around the region trying to get some diplomacy going. I think that what's happening here is, or what will likely happen is that the, then we haven't talked about the Russians. Let's connect the Ukraine conflict with this one. Let's try to do empathetic analysis on Russia. What does Russia need right now? So there are a lot of rumors going on that, hey, did Russia have something to do with this to distract from the Ukraine war, distract the United States? I don't think so. I seriously doubt that Russia supported this or provided any assistance because they have a relationship with the Israelis. That's a relationship that the Russians value. They do not want that, you know, gone. And the Russians, you know, flirt with Iran, but they don't share their ideology. It's a marriage of convenience. So I think that what Putin may have said to the Iranian leadership, (68/99)
because Iran is helping them in Ukraine with weapons and whatnot, that gosh, we could use a Middle Eastern conflict right now, you know, because they're stuck there and they want to push forward, and they're not able to make headway, because they're not able to force the Americans to come to the table and say, We have all this area. We've created the land bridge from Donbass to Crimea along the Sea of Ozov. Tell Zelensky, we won't move any further, but these areas are ours. And that's let's call it a truce. Let's have an agreement here. That agreement is not taking place. So they have to push militarily more harder. In Ukraine, it's they're finding it difficult. But now, I think if I had to imagine and I'm being facetious here, I just want to lay that out for your listeners that if they said to the Iranians, hey, you know, we could use a Middle Middle Eastern crisis right about now. I think the Iranians probably said, Let's see what we can do about it. Not because they did it, they (69/99)
were going to, you know, deliberately do something for the Russians, because they are already working on these things. They already know that they have all these strategic plans and tactical operations in play. So now that there is a crisis, Putin is looking at this and saying, and if I had to sort of bet, I would say that, you know, the Kremlin signal to the Biden White House that, Hey, looks like you have two wars now. It doesn't have to be this way. We can help you. You can't talk to Hamas. You can't talk to Iran. We're friends with Iran. We can mediate in this, but it's not going to come for free. So can we talk about us helping you figure this one out while you help us reach a settlement? You know, you don't want the Ukraine war to begin with. Your own people are saying, How long is this going to go on? So can we come to some form of a grand arrangement or quid pro quo or something like that? So I think we need to watch for what the Russians are doing because they're going to be (70/99)
key. The Iranians rely on the Russians quite a bit. You asked about the Chinese. I think the Chinese are a very small player. They're overrated. I mean, they have serious financial problems going on right now that are turning into political problems for Xi. Their economy isn't doing well. They like to go in and benefit from what others are doing. So just to give a sense of how the world has changed in just a few months. It was only a few months ago that we were all talking about, Oh my God, the Chinese have, you know, displaced the Americans as the great power in the Middle East because they broke a deal between the Iranians and the Saudis. So much for that. You know, the Iranians turned around and while they were doing this, they were also planning this. So the Chinese are not a major player. Yes, that we can use their help at a tactical level to press the Iranians and they won't do it for free. They won't do it for free. You saw Mr. Wang Yi come out, the foreign minister of China (71/99)
come out and talk about how, you know, the Palestinian issue cannot go on like this. It has to be resolved. Why is he saying that? Does he may care about the Palestinians? But he's a Chinese foreign minister. He cares about Chinese national interests more than Palestinians. So it's safe to say he's using that to say to the Americans, we could stop talking about this, you know, and we can help you because what did Senator Schumer try to get from G when he met? He said, you know, we need you to support Israel right now. And the Chinese turn around and said, Well, you know, we're going to support the Palestinians verbally issue statements. So they're going to say, you know, all that pressure that you're applying on us in terms of our access to high technology and, you know, the limits placed on doing US companies to do business with us. If you can be flexible on that, we can be flexible on this. We can help everyone wants something. Everyone wants something. And so this is the problem. (72/99)
And this is the nature of revisionist powers. They know all these things. Those powers that are not revisionist want to maintain, you know, the existing order, you know, and as Americans as Canadians as as Westerners, we want the international rules based order. But while that is a cherished value for us, our opponents, our adversaries want to tear it down, and they have the means to tear it down because this is such a fragile thing by nature. It requires actors to play ball to cooperate with one another to comply with those rules. And creating chaos is the way for revisionist powers. And they have the upper hand, unfortunately, because it's easy to create chaos and harder to stabilize. And so this is why Iran exploits Fili. The Chinese exploit this as well in their own way. And the Russians are masters of this. Absolutely. Also, the Chinese have seen what a disaster the Middle East has been for the United States and for the Soviets. They don't want any part of it. So who comes out (73/99)
where as a result of what's transpiring today? Who benefits from it? And how do you see it? I mean, again, I've asked you this a number of times, so I don't want to keep pressing. I tend to think about scenarios and likelihoods about what's most likely, what are the various likely possibilities? What are the scenarios that you see here and who comes up or down in those various scenarios? Let's go through the list. The United States wants to restabilize the situation, which means that these that the underlying problems aren't going to go away. So it's kind of like, can we not have this right now because we're dealing with Ukraine and we're dealing with great power competition with China? We don't have a solution for the Middle East. There is none to be fair to ourselves. But we want to stabilize. So I think that the path towards stability again depends on what happens in Gaza. Is Israel going to be successful in regime change in Gaza? What does that look like? How long will the Israelis (74/99)
have to reoccupy Gaza? How do the Egyptians cooperate with that? Do the Iranians accept the loss of Hamas in Gaza at this moment and not open a second front? Do the Iranians think that if Hamas is neutralized is removed from power, neutralizing means, you know, zero Hamas. Hamas will still exist in some shape or form because it's a social movement as well. But if Hamas is removed from power in Gaza to be very specific, will that satisfy the Israelis? Or do the Israelis then say, hey, we are successful in doing this? We're going to turn north. We need to get rid of Hezbollah as well. And otherwise, if we don't break with this pattern, if we just sort of go in clean house and kick the can down the road, then we're emboldening the other side. So the Iranians will look at this and say, OK, these guys are weak. We can add more pressure. Iranians also have constraints. They want to keep Hezbollah as an insurance policy for any future direct Iranian-Israeli confrontation, especially. Sami, (75/99)
did they're reluctant to use them? They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. They're reluctant to use them. But if a settlement allows their assets intact, they'll accept a certain loss of Hamas. But we've seen them rebuild as well over and over again. So I think that that's the kind of scenario that I'm looking at at this point. Not knowing what else is coming because the situation is so fluid, it's hard to make a forecast or even a scenario. So it seems that that wouldn't be something that the Israelis would accept or would want. I was just going to get to that. Right. And then my next question is also, though, the Iranians also don't want a two-state solution. That's the last thing that they want. Right? Presumably they want the grievance to maintain so they continue to exert (76/99)
influence. So a two-state solution would also be in the interest of the Israelis if they could get the security guarantees that they want, but they haven't been able to get them. So I don't know. Go ahead and you said you were about to get to the, that the Israelis wouldn't be satisfied with that. I don't want to interrupt you. So I was listening and I wrote about this in my piece, the one that published a couple of days before the Hamas attack. Everybody knows that the two-state solution is not going to be realized anytime soon for the foreseeable future, given just the sheer complexity of the situation. But what did Crown Prince Mohammed bin Salman say in his interview with Fox News? He said, it didn't say I want a state. He said, I want to make the lives of the Palestinians better. I want to improve their situation. He wasn't talking about Gaza because he has no control over Gaza. Iran has more influence over in Gaza. He was talking about the West Bank. So it's concessions. So the (77/99)
non-revisionist powers want a solution that can show marked improvement for the Palestinians. The Iranians, on the other hand, demonstrate that they are championing the Palestinian cause, maintain their influence by showing that they can attack the enemies of the Palestinians. So they show they're standing up for it. So the actions of the United States and its allies inadvertently work for the Iranians. And so I think that the Iranians also know the two-state solution is not there. Right now, their goal is they're not looking at a solution. Their first order of business is to preserve as much of Hamas as possible, basically not have necessarily a second front open up with Hezbollah because it's very unpredictable. They got lucky in 2006 with the Israeli Hezbollah war. They don't want to take chances. They are setting up shop. They're not consolidated themselves in Syria, where the Assad regime is very fragile. They want to be the kingmakers in Syria. They know Assad is not going to be (78/99)
there forever, but they want to be the ones bringing the next leadership. They're playing the long game. They're looking to improve their position for the long term. Exactly. Iraq is also a place where they have a lot of problems that they need to manage. They're looking at the West Bank because the West Bank is tanking. And that's the price for the Iranians and for Hamas. And so let's say Hamas is neutralized in the Gaza Strip. It still exists in some shape or form in the West Bank. Its leadership is overseas. And if there's chaos in the West Bank, then the Iranians have a chance to expand into that theater. This is far more important than any solution. All they have to show to the Palestinians to keep them within their orbit or the people that sort of look up to the Iranians amongst the Palestinians. Most of them are supporters of Hamas or Pij. Is that we're there for you. Look what the other side is doing. It's not getting you anything. And so this is the unfortunate situation, the (79/99)
inability of the United States and its allies in the region to resolve or move the Palestinian-Israeli conflict forward, show some progress is working to the advantage long term for Iran and its agenda. So how do the Israelis move forward and manage this really just disastrous, catastrophic, giant, complex mess that is their entire security environment? What do they do? If you were advising the Israelis, what would be a realistic way forward for them? Because it genuinely feels like, and it's not just today. This has been the case for a long time. There's no good solution and everything is just moving them more towards a more complicated, worse situation over time. So what is the way forward for them? Again, I can offer analysis and forecast, maybe some policy recommendations. But I think that first let me say what I think the Israelis will do. And then let me talk about what I think they should do. I like that. Let's do that. So the Israelis need regime change in Gaza. That's clear. (80/99)
Everybody knows that, how it happens, when it happens, those are details. It's not easy. It's easier said than done. And it'll be a long time before they deal with that. Right now, they want to do that, focus on that. The US is helping them make sure that his bullet doesn't jump into this. And the US is doing that how? By implicitly threatening the Iranians, by bringing two aircraft carriers into Mediterranean? By putting pressure on them saying, hey, if you do that, then we'll be forced to jump in. And jumping in means attacking southern Lebanon or jumping in means attacking Iran? Air strikes. I mean, you have to telegraph to the Iranians that all bets are off. They should know that, let's put it this way, they should be uncertain of what the US needs to do. Iran is behaved as an unpredictable power. The Israelis are saying, we're unpredictable as well. And so is the United States in order to force the Iranians back. So they're saying, they're having the Iranians wonder, I mean, that (81/99)
are these aircraft carriers going to just strike at Lebanon? Are they going to strike in Syria as well? Iraq? Maybe even Iran itself. Is there also a level of sort of like madman theory when it comes to Israeli policy here that the Iranians might think that they could have pushed the Israelis to a place that they don't want them to go? And that might discourage them? Or would that actually be great for them to have the Israelis attack them directly? So again, in the short term, everybody's risk averse. Even the Iranians as a revisionist power is risk averse. They don't want them because they don't know the outcome. It's a gamble. It's a high stakes maneuver. And they don't know that they're going to come out on the other side with their hand on top of the situation. It's a risky move. But eventually, if their calculus is, if Israel goes all out in the long run, it works for us. Because there's, there'll be more chaos. The more there is chaos in the region, the more we benefit. So we (82/99)
don't want to get hurt. We don't want our assets to be hurt. But if it happens, then we still win. Do you see what I'm trying to say here? Sure, I do. And so the Israelis are looking at first order of business Gaza, make sure Hezbollah doesn't open up a second front. If it does, then we have a contingency plan for it. But let's say they don't. Let's hope they don't. We focus on that. Once we have Gaza neutralized, then we will focus fully on Hezbollah. Because this is an intolerable security threat on the northern border. Hamas is a much smaller weaker group compared to Hezbollah. Hezbollah is literally the armed forces of Lebanon. It is more powerful than the Lebanese armed forces. And then we will exploit their vulnerabilities because look, there is also the Hezbollah has its hands full as well. Lebanese economy is doing very bad. It's tanked. They need to keep a certain number of forces in Syria to maintain Assad in power. So it's not like they have freedom of movement either. So (83/99)
this is what the Israelis are hoping to do. And eventually, I think the best way to deal with from an Israeli point of view, the best way to deal with Iran is to neutralize its assets one by one in a way that they can manage. They know they can't deal with it in Syria. It's too big. But they don't have any guarantees that they will succeed against Hezbollah either. Because they already have the history of the 1982 Lebanese invasion. They have the withdrawal in 2006. The war that didn't go anywhere in 2000, sorry, in 2000, the withdrawal 2006 war that the Israelis could not impose a military solution on Hezbollah. And so they have that. So they need the time to deal with it in an effective way. Now is not that time from an Israeli point of view. Now, what do I think that the Israelis should do? I think that the Israelis, and it's very hard for them to do this because they're politically divided on this, extremely politically divided, is that they need to sit down and say, if Hamas is (84/99)
taken out of the equation somehow, let's say regime change. Hamas is weakened. Let's just say Hamas is weakened because it still exists in the West Bank. It'll still have some presence in Gaza. Can that be a moment in which the Israelis and mainstream Palestinians, the Palestinian Authority, can sit down and work out an arrangement and say, let's finally get the Palestinians some measure of autonomy. I hesitate to say an independent state because that's such a big thing. That's not realizable in the short term. But can they make sufficient progress? Can they give them more autonomy and reach a settlement? Again, because the PA, FATA, the PLO are in meltdown, that is very hard to do. So I would say every crisis provides opportunities. I think this is an opportunity, while it's a crisis, while it's ugly, but I think that it also has embedded within it the space and the time to think outside the box and try things that have not been tried so far. Again, I say that with lots of caveats. (85/99)
The Israeli political spectrum is divided. The Palestinians are divided. You need two coherent partners to move towards that. That's not there. But if the United States can steer in that direction, it's going to be a long-term process. But if we can see movement, maybe this place becomes manageable. And because the key here is to limit the space and time that Iran has to exploit the situation. I see. So in your mind, both the Israelis and the Americans right now are aligned in so far as wanting to end hostilities as quickly as possible, create some kind of stable foundation so that the Iranians have a limited opportunity to exploit it, and then from there reassess for the long term. Whereas the Iranians want to keep the wound open for as long as they have to in order to get concessions so that they can end up on higher ground. And that's sort of where we are right now. Exactly. How sensitive is the Israeli government to the public perception of what's going on right now in Gaza? And (86/99)
how does that factor into how you think that they're going to approach this and whether or not they're going to continue the bombing, the scale of the bombing, and whether or not they're going to send troops in? In other words, that it's not just about the political pressure they're getting from other governments and capitals, but also the awareness of what the perception is publicly and how that factors into everything else and the pressure that it applies on other governments. I think they're very highly sensitive to that. They have to be. Israel is a serious power. And you don't become a serious power by being sloppy, by being sort of ignoring the obvious. Look, for the longest time, they have relied on strong American support. And that has been a function of the fact that for the longest time, there weren't voices inside the United States that would talk about the Palestinians in the media in, you know, the public square, definitely not at the government level. It was Israel is an (87/99)
ally and we need to have a solution. You know, Bush wanted a solution that started the Oslo negotiations or the peace process. Clinton signed the Oslo Accords. He tried to reach final status. You know, the Bush administration was caught up in 911 and post 911 world. So there was sort of a status quo as far as American support for Israel. Now you have voices in the American media, in the American public square coming out that are critical of Israel. Those voices are gaining strength. I have a hard time believing that the Israelis are not sensitive about that. The fact that I believe that even the Biden administration in its conversations with the Netanyahu government is saying, guys, it's very difficult for us to just support an all out war in Gaza because of the cost. It can cost me politically. I mean, Biden's own party has a strong sort of left and hard left leaning constituency. If he's going to be reelected, or if the Democrats are going to hold on to the White House and build upon (88/99)
the Republican disarray in Congress, they need to keep themselves coherent. And I think that the Israelis are being told that we're with you. You tell us what you need. Make this as quick as possible. Make sure that you limit the number of Palestinian lives lost because if this gets ugly, then we can't promise that we can continue to support you because it's going to get really hot for us as well. So I think that the Israelis are very mindful of this. You see how the debate is taking place when Western media, international media is interviewing Israeli leaders, civil and military on this. You see the tensions. Why is that tension there? That tension is there because the Israelis know that global public opinion is now growing. If you have the Chinese, the Russians, country like South Africa, it's president coming out and saying you need to solve the Palestinian problem. They know that their room for maneuver has shrunk. So I think that they are really mindful of this. And this is what (89/99)
is frustrating for the Israeli leadership because they have to balance what the international mood sentiment with their own divisions because the Israelis are divided as well. So right now everybody wants Hamas gone. Palestinian rights are secondary. But for Netanyahu and for the, let's say, forget Netanyahu right now because Netanyahu's political career is at the very least uncertain and possibly over. Okay. Whoever is going to inherit the political right has to deal with far right groups. I mean, this government has really far right people who are, who can be easily called extremists in the Israeli government. How do you balance their demands with the international mood? It's a very difficult position for the principles in the Israeli government. And one of the things that we'll see right now is while this unity government has come about, the opponents of Netanyahu want to use this opportunity to push him out. And therefore, I wouldn't be surprised if there is infighting within the (90/99)
Israeli government over what to do as time goes by. Because right now everybody's on the same page saying, hey, we got attacked. We need to respond. This is our 9-11. And one understands that. But it doesn't take long for that camaraderie to sort of descend into disagreements and differences. I really appreciate that you brought up politics and I want to encourage listeners to go back and listen to our episode with Henry Olsen. And this is something that we've been talking about on the show for a long time, that the division within American society, political division, it does not come without costs. And that it makes it increasingly difficult to operate a foreign policy and manage foreign threats when that traditional division has existed in American society between domestic politics, which were open to negotiation and foreign affairs, which there was a bipartisan consensus for, is breaking down. And I think that's all part of a new political realignment in American society. Last (91/99)
question for you, is this a wake-up call for America's military and strategic planners? And if so, how do you think this is going to affect the strategic direction of the United States and the urgency with which they might seek to reassess and improve upon some of the long-standing issues that have maybe been highlighted initially by the war in Ukraine, like the defense industrial base, which presumably would be stretched even more in the event of an open war in the Middle East. How does this factor into U.S. strategic planning long-term, do you think? I think that this is just the latest in terms of wake-up calls or sort of red alert situations. So let me step back here and sort of say the world was simple until 1991. It was a Cold War. It was a bipolar world. And the United States federal government was built and designed to do that, deal with the Soviet Union. All our agencies that we, you know, the most powerful security, national security agencies came out of the Second World War (92/99)
and basically were consolidated fighting the Cold War. After the end of the Cold War, the United States government found itself in the position of being the only superpower with some rising other regional powers, other global powers. China was rising at the time and now China is a major economy in the world. India is rising as we speak. The world is getting complicated. Russia is weakening, but it's still there. The European Union in 1991 was created and it's also has its fault lines and its limitations. And the rest of the world that was unstable has become more unstable. The nation states that emerged after the First World War and after the Second World War, those are weakening. You see the rise of non-state actors, strategic vacuums being emerging. So the United States has not really rejiggered its institutional architecture to deal with the world where it is still the superpower, but there are other power centers in the world that are emerging. And in the meantime, the United (93/99)
States is going through an unprecedented evolution on the domestic political front. We talk about right and left. That's always there. It's becoming more polarized, but the right is fractured, especially after the Trump presidency. The left is not too far behind in terms of fracturing. It's a generational thing. You know, once the Nancy Pelosi's of this world, the Bidens of this world move on, a younger leadership comes in. You're going to see a crisis emerge as to who speaks for the left. Right now, there's a lot of people who we can say are far left that are emerging, younger congressmen and congresswoman. And so you have a domestic situation that is constraining the United States. You have the fact that you have a governmental structure, a strategic outlook that is dated that needs overhauling. I think this is going to be the challenge of the 2020s, maybe even the 2030s. I can't see that far out. But I know that it's not going to be resolved anytime soon. So absolutely, the United (94/99)
States federal government needs to rejigger itself to be able to deal with, institutionally deal with these problems. So the last time this happened was FDR because of the 29 stock market crash, the economic crisis, then world coming out of World War One and then you had World War Two, then the Cold War. But FDR had four terms as president. Now we only have presidents with two terms. So we need domestic political consensus for this. We're not there yet. So we're in a very sort of long stretch of putting out fires, if we will, before we can get to a stage where we have a strategy to manage the world. What does China look like given its crises? And, you know, we're still thinking China is a big threat, but China has vulnerabilities. What does that net assessment look like? Russia is weakening. We've already seen this in the South Caucasus with how the map of the South Caucasus has changed since 2020. And the Turks are rising in the Black Sea region. Iran, we've talked a lot about how (95/99)
Iran's intentions are and Iran's reality is. We haven't talked about India and how India is projecting soft and will project hard power in the future. There is a new world emerging out there unfolding right before our eyes. And I think that it will require serious leadership from both Republicans and Democrats to be able to, for the United States, to be able to deal with it. Look, the United States is not declining per se. The United States needs to evolve. It's held back by all these problems. And somehow we need to figure our way through it. There isn't a power that is challenging the United States in absolute terms. You have powers that are creating problems for the United States. We need to analyze and diagnose the situation globally very clearly and move forward. I think we can do it. I think we have it, but it's going to be, you know, a long-term effort. I couldn't agree more. There was an excellent series of closing remarks. The need for a new Democratic consensus is actually (96/99)
the subject of the newsletter that publishes today. We'll have published yesterday if this comes out on Monday, as my intention. And we talk a little bit about that history from agrarian populism through the progressive era to FDR and the need for something new. I think we are really, I mean, I completely agree with your analysis. And I think in general, your analysis today has just been really high level. And I really appreciate it. I really enjoyed this conversation. So thank you again. I will have a link in the summary section to the New Lines Institute's website. For people who heard your analysis today and also found it as useful and enlightening as I did, how can they get more of it? What can they do to learn more about your thinking, to get access to your writing? What is the way for people to do that? Follow me on Twitter. I'm not a big social media person just due to the nature of my job. And probably I'm from an older generation that's not so social media savvy. But follow me (97/99)
on Twitter. I have a very active LinkedIn page. I post stuff on Facebook, but not so much. But follow, you know, www.NewLinesInstitute.org and www.NewLinesMagazine.com. And you will get this kind of different thinking. We'd like to believe it's different. And you'll get more of this. I also write for GeopoliticalFutures.com as well. I publish other outlets like the Wall Street Journal, Foreign Affairs, Foreign Policy, National Interest. So yeah, I write a lot. And so you can't miss me. I don't know if I'm going to be useful all the time. But yeah. No, look, I speak to a lot of people. You don't need me to tell you this. I'm going to speak to a lot of people. This is definitely one of the better conversations. So your Twitter handle is at KamranBohari. It's spelled exactly as your name is spelled on this episode. So people can just combine that together in no space. And that's how they can find you. Kamran, thank you so much. This is really wonderful. I appreciate you taking the time. (98/99)
And on a Sunday as well, we're really fortunate to have had this conversation. Thanks for the opportunity, Dimitri. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io. And join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolau. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (99/99)
This is the full transcription of podcast 'Hidden Forces'.
Navigating the Fourth Turning Power, Technology, & Moral Decline Demetri Kofinas #Podcast #Transcription #ReadAlong #KnowledgeUnlocked
What's up everybody? My name is Demetrius Cofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. What you're about to hear is my recent appearance on the Grant Williams podcast hosted by my good friend, Grant Williams. Grant was kind enough to have me on his show to discuss some of the more aberrant developments in American politics, society and culture and how they feed directly into our concerns about national security, the public interest and the future of humanity on this planet. I was pleasantly surprised at how much this conversation seems to have resonated with his audience and I am very excited to share it with all of you today. In it, we discuss my concept of financial nihilism and how it continues to explain much of the aberrant behavior that we see in financial markets, the corruption of our politics (1/99)
and the transformation of the American political economy from an imperfect capitalist meritocracy to a banana republic, the inter-elite competition between the old ruling class and a new cadre of Silicon Valley elites and tech pros, the fragmentation of our information ecosystems and the breakdown of consensus reality, the dangerous disintegration of the global security order and its implications for further international conflict, the broken social contract and the general moral decline that has been taking place in America. I encourage all of you who aren't already subscribed to Grant's podcast to take this opportunity to do so. He's been a wonderful friend to me over the years as he has to many people and he has done more than anyone to help elevate and amplify my thoughts and ideas on financial nihilism and the challenges that our societies face in this new century. You can learn more about his podcast at grant-williams.com where you can also sign up to one of his three content (2/99)
tiers that include his podcast, newsletter, long-form video interviews and online community. And with that, please enjoy this wonderful and important conversation about American society, our financial markets and how to navigate and make sense of the challenges of this moment with my friend, Grant Williams. Dmitri Kovinovsky, my friend, welcome back to the show. It's been way too long. It's great to be back, Grant. Thanks for having me on. Yeah, it's funny times we find ourselves in. I mean, I'll get to the reason why we're having this conversation now in a second. But first, since we last spoke, you've become a father. So congratulations on that and welcome to a very different world, my friend. Thank you. Yes, we were just talking about before we started the show and it's wonderful. I'm very happy. It's a wonderful experience to live through, tiring, exhausting, but very, very, very fulfilling. Yeah, I think that's the perfect way to encapsulate it. But I think for both of us, the (3/99)
fatherhood aspect of this is certainly one of the things that kind of kicks up some of the things we're going to talk about today. And just to frame this conversation for the listeners, this conversation is going to be very free-form in nature because it's really about feelings and just a sense that I'm getting. I know you've had for a while now and the switch that flipped me was the Trump coin. Something happened to me when I woke up on that Saturday morning and read about what was going on. It took me to a dark place. It took me to a place that I haven't been, despite having kind of written about the way the world is heading and chronicled it for many years now and done presentations on it and all kinds of things. And I wanted to talk with you about that because it was your framing of this concept of financial nihilism a few years ago, which really gave me some scaffolding to put around this. And since you framed that beautiful phrase those years ago, being able to look at it as (4/99)
financial nihilism has helped me make sense of it and helped me to understand what's unfolding. But still, I feel like we've reached a point now where it's kind of taking over. So I just wanted to talk with you again today about this concept and about what's happened since we last spoke and where the world is going. Because more and more of the people that I've spoken to and kind of shared my thoughts and concerns about this have echoed them right back to me. And these are thoughtful people who I've had these conversations conceptually with for years now. And all of a sudden, those conversations have become very real and people are feeling it rather than kind of thinking about it. So let's go back to the idea of financial nihilism because there will be people perhaps who aren't familiar with that concept. So talk a little bit about that, how you framed it and what you kind of mean by that phrase. Yes. So I've always defined financial nihilism as an investment philosophy that views the (5/99)
objects of speculation as though they were intrinsically worthless. And it's a departure, as I've described before, from Carl Popper's view of reflexivity, later made famous by George Soros, whereby there is some, albeit at times, tenuous relationship between price and value. It rejects that entirely and views value entirely as being subjective. And in a world of subjective value, the things that really matter are narrative and flow. And the fervent adherence and faith of the community of hodlers and the convexity of the potential returns, the YOLO, those are the core ingredients for understanding financial nihilism. And I think that in order to understand how this, again, investment philosophy for lack of a better term has evolved and spread over the years, you have to understand the transformation that's taken place in crypto because crypto began as an ideological movement based in a view of bettering the world. It was the solution to the corruption in the aftermath of the great (6/99)
financial crisis. And what has happened is that that is no longer what drives prices in crypto. What drives prices in crypto is the potential for financial returns. And that, I think, is something that we increasingly see in other parts of the economy and in society, so much so that the president of the United States launched his own cryptocurrency as a sort of concession basket that anyone can put money into, post the transaction on the blockchain or in this case on Solana's blockchain, and prove that they've given the president money. The president's wife is on the same thing. And this is part of a slow evolution towards a more corrupt society. This isn't some anomaly. We have various forms of corruption that contribute to this kind of nihilism. The Biden administration used lawfare to go after its political enemies, most notably Donald Trump. And I have begun this process. I've talked about the twin crises, the two seminal events of the 21st century, which was the illegal by (7/99)
international law invasion of Iraq. And it was important that it was illegal because it was hypocritical. And it undermined the very argument for unipolarity, for the rules-based liberal order, for American foreign policy and the beneficence of American empire. And the 2008 financial crisis and its aftermath, which once again showed that the elites in society were willing to change the rules. Everything they said about why they were doing, what they were doing, turned out to be just a story. And that goes back to the nihilism. It's just a story. It doesn't matter. It doesn't mean anything. In that sense, it's also very post-modern, which is why you also see as a core framework in financial nihilism, this concept of narrative investing, which is that it's all just a narrative. It's not actually true. We just have to believe it hard enough and get enough people to believe it along with us, and the price will go up. And price is the signifier. Price is the thing that matters to us. That's (8/99)
what we're all coalescing around, and it's money. It's ultimately the worshiping of money. And our society has become so corrupt and so wealth obsessed that the target has become money and not progress, not growth, not moral excellence, not something else that could result in the betterment of society and a sustainable path towards the future. And that's what I find so alarming. That's why I also went into a very dark place on that day. It's interesting to hear and wonderful to hear also the experience that you had, because I also got calls from friends. And the best people I know in my life, there are also people that we didn't, I didn't speak to that day that are also good people, but the only the best people I know had this reaction. People that really, really, really actually cared about the world, about the country, about the future. And I think that says something. And I'm not sure it's hard for me to suss out what percentage of this country really is in this sense embracing of (9/99)
the nihilism. But it's a sufficient amount that I find it rather alarming. Yeah, I mean, that's so beautifully put. I mean, that's a podcast, all in itself, though, we could just clip that and be done with it. But there's so many places I want to dig into with you. And that's, I guess to start with, there's this sense of cyclicality about this, this sense of we've been here before, you know, everyone talks about the roaring 20s and this kind of hedonistic approach before the Great Depression and this kind of blow off top. And you know, you and I both believe as encyclicals, we're willing to believe that mankind is cyclical and therefore history is cyclical. And you know, there's been this feeling as I've gone through the last number of years, and really, you know, I can't give you enough credit for this. And I'm going to keep hammering on this. It was that framing of financial nihilism that kind of almost accelerated my understanding of what was going on. And I think once you can find (10/99)
a way to put things that you feel into something quantifiable, it helps. And as it turns out now, and in the dark days that I've had since, hinders. But I gave a presentation, I guess it must have been two years ago now, which was all about trust, trust in society, trust in money and the decaying of that trust. And at the time, it was an important topic to me, I'm not saying the presentation was important, but to talk about this with people was important. And I put this thing together. And not really knowing what the response to it was going to be, because it was a personal thing. I wasn't normally if I go to give a presentation, I try and work out what the people want me to talk about. And I create a presentation that's appropriate for the people in that room. But I felt so strongly about this that I went against that and I put together a presentation that I felt people ought to be exposed to. And I really didn't know what the response was going to be to that. And I gave that (11/99)
presentation four or five times. And each time the response was actually very powerful. And people could feel what I was talking about and had felt just the same way your financial nihilism kind of frames stuff. For them, this presentation had been something of a jumpstart to help people perhaps think about the role of trust in society and trust your money is trust, crederic credits is from the Latin to believe. And so when I think about whether this is all just inevitable, and it was always going to happen. And we just now reach the point where it's going to happen. I keep coming back to this idea of trust. And this all the things you laid out there, after, particularly after 2008 and the invasion of Iraq, you know, the trust just evaporated. The trust evaporated in leaders after Iraq. The trust evaporated in financial regulators after the crisis. And, you know, for many people trust evaporated in Obama, because nobody was punished for Oh, eight. So how do you see trust? Where do you (12/99)
see its role in the causes of financial nihilism? And where do you see trust being now? And what happens to it next? How do we get it back if it's completely gone? Or what is there left to erode in it before we reach that capitulation phase? Yeah, I mean, obviously, trust is very important as is faith in the institutions, in the leaders, the people that have governed. And I, you know, it's interesting, as you ask, if it's completely gone, my answer to questions that are framed that way is almost always well, it's not completely gone. But we're actually, I do think trust is completely gone. I don't think anyone really trusts the previous power structure anymore. There might be people that have benefited from it, that are closer to the source of power. And so they just like it and it works for them. But I don't think trust is there. I think that fundamentally what's happened and there's something again that I've talked about quite a bit on the show is that the social contract is broken. (13/99)
Again, in the context of the two examples I gave earlier, the war in Iraq, the war in Iraq broke the international contract, so to speak, the contract that allowed the United States to be the leader of an alliance of global free states. And it transformed us into an empire that used aggression and force to get its way. Again, the rules didn't work for us. We couldn't get a United Nations resolution to invade Iraq. So we went ahead and did it anyway. And the 2008 financial crisis was a breaking, I think, of the social contract. And it accelerated the inequities in society and moved us further away from meritocracy to the kind of patronage system that we are now living in. Again, this issuance of a cryptocurrency meme coin is significant, not because it signifies necessarily a meaningful increase in the amount of corruption in society, but in the form that that corruption takes, moving from a clandestine form of corruption, where we've always kind of assumed that corruption has existed, (14/99)
but there's always been an attempt to kind of hide it to now where it's a kind of open larceny. And that is indicative of a banana republic. And in banana republics, there is no trust. And I think now that you say that, I'm reminded of that tweet that I wrote, because I did say that I think part of the challenge that people have who look at this and may genuinely not think of it as such a big deal, kind of like whatever, Trump is kind of doing this thing. But so what? Look at Biden, look at Hunter Biden. He was on the board of Barisma. What did he know? Biden put him there. I think that what people who haven't lived in low trust societies don't necessarily realize is that when you lose trust, when you lose faith in institutions, and you hand over power to populist demagogues and increasingly rely on figures to lead you, whoever those figures may be, you can't get that back. Like once the institutions are broken, you can't just fix it again. And a great example of that is Argentina. (15/99)
Look at the example of Argentina. You know, I've thought about this recently because I recorded an episode on Argentina. I have another one that I'm doing with the head of their doge department, Federico Sturzeneger. And one of the critical periods for Argentina was the 1930s. Now, the Great Depression obviously hit Argentina exceptionally hard because it was an export driven economy, and it was a commodity driven economy. So the depression hit them harder and earlier. But unlike the United States, Argentina, one experienced a coup in 1930. And now maybe that was because their democracy was more fragile than the United States, because democracy wasn't necessarily sort of inherent to the Argentine experiment as it is in the United States. But the United States also almost experienced a coup in 1930, 33, 34, which is medley butler, blew the whistle on, and it was the sort of Wall Street push, a fascist coup. So countries are very fragile. It may have happened to the United States, but it (16/99)
happened to Argentina, and you see that Argentina remains a basket case. And even now, in order for Argentina to try and undo all the bureaucratic red tape and all the problems that have arisen from these state edicts and all the price controls and everything else, you need a very charismatic and sort of cinematic, larger than life, mythical figure like Millet to come in with his chainsaw and afuera, and all these things to get people to move in his direction because no one believes in the state. And this is also, again, there are other examples. There's a wonderful example of some Russian anthropologists who tells the story about how in the Soviet Union, they used to, whenever a Soviet leader would die, I'm going to butcher the story, but they used to place their remains on the Kremlin Wall, and for years, they didn't actually put their remains on the wall. They put it inside the wall, but the newscasters continued to just say one thing, and reality was something totally different. (17/99)
And I think that's also a big part of the story, which is that the organs of propaganda no longer work. The official narrative storytellers have lost all credibility, and they didn't realize that they lost that credibility in the course of doing so to the point where we are now, I think, in a stage in America of rapid decline. And I want to caution myself here because I don't want to sort of be spreading undue pessimism, though I must say that I've generally been optimistic, though I've recently gone to a dark place as you have. I think that the ruling class, so to speak, has not, really has, I don't even know if they still understand it, quite frankly. They ran Hillary Clinton in 2016, which was obviously a giant red flag. They wanted to run Biden again. They wanted to keep Biden in for as long as they did, which was just like they were totally, it's almost as if they felt that they could control the narrative. Even though they clearly weren't, and most Americans could see that (18/99)
plainly. And so I think that we're past the point now. I think they've lost control. But what we do see, and what people like you and I see, is that we see a power grab here. There's a new set of elites who want to come in and use the government for their purposes. You saw them all lining up. Mark Zuckerberg did his whole new PR tour with Joe Rogan and everybody else. What we're seeing is the rapid formation of a new power structure in America. And what's absent in all of that is a conversation about the public interest. What is in the best interest of the majority of Americans? Is it the creation of a patronage state that allows for certain large tech companies to centralize power or to use the government to pad their balance sheets? Or is it to strengthen free market capitalism, strengthen democracy, set guidelines or rules around some of these really powerful technologies that increasingly sit in the middle between reality and our perception of it, and which obviously has a very (19/99)
consequential impact on our democracy and how well it works. These conversations aren't happening. And there's no one stepping up with credibility in a platform to speak on behalf of the public, in my opinion. I think for the most part, what I see is people who are aligning themselves with the power structure, with this new power structure or with the old power structure. And that's what we saw in the previous administration, people that were aligning with the old power structure, lawfare against President Trump, former President Trump. And now we see a new form. And it's very concerning that there isn't what seems to have happened. And I'll just leave it there. It seems like we've really lost our way and there's been moral decline in America. So when I spend as much time thinking about as I am, and I'm down in Australia at the moment to see my daughter. And so it's the summertime here. It's the perfect time to go for long walks and just think. And I've been doing a lot of that as I'm (20/99)
trying to get over my jet lag at strange times of the day. But the cyclicality of all this and almost the inevitability of it. And I keep thinking about our mutual friend Neil Howe and Bill Strauss's The Fourth Turning. And I keep thinking about the impact that book had on me when I read it, that getting to know Neil and being able to talk to him about it and ask questions about it had on me. And this feeling I had that because I read the book and because I've been fortunate to spend so much time with Neil talking about it, I understood it. And because I understood it, I was prepared for it. And I felt bad for the people that hadn't read it. And I bought so many copies, you give to people and I've recommended a book to everyone I can. And I felt that by reading that and understanding how these turnings work, would prepare you for it. And here I am, I'm in the middle of The Fourth Turning. And we have been for years and I've recognized that and I've spoken about it and I've said the (21/99)
phrase, you know, we're in The Fourth Turning. Suddenly it seems to mean so much more to me now. And I, when I think about what Neil and Bill wrote about The Fourth Turning and how the first turning comes after that. And that's what, where the hope comes from. When we tear down these institutions, you know, conceptually, you kind of kind of like make sense, but living through the part where those institutions are torn down and more importantly, I guess, feeling the reasons why those institutions are being torn down. I find to be incredibly turbulent, incredibly unsettling, even though I'm prepared for it. So I try to imagine what this feels like for someone who has no framework, who hasn't read The Fourth Turning, who doesn't have a way of understanding what's going on, even if it's difficult. And I keep coming back to consequence. I keep coming back to the lack of consequence for anything, any action that doesn't seem to be a consequence for it. And that, once you take away (22/99)
consequence for bad actors, it just accelerates everything because without consequence, there's no meaning. There's no meaning. And also the phase that we're in where it's like, okay, we may as well grab as much money as we can from this. You know, you talked about technological progress. In the 60s, it was to get man to the moon. People weren't making themselves rich from getting to the moon. It was a collective desire to do something meaningful. Now, AI is a perfect example. It's all about getting rich from AI, you know, and the deep seek thing comes along. And we can talk about that later if you feel that as a partner. But consequence, let's talk about how important consequence is and where we got off track. Because I've been trying to figure out where we got off track. And it may well be the Iraq stuff. It may well be the WMD and the lack of consequence for anything that went on there. It was Iraq. But what are your... Okay, so let's talk about consequence, how that happened and (23/99)
why it's so important. Yeah, because Iraq, and look, my experience of Iraq at the time for whatever reason was one where I understood that this was a diversion. I've talked about this on the show. I was very lucky because I was also a student of foreign policy. And my professor before the Iraq war explained exactly, he understood the sectarian divides in Iraq. He explained why this was such a bad idea. He had worked in the administration, he'd worked in the defense department. So I was fortunate in that regard. But the Iraq war was a blatant abuse of power on a scale that I at that age had never experienced in my life. I don't know enough about American history to be able to point to another example. I don't know of another one where the president of the United States centralized power. Again, we should also remember that the passage of the Patriot Act, the tightening of financial regulations around money laundering, et cetera, post 2001 was a dramatic departure from the world that we (24/99)
lived in before that, given the experience of going through the airport security. So that was just one thing. That was the backdrop. And you could argue for those changes, for the same reason that you could argue for some of the changes during the COVID-19 pandemic. In other words, you could make an argument that you're doing this to protect people. There was absolutely no argument for the invasion of Iraq that can possibly be made that I think is charitable. At the end of the day, the Bush administration lied to the American people, the press was complicit in doing so, and the entire nation was driven to a war of aggression against the sovereign nation that undermined the entire rules-based liberal order, undermined the United Nations, which was the key international institution for global cooperation and global international law. And it not only did it undermine the trust of Americans, which led also to many veterans returning home with PTSD, many of whom became disillusioned with (25/99)
American policy and with politics, but it also deeply unnerved our adversaries. It unnerved the Russians and it unnerved the Chinese. And so I think you have to begin with the war in Iraq. And it also set us back. Remember, it isn't just that we lost trust. The Bush administration was much more focused on China when it entered in 2000 than it was when it exited in 2008, because the two wars in Iraq and Afghanistan consumed American foreign policymakers, not just in the administration, but in the think tank community, in academia, in the press, everything became about the Middle East. And during that entire time, America's adversaries were growing stronger. Fast forward, again, the 2008 financial crisis is also very important, but fast forward from the invasion of Iraq to today, and the world looks dramatically different. The security picture for the United States looks dramatically different. So much so that the smallest detail, like the story around DeepSeek and the competency (26/99)
relative to JEP, GPT01 preview model, has literally unnerved people invested in Nvidia, the whole market sold off, but it didn't even sell off that much, by the way, just shows you how fragile, how fragile the bull market is and people's optimism. And also, again, it brings us back to what is it that people worship here? Like, what are we doing? Is there no sense of national mission? Is there no national project? And so anyway, the answer to your question is, I think it does, you have to look at the 2003 invasion of Iraq. That was peak American empire. And we're in a dramatically different place now. We're in a multipolar world, quasi bipolar, and it's not clear what the final order will look like when we get through this turning, if you want to use Neal House framework. As I think that through, and I think you're absolutely right about this, but sticking with this idea of consequences and the lack of them for that, it seems to me that what that's done is the worst, most dangerous (27/99)
thing. It's emboldened the leaders in America to believe that they can push and push and push, and they can use America's hegemony, declining as it may have been at the time, and it may be now, evermore. And I think nowhere is that perhaps less understood, but more important than with the freezing of the Russian central bank assets. That was a blatant power grab, a blatant flexing that really had no basis in law, certainly in the international understanding between countries that reserves should have some kind of sanctity about them. That military might and the lack of consequence has moved on to financial might and lack of consequence. So what happens to you think to me, Tric, because somewhere there is a consequence. There is a consequence of this, and it will manifest at some point in the future. It feels to me like it's brewing now in perhaps the treasury market. That might be somewhere where the consequence might be shown. But when you think that through the procession of lack of (28/99)
consequence, where does that procession go for you? When you say lack of consequence, do you mean lack of consequence for the freezing of the reserves? Well, I mean the fact that- Lack of consequence for the value of the dollar? I think what I mean to be clear, and you're right, I probably frame that as clear as I could have done. The lack of ability for other countries to push back, the fact that nobody could go and strike when America took that move and froze those assets, no one could do anything about it. There was a powerlessness. The rest of the world could palpably feel. You could see it. The only response they could possibly have, it seems, is to buy gold and not even sell treasuries, because that would put them in the spotlight, but gently buy fewer treasuries and try and quietly slip out the back door while America was on the stage, on the bully pulpit, telling everybody what they could and couldn't do. Yes. So I think what I'm getting from what you're saying is also, is the (29/99)
United States now relying on financial tools in the absence of the coercive power of hard power, because we're no longer the unipolar power. I don't know how long the United States will be able to continue to sanction countries without consequence to the value of the dollar. I think the reason why I feel like this answer is complicated is because I feel like so much of this also is tied up in the global order and absent an international war. I don't necessarily see consequences for them. Okay. That in other words, how do I say this? I also want to suss things out, because I think the issue for me is less about whether the United States was morally correct in sanctioning Russia, because we already established the real moral failure was the 2003 invasion of Iraq. The invasion of Russia, in my opinion, I don't know where you stand on this, but I've been very clear about it. I think it was not just morally incorrect, but unjustifiable based on the enlargement of NATO. I also think that a (30/99)
lot of people don't hold the Russians to the same standard that they hold themselves. We talked about how the invasion of Iraq was illegal. It was an illegal war. It was also horrific for the Americans. The blowback was enormous. There doesn't seem to be the same sort of accountability to the Russians for their actions, or I think also a lot of folks see the Russian invasion as having been some sort of 3D chess move by Putin. But I think this is a very long game and it's going to be a long term. It's going to be awful for the Russians. Not to mention that for Russia, they are now closer to the arms of the Chinese. It's been bad for the United States, and I also do think that long term, it is possible for the US relationship to Russia to strengthen, for Russia to re-enter the Western fold. I think long term that's perfectly possible, because their long term interest aren't with China. I'm kind of diverting from your question a little bit. No, but that's the beauty of this conversation. (31/99)
It goes where it goes. It's just fascinating to talk about these things. Yeah, but partly because I don't, I guess I still don't quite understand the through line of consequence. Okay, so let me try and do a better job. I'm mostly doing a lousy job. No, no, it's okay. It's not an easy subject. But for me, I've just got so many thoughts in my head, and I'm trying to get them in order, and that's why talking to friends like you will help me do that. And so the questioning of my questions is a really useful thing to help me frame my thoughts correctly. I think what I'm trying to say is, is this idea of lack of consequence. From 2003, there was no consequence because everybody was involved. Blair was involved, Bush was involved, all the people that fell in behind were all involved. And so when the lack of WMD, when the unnecessariness of this whole invasion truly came to light, enough high powered, well placed people were likely culpable that it just got brushed under the carpet and (32/99)
nothing was ever done about it. And nobody was punished. There was no, I mean, yes, we had inquiries, but they were a whitewash. And so people were angry because they felt like, think what you will about humankind, particularly in the West, there is this deep seated sense of fairness and justice and accountability that we feel. You know, we're taught our whole lives and we're taught that we live in these countries where the rule of law is paramount and that's the basis of everything that is built upon this rule of law. And so people felt that viscerally and it changed the way they felt towards power, towards their leaders. And then we had the 2008 financial crisis. And again, too many well placed people, nobody was punished for it. This is lack of punishment. And I think in Western Judeo-Christian society, there is this sense that punishment is appropriate when people transgress. And so as we've gone through, whether it be kinetic warfare, whether it be the ignoring of international (33/99)
norms and orders, or whether it be the enrichment of oneself at the expense of others, and then the little people feel powerless because all those elites that you talked about earlier on have their inquiry, they all wag their fingers at each other. A few people pay a few fines, but nobody really gets punished. This idea of consequence, I feel, has fed directly through into the cryptographed this idea that, well, what's going to happen? Right? I mean, look at the Hawk tour girl recently, right? You know, a classic rug pull and it's now become a rug pull. It's not become fraud. It's not become anything. Nobody has been punished for anything major, any headline making enterprise. There's no punishment. And so this idea that there's no consequence just accelerates the decline because people who would ordinarily never dream of committing anything that was remotely close to breaking the law will now be tempted because it's like, well, what's the worst that could happen? You know? So again, (34/99)
it's a meandering stream of conscious, unfortunately, but I just feel like there's a line of lack of consequence that runs right through all this to the point where people don't feel like doing something bad will lead to a bad outcome anymore. I agree with that. So just to tie off the conversation about Russia, I think that because the way I view it, the sanctions put on Russia were an attempt to create consequences for the Russians for their invasion of Ukraine. So for me, the more interesting line of inquiry there is what was different about America's response or the way it was interpreted than it would have been, let's say, 20 years ago. And I think that speaks to, again, 2003 and the hypocrisy. It was just much more difficult for the United States to make a moral argument against Russia's invasion of Ukraine because they did it in Iraq. So I think that's sort of like where I view it. And I think also because the United States is no longer a unipolar power, it just has less teeth. (35/99)
And so that may also explain why it decided to use sanctions as a tool to try and do something, to punish the Russians, to show this was not allowed. This could have also been an opportunity, again, not to stray too far from the initial question of consequence, which I think I understand that where you're going and we can discuss it. I think it was also an opportunity to rewrite the ship of state and to create a new consensus with American allies about what the future will look like because the United States is not a unipolar power. We need to offload some of the security burden to the Europeans and NATO. I am someone who believes in NATO. I do not want to see NATO disbanded. I think it's an important security architecture for Europe, but it has to be a security architecture that's going to work. And by work, I mean, it's something that the American people have to support. And it has to be constructed in a way that's sustainable. And I think the big failure to me since the 2022 (36/99)
invasion of Ukraine is the perplexing inability to scale basic military production, to support the Ukrainians and to support them in a manner that would allow a US-backed peace that was on the best terms possible. We're not even talking about what led to the war, what could have been done in the months before the invasion to have possibly arrested the war. So anyway, that's my view on that because I do think that the security picture is terrifying. The invasion of Ukraine accelerated this deterioration and the possibility of things going south with China also are very scary. Now, in terms of this idea of consequence and peep these scams all over the place, there's so many scams. I mean, Coffee Zilla does such a great job highlighting this stuff. I also see a lot of the thing that's also for me just shocking is the scale of the debauchery that I see in many of the new media platform, which right now, the mainstream media. There are people and news, whatever you want to call them, news (37/99)
organizations centered around influencers that have so much influence today. And their views and takes are so disgusting and so immoral on so many issues that I think this also speaks to the moral vacuum, the collapse in the institutions of old because the hypocrisy, right? We say we believe in one thing, but then we don't actually do it, whether it's the Bush administration invading Iraq, whether it's the media saying one thing and the reality is something totally different, you know, the horse dewormer of Ivermectin as an example. I mean, one of the reasons I think that Joe Rogan has been so radicalized is because he experienced the mismatch between reality and perception in his own particular saga during COVID. So this moral collapse of the traditional morgans of propaganda and consensus making in society has opened the door to something else. But rather than something positive fill the vacuum, what's filled the vacuum is greater depravity. And I think that's the darkness that I (38/99)
encountered with the launch of the Trump meme coin followed by Melania's meme coin. And I think that's, if that's what you're describing, I see that. And we saw that back, remember, I mean, Elon was way ahead of the curve with, you know, taking Tesla private at what was it, 420 and the lack of consequences. But again, I think that on the financial side, that financial nihilism was born out of the 2008 financial crisis and the lack of consequences coming out of it, all right? And the drop to zero of interest rates and the expansion of the Fed balance sheet and so many of the things that we thought were not supposed to happen actually happened and there were no consequences as a result of it. And that's what breeds the nihilism. That's what breeds the cynicism. And we haven't made any progress in that direction. We just keep going down the road of the Banana Republic and towards a patronage system. And a patronage system is not compatible with meritocracy. And those systems breed a lot (39/99)
of resentment. And I'm very concerned about that. And I think that's probably what you're also describing. Yeah, I think, you know, being, it's funny, this idea of being bearish about markets as they've climbed coming back to 2008 and what happened after that and this lack of consequence, you know, I think this idea of being bearish is coming more into focus for me now personally, personally. And it's not about markets. It is a bearishness for society. It's a bearishness for what happens when we reach that moral vacuum that you talk about, you know, this idea that if number go up becomes the only thing that matters, you know, that's what leads to only fans and all these God awful women putting themselves on the internet, proudly boasting of how many men they can sleep with in a day and all this stuff for attention. And you talk about influences. It is a complete and utter moral vacuum. And I think I'm only now starting to understand what my own bearishness was really all about, because (40/99)
it's not that I haven't invested in in all these years. It's not that I haven't, you know, I've just sat there on a pile of gold, you know, and can't so most people think about you, right? Yeah, yeah. We're the shock out of my hand, waiting to repel the zombies. It's not about that at all. For me, it's been an attempt to try and talk about something other than what's going to go up tomorrow. And that to me has felt important. It's felt that there are plenty of places where you can talk about the number going up. There aren't so many places where you can listen to people like you have meaningful conversations with people about meaningful subjects that don't end with a, so just to distill that, here's three letter acronym that you need to buy to make money out of this conversation. And that you use the word moral vacuum there. And that's what it feels like to me. It feels like we've entered this moral vacuum. And a lot of that, I feel, is because money has become to your point in your (41/99)
opening monologue, which was quite brilliant, by the way, the one thing that matters to anybody. And I don't know if it's chicken or egg. I don't know if the, if the morals go and so all that's left is money, or money becomes so important that all the morals go. But the two are inextricably linked. There is no question about that in my mind. So I wonder if you can help me figure all those little bits of that chicken. So again, I'm floundering here, and anybody listening to this, I apologize if I'm talking complete nonsense. But this is so real to me. And these thoughts are flying around my head. And I don't have that many people that I can talk to to try and make sense of it. And you happen to be one of them. So apologies for anything random. Go wherever you want with it. And I'll try and hang on for dear life. Yeah. So I guess a few thoughts. One is that I just think part of this isn't all that complicated. When money becomes free, the economy and the financial markets come to (42/99)
resemble more of a casino. And that's, I think partly what we've seen. I told you before we got on here, I got a notification coin base about, I don't have it now up there, but it was something about like there's still a chance to enter, make a trade for a chance to win. And this is a brokerage app. You know, Robin, who was doing the same thing, it's the gamification of investing. So part of it's just that. Again, that's the debauchery. That's the, again, what is the term of affection crypto degen? Degen, yeah. But I think there's also something else that's important here, which is there's this, we all are familiar with the concept of exit liquidity. And what we've seen is that this idea of exit liquidity has elevated itself to this idea of exiting the system overall, that whether it's Bitcoin, whether it's some other cryptocurrency, whether it's a meme coin, whatever it is, if you can make it, just make enough, you can exit. You can exit the rat race. You can exit the feudal manner in (43/99)
which you've been assigned. And you can achieve escape philosophy. And there's a kind of sort of religious resonance there too. And what that really also suggests is that, or it assumes is that you can live and you can exist and you can be happy outside of the systems that support life on this planet. And there's nowhere you can go by the way, there's nuclear war, or if we have more high tech warfare, if we have EMP attacks or cyber attacks in this country, because by the way, World War III is going to look very different than World War II. Yeah. World War III is a world where no one's safe. The entire world is a battlefield because everything is connected. And so I think that's particularly scary, that also I think aligns with a trend that has occurred over years now, increasingly every year more and more, which is that people just kind of check out and they just assume that someone else will handle it. Mike Green and I have talked about this. In fact, I've said before that Mike Green (44/99)
deserves some credit for my term financial nihilism because it was a conversation that he and I had in 2019 on a long walk from Union Square to a diner in the early hours of the night. And we talked about a lot of things and it was out of that in 2019 that I developed this concept of financial nihilism. But one of the things that I remember distinctly him talking about in that conversation that we had was about how, whether it was passive, because of course that's the area where Mike has made I think one of his most important contributions, whether it's passive where you just assign the discretionary allocation intelligence to another investor to the market. You're just riding off of their pricing decisions or whether it's just kind of following the GPS on your phone, even as you're driving off a cliff. People have increasingly checked out of making the decisions themselves or participating in a manner that is critical for the functioning of society. And democracy is another one of (45/99)
those areas. Yes, people vote, but there's a lack of seriousness which people take their role as voters in this country. So I think that generally speaking, and again, I'm actually hesitant to say this because I think that doesn't fully explain things because of course there are many MAGA voters who feel that they're taking a lot of responsibility in their vote. But maybe they're what I'm also sensing in the case of MAGAism and Trump populism is maybe too much of an embrace of the entertainment factor. And maybe that's sort of what I'm also touching on, which is that we're kind of in it for the lulls. A lot of people are in it for the lulls and that also is part of it. That implies a level of sort of checking out, right? I'm not particularly concerned about how things are going to work out. I'm actually here for the show. Well, that's also scary. It's like, because we're not Argentina. If Argentina collapses tomorrow, it actually has no impact on the rest of the world. Right. Like (46/99)
it'll have some impact on commodity prices and natural resource prices, but there's no security architecture built on Argentina. And there's no embedded national security state that could go buck wild and launch a preemptive world war in Argentina. Like we are still the most powerful state in the world. And if we withdraw from the rest of the world rapidly, that's going to have massive consequences. And if we decide to go full Hitler, not suggesting in any way that there's anyone just to be clear, because I don't want people to think that I'm somehow saying that that's the case here. I've never, by the way, bought into that argument. I didn't say that you have to point that out, but you just said you're like, yeah. I think it's important though, because I never actually bought into it. I think that our democracy is at risk, but not because of who's in the White House now, I think for systemic factors. And I never bought into the argument that Trump was a danger to democracy when he was (47/99)
first elected. And in fact, what we saw was that the party that was more willing to use lawfare was the Democrats and not Trump. But I do think that if we lost control of our country, if we had a coup d'etat, or we elected someone to office who centralized power, who was very interested in doing that, and maybe Trump is interested in doing that today, but not necessarily for the same reasons, regardless, that person would control the most powerful military on earth. And so these are not a games. I remember also that during the invasion, of Ukraine, there was a video circulating. I'm sure there was lots of this kind of stuff, but I saw it and I had tweeted it and I said, this is absolute nihilism. This is an example of it. The whole conversations about escalation, it might have actually not been in the initial invasion. It might have been during the peak escalation fears about nuclear when Putin was making some of those threats right around the time, maybe also Nord Stream, the Nord (48/99)
Stream pipe breaking or being bombed, attacked. There was a video circulating of a sort of, you know, fake video of this Putin character dancing to house music with a cake in front of him and a giant red button and like crushing the red button. And that's just so incredibly disturbing. Like this is our life. Human beings have been on earth for at the very least 100,000 years or more. Civilization has been around for a very long period of time, not in the grand scheme of things, but a long time, that we could just kind of flirt with it and play with it and kind of make jokes about it like that. And that people generally have this kind of, I don't know, yo lo view of a lot of these things. It's disturbing, but we keep getting used to it. I'm already used to the fact that Trump launched the meme coin. I'm over it now. I've forgotten about it. I'm on to the next thing. And that also, that sort of chaotic sense of progression in our society just leaves, I think, a lot of people feeling (49/99)
uneasy. That's something's going to go wrong. And the consequence of something going wrong in this particular version of human civilization is bigger than at any other time in our history that we know of, unless there's some law civilization that we're not aware of. Well, it's interesting to just come back on a few little bits and pieces of that, which is really interesting. I come back to this idea that the feelings like those you and I are having are very much generational. Like exes, boomers and above, I think feel this way. I think we're a lot more prone to feeling like this because we've been around longer. We've seen more. We have seen inflations. We have seen huge recessions. We've seen political violence and the IRA or the red brigade. We've seen all this stuff. We also lived through consensus reality where there was a popular culture and we all had a general idea of what was and what wasn't. Exactly. Right. And we are used to there being consequence. We are used to bad actors (50/99)
being prosecuted. And I'm curious, the generations, I remember that meme very well. I think you shared it and I remember seeing it on your Twitter feed. But there's a generation who have grown up where everything is a video game and you can destroy worlds with no consequence and Grand Theft Auto, you can rape and murder and steal and loot and all this stuff with no consequence. And this feeling like is this whole thing just a game? Is it all just a video game? And again, this is just, I'm just talking with the things that you're saying that are resonating with me. This idea of exit, my generation, I remember my first day, literally my first day at work, thinking to myself, I missed the excitement of having a job and traveling up to London and being in the city and all that stuff. But I remember that my goal was to be able to buy a house and pay for my house and exit and be able to retire and not have to worry about that kind of stuff. And so when we talk about exit liquidity, the (51/99)
amount of exit liquidity that has been generated in meme coins and crypto and all these get rich quick schemes that has been left on the table. And a mutual friend of ours told me a story about someone that worked for him who made a ton of money in one of the crypto booms. And he said to this kid, look, just pay off your mortgage, buy your house, spend some of that Bitcoin and buy your house. At least then if something crazy happens, you don't have to worry about it. And the guy's response was like, are you insane? Why on earth would I give up some of my Bitcoin to pay off my house? I mean, that's just ludicrous. Subsequent Bitcoin went down to $13,000 and then back up. Who knows what he's done? But this idea of an exit, it feels to me as though you're in the game and you don't want to exit the game because if you're in, not in the game, the game's going on without you. And it might cost you everything to participate. Absolutely brilliant observation, such a brilliant observation. It's (52/99)
also that your identity is wrapped up in owning these call options. Right. It's part of a dream and that dream is tied up in meaning for you in your life. So I think that's also absolutely true in crypto. But the thing about dreams, right, is... We have to realize them at some point? Yeah, we've all dreamt about winning that lottery to you. What would you do if you won the lottery? And no one's answer is, ever, I would buy 100 billion more tickets to the next lottery. No one ever says that. So let me turn the mic on you and ask you, what is that about? So what does it mean that you have the money to exit and you don't exit? What does that say about what you're chasing? And what people are chasing? I think for me personally, when I think about that, because there's a degree of hypocrisy in what I'm saying, because I'm still doing this, but I love doing this. I love doing it. I do this because I love it, not because I'm trying to take over the world or build some big mega organization. I (53/99)
love having these conversations. I love writing. I love thinking and doing all those things. I do it because I love it. I'm fortunate having worked for 40 years in finance that I can pay off my mortgage. And it's not a case of, oh, you're not the kid who dreamed of paying off his mortgage all these years ago. You're still in the game. I do it because I love it. And one day, when I don't love it anymore, that will be the determinant for me to stop doing it. So I'm very fortunate from that regard, but I've worked incredibly hard for four decades to get to that point. But when I think about the people who've made life changing paper gains, and it doesn't seem to have changed their lives, and you could argue that and say, wasn't that great? They got all this money and they still want to carry on doing what they're doing. But I don't know if that's the reality. I don't know if coming back to money, the fact that money has been so debased that it doesn't necessarily mean that much anymore. (54/99)
And it's just a means of keeping score. It's not a means to provide for your kids and provide for your future and to take savings and use them productively for enterprise. It's a means of keeping score. And that comes back to this. And I talked about the corruption of money many, many years ago, and I had to explain what I meant. It's not corruption in the sense of some bad guy doing something with a brown paper bag under a table. You have absolutely corrupted what money means. And because money is trust, you are corrupting the trust in everything. This is the thing that people outside the world of finance don't perhaps understand is that every single thing is ultimately built on money, which is trust. And you have chipped away and chipped away and chipped away at one of the very foundational bedrock pieces of society. And you've rendered it to a lot of people, as we're seeing now, completely meaningless. And if the bedrock of society is completely meaningless, where do you go from (55/99)
there? What do you build anything upon if you don't have a foundation that has meaning? So I'm going to hopefully answer your question, but a few things can't... I don't care if you don't at this point. I'm just enjoying the conversation. No, no, I think it's relevant to your question. So just to address this thing about meaning, I think this is in my experience, and I'll bring it back to myself because I've actually had a personal experience of life-changing returns, which I'll share, which I've never shared before, and what my experience of that was, realized gains and so how that ties back in. But I think that what I have seen in this cycle and increasingly is that the types of returns that were once available only to financiers, the kinds of returns that would lead someone, and I met people like this years ago, over the years, people that made so much money when financial gains, contributing nothing to society, that they basically exited and tried to do art and spent crazy amounts (56/99)
of money sort of painting on walls and having people tell them that they're great painters, but the art sucks and they're unhappy because money didn't fill the hole. Money wasn't the thing that they thought it was, and when they got it, that's when the depression began to set in. I think that more and more people experienced that today because that call option has been available to more people as we've sucked capital out of a bigger part of the pyramid at the base and allocated it up to the Keystone. So I think that's where my head goes at when you say that. I've talked about not in any detail like maybe I'm prepared to talk about here, not in too much detail, but I have talked about how I've actually applied this framework in my own investing. And in this cycle, I actually did realize returns. I mean, I've realized some gains in the previous cycle, but not to this extent. And my experience, and I think this is relevant again to this idea of nihilism because these gains were in crypto. (57/99)
My experience of realizing these gains left me feeling empty and empty is not quite the word actually. Yeah, a little bit empty, but it didn't feel the way I expected it to feel, and it also felt bad because I felt that I was dumping on other people. I didn't feel that I was making money and being rewarded for my contribution to the allocation of capital. I felt that I was making money in a pyramid scheme, and I was taking other people's money. And I called my wife, actually called a few people after the experience. By the way, it didn't stop me from doing it. I kept doing it. And that experience, and I think it's also instrumental because I think also the thing that's, again, I don't mean to harp on crypto here, but it's just such a unique experience to be in an industry where everyone who's smart that I know who's in it, who's made money, knows that almost all of it is a scam, that almost all of it is a pyramid scheme, rather. That's a better way to put it, that it's almost all (58/99)
pyramid driven. If you've been in crypto long enough, you remember what it was like when people actually believed that most of this stuff was going to do something. Now, maybe it eventually will. You throw enough money at something, you get enough government regulation to support it. There are ways to use blockchain and other DLTs to certainly do certain things in finance. But the amount of capital, the amount of wealth that's been generated, in my opinion, just doesn't justify. And I worry about, and I have been open about this, I worry for in the long term, what does that mean for the success of our economy? If we're expending all this effort and capital in an area of the economy that's only going to produce so many gains in return, of real wealth in the economy, what are we doing? And is that what the Chinese aren't doing that? So I guess that's where my mind goes and has gone quite often, which is that we are in a phase where we are just focused on financial gains at the expense of (59/99)
everything else. Our capital model is broken. The capital isn't going to the places where it needs to go in order to address some of these deeper social inequities, some of the bigger strategic needs that we have. And the launch of Trump's meme coin, I think, was especially disturbing because Trump was elected on a certain platform that had to do with national rejuvenation. So when he came into office and the first thing he did on inauguration day was to launch a meme coin, it was like a gut punch, man. And I've never been someone that believes in the... I don't mythologize people. I didn't mythologize Trump, I didn't mythologize Biden, I was young enough to mythologize Obama. I was a Ron Paul and Obama supporter who voted for Obama in 2008, but I was young. All right, I'm not that stupid now. But it was a gut punch because I still know that lots of people, millions of people believe that he is their savior and that he's going to change things. And I'm also someone that when he was (60/99)
elected in 2016, I supported the guy, I wanted him to do well. And I was less optimistic this time around, but I would still welcome it. And I was hopeful that maybe something, maybe they're right, maybe he really did change after he was shot. But he didn't. Clearly, he launched a meme coin. Who are we kidding here? The guy launched a meme coin. I tried to think about what... Sometimes when I see things like this, I say to myself, I put myself in the other person's state of mind. I'm like, what would it take mentally in your framework and in your worldview and in your heart to do something like that? And I just cannot square that with someone that's mission-driven and focused on what's in the best interest of the country. It feels like it's time to loot and pillage. That's the stage we're at in America. It's time to loot and pillage. Everyone get on board the Gryff train, all the tech bros, come to the White House. Let's see what we can do. This is now a patronage system. We've moved (61/99)
to a patronage system, it feels like. Yeah, I think that's incredibly to the point here. And I think the Trump meme coin, I don't think Trump sat up all night on the Solana blockchain. I think one of his guys said, hey, you know what we should do? We should launch a coin. Oh yeah, fine, go for it because and you'll make X. Great, I'm all for making money. The Scorpion and the Frog and that is yours by Trump. But that's crazy, right? But just think about it. Totally crazy. That's totally insane. You're president of the United States. This used to be the most glorious office in the world, an incredible privilege to sit in the Oval Office, an opportunity to make change. You're in your 70s to have an impact, to have a legacy, to change people's lives for the better. And you're launching a meme coin. It doesn't make any sense. It shows you how depraved the morality in our society is. But this, you know, to me, this comes back to something else that I'm glad you've brought me back to. And (62/99)
that's the distinction between the president and the office of the presidency. You know, because it used to be about the office of the presidency, right? Nixon resigned because he brought shame upon the office of the presidency. Right? I can't continue this job because the presidency is bigger than the president. And I'd be curious in your thought on this because I've brought this up with a couple of people and I've got different responses. And I'd be curious in yours because I know what a thoughtful guy you are. You know, I go back to Bill Clinton and the Lewinsky affair. And to me, that was a turning point because that was the first time that someone had brought shame upon the office of the presidency and said, you know what, I'm going to brazen this out. I'm not going to go. I'm just going to stand there and I'm going to go through this. And I think I'll still be the president at the end of this. And since then, we've had what, four or five impeachment attempts thrown at Trump or (63/99)
Biden or whoever. I mean, the impeachments are thrown around like confetti these days. But once you conflate the president with the office of the presidency, you end up with exactly this kind of problem and that the two become intertwined and it becomes about the president because you can't see the office of the presidency. You know, I remember our mutual friend, Pippa Malcom, telling me that when she was in the White House, she would sit outside the Oval Office with the CEOs of big, big American companies and they'd be, I'm going to go and tell the president he's making a big mistake here and he needs to do this and he needs to do that. And she would say, you go in there and you tell him, you know, he wants to hear this stuff, you go in there and tell him. And the way she framed it was beautiful. She said that she came to believe that Gollum lived above the transom of the Oval Office. She would see these guys cross under that transom into the seat of power and become complete (64/99)
pussycats. Oh, Mr. President, what an honor to meet you. And here I am in the seat of power. And nowadays, you kind of know it's about, oh, I got to meet Trump. I didn't get to go to the White House. I got to go and meet Trump. And I think once you humanize an office- What a really great, what a really great observation grad. Oh, I mean, she's brilliant, absolutely brilliant. But once you humanize the office, once the office becomes about the person, the office is gone. It's a popularity contest. There's no gravitas anymore. It's just, hey, our guy's in this time and let's make sure their guy doesn't get in. And I spent some time in Montana last year with a guy who was a very senior in the Democrat Party, very senior in the DNC. And a superb guy. We had a great conversation. We were talking about the upcoming election. And I said, the way I see it, I think Trump's going to win pretty handily. I just don't think this is going to work out for the Democrats. And we had a very good and (65/99)
open conversation until we got to the point where I said, I said, you know, the things really surprised me. I knew it was going to kind of happen, but I've been amazed at the degree to which the media is in the tank for Harris, how hard they've come out and desperately tried the second Biden step down to reinvent her, the Time Magazine covered his presidential illustration and they've done everything. And he just, he said, I don't see where you're getting that from. I think that's ludicrous. I'm not seeing that at all. And, you know, I said, I don't have a dog in the hunt. I can't vote in this election. So I'm just observing it without any dog whatsoever. But you're genuinely telling me that you don't think that the media are pulling hard for Harris. You said, no, I think the media have been pretty even handed in their coverage. And that was a real aha moment for me because this was a, he was a great guy. I've been a great conversation and he was very pragmatic about the shortcomings (66/99)
of certain parts of his party, blah, blah, blah, until it got to that. There's a blind spot. And so it seems everybody now, it's an our team against their team competition. It's not about the president anymore. It's not about the presidency. It's about, we got to win. We got to get our guy to win over their guy. And if their guy wins, we've got to do everything we can to make sure their guy doesn't win next time. To hell with who's the president going to be? Who's the winner? Yeah. First of all, I just want to reiterate that I think that that observation that you made about how the office of the president used to be, oh, Mr. President, when you, once you became president, you were no longer George W. Bush, you were Mr. President to now where the personality supersedes the cachet of the office. Part of that may also have to do with the directness and power of social media and the ability to speak directly to your audience. I think that what's more notable is that he actually believed (67/99)
it. But in any case, I guess that just speaks to just how aloof those folks are, that they could see the media's biased support for Harris and not really notice it at all. But look, I mean, this brings us back to, I think, a really big, important part of the story, which is the transformation of media. You and I are part of this in our own particular way, though. We're not political. I mean, I guess I'm political more, certainly more than you, but I'm not political in the way that the sort of talking heads are political. But what we've seen is we've really now seen the alternative media is no longer alternative. The old media is dead. This is the new media. This is the media. The media is these big influencers with their own private platforms, and they are forming part of a new power structure. And what I think we have seen here is a battle of elites, the old elites versus the new elites. The old elites had a different power structure aligned with different industries, and this new (68/99)
elite is, I think, also very tech driven. And something I think, you know, talked a little bit about Gen X. I'm actually technically a millennial, but I'm on the cusp. Dude, you're the most Gen X millennial I know. I think so. I think so. And I think that this moved towards a more disembodied experience of the world through digital media. And because we're such rapacious capitalists as a society today, we've become such corrupt capitalists, and we worship money so fervently, we don't have the proper framework to talk about the public interest, so much so that we can allow these rapacious tech companies with their extractive ad driven ecosystems and some of their demonic applications to exploit the minds of our children, and we don't stop it. And there are other areas where this is important, but I always go back to the impact on kids, on the health of children. You mentioned this OnlyFans thing, the prostitution of young people, as though this was like post-Soviet Russia, and we don't (69/99)
do anything about it. That's the sign of a moral failure. Why don't we do anything about it? Why? Is the excuse that the Mitt Romney Republican, and I use Mitt Romney, even though perhaps he's not the best example because of Mormon, maybe he would have a moral problem with it, but maybe not, is kind of like, well, this is free market capitalism work, we can't put our thumbs on the scale. What are you talking about? What's the point of money if you can't protect your kids? You see a strong correlation between the usage of a particular application and the rise in gender dysphoria among girls. So does that concern you? So your point is that it's more important to protect the private profits of these corporations than it is to try and address the problem, try to get your arms around the problem. And that's the other thing. We're at a point in society where there's a kind of inertia, an embedded inertia in our policy making, such that we can't seem to address these deeper social ills. And (70/99)
also, building new social contract because the old one's broken. So is the new social contract, is the argument that some of these folks make, and I call them free speech bros, I'm very much in favor of free speech. Of course I am. I support the First Amendment, but I don't, of course, buy into the lie that what happens on Twitter is free speech. I don't buy that lie. And so I think that, again, the clear ominous dangers besides the impact on children is the capturing of speech and the ability for one man who owns one platform that's dominant in political discourse to surreptitiously undermine the nature of that discourse and to define the parameters around which it exists because there is no free speech on Twitter. You type something in, it goes to the Twitter database, and then it comes out as whatever the algorithm spits it out to be. And this is the more important thing. It isn't necessarily that Elon Musk is sitting on top of Twitter and calling balls and strikes. It's that we're (71/99)
building increasingly automated systems by AI that are determining the scope and nature of our reality. And people are just kind of plopping along and moving forward. And part of the other, I think, major fault lines in society today, and it's not along party lines. I mean, I think people that are just party-driven minds will default to whatever position the party supports, but it's people that have a sort of conservative sense of our values and who we are as human beings, and what matters, and what do we want to hold on to, and people that are just like, full speed ahead. Let's just go. Disembodied future, transhumanism, whatever. Let's just go. And I think for me, that has been a huge thing that I talk about on the show for years now. It's deeply concerning what kind of world are we building? What are we speeding forwards towards? Do we even want this? But because we can't have a conversation between ourselves, because we've lost a sense of common identity, there's no place or way (72/99)
for us to have that conversation. And so it ends up filling that vacuum with populists and demagogues and oligarchs. And that's what we're seeing in American today. It's a free-for-all among people with power who are looking to use the system to advantage themselves. And nowhere is there a conversation about the public interest. And I hope, I hope, I pray I'm still waiting for some kind of critical threshold to be reached where we see people stand up and take a stand. I mean, Navalny took a stand in Putin's Russia, and he ended up dead in a gulag. Why are people not taking a stand here? Why are not people with power and money taking a stand? I don't know. Well, I think because the people with power and money realize that there's more power and money to be had by Zuckerberg's a perfect example, right? I mean, a perfect example. Watching his flip-flop once Trump won tells you everything you need to know. It tells me everything I need to know anyway, that there's more money and power (73/99)
being aligned with the winner. You know, let's take the example of Joe Rogan, who I don't know, and I've always liked and I've always felt and continue to think that the man has a strong moral compass. At the same time, I don't understand the way he talks about the election of Trump as sort of like, thank God, again, and I just really want to make this clear for your audience. I did not support Kamala Harris. I was not someone who thought, oh my God, let's hope Kamala Harris wins the election. I really am in a place of sort of pox on both your houses. Kind of place. But what I did understand about Joe was, he said that he supported RFK. RFK was the only one that made sense for him is what he said. And right after that, he was attacked by Donald Trump. And shortly after he had Trump on his show and he became a full Trump supporter. And now he just talks about how much he likes Trump and he gets chummy with all the sort of pro-Trump people. And it feels like he just joined a club. It (74/99)
feels like there wasn't some other sense of kind of what he wanted or his own sort of sense of what's right for the country. It's just kind of like, well, this is the club. It's better to be in this club. It's a good club. It's better than the other club. Like there's no like sort of independent sense of what's right and wrong here somehow. And that was also, I think, I wouldn't call it disturbing, but it was also confusing for me to see Joe not, I guess, take a more independent stand there. I don't know, man. I mean, I'm a small voice. I'm nobody. So maybe if I was somebody- But you're a consistent one, Dmitry. You're a consistent one. Maybe I'd be scared. I mean, I don't know. Maybe these guys are scared. No, I think, I'm not sure it's that. I think you are. You may be a small-ish voice, but you're a consistent one. And I think when you get to that level that where Rogan is, you have something that you're incredibly keen to protect, right? You want your standing. You want everything (75/99)
that comes with it. And you kind of feel a need to be on the inside because if I'm on the outside, what do I have in the world this media? If you get disavowed by Donald Trump in the world of media today, you know, I guess these guys, it's about the prestige. And look, we live in an age where narcissism is rampant, right? I mean, because of all the things we've talked about, of course it generates millions upon millions upon millions of people who are driven by ego and the need for reaffirmation of how amazing they are. And if you're in that situation, it is more important than money, right? Especially when you get, once you've got the money, the money doesn't matter anymore. It's just I need to be worse. And the good graces of the power structure. Right. And so there's one other component to this that I'd love to get your thoughts on if you can. And that is religion. And this is a difficult one for me because I'm not a religious man. I grew up in the UK in the 70s and religion wasn't (76/99)
a thing. You know, I went to school with all creeds and races and religions and I had no idea. I have very good friends who were Jewish, for example. I didn't know they were Jewish until we were in our 40s. Religions has not been in my life at all. It's not an important thing to me. Never has been. And I don't care if people are religious, but it's just not been important to me. I have a very, very good friend of mine who is a religious man. In fact, I have two very good friends of mine who are religious men and they're incredible human beings, incredibly thoughtful. And I've had plenty of conversations with them about religion because I'm curious as to their grounding in that and where it comes from. And as I've thought this through, there was an article recently which I saw and sent on these friends of mine, Neil Ferguson came out as having renounced atheism and embraced Christianity. And I find that interesting and I found this thread to be very interesting because if I tied this to (77/99)
my view that your money has become the God and it's become the thing that everybody worships above all else, then it stands to reason for me that once money reaches the end of that place where I can't worship money anymore, we're going to see people turning back to their God. And there definitely seems to have been a rise in certainly Christianity in the West, a certain people turning back to the church. And I've talked to my friend about this and his view is based in the Gospels, is based in religion, but it is that ultimately there is only one God and people will come back to that. So I'm curious as to your thought, A, whether you've seen this happening the way I have and if you've thought about it or any thoughts you might have about this. Yeah, so I want to segment my answer. First of all, there's clearly recently been a rise in opportunistic Christianity. Yeah, okay. People coming out to say how Christian they are, including Elon Musk, making illusions if not outright statements (78/99)
to that regard, because that's the new heuristic for signaling that you're on board with this whatever this new movement is. So I actually find it really disgusting to the extent that which is happening. And those people are truly lost spiritually. I also think it's just insulting how many people will at once both suggest that they're Christian, but then you can't find Christ anywhere in their heart. Nowhere do I see them talk about love or express compassion. Where is that in their religion and in their framework? As far as whether there has been a rise in interest in religion or Christianity, I definitely think there has been. I definitely think that reflects a lost sense of community and a search for meaning. I think that's something that's been ongoing for a while. And I think that the teachings of Christ are valuable and that personally speaking, I don't, I've never, not true. When I was very young, high school and maybe my very early 20s, I had a sort of radically atheistic, (79/99)
materialist framework of the world that, you know, kind of it's all just atoms and bits and consciousness is some emergent phenomenon. That's not a view that I've held for a long time. I don't know what the nature of reality is. I don't know what the nature of my own identity is. Where my own sense of ego ends and something larger begins, is this just a temporary expression of a larger source energy? I don't have the words to describe those things and that's part of what religion is. It uses allegories and myths and stories to try and grasp at something that many of us intuitively feel, but don't know how to find the words to describe, which is that there's something more that this world doesn't make sense, that I open my eyes, I'm here. What is this, you know, what is the nature of this world? These are basic philosophical questions. So, part of it is the search for community, which by the way, you may remember this or may not remember this. In our conversation, you and me and Ben (80/99)
Haunted in 2020, in that episode that I titled, this is before the pandemic, February, titled Financial Nihilism, Price Discovery in a World That Nothing Matters. In the second hour of that conversation, if I remember correctly, we talked about the cult of the Church of Tesla and the meme stock crazes and crypto and I made the point, I remember Ben Haunted saying that people are really saying something along the lines of like, what's motivating folks here is the sort of the desire for money and, you know, the product. My point was actually, I think, you know, that a bigger component that people are missing is the search and need for community. And again, that's something I learned from crypto because I was navigating the circles long enough that I remember that that's so much it was about community. So, I think part of it is community. That explains part of what has been happening. And I think another part of it is that because the nature, I don't know if you've ever smoked weed or (81/99)
done any kind of recreational drugs, but I haven't. I'm not cool enough, I'm afraid. Sorry, mate. Okay, no, no, no, no, no. Actually, I think one of the actually positive things that's happened in recent years is that the sort of like, you're cool if you do drugs thing has kind of, you know, taken a bit of a hit, which is fantastic because actually, I don't think that drugs are good, but I used to use, and it was only marijuana, that I used to use marijuana. I started it late when I was, I'm trying to think 22 or something. And I did it for some years when I launched the business. And I used it as part of my creative process. And it was remarkable, I must say. It was such a benefit for me. Somebody of my best ideas came out from smoking marijuana. And I can't do that now because I'll go brain dead. I can't. But I, the way that your perception changes when you're on drugs, whether you drink alcohol or you smoke marijuana or whatever it is, it alters your reality. And I think part of (82/99)
what's happening to people is that their time spent on digital platforms is altering people's perception of reality. And that they're beginning to realize just how tenuous their preexisting sense of what is real actually is, that they realize that what they thought was real, was substantive, actually isn't. It was just a matter of perception. So I think part of what's happening is that people are in a sense kind of losing their minds in a sense. And if you believe that the nature of the world and the nature of who you are is more in your heart than it is in your head, that could explain partly what people are searching for. They're searching for a sense of, a sense of what's real that isn't, you know, subject to the manipulations of their mind. So that's my best way of describing it. But I do think that that's part of the explanation, the changing perception of the world and also people's loss of community in a sense of, you know, sense of community and the search for it. So, look, (83/99)
it's time to wrap this up. But just, I mean, this is a huge question and it's one I'm pondering and there's no answer to it. I realize that after all the thinking I've been doing. But a broad question like where do we go from here? What I'm trying to get a sense of is, does this necessarily get worse? Do we have to burn this whole thing down before we can actually rise up from the ashes? Or is there a way that we can arrest, you know, pull back on the joystick before we hit the mountain and pull out of this dive? Because it feels to me from, you know, reading Neil's work and reading history that you almost have to slam the plane to the ground before there's no way to pull out of this because so many people are making so much money and getting so paper rich forever to change on its own. All that has to go up in smoke before people, and I'm using the air quotes this time, find religion. Man, it's a great question, right? And I think that's something I thought about as well. I think we (84/99)
have to probably begin by asking ourselves what a crash looks like. What is sufficient to qualify as hitting the mountain? I bet if you told me 10 years ago, we would be here, I'd be like, we hit the mountain. Yeah, right. You know, so the question is like, you know, at what point does that qualify? Of course, like everyone's always thinking in the back of their head about World War II or World War I, right? You know, conscription, people going off to die, cities being burned to the ground. That is my fear. My fear is a new World War, a World War III. I said earlier that a World War III would not look like the previous World Wars because everything is a battlefield today, because everything is connected and everything is vulnerable. All our devices and our cities and the way we live, we're so vulnerable to these types of disruptions. And the worry, of course, is that once you enter a war, the logic of war takes over. And then the bottom is unclear, you know, when you hit bottom. So I (85/99)
guess to answer question, I am afraid that in order for this to change, yes. So unfortunately, reflecting honestly on your question, I think we have to get to a place where circumstances demand collective sacrifice. Right. Great way to put it. In order to forge a consensus that will allow us to rebuild. And then the question becomes, what qualifies as such an event that requires collective sacrifice? Otherwise, do we just turn into Argentina? And we just kind of roll from one crisis to the next and never kind of escape until we eventually maybe do. But what we don't... So is it a V-shaped recession or is it an L-shaped recession? Yeah. And I don't know the answer to that question, but I think that it will depend... Ultimately, what that will depend on is the U.S. relationship to China. Well, you know, I go back to the 20s and 30s and I think about the Wall Street crash, which we in finance is a day that we mark in our diaries. But after that came the Great Depression, of course. And it (86/99)
feels to me as though... I think you're right, that period of collective sacrifice, but with money being the most important thing now to so many people, you know, it feels to me that something as simple as a proper stock market crash, a proper one, not one that's arrested by all kinds of throw everything at it to make sure that number doesn't go down, but a proper stock market crash might even be all... That could be the plane going into the ground there because the stock market has become so important, not just to the people that have money invested in it, but to the psyche of the population, right? This idea that even people who aren't invested in markets, you know, they may have a 401k, they may not, but they don't actively look at markets. When they see on the front page of the New York Times, or the Washington Post, never mind the Wall Street Journal, or the Seattle Tribune, or whatever it is, stock market crash, they panic because if the stock market's crashing, we are programmed (87/99)
to panic. And so the fact that we've avoided stock market crash, you know, we have markets in turmoil and all the joke segments on CNBC, but it feels to me as though the plane going into the ground at this point would be the evaporation of paper wealth that would come with the stock market crash. It feels like that's the thing that everybody, the one place people are aligned in terms of business community, investors, policymakers, central bankers, governments, presidents, is we don't want to get poor overnight. We don't want to get poor. And so do everything we can to not get poor. Never mind building, you know, repairing the interstate system. Never mind high speed trains between New York and San Francisco. Never mind all that. Just let's not get poor overnight. And so that for me might be the only catalyst that would actually send the plane to the ground. I don't know. Do you think that that would be driven by an exogenous shock or an endogenous shock? Well, I think the deep seek (88/99)
thing that we've seen happen over the weekend tells you that, you know, these shocks come when you least expect them. You know, I think it would have to be a shock. I don't think we'll get a creeping people suddenly deciding, you know, I've had enough making money now, I'm going to take my money out and I'm going to be, you know, so I think it will have to be a shock. And I think it'll come from outside markets. And then you'll just see this capitulation of people who do quickly say, look, I've lost half of it, but I've still got a whole load left. I need to get that out. But it just, it feels to me that everything is wrapped up in money now. There's nothing else that really seems to matter with people, money and influence. And, you know, if you're poor, you lose all your money, you lose your influence. So I would take the under on that. I think my sense is that it's likely to be endogenously driven. I'm not convinced that this latest particular thing is going to knock markets over. I (89/99)
mean, look at how resilient they have been in the face of exogenous shocks, the invasion of Ukraine, the proxy war between Israel and Iran, just blip just onwards higher. My sense, again, I have no idea, right? But we're just like spippling here. My sense is that at some point, the endogenous flywheel of capital appreciation will go into reverse. Whether it is, you know, some analogous, maybe something analogous to what Mike Green has talked about, it doesn't necessarily have to be passive, it could be something else. Maybe it's just psyche. And at some point, people stop believing. And again, I have no basis to stand on this, but I feel like this rally could go on a bit longer until the end of this year. But my sense is that at some point in this administration, something is going to break. I feel like I'm in that meme where I was like, tell us what will break and there's like a goose chasing the person. I'm that guy that said something will break. The most unscientific thing in the (90/99)
world. But at some point, I think the bull phase of this long expansion and prices will exhaust itself. But my sense is that it will exhaust itself. And it will not be some exogenous shock. There may be something that happens and it'll grab ahold of it and say that this is it. And so maybe this is it. Maybe, you know, the mania is over. Right. But my sense is there's still a bit more sort of euphoria to go with the tech pros in the White House and their home narrative. Yeah, I think that could be the case. But do you subscribe to my theory that a stock market crash could be the tipping point for all of this? Or will it happen in isolation, do you think? Absolutely. I think that if a stock market crash is big enough, it depends on how bad it is. Right. If it's big enough to impact the economy, given how many people are invested in it, certainly it would be catastrophic for people of a certain demographic. Whether or not that wouldn't though lead to the kind of, in my opinion, need for (91/99)
social cohesion that I think would be necessary to mark a bottom. Something has to happen that's big enough that it impacts either the whole of society or near the whole of society. You look at the pandemic, that impact the people above a certain age, didn't do anything to bring us together. But I don't know what that is, man. And the thing is also, Grant, what worries me, man, Jesus Christ, I'm trying to remember what it was that gave me this realization. But when I was young, I read a world only by fire by William Manchester. And of course, I've read histories of World War II and wondered how societies go crazy, how people lose their minds and believe things that you're like, man, those people were nuts. And you're kind of just like, well, we're sophisticated now. We wouldn't do something like that. What worries me is that because the central square and also both the central square, the fact that there isn't as much of a unified media ecosystem today as there was in certainly in the (92/99)
lead up to World War II, though obviously that wasn't the case in the Middle Ages. But because there's not as much of a unified ecosystem, and because again, the nature of reality is changing so rapidly, our ability to verify things is dissipating. And people are questioning the most basic things. I mean, you see all sorts of rumors catch fire. It might have been the drone story. The drone story is a great example. What are these drones flying over New Jersey? Why can't we get an answer? They're just drones in the sky. No one knows. Governors are coming out and saying, no one's telling us, mayors, the media can't tell us. And there's a, I worry that the nature of our reality and how we perceive the world and how we communicate with each other and we form consensus truth is breaking down to such a degree that maybe what the future holds for us is anarchy. And the ability to come together disappears because our society is so large that the only way you can manage 300 or 400 or 500 or a (93/99)
billion people in a unified sort of nation state is through very strong, common narrative structures held together by media institutions that form some sort of shared reality. And if our reality is each person's own reality on social media, on YouTube, whatever your particular channel is getting, and people are increasingly checked out, as we talked about earlier, in the process of governing themselves and in being responsible for the world that they live in, I mean, again, this is, people interact less with their neighbors, talk with fewer people out in the world or on their phones, with their headphones on. I do worry that we're ceding a potential anarchy. And that is very scary. That's very scary, man. That's what it feels like also when the president launches a meme coin, or maybe what that just means is either it's anarchy or dictatorship. And I do think that dictatorship is totally in the cards for America's future. And I feel more like that today than I did four years ago. I (94/99)
hate you, man. I hate you. Well, you know, it's very difficult to imagine a way that a conversation like this can finish on a bright note, to be honest with you. But I am... It used to finish. I used to, you know, this is the first time I've ever had a conversation like this, where I've actually ended on such a dark note. So I apologize to... No, no, actually, to be honest, for me, I think it's important. If part of this is, everybody's like, well, let's try and find a bright note to end on. Let's just be real about this, you know. And the reason why I wanted to talk to you particularly is because I know the depth of your thinking on this stuff. I know your ability to communicate it. And I know you don't shy away from the reality and the hard topics. And so, you know, I was really keen of all people to have a chance to talk to you about this. And I'm incredibly grateful you've given up a couple of hours of your time to sit and do this. And, you know, I have no idea where this goes. And (95/99)
I'm okay with that at the moment, because I know I'm not going to stop thinking about it and just curl up on a ball. I'm going to keep thinking about it and keep trying to figure it out. And, you know, conversations like these are the only way that I can not get through it, but move through it, you know, without having the access to people like you and to be able to talk these things through and go away with a few new threads to pull on. All you can do is curl up on a ball. So, you know, my friend, thanks to you so much for doing this. And look, I mean, I would imagine the Venn diagram of overlap for our audience is as close to two circles on top of each other as possible. But just let people know if they aren't listening to Hidden Forces already how to do that and how to become a Patreon subscriber, because it's just your conversations are the best in the business, and everybody should be listening to all of them. Yeah. I also, one more thought that came up while you were talking (96/99)
there is, number one, I totally agree with you that these conversations are very important. And I think one of the other corrupting influences that money has had is in the sphere of thought leadership, where people have converted their ideas into intellectual wares to be sold. And their sort of thought leadership is a brand that needs protected and people are always trying to IP everything. And again, there's just, it seeps into all the cracks. So Hidden Forces is, yes, we used to be years ago on Patreon. It's not added supported. We have a subscription-based business, always have. And you can learn about our subscriptions at hiddenforces.io slash subscribe. I also have a community, a private community that I run that's not been around for more than two years where I put dinners on all over the world, among other things. And we have a dinner in Argentina in Buenos Aires next Friday, the 7th of February, where we bring together people in intimate settings of 14 folks, a mix of our (97/99)
members and special guests. And we work on these problems. Sometimes we work on these specific problems, but other times we work in the case of Buenos Aires, we work on the specific opportunities that present themselves in Argentina and how to navigate them for investors. And I try to use the show as, in a sense, as a kind of pipeline between the show to the Genius Community online Q&As where people will join. And I also share, in some cases, Payworld subscriber material to people to help them educate them on specific subjects and sort of guide them slowly towards an understanding on various particular themes. So anyway, that, I don't know if that was a useful description of what I do or what the podcast is or how to subscribe. But again, hiddenforces.io slash subscribe. And thank you so much, Grant, for having me on the show. It was more than good enough, trust me. Dimitri, my friend, thank you. I have been to one of those dinners in London. It was fantastic. I'm very jealous. I won't (98/99)
be an artist. That one got a little rowdy if my recollection is right. It was terrific. It got a little rowdy. Yeah, it's a great conversation too. But I would love to come to Argentina, but I'm downhill with my daughter. So I won't be going anywhere for a while. But again, thank you so much for doing this. And I will see you down the road somewhere soon, I hope. My pleasure, Grant. I hope to see you soon. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolao. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at cofinas and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time. (99/99)
I am too
So good! !BBH
Without a doubt. I keep diving deeper into what is going on with models, data, and tokens.
It is crucial that we keep adding to the database. The compounding effects are clear to me. People need to grasp how we are training it.
Absolutely, I'm at the point, I can't even believe any reported user behavior in my company's software. It might be all #ai agent orchestrate to do some meta things xD
Getting reading for feeding the recordings of the #bundestag to #leoai