The Monetary Consequences of Mr Putin | Luke Gromen

my name is john stevens i'm the chairman of the federal trust among other things and i'm very pleased to welcome this morning uh luke groman who is the ceo and founder of forest for the trees luke um very kind of you uh to be with us i'm this is a very crucial time obviously for a whole range of reasons um i was wondering whether we could start off perhaps by saying what do you really think is the monetary impact of the ukraine crisis as it's unfolding i i think it's an i think it's an enormous impact i really think the reaction to the ukraine crisis in particular the u.s and eu sanctions of russia's fx reserves i think are a pandora's box that has been opened and i don't think can be reclosed and so i've i've talked about it potentially being on level with the us's closing of the gold window in 1971 from a monetary perspective you already had the u.s and eu sovereign debt credibility uh under threat as a reserve asset and when i say credibility credibility is a reserve asset right because uh given the u.s fiscal situation the european fiscal debt situation the us debt situation it was increasingly apparent that you needed significantly negative real interest rates for a sustained period of time in the aftermath of the covid crisis and the problem is is nobody wants to hold debt with significantly negative real interest rates uh because you're just going to lose purchasing power uh over time and so the credibility of of of western sovereign debt as fx reserve instrument i think was already under threat on its own and then when you layer on top of that uh peak cheap energy where we have seen uh over the last decade plus the marginal oil you know marginal barrel of oil reserves that cost has continued to rise and rise and rise and so here too when you consider the part of fx reserves that are held for uh to ensure the ability to buy energy to buy needed raw materials to the extent that the geology the the physical world reality is dictating that those costs are going to rise secularly hereto when the debt of the west is in a position that interest rates cannot rise to offset or to compensate the debt holder for rises in inflation here too because of peak cheap energy peak chief commodities uh fx reserves western sovereign debt as fx reserve assets are once again losing credibility and when you layer on top of these two things which are probably enough to really indict the credibility of of western sovereign debt as fx reserve assets on their own let alone together when you further layer on the what what just happened with the us and eu sanctioning russian fx reserves which is now not only do they not do are they not going to compensate you in in a positive real rate manner not only are they not going to hold their purchasing power against oil gas copper critical commodities but now anytime we deem you a bad actor we can just take them and so it's sort of strike one strike two strike three for for western sovereign debt as fx reserves in my view and so uh i i think what just happened in response to uh the russia ukraine crisis uh uh russia invading ukraine i think is in as we look back in history likely to be much more uh impactful than the actual russian invasion of ukraine itself you've suggested that we could be seeing the end of fx reserves per se i mean that would entail a massive exit from sovereign debt by a whole range of current holders around the world i mean that is a potentially a very serious crisis where would that money go i think it goes into things that better hold purchasing power right so it's going to be gold hard assets equities uh and so you've seen some move on this front as it is right the swiss national bank has obviously been printing money and buying u.s equities for some time uh we've seen shifts by the russians by the chinese out of out of dollars into gold in the case of the russians out of dollars into gold and the port of perease and the belton road and copper mines oil fields etc by the chinese and so i think that is going to some version of that is going to be the model going forward and and you'd probably have a greater percentage of fx reserves not held in official reserves but instead are are in the case of china hived off into one of their other state-run uh wealth uh wealth management uh uh um or sovereign wealth funds rather than being in official reserves that and you know the sovereign or the official reserves just stops going up or starts going down and instead you know safe ends up with more money and they go invest in inflation-hedged assets along the belton road some gold and so i think it's a it'll be a broad-based exodus out of fx reserves out of western sovereign debt as fx reserves and that you know that's a 12 trillion dollar pool of money right now probably 65 dollars uh those will go elsewhere over time i mean i'm sure they'll still remain some working capital amount of of fx reserves in dollars and euros i don't think it all goes away but i think what we'll see is a shift out of you know 12 trillion of savings to what's the true working capital amount and you can sort of calculate that using different imf calculations of imports exports etc current account and that'll be the number held in fx reserves and not a dollar more and the rest will go into things that better preserve either purchasing power or national security access to commodities or both but on the third point that you made the third strike that you mentioned of the impact of sanctions i mean in some respects these alternative assets are even more vulnerable to sanctions i mean if you buy the port perez if if portobarres has been bought by the russians that would be the end of the story there's nothing they could do about it um and the same is true surely of holdings of bullying and of and indeed at the way in which uh major commodities operate i mean that the the u.s stroke the west grip on these other markets commodity markets is as tough in in many respects potentially as uh its grip on on the uh normal form of reserve so cash and and bonds and all the rest i i think that's right uh you raise a great point which is exactly that anything held outside their borders can be subject to seizure and it raises interesting point because you often hear well the us is not that indebted if you look at all of the assets of the united states all the land all the farmland the grand canyon the rivers blah blah blah blah we have all these assets and my question is always okay great how are they gonna how are they gonna claim those assets if they wanna are those exchangeable for u.s debt the answer of course is no you have to talk to the united states marine corps first and that's that is not a treasury issue so i think the answer to your point is is i think we are going to see the preeminence of not just gold but of physical gold i think you're going to see a market to gold is going to grain a significant amount of share in global reserves for exactly the reason you say and not just physical gold but it's no longer going to be we trust to hold it in london in the lbma system we want it give it back and yes again once again you'll probably see people hold working capital levels of gold in the lbma system in hong kong and singapore in these global financial centers but the rest of it is going to start coming back to borders uh inside inside sovereign borders as a as for the exactly the reasons you say again because a the west does have a grip on the financial system plumbing and then b the you know the control of the deep water the deepwater oceans is is a problem as well and so to the extent unless you are prepared to go to war to defend it you know you can redeploy assets along you know you can buy the port of pereas but you know if the us navy shows up and says it's ours now what are you going to do and the answer to your point is not a lot now if you invest along the belton road and across eurasia u.s navy can't touch you right so it there's probably that actually probably does start to factor into not just a i think a lot more gold a lot more physical gold held within borders but then b i think to your point is okay where can we invest that the western navies can't touch us where where do we have a defensible position right so you know yes in theory the u.s can choke off straits of malacca and and prevent oil into china that's casa's you know quesadilla right and and the us navy conceivably would take extraordinary losses were that to be the case being so close to china so i think i think you're it speaks to i think a wholesale change that is we're in we're not even in in the american term in the first inning of the game we're we're we're in pregame and it's not really any appetite for this i mean the crucial question lying behind the the current crisis in ukraine is is where are china's interests in all of this and people have been particularly in europe there were tremendous hopes invested that china would be able to reign in russia and the view that in some respects putin would never have undertaken this operation without chinese support and indeed the fact that some of the modernization of the russian military has been based on chinese technology and this hyper sonic missile and things for example so that what we've seen is curiously for a patriot like putin now a sort of um vassal status developing of russia vis-a-vis china um not uh which has been compared by some to the to the position the mongols had uh with alexander nevsky but the um the question really is now is there an appetite in china to given the problems they got with with kovid and things given the sensitivity coming up to the party congress um and she's positioned which may not be as secure as as some people have previously uh thought um would they really wish to go this far let this crisis continue that's the first point i mean is there really an appetite for the sort of dramatic shift and um deglobalization that that your scenario would entail if it were to be put into practice to any degree but the first question the second point which is linked to that is is there not also a self-correcting mechanism i mean you've said that one of the reasons why government bonds have been such a an appalling investment is because of the low interest rate regime the the the monetary suppression that has been underway but of course if you do get signed any even to a marginal degree the sort of disinvestment that is potentially in the pipeline the juventus these yields will rise quite dramatically and that will therefore change the calculation how would you see those two points balancing so i think i think you raise very valid points on in in sort of the near term as it relates to domestic chinese politics uh the party congress coming up the covet situation the potential tenuousness of of xi's position relative to those things and i think all else equal they probably don't they probably want more stability than less right so i think i i i tend to i tend to agree with your view there that i that i think that this is probably sub optimal from a timing perspective for them in the short run in the long run i think china understands its vulnerabilities vis-a-vis energy food water the dollar and i think they understand that you know to borrow to borrow the phrase from the american revolution if we don't hang together we'll all hang separately which is to say they may not the chinese i think are are trying to balance off the near term which is this this crisis is sub-optimal from a timing standpoint relative to the covet crisis relative to the domestic party congress relative to internal political challenges that that may be occurring however this is a fight that is always going to have to happen because otherwise the us is going to use the dollar system to choke out russia and then we're going to use the dollar system to choke out china and then we're going to use the dollar system to choke out europe and in probably in that order and so um that i think is also i think that the chinese are trying to balance that off and i think that is why there has been this surprising support they're surprising in the west support despite the inconvenient timing from a short-term perspective i think they are realizing in the long run a fight was going to happen you know at least now they have some they it's happening it is what it is uh from russia's perspective as being a vassal state you know here too in the long run russia's looking at collapse if they don't change the dollar system if they don't change the currency system if they don't get start getting paid or reserving uh real assets uh relative to western sovereign debt for their energy right because their energy they're gonna run out of energy at some point and then they're gonna be left with a pile of ious and the the cost of those cost of commodities we don't have to speculate i've always said you know if russia's oil peaks and starts declining then the ious the western ious that russia holds are going to be a lot less valuable in oil terms one thing we have absolutely empirically learned in the last two months is if you start taking russian oil out of the system the treasury bonds collapse against oil treasury bounds collapse against gas against palladium against cobalt etc so i think in the putin's case it's a question two of if we don't hang together we hang separately am i a vassal to uh to china in a lot of respects yes uh but some of that can just be how you spin it right he's also a key linchpin to rebuilding a eurasia that connects from vladivostok to portugal that's been the dream of of many strategists and the nightmare of of anglo-american strategists for 120 years and so he can reposition himself as a person that helps build that and for him his downside is so great given his demographics given his still over reliance on energy there's a time burn on this so not only is his energy depleting in in over time not that but to the extent some new technology is rolled out in the next five years 10 years 15 years that significantly increases energy efficiency or reduces fossil fuel usage um that that hurts his leverage so he he's i think at a point of of maximum leverage particularly when you consider what's happening with u.s shale right so to the extent that we had a peak cheap oil scare in 2005 through 2008 we can see that in the price we can see that in the financial crisis shale positively surprised everybody we we sort of always knew it was there but the the long lateral steerable laterals significantly the u.s became the world's biggest marginal producer of oil where we are now it's highly unlikely the u.s is going to can address what russia is doing and that's been our position the whole time and what's interesting is we're now 8 to 10 weeks into the russian crisis oil prices remain elevated at 25 to 30 percent above levels where they were trading when the crisis started u.s oil production hasn't moved it has not moved at all and it's a geology issue it's a labor issue it's a it's a materials issue um and it's a decline rate issue that you looked at big four oil oil basins in the united states the big four shale basins and they are declining at a five to six percent per month rate so they need to increase production by 60 to 70 percent per year on a really big base now just to stay flat and so i think part of putin's calculus is okay energy efficiency is probably all else equal gonna rise over time that means my power is all going to shrink over time shale can't save them now where over the last 10 years shale could save them and they can't live without my energy because if they take my energy the result away the resulting inflation is going to blow up their sovereign debt markets uh it's going to force their central banks into some version of yield curve control and so if i have to go i have to go now and and then you layer in he's 70. there are rumblings that he may be sick all of those things only further so it's it's very uh relatively easy to see where putin is coming from in this in this crisis and it's um quite easy to see within limited terms where the chinese position is but given your scenario of what the potential consequences of this crisis could be on particularly the foreign exchange reserves and and the rest what about the interests of the united states in all of this i mean they can't surely wish to see a shift away from the dollar towards goal towards commodities and i mean surely the power of the united states is the most significant element in this whole story it's an interesting question and i think it's a key question because it depends on which united states you're referring to right and i say that with a bit of a smile because there are really two united states there is washington and wall street and there is the rest of the united states and for a lot of the time in the last 50 years the u.s military defense intelligence establishment has had its interests aligned with washington and wall street and so we've seen broadly speaking as an oversimplification over the last 40 years wall street has won washington has won the defense department has won in relative wealth terms in the united states and the rest of the united states has lost dramatically middle class working class have have lost relative to those other interests what has begun to happen over the last 10 to 12 years and what the u.s military has been increasingly vocally warning about has shifted the defense department's interests away from those of washington and wall street and the dollar system as structured and more in line with the u.s working and middle classes uh a perfect example of this can be seen there's a great book by uh edward loose uh the the financial times reporter and he uh he wrote he was speechwriter for larry summers a book called um uh um sorry uh what is oh uh time to think uh time to start thinking and and in it he is uh he's invited to participate in a high level meeting with the some of the most senior military representatives of the united states about strategy and in 2011 they said listen we still have time the window is still open to reshaping u.s hegemony where we still have choices by 2021 we will be out of choices and what we need to do to fix this is we need to significantly wind down the u.s military footprint we need to wind up all wars specifically in afghanistan and iraq we need to bring a lot of troops home we need to pull back on our foreign commitments we need to reinvest into infrastructure education supply chains uh we are are the biggest threat to america is not climate change it is not weapons of mass destruction uh it is our national debt right now we are borrowing money from china to build weapons to face down china this is not a sustainable strategy this is pretty much verbatim what they said in 2011. so we fast forward to 2018 under the trump administration and we find uh a uh 130 536 page uh white paper assessing the u.s milit u.s defense supply chain and it goes i i've only read the unclassified version there's a classified version as well which of course i haven't seen it would be fascinating to read but what it says is it just reviews supply chain by supply chain supply chain and shows how the u.s defense supply chain is dangerously either single-sourced dual-sourced or only you know only sourced from china and their point is is uh that we are being told that china is the up and coming adversary we need to prepare to fight china obama shifted us to asia yet we can't fight a war against china without chinese supply chains this is a matter of utmost u.s national security and i don't specifically mention the dollar in this piece but if you if you search the footnotes what you find are numerous references to the fact that chinese buying of fx reserves of treasuries chinese buying of treasuries is overvaluing the dollar and undervaluing yuan and thereby allowing the de-industrialization of u.s defense supply chains so defense is now looking at the dollar system that forever was seen as a nothing but a strength as a literal act of war by china against the united states they can they can defeat the united states in war by simply crushing our supply chains before any war ever starts and they've effectively done that and so there's and what's interesting is is after biden got elected who is sort of a system guy right we can make the case okay under trump the defense department wrote what the trump administration officials wanted to see but they have continued the same thing they have continued a pursuing industrial policies related to semiconductors related to other uh different critical industries so i think that when you say it's in america's interest i think what has happened and i think the final piece of the puzzle that has really started to change perceptions is i think this view even in 2018 2019 was still a minority view i think in covid when covet happened and washington said okay we need masks and we need ppe we need all this stuff and china said you'll get your mass after we get our masks then i think even the most staunch defender of the dollar system as it's been structured in washington dc began to say wait a second this isn't just a one-sided benefit to us this is a real problem and i think the defense department officials were saying that's what we've been trying to tell you are you suggesting that this um weaponization of the dollar and of the of the dollar financial system which has been the most dramatic feature of this crisis which people say well as you as you said at the beginning it's a it's a a shot that you could use once but thereafter everybody gets scared uh for its implications are you saying that the us has actually been happy to cast this aside and to put put this at risk because they think it's no longer actually the asset that everybody had assumed it to be and that in fact the us would welcome a weaker dollar um and perhaps um a a a collapse in the u.s treasury market which would allow a in some respects the debt to get a lot uh to be to be easier to redeem um i mean as a structuring in that way of escaping from the trap in which they're in and that this crisis is there is in fact a deeper method um in in what the united states is currently undertaking in in this crisis the defense side i think absolutely wants that i think they absolutely do at least at a high level in certain certain circles yes i think you can look back to the day before these sanctions were rolled out and you can see jamie diamond or jamie dimon on on tv on bloomberg saying don't weaponize swift it's a threat to the dollar system you can see citigroup advising the white house don't weaponize swift or the dollar system it's a threat to the dollar system so i think wall street doesn't want anything to to change here i think the fed goes with whatever wall street wants and i think treasury largely goes with whatever wall street wants i think the defense department and certain intelligence circles i think is absolutely happy and i think there is some method to the madness in terms of uh being cognizant of what this could trigger which is yeah a change in the thought of how people look at the riskiness of treasury bonds at the sovereign level and basically forcing a crisis where yeah yields are going to rise until yields aren't allowed to rise anymore and the fed's going to have to put it on their balance sheet and the value of the dollar will be marked down to levels that will allow a reindustrialization or reshoring in the united states and a rebuilding of the defense supply chain which defense absolutely wants and absolutely needs if we're going to compete against china and you think this explains current u.s treasury policy which is very hawkish uh i think possibly i think it's it's again i think there's two schools of thought i think there we are witnessing in real time i think a bit of an ongoing civil war uh in terms of policy in the united states where i think there is still a a large group of people that think they can bring russia and china uh to bear uh or to heal a better word excuse me to heal using yields the way they have uh in the dollar the way they have in the past and so to me it's hard to tell i i think that's i think that's the outcomes razor explanation i think that side of the house is is trying to to the extent there is a geopolitical angle to it um i think i think the bigger side of treasury and fed uh motivations i think quite frankly are strictly domestic politics which is we have an election coming up inflation is pulling bad quick do something and and i think that's reason number one reason number two i do think there are still some people on that side of the house in the united states so to speak that i think want to bring that aren't afraid to use the dollar system are using it as a geopolitical weapon to try to bring russia and china uh to bear um and and so i i do think it's part of it i mean there is potentially a silver lining for wall street in this i mean if you're right going back to your your opening remarks that one of the alternatives to uh treasury bonds uh for fx reserves has been obviously equity purchases you mentioned what the swiss national bank has been doing a rather special case but nevertheless um the if you were to get a significant shift out of government debt into equity as an alternative uh form of holding that could have quite significant implications for market valuations and that a complete reassessment of the relationship between bonds and equities i think that's right i think it's ultimately where this will go where basically i think we've been seeing sort of a slow motion you know cramming of the bond market into the stock market oh you know in the qe era right which is basically the central banks take the bonds off the market and the market moves liquidity into equities that's it's generally you know with with fits and starts between you know qt and trying to unwinding a balance sheet since 2008 but generally the story of 08 to 2022 has been uh r09 to 2022 has been central banks buy the bonds and then the people that sold the bonds take the cash and put them into riskier assets and so i i think that we are in for i um if i'm right we will see some relatively compressed period of time where there will be uh a rather i think monumental danumaw into this what has been this sort of slow motion move of the bigger bond market into the smaller equity market that i think will be very very good for equity valuations asset price valuations it's going to be really inflationary i think it'll be a p you know and and where you end up in that at the end of that period is defense is happening because they have their supply the ability to restore their supply chain um the u.s debt to gdp is significantly lower just by virtue of gdp rising with nominal nominally with with high levels of inflation americans feel richer with their stock market they continue to buy lots of stuff from the people that sell us lots of stuff and then that the gdp is is normalized back to a range from where the fed can normalize policy without creating these dollar liquidity problems that we've been seeing every time they've tried to tighten since 2008 with that the gdp and what we're seeing right now right we haven't even tightened yet you can you can see where the dollar is you can see the strains already in the treasury market you can see the strains overseas and in yen yuan uh etc um it's you know it's it's it's a great scenario for everybody except somebody who has too much of their net worth and bonds and they'll get paid every day in the road it's just not going to buy them as much as it uses the problem is that that in europe i mean the the importance of bonds is is significantly greater than than in the us relative to equities and you already have several potential crises in the in the european government bond market even before this situation arose do you see particular problems arising in europe europe is is in a very difficult spot and that's putting it diplomatically um they are short energy they get that energy from putin they still have these generational ties to the united states they can't get as cheap of energy from the united states and they and probably not even in the volumes needed if they cut off russia and so they're sort of being forced into a position and and they have the debt levels you talked about they still have some questions about the banking system that i think have been much more resolved that than in the us than than in in the eu um and so they are sort of backing themselves and then geopolitically to paraphrase louis gav it's is a friend of mine he he coined this phrase and it's it's harsh it's tongue-in-cheek but there's a direction of truth to it which is the americans are prepared to fight the russians down to the last european and so it's as long as the costs are only borne by the europeans in this whole thing we're happy to to string this thing along and try to try and so the eu i think is in a very very difficult and outright dangerous spot because they need such low bond yields to kind of keep everything together they are willingly giving away their energy security uh out of this political crisis the virtue signaling back across to the americans and sort of uh uh acquiescing to the the us administration's wishes on that front to now but we have seen a version of this movie before in europe right when that when the french and the belgians showed up in the rural valley and seized rural valley coal stores from germany as war reparation and undercut germany's energy security um and the germans said well okay well we'll just paper over the economy we'll print money and we'll make sure the bond market stays solvent by printing more money and of course we had one of the famous hyperinflations of all time in germany that i think ultimately has been forgotten was tied back at some significant level when it really got crazy to an energy security issue in germany and so here we have again that's not my base case i it's a tail risk but you can see things rhyming okay we've had european energy security significantly compromised we have the americans encouraging to to further um compromise their energy security to reduce their competitiveness to to wear blankets and turn down the all of these things in a situation where the eu already has a post-war like that to gdp they already have banking system problems um it's a very dangerous position they're in and i think ultimately where this is going to go is the europeans are going to have to make a choice do we choose europe and energy security and sort of you know eat our lima beans and go with putin or do we commit economic suicide effectively to some degree that at the extreme could be a hyperinflation type scenario of the euro and go with the americans um well the test for this shortly will be uh policy towards the war i it it's quite clear that in continental europe there is a desire for a deal at some point over the ukraine that um the much stronger line taken by the united states um is not as popular in germany or france to put it mildly there is a belief that in some respects uh ukraine should accept some form of accommodation with russia in return obviously for being able to join the eu and having european financial support for reconstruction and all the rest i mean but it's not really clear whether on the one hand the united states and on the other hand china um is willing to see this sort of accommodation i think this is going to be the test is whether there is any form of strategic autonomy left in europe uh we've had the re-election of of uh president macron we've had elections in germany quite recently even though this current crisis has made the coalition in germany quite fragile in some respects um but you have got nevertheless in the two main countries a period of new relatively new or very new leadership which does give an opportunity and there is tremendous pressure for the on the europeans because of the existential factors that you mentioned i suppose the crucial issue is going to be whether we get an early end to this war or whether the scenario that seems to be favored at the moment that this is going to be a permanent um running saw along the lines of of the rand report in 2019 of turning the ukraine into another um afghanistan in fact for the russians and indeed by extension for the chinese what is your your gut feeling at the moment about how this is going to kind of work out my gut feeling is that europe led by the germans and the french to your point are trying to delicately ride two horses with one with one ass so to speak from a strategic standpoint because i think they understand in particular in germany they understand that their economic future uh is east not west to to to sort of having german industrial goods being shipped into uh the the belton road to as a broad oversimplification and and understanding that there are significant eventual competitive issues with china in intellectual property issues all those things that you always run into when you deal with the chinese the germans are aware of but i think it's the devil you know versus you know the one you're going to face down the road so i think they understand that the germans and the french understand the future strategically is east more than west um the challenge is the the near term trying to placate to these historic transatlantic ties with the us administration and and balancing those two things my gut tells me that eventually europe is going to have to go uh with eurasia that basically they are going to have to cast their lot with a eurasian uh uh um the eurasian dream whatever whatever you want to call it uh out of economic necessity and that's going to be an interesting moment in history for the u.s because at that point mckinder the mckinder theory will have have you know become a strategic nightmare for the u.s but between here and there we're in this limbo zone now it's a really interesting point you raise about these elections because i think if we think about this strategic issue tactically tactical issue number one to your point is okay french german political situations are relatively new which means they should be relatively stable to be able to make some sort of deal does this open a window for the chinese to come in and play a deal maker supplant the us which would be another huge moment i think in terms of geopolitics where they bring russia to the table they bring the europeans and the ukrainians to the table and they agree on something within and they reassert uh some sort of strategic geopolitical uh independence that to me is is very possible and then the other tactical thing i think is uh the the the realities of weather right this is all fun and games for the europeans to play all tough with putin in april in may and june you start getting those cold nights at the end of september october you know six months from now it's in five months from now it's gonna start to be a very different domestic situation politically um you know you're you're not going to let you know wake up to your crying baby in the cold at night too many times before you're going to start seeing domestic political disruption now interestingly for the us there's probably elements in washington like okay great that's how it goes that's okay if you know the only thing we don't want probably is the scenario where china comes in as peace broker and brokers a deal that works out for the eu for russia for china for ukraine uh because that's a huge that's a huge i think uh i think that's a huge shift so those you've got sort of the strategic long term the tactical near term and then sort of these signposts or these tactical sort of triggers right you've got a stable political situation i think between now and when it starts to get cold i think if we still got nothing that starts to get cold i think the political situations in france and germany probably start to get much more disruptive internally or much more unstable internally i think it's a very interesting um analysis could be and perhaps by by asking you a political question about the united states which is frequently completely misunderstood in europe um because the next big political event of course is the way in which the elections are going to go in in the united states and in particular looking forward to the next presidential election you describe this split debate in in in in us strategic interests between wall street and and um on the one hand and that the military on the other to what extent does that reflect um the red blue debate politically in america and if we are to anticipate as many people do a return of the republicans and maybe even a presidency how would that affect all that we've been discussing it's a great question um i'm sure you've seen the political maps in the 2016 election of the united states red versus blue right which is vast stretches of red with little specks of blue but the specks of blue tend to be the big urban population centers and that's kind of the political story of the united states that electoral map tends to mirror the relative representation of the military in other words you know there tend to be vastly overrepresented from what i would call flyover country or uh you know yi country is as they jokingly call it right these rural conservative areas um and and working class uh uh then there are people from the military from manhattan and downtown chicago and and los angeles etc so i think this split is actually that we refer to before i think is really actually a manifestation i think it's actually a lag manifestation of that electoral map now happening in policy so i think the leading indicator was was trump right where all of a sudden the deindustrialization of the u.s the working class the middle class had gotten so bad that they actually basically threw a molotov cocktail into the u.s electoral system by electing trump it wasn't that anybody really loved him it was just that he the establishment hated him so much he literally would got i think a lot of his votes because people said if if they hate him that much then i wanna then then he's my guy and so i think this strategic separation of the strategic disagreement between the military and sort of wall street and and certain elements in washington the dollar you know the dollar sort of group in washington uh status quo group in washington i think breaks down along those lines so i think you're gonna see you know military working class a lot of the middle class all in favor of sort of this america first and not in the an america first racist or or some of the negative connotations of that but simply in the strategic aspect of it of what was discussed by the military in 2011 and lucy's book which is look we have a window where we are in serious trouble we can do something in this window and after that window our lit our choices are going to be limited and that includes pulling back and reinvesting in america and these types of things so uh i i think the elections this fall barring something crazy i think i i agree with what you're seeing a lot of i imagine you're seeing over there but what we're seeing here which is the democrats are going to lose a ton of seats in in the house of representative i think they're going to lose a lot of seats in the senate uh i think at that point biden will effectively be a lame duck uh unable to do really anything substantial on his on his policy options and then that takes us another two years to the next election and that that starts to get interesting because i don't i mean biden i i don't think even the democrats want to run i i think he is wildly unpopular even within his own party there are questions i think rightfully so unfortunately about his actual where he is from his mental faculties and i think there's questions while harsh are rightfully need to be asked they're i i don't think his vice president unlike past situations in the united states right where we had bush run after reagan and we had gore run after clinton she might be more popular than him politically and i i hear from what people that do much more of the politics stuff that that i think she's seen internally as a lightweight so then at this point you've almost got two sort of unknowns i think you could there are fears that trump will run again there are hopes that desantis the florida governor will run from the republican side and from the democrat side i don't know who they run come on simplify this in saying that broadly speaking a republican administration up next would be a weak dollar administration whereas a uh a democrat one would be a strong dollar administration or would it be the other way around i mean how would they how would that in terms of the policy choices that you were outlining in earlier i think it would be a week i think a republican i think a republican president in 2024 whether it's desantis i don't think it's trump but trump or desantis just for sake of discussion i think is going to be a weak dollar president with a wide backing of the u.s defense department and sort of flyover country um and to the loud screams of of wall street at least until the stock market starts flying and then they'll probably just shut up and and and you know count their money as the stock market flies with the weaker dollar and the reinvestment the capital flowing here to reinvest uh in u.s infrastructure i think it'll be really good for the us it's just going to be really bad for bondholders yeah yeah a last supplementary question which is i have been burning in me which is crypto does this have any place in your um various scenarios and we've seen obviously um elon musk taking over twitter there have been some suggestions that this is a crypto play of some kind do you have any view on those two things so for me i am focused strictly on bitcoin as crypto and i think bitcoin has been and will continue to serve as a neutral reserve asset for the people it has an energy tie to it to the fact that their the proof of work algorithm requires you to expend energy so it is you know there is a there's a a an energy tie to bitcoin in the same way there's an energy tied to mine gold it's a proof of work neutral reserve asset to float so i i like bitcoin i own some bitcoin i think everybody should own a little little bit of bitcoin because the volatility to your point earlier is extraordinary uh so i don't i don't think you need very much bitcoin but i think just a little bit um in terms of the policy side there's a reserve asset potentially replacing the reserve asset right so it's there's some really interesting things that you could game theory out which for example we're seeing the shift by russia to effectively bring gold back into the system it's been happening it's getting more explicit in response to this crisis the chinese have obviously been stockpiling large amounts of gold for a long time but if you look at a chart of gold versus bitcoin gold over the life of bitcoin has consistently fallen at a at an exponential rate at a logarithmic grade and furthermore you've seen the chinese kick miners out bitcoin miners out last year my understanding is that was heavily due to it being a power issue and the power issue was heavily marginally due to it being a water issue and so there's this interesting game theory where if the chinese and the russians want to change the game back to a neutral reserve asset a move that the u.s defense department actually doesn't mind that we want because we need it as a national security issue but we don't necessarily want to give away the farm and because they've got as much gold relative to their relative to their their monetary base their economies etc relative to us then there's a trump card we could play which is okay we're not gonna use gold we're gonna use bitcoin it's transparent it's it's more finite it's instantly transportable it's auditable it's all these things that that you can sort of ding against gold and incredibly or or leverage wise it requires a nation to consume a lot of power and for china it then stresses china's water issues because a lot of china's base load power is hydropower so i i you know i think the time between here and there i think there are probably little groups at the pentagon thinking about this and it's three guys and they're talking about it but it's it could be a higher issue that people um normally talk about in relation to chinese attitudes towards krypton um is the political power issue that they of the chinese government is frightened of the loss of control that would be entailed in in such a an autonomous uh financial instrument and it's for them it depends ultimately really on on the economic management right of of of their economy if they run massive deficits and everyone's scared into bitcoin if they run a structurally inflationary policy that's a problem but i think i i do think they probably dislike that to a certain degree but i think the real issue is much more fundamental i think it's they have power problems because they have water problems that are getting infused and so america is the saudi arabia water we've got plenty of water so we could in a roundabout way stress china's water issue by saying all right you guys want gold let's use bitcoin and and um that's an interesting it's an interesting strategic concept but there's a long time between with that very intriguing thought luke i want to thank you very very much for what has been really a fascinating discussion and uh look forward to speaking to you again soon many thanks absolutely thank you very much john i appreciate it enjoyed talking with you you

Channel: The Federal Trust

Views: 14,393

Keywords: Luke Gromen, Federal Trust, Bretton Woods 3, gold standard, Putin Ruble, Russia war Ukraine, commodities gold Dollar, Dollar global reserve currency, Euro, European Union energy crisis, sanctions regime, SWIFT, central bank reserves, Forex reserves, Geopolitics great powers, Europe between West and East, China and Putin, Bitcoin reserve currency, EU-Russia relations, transatlantic relations war in Europe, monetary policy financial system, Belt and Road China, Eurasia

Id: PTv_kX3_HxA

Length: 50min 18sec (3018 seconds)

Published: Thu Apr 28 2022