Is the World Really Dedollarising?

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Yeah, these are confusing times. We've got, you know, a whole lot of chickens coming home to roost at well between the banks, the inflation, the economy, and now all this talk of de-dollarization of other countries, getting out of the US dollar.

Yeah, and I think what we see is a lot of people all with their own different narratives, and I think it's difficult because people don't know who to believe, right? Because it could be somebody who's got a newsletter to sell, or it could be somebody who has a political message that they would rather put Trey and, I mean, not that having a newsletter is wrong or having a political message is bad either. Of course, you and I both have similar things to, promote in a way, but I think it's more about Being able to think through from a sound perspective, what's really going on, right? And I think this obviously, I think the whole theme with de-dollarization has been very prominent recently, and we've seen a lot of articles. But, you know, at the same time, we could say, "Look, hang on, if you look back over the years, there have been articles here and there that come up over time, or that you'll see a, you know, an announcement, oh, look, these other countries are doing a deal not denominated in the US dollar. Is this the end Or is this the start of de-dollarization? So can you tell us a little bit your, of your thoughts on this whole de-dollarization, de-dollarization idea, as well as give us like some kind of confidence level about it or, the, the pace here, right? Are we, are we just still in gradually? We're not really in the g-- suddenly part of the gradually then suddenly?

Yeah, I mean, de-dollarization's been going on for a long time, but it's been a really, sort of slow pace. And, you know, I Austrian lens, meaning that, you're sort of cutting through it and, you know, analyzing it economically and what are the moving parts on the inside. And the last time that we had, I think, a real threat to the dollar was the 1970s, right? We had double digit inflation for a number of years, but this time, I think it's very different from the 1970s, and there are a couple of reasons. number one is what the US did last year, seizing, Russian central bank assets As a form of sanctions over Ukraine, that really crossed a line for a lot of countries. That had never been done. Even during the Cold War, the US didn't seize dollars out of foreign central banks. The, the USSR kept their dollars at the New York Fed despite, you know, having proxy wars in pretty much every single continent. so that was really, I think irresponsible. You know, there had always been sort of a gentleman's agreement that even if we're having a fight over this, it was in the US Interest to keep everybody in the world addicted to the dollar, and for whatever reason, they threw that away. And so now you're seeing countries, you know, just this morning, ASEAN, the, the collection of Southeast Asian countries The, president of Indonesia, he was specifically saying, "Look what happened to Russia, we need to get away from the dollar." You know, if you are a-- in Indonesia, for example, the prospect that the US is gonna be displeased with you for some reason and they're actually going to take your central bank assets, you know, which is, that's the most important thing that's underlying confidence in, in, in your economy, that is a huge threat to them. I think Americans- Have trouble appreciating, what a big deal the bullying, the, you, you know, using the dollar to sort of push countries around. And that was one thing when the US felt like they sort of had some control, you know, you could sort of predict what the rules are, but I think Russia just caught everybody by surprise. The sanctions were so complete, so aggressive, so fast, they were done, I think, really without consultation. so that put, I think, a, a big new risk on the dollar. You know, a second related point is The US is retreating from the world. the Afghan debacle, I think, communicated to a lot of countries that even if the US wants to stay involved in your region, they're not able to. they've lost their edge, and that threatens one of the main things that is underpinning, the US dollar's use internationally, which is the so-called petrodollar deal whereby, Gulf countries, especially Gulf oil producers, they continue using the- The dollar and exchange, the US kinda handles their security, right? Those countries have long been threatened by Iran. Saudi Arabia and Iran are regional competitors, and they compete pretty fiercely, and so that was kind of the deal traditionally, and we can see already the results of that where, you know, Saudi is now co-de-- cozying up with China. they're talking about joining, you know, China's trade bloc, the, the Shanghai Group. and then I- I think a third point here that sort of magnifies all of these is that the US is only half what it used to be, right? In the 1970s, the US accounted for about forty percent of world GDP. Now it's more like twenty-two percent. So if the US is threatening countries, if it's, you know, pushing them around on foreign policy, even sometimes domestic policies, things like union policy or, sort of social policies, if they're doing that in the context where the US is only twenty-two percent of the world There comes a point where a lot of countries say, "You know, we don't necessarily need to break up, but we should start seeing other people."

Yeah, I think it's well put. There's, there are all these effects going against the US, right, as you said. now, there's, there maybe there are some points that are still in favor of the US, we could say. but I'm also curious to get your view on this whole idea. There's been a popular notion promoted by various people, even people like Lynn Alden, have said, "Actually

reserve currency, that actually it hollowed out some of the local industry. Now, I think from an Austrian perspective, we could look at that and say, "Well, hang on a second, we're thinking here about the Cantillon effect, and if we're thinking of the Cantillon effect, he who is closer to the monetary spigot is the winner in that scenario. So therefore, isn't the winner really those people who are close to the monetary spigot? And so couldn't we argue then that American banks, American construction companies- So anyone who's getting that first loan or the American government is who has benefited. But I'm curious how, how you see that? Would you agree or disagree, or do you have a different take there?

Yeah, so Lynn is, is brilliant. I love her work. she has a lot of amazing insights, knows a lot of stuff. and I think that's correct that we've had sort of Cantillon effects where the people who are producing the money, specifically the Federal Reserve and American commercial banks, they have benefited massively from this system. I think the second- The question is what happened to American workers, right? Whether the US dollar was sort of propped up and made too expensive and therefore those guys lost their jobs and, you know, the factories went to China. I think there the probably I don't think it had a systemic effect necessarily on the dollar value, and the reason is that the Fed and the banks sort of collectively goldseek the dollar. They're-- the main incentive they're responding to is that voters get upset if the dollar goes up too quick. And so they sort of start with, you know, the way the chessboard is, in other words, you know, what is the price level right now, what is the exchange rate right now, and then they try to not disturb that too much, you know, so that they can continue siphoning resources from people. one of the metaphors, I used in the videos is you have a reservoir and you have all of these new dollars flowing into that reservoir, dollars produced by the Fed and produced by the commercial banks, and if that's matched by a river flowing out towards foreigners, then the banks and the Fed can create a whole lot more dollars, and then of course, you know, if you r-lose reserve currency status, in other words, if foreigners don't want so many dollars, then that- river comes, flooding back in. But I think the question that Lynn is addressing is, what is the level of that reservoir, right? Is that reservoir at a high level, is, or, you know, is it a low level, where, where the dollar is paradoxically relatively strong? and I think that that question, has a lot more to do with the Fed's own, you know, sort of political goals, it wants to maintain its independence. The people who work at the Fed tend to go back and forth as kind And so, they know who butters their bread, they know who's going to, you know, Janet Yellen was getting sixty-thousand, seven thousand five hundred dollars for a speech, so, you know, at, at, at some point, there's other incentives that intrude, rather than them just trying to, you know, keep on the good side of voters and not make voter, voters, notice the inflation.

Right. And I think you are certainly right to point out this whole revolving door factor that we see commercial banks and- Market leaders, often there's this relationship, let's say, where maybe if you perform well in one of them, you may get a job in the other, and that if you play nicely, you can have a nice career in this, you know, you can become a person who is well-regarded in this industry, that you were senior in the bank, and then maybe you go and become senior in the regulator, and you help from that perspective, and maybe after that career is done, oh, now you get a nice speaking tour, you get these nice, you know, you get given awards, you

professional career aspect to what happens for these people, right? And so they want to, they want to keep the system going, and then obviously those of us who are, let's say, outside the system, we're trying to critique the system because we are against it for, you know, many reasons that listeners of this podcast, well aware. It puts you into a position where you are having to understand and explain all these different programs, right? So the latest one of which is the BTFP, Bank Term Funding Program. But, you know, there's all these different programs, and they have different effects. And so then the challenge becomes, as an Austrian is trying to understand the seen and the unseen, right? It's not just, "Oh, look, this government gave a bailout for this bank or this depositor, and now look, oh, it's all good now because they saved the depositors." And, "Oh, that's The end of the story? Well, no, hold on, there's no free lunch. That money or those resources came from somewhere. Someone somewhere is paying the price. So if you could, I guess if, as you look at what's going on, bank debt, funding program, and, you know, what's happening with rates, what's happening with the Fed, who is losing out? Where is the cost? Where is the downside being taken? And where is it being hidden?

Yeah. So I think the sucker at the table, you know, when we're talking about central banking and our, fiat financial system, the sucker at the table is always the taxpayers, right? whenever things roll downhill, they keep rolling and rolling, everybody gets out of the way, and then finally they land in taxpayers' lap in the form of trillions of dollars of additional debt, which in theory the taxpayers will someday be responsible for. And I think that's really where the Fed is going today. You know, the Fed has a choice on interest rates Rates, that's the main thing they're using to choke the economy to try to cancel out the inflation the government spending caused. And within that, they have two choices. They can try to, raise rates and cut off inflation, but they know that that's gonna cause more distress from banks, right? Because the main reason why banks are in trouble right now is because central banks all over the world yanked up rates. so quickly, or alternatively, they could lower rates, which would take some of the pressure off the banks, but then inflation would take off. And I think central banks are aware that, you know, inflation is how they're judged. if they let inflation go on too long, then the voters will tell the politicians to rein them in, and they'll lose control. And they believe very strongly that, you know, they are the godlike- Managers of the economy, and, you know, we're all, too stupid to run our own lives. So I think that the way that the Fed, is trying to navigate that is to say, "Well, yes, we're going to raise rates, yes, it's gonna, you know, cause a lot of trouble for banks, it's gonna choke off the economy." Jerome Powell's been very clear, he said there are too many jobs. The, the goal is to strangle the economy, and then I've, you know, based on sort of recent behavior, they'll then jump in with trillions of dollars of additional bailouts, the taxpayers, you know, if you cloak it with enough, what is it, the, BT, FP, I have to remember that somebody had a comical, sort of words that he used to remember that, but I don't necessarily wanna repeat them on this show. But right, so, you know, if they can cloak it with Most voters really don't understand the financial system. In many ways, the system is designed so that it's very, very difficult to understand. I think many Fed economists don't even understand the system, and so they can get away with that. You know, it's sort of a shell game where they can pile trillions of dollars onto voters, and voters don't even realize they did it.

Yeah. one other question that I'm curious to hear how you would explain this, because the paradigm that a Keynesian and a neoclassical person might be thinking is This, oh, there's this trade-off of inflation and interest rates, and that, oh, you, if you have higher, you know, one goes higher, the other should go lower. In their, in their view, right? That's in their view. Now, as an Austrian, we don't necessarily agree with that view. That's also, I guess you could also say that's known as Phillips curve thinking. And we could even argue that, you know, as I'm sure econ-- economics, teachers and professors have spoken about how the '70s, maybe that Of this Phillips curve thinking. So isn't it weird now that people are slipping back into Phillips curve thinking? They, they just believe, they just accept this idea that, oh, just raise the interest rates and we can lower inflation again.

Yeah. Yeah. And it's, it's disappointing. It's like, we've learned nothing, you know, something that we've been pushing since really the beginning of the inflation is, you know, leave the economy alone. Don't, don't, don't try and crush it. Don't try to wipe out businesses. normalize rates, you They were bumping along at about zero percent, and that isn't healthy. you end up getting a lot of malinvestments, a lot of crappy investments that have to be liquidated. but, you know, what we've been saying is, no, instead of doing that, simply rein in the government spending. if the-- worldwide, if, if Europe, if the US, if Japan, if these countries would have cut their spending, then the inflation would have calmed back down. You wouldn't not have had as much, money flowing into the economy, and you wouldn't have actually caused this collateral damage. You certainly would have-- would not have caused these kinds of bank panics. You know, cutting-- when we say there's no free lunch, one pretty close to free lunch is cutting government spending, right? I mean, government takes resources that could have been used for something useful, they Gun, done good in the world, and instead it squanders it, you know, because of the political process where, you know, it sort of jumps up and then plunges and up and plunges. the government is a massive source of instability, even aside from the garbage that they spend the money on. so that obviously would have been the correct solution, that's what the Fed should have done. there's this popular narrative now that, you know, Jerome Powell, by gum, he tried his best and, you know, he's just making the most of a Garbage. He could have stood up from the beginning and say, "No, we aren't going to buy all of these trillions of dollars of bonds. You government have to cut other garbage you spend. If COVID is such a deal, then cut the other crap and focus on COVID, but we aren't going to enable your addiction." He didn't do that. Instead, what he said was, "There are too many jobs." In other words, he didn't confront his master. He treated the voters like dogs.

Right. He's just selling them out and saying, "Well, you, you

It's difficult because a lot of them don't understand how they're being screwed. They don't understand the ways in which the resources are being transferred from the private sector to the government. And so even though we look at, we try to understand the impact of these different, whether it's a bailout or these government programs or making the depositors whole, that-- because in each scenario, there's different ways things could go, right? I mean, in twenty thirteen, in Cyprus, it was bailouts. It was depositors were paying, were taking, colloquially- Or the, the nice word is a haircut, right? Is the nice term, but actually it means you lose money, right? Like if you had, if you were a depositor with a lot of money in the bank, you lost money. That was, you know, that was bail-ins. And, you know, bail-outs were this kind of two thousand and eight scenario where the government and, you know, a lot of the financial press is saying, "Oh, no, if we don't step in now to ride in and save the people, the system is going to collapse. Therefore, you And, you know, save, save the system that way. So I guess these are some of the different ways that they can try to play it and spin it to socialize the losses, but there's different ways and there's a different person who wears the loss in those scenarios, right?

Yeah, there totally is, and, you know, the challenge for them is central banks and fractional reserve currency have made the financial system extraordinarily fragile and extraordinarily vulnerable. there's this great line from John Stuart during the, two thousand eight crisis, and he was complaining about all the perfect storms, if you remember those, there was like a perfect storm every week, and they kept telling us, "No, this, you know, can only happen once every century or once every seven thousand years or, you know, once every three heat deaths of- of the universe, and John Stewart was like, "Well, wait a minute, why are these perfect storms happening every freaking week?" And he said, "I'm starting to think these aren't perfect storms, I'm starting to think these are regular storms, and we have a crappy boat." And that is what they've built for us, you know, if we go through, sort of line by line, you know, when it comes to Silicon Valley Bank or Credit Suisse or Deutsche Bank or Signature, these were all regular storms, right? Deutsche and Credit have been, you know, pretty crappy banks for a long time. Everybody's known this. Their stock price has, has not budged because everybody knew that the management, was pretty bad. so, you know, the, the sort of larger question is why are all of these regular storms turning into, Drizzle is now a perfect storm that requires trillions of dollars of bailout, and of course, when that storm comes, the financial, system that has created this crappy boat, right, is that, that, that has created this sort of permanent state of quasi-crisis, they swing into action, and their goal is to, create human shields. Okay? They go on about, you know, we need the financial system, grandma will be eating dog food. they look out, you saw it with Silicon- Valley Bank, where, you know, a bunch of rich tech bros were going to be bailed out, and you had all these venture capitalists and, you know, like this entire PR machinery looking for some single mother in Ohio, you know, who has to feed her diabetic kids. I mean, it's, it's, it's an operation, it's a psyop, and the goal is to use their victims as shields to get you to pay for their gambling losses.

Yeah, that's really part of how the, the political game ends up being played, sadly, where- Where people who are best able to rally visible victims, yep, and put them up in front of the, the TV, the social media, anything, you're more able to win sympathy to your cause, and then people say, "Oh, okay, we didn't socialize these other bank failures, but for this one, okay, we're gonna socialize, we're gonna make them whole, we're gonna make sure the depositors don't go under, that, you know, these particular companies can still make payroll, whereas in years gone by there were other banks that..." It failed, and they didn't get the same treatment, did they?

Yeah, absolutely. banks go down all the time. usually it is a regular storm. you know, what sort of shifted the ground on this, you know, central banks set the stage with their, they had the fastest rate increases in fifty years, so that started things wobbling. and then, you know, if you dig into each specific bank, you've always got colorful, you know, blurbs to put in the newspaper. You know, Silicon Valley Bank, had Like this, but the point is that, taking, you know, poor quality collateral on a bank doesn't crash the entire universe, right? So they're, they're sort of coasting along the edge, you know, post-COVID, when they created the inflation and then sort of, knee-jerk backlash against that, they put it even closer to the edge, like right up against the cliff, and then at that point, yeah, it doesn't take much of a storm at all. Lend some money on a yacht, and boom, the whole world collapses.

For decades, the US government has been weaponizing its payments systems, right? They've been doing things like, okay, we, we don't like what you are doing as a country, we're going to sanction you, or we don't like what you're doing, maybe FATF will graylist you, if we don't like what you're doing, we're gonna cut you off totally from the SWIFT system, the payment system. So I think that has also been playing into part of this, right? So it's not just the seizure of assets from other governments It's also, it's literally banning them from interacting with the payment systems that other countries and normal people, everyday companies and banks have been using for decades

Yeah, and to those countries, it feels like America's walking around with a gun to their head, like it's just a crazy person screaming in the street, you don't even know what's gonna set them off, and, you know, the prospect of cutting a country off, from world payments, that, that's-- you're going to have burning cities and riots, if you do that to somebody, so that is a very big deal for them. And, you know, I think the weaponization is, I mean, in a sense, you know, they In the form of a CBDC, so that would bring us to that wonderful world where, you know, you better watch what you say, you better, you know, hope that nobody in government takes an interest in you. just the entire financial system, you know, whether it's between countries or whether it's, it's on an individual level, they're really, sorry, my, my cat, they're, you know, really using that as a tool, against the rest of us. And of course, the timing is amazing because we do You know, they, they are sort of launching this monetary offensive against really the entire world, starting with foreign countries, and we do finally actually have an out to this, in the form of Bitcoin

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Yeah, absolutely. And, you know, there are extremely strong network effects, in currencies. If you take stable coins as, as kind of a test case, I think it's ninety-eight point five or maybe ninety-nine point five percent of stable coins in the world are denominated in dollars. Nobody forces them to do that. You're free to make a dollar coin in dirham or yen or euro, but in fact, you know, the market Dollars, why? Because they are the most liquid. So, you know, currencies, trade is a v-- very much a winner-take-all as sort of your, you know, base scenario, and then on top of that, you know, you've got different questions like, are certain forms of transactions being, sanctioned or are they being, you know, are they raising red flags? so that kind of goes on top of it. And so I do think that, you know, to say that other countries are diversifying, diversifying away from It's gonna collapse overnight. I think it's more that, the network effect of the US dollar is getting weaker, and there is some point where it begins to accelerate quicker and quicker, right? So if people, if two percent of world trade is moving away from dollar, that's not gonna have a significant impact, however, it is going to feed through to the value of the dollar, and the value of the dollar is that feedback mechanism where, you know, banks in Japan may not have an opinion whether they're holding dollars or yen, but they have an opinion on One is what's happening to the price. And so you can get this, sort of snowball effect where it's getting bigger and bigger. So some exit from the dollar leads to a decline in price, a decline in price leads to a bigger exit from the dollar, which leads to more decline. You can get this vicious cycle. And I think if you sort of zoom out in the world, in a sense, there are three times more dollars than are needed. Okay, so there are three main ways that the world uses the dollar. Number one, they use it in America to buy and sell stuff, go have, you know, a restaurant meal. number two, it's used in international trade. The amount of international trade denominated in dollars is roughly comparable to the American GDP Can, in other words, foreigners use about the same amount of US dollars among themselves, as Americans do, between each other. And then you've got this third hunk, which is savings. Right? So in many countries, if you take a country like Mexico, rich people in Mexico, they're not walking around with millions of dollars in pesos, because it's risky, right? So they will treat it a bit like, oh, a Bitcoin wallet, you know, like, like on an exchange or something where you've just got a small amount on there that you're hoping to use in the near future. And, you know, you may have one or two or three months' worth of pesos in there, but the vast majority of their savings are gonna be in something more solid And today, partly because of those network effects, those are parked in US dollars. So when you take those three hunks, the picture is sort of the US, it's, if it declines, it's going to go slowly at first, but the thing is that it's got a heck of a way to fall, right? there's no other country that has three times more currency in the world, than it, you know, uses at home. So I think that it's somewhere where Americans, we don't need to panic, but we definitely need to be aware that- You know, if, euro or the yen, for example, have certain, reserve currency aspects, they're used in other countries, they're used to park savings, but the mismatch between the amount of yen in existence and the amount of yen that are used in the Japanese economy, it is nowhere near, three x, and so, you know, I'd put it in the category of something to watch that could potentially get much, much worse.

And one other point I've seen, and you might have seen this also, Al Francine made a, made a point saying it's like that infamous Ronnie Coleman line, right? Everybody wants to be a bodybuilder, but ain't nobody wanna lift these heavy ass weights. And in currency and capital markets, he's saying it's one thing for people to say, "Oh, look, we're just gonna trade without the US dollar," but a-are they, are they going to be credible alternatives where they also keep their inflation rate low enough and have open enough capital markets? So I guess the saying is kind of, "Everybody wants to be the world reserve currency, but are you gonna, are you gonna keep the inflation Markets to facilitate that.

Right. so and, you know, a lot of that is transaction costs. some of the de-dollarization at the moment is being effectively subsidized by China, this sort of long-term goal of theirs, so, you know, getting discounts for, for using their, yuan. And the, you know, key here is going to be really, I think, monetary policy. So if a given country like China, for example, has a bad inflation rate, then people- People may use the yuan, right? They might use it almost like a coupon or like a Chuck E. Cheese, token, like a casino token, they might use it through sort of,

yeah, yeah,

exactly. But they're not actually gonna use it as a sink, right? They're not gonna park their savings in that currency, in which case the currency gets a very, very, very slight amount of demand. savings are, you know, really what sustain a currency. If people are just kind of using it, in order to transact and they're not Then, you know, that's, that's, that's much weaker. And so that's going to be the question. Historically, and, you know, one of the reasons why the US has been so dominant is because, the Federal Reserve has been relatively prudent not what we'd hope for, but at any rate, compared to other countries, it's been sort of the cleanest dirty shirt. and so the question at this point is, you know, partly the costs of empire, there are certain costs that the US has that are somewhat unique, and so are those collectively going to force, the US to be, you know, less prudent than other competing currencies would? And if that's the case, if the US actually runs around with a five percent inflation ongoing, then you would actually see- Durable demand, and people would not only use, the, you know, Indonesian or, Nigerian token like they would today, but you could actually get to a point where some of these competing currencies could actually hold on to durable demand. At that point, the US dollar would go in freefall.

Yeah.

And

I think the other element to layer on here is, our question of the fictional reserve, right? This, as, as you called out earlier, fictional reserve, known to- the financial press is fractional reserve banking is, a practice where state entities and state-sanctioned or state-permissioned banks are permitted to legally counterfeit, and you and I, the regular person, we are effectively pushed into holding that same inflationary token, right? This is done, it's accomplished through things like legal tender laws, capital gains tax laws that try to stop us from- Using other things as money. It sort of pushes us towards using the US dollar, the Australian dollar, the pound, the euro, the yen, et cetera, and holding the government's inflationary fiat. And we could argue that, you know, up until Bitcoin, we didn't have a real alternative. We didn't have a real way to actually operate in a full reserve system. I'm curious what you, what you see on that. Yeah,

I think you're absolutely right. You know, most of the inflation, at least in the US and, I would imagine all over the the about twenty-five percent of the new dollars, the increase in the money supply, are counterfeited by the Fed, and the other seventy-five percent are counterfeited by the banks. And, you know, the reason is they have this exorbitant privilege where they can, you know, make loans and then put only a small amount of, money away to, to allegedly cover those loans. And of course, they tell customers, bank depositors, they say, "Your money's here waiting for you, Grandma. Don't worry, anytime you need Money's out, running around. So that, d-d, you know, I would call it a fraud, but that, you know, sort of, I mean, that was really the source of central banking in the first place. You know, the reason why we have a Federal Reserve in the US, for example, is because that exact hustle, that fictional reserve hustle, it caused the bank panic in 1907, and the banks got together and said, "Well, this was no fun. We had to pay for our own bailout. let's fix

and that's where the, the taxpayers come in. So, right, I think, fractional reserve is a big part of this, and what's beautiful about Bitcoin is that, you know, gold, I, I love gold, gold is my first love, I, I, I will never say anything bad about gold. However, gold has a flaw, which is that it is physical. And this is paradoxical, because usually people like gold, because it's physical, you can drop it on your foot. And being physical means that it, it means two things. One is that it's very vulnerable to government. Okay? If you have physical gold, you can only hide so much in your backyard. And in fact, if everybody's hiding gold in their backyard, then you'll have an entire industry of people who dig backyards for a living to find the gold. gold storage, like distributed gold storage, doesn't scale very well. so inevitably you have Put it somewhere, you have to put armed guards, and now the government, knows how to find it. Then of course, the second problem with gold is that because it's physical, it's very difficult to transmit over distance, right? If you were to tally your monthly spending and to see how much of it was actually handed over hand to hand, in this day and age, it's probably nothing. And so for that reason, gold necessarily, in, in the modern age, has to be centralized. There has to be some intermediary, for example, they give you a gold credit card And they've got the gold in their vault, and then you run around and use the credit card, you can use it online, that works just fine. But the flaw is that the gold has to be somewhere, and the government knows where it is, they can find it. and so that means that the, you know, I think one of the sort of debate points, for example, when you're talking about gold, you know, for years, I think you and I were both advocating gold, and one of the responses would be, "Well, if gold is so amazing, where is it? Like, why isn't no country using gold today, right? Why, why did, quote unquote, the market, choose fiat?" And, you know, my answer would be, "The market didn't choose anything, violence chose."

you Transactions were, hand to hand, and so, you know, it was, you could have a, a decentralized currency that the government didn't necessarily control, once you're into the twentieth century, that was extraordinarily difficult, and at this point You know, this is part of why, again, I love gold, but, you know, this is really one of the killer apps of Bitcoin is simply the distance. you, you, you know, don't need a huge, castle to store it in. You can, of course, you can transact it using Lightning Network, for example, far cheaper than you can even transact, fiat.

Yeah.

And

importantly, I think it's that even those people who do try to transact in a full reserve context, they were stopped out Start in one reason for one reason or another. Now, now I've listened to obviously, our other mutual friend, Bob Murphy, and he's spoken about how not even, like, even if we take away the Rothbardian, you know, Austrians, there were Greenbackers who were kind of like a, almost like a full reserves, but they, they believed in a kind of like a cash full reserve system sort of thing, right? or that, you know, today the system that we're in, where it's, you know, there are probably two big Examples that most people are thinking in recent terms, the narrow bank and Caitlin Long's Custodia bank, where there was an attempt to, you know, create some kind of a full reserve bank within an otherwise fractional reserve banking system, and surprise, surprise, the powers that be didn't allow either of those ventures to proceed. Now, y- now the cynical, you know, their answer could be that, oh, maybe there was something else that they found objectionable All about custody, you know? But, you know, is, is the answer really just that full reserve has just been outlawed, and that's really why there's not, you know, there's not been a full reserve competitor pre Bitcoin?

Yeah, I think you're absolutely right. You know, it's similar during, the two thousand eight crisis in the US, they were handing loans out to banks, banks that were distressed, and some of the banks said, "No thanks, I don't need your money, we're doing just fine." Famously, BB&T Bank, they said, "Nope, I don't need it," and they were literally forced to take the money The claim being that if everybody sees that you don't need the money, but everybody else does, then you'll have an unfair competitive advantage and you could destabilize the entire financial system. That's the human shields, right? Always with the human shields. and so, you know, there's- That's one of the speculations with Caitlin Long's application for her, fully reserved bank, was that they were concerned that if they have one bank that is completely safe, where, you know, they actually have your money, there's no reason to ever run, because your money's just sitting there, then all of the other banks, you know, people would start to think they're too risky. And, you know, they're right, that's absolutely correct. Everybody would conclude that the rest of the banks are garbage, and you should get your money out so, you know, again, it's, it's, it's kind of a psy op, and, you know, of course, if you have, Bitcoin in there, you could imagine that some people might still use intermediaries for Bitcoin for, for various reasons. people did, you know, There could be services attached to it, you know, you could want, I don't know, escrow or there's like sort of side things that you could want to happen to your Bitcoin, on its own. So you could imagine intermediaries existing, but the point with Bitcoin is that you don't need it, right? It is a bearer asset, if for some bizarre reason you'd like to go do fractional reserve You're able to, but with Bitcoin, you don't have to. And something, just in case there are fractional reserves, I know that a lot of sort of free marketers, are fans of free banking and fractional reserve. just kind of highlight, under full reserve, the idea isn't that every single dollar has to be in the bank all the time. In other words, you know, you're not removing the banking as a function from society. What you're merely saying is that there's a difference between demand deposits where you can come and- And get your money anytime, a checking deposit, say. There's a difference between that and time deposits, right? In a time deposit, you park your money for a period of time, one month, three month, you know, a year. And the difference is that if you are promising that you have money in this moment, then you actually have to have it in the moment, right? On the other hand, time deposits, you'd be free to offer any interest rate, and in fact, you don't have to back time deposits, right? If you look at, say, Ford Motor Company Okay, Ford owes certain money right now and like it has immediate liabilities that it owes right now, like somebody's paycheck that they're about to come by and pick up. Alright, and then it has other debts that it owes in five years or ten years or twenty years, and it doesn't have to back up those other debts, right? And so similarly, a bank also should work on the same principle. So money that is immediately due should be immediately there, otherwise the bank is technically bankrupt. And in practice, you know, checking accounts make up about twenty percent a bank deposit, savings account make up about eighty percent, and so we might expect that would be roughly the ratio where most money would continue to be lent out, it would just be in time deposits, say a three month or a one year CD. Banks would have an incentive to get you to park your money in a time deposit because they can re-lend the money. you know, if we look at gold custodian fees to kind of get an idea of what the demand deposit, what the bank would charge to just park your money there, not lend it out, they run about a quarter percent a year Right? This is, I mean, this is pretty low. And, you know, indeed, if Mo- if, if the bank knows that you're gonna park some of your money in a demand deposit and then it could lend the rest out Then, you know, the bank would likely just offer you, free, you know, free custodianship, just like banks today offer free checking accounts because they're hoping to make money off of the, you know, cross sale, onto that product. So, you know, if I had to guess what a full reserve bank world would look like, it would look an awful lot like the current one, but it wouldn't have bank panics.

Right. And so I also speculate that we'll see a lot less credit, and I think you probably agree with that Reserve camp would see there'd be a lot less credit, than there is today because of all the rehypothecation for obvious reasons, right? because as you said, there's nothing precluding full reserve credit, aka commodity credit. The issue we take is with circulation credit, and so this is credit that is, you know, created with nothing backing, and this is, you know, what we're seeing today is effectively- This banking system that has multiple people believe they are in control of the resources, and that's, that's, that's where we come into the problem, right? Because in a fractional reserve system with circulation credit, what happens if we're thinking through the banking and the accounting and stuff, what's happening is that bank has, you know, given, you know, let's say a hundred thousand dollar loan to you, Peter, and now you're running around with that hundred thousand dollars thinking you can access those resources, right? Yup. But Let's say on the other side, this other person who believes his money is there also, and he believes he has access to it in his bank account, and from both people's perspectives, it's like they both believe, "No, I have-- this is a debond deposit, this is not a time deposit," and that's where we're running into the issue, aren't we?

That, yeah, that's exactly it, and I think that, you know, when we're sort of considering what the world would look like, you know, keep in mind that the part that matters is actually real savings. Right? And real savings doesn't change here. So real savings means, you know, if you sort of ignore inflation for a moment, so people would save a certain amount of their money, and then they would go out and, you know, they might invest some of that in things like factories, or they might lend it to other people. The only difference when you have this fractional reserve, which is printing all this money, and, you know, remember about seventy-five percent of new dollars are printed in the fractional reserve, Ponzi, they're, they're re-hypoth When you have that huge flood of money coming in, it's, now it's like you've got this confetti that is bidding up the resources. So in other words, if it weren't, for that, you know, sort of new channel of counterfeits, then you-- the, you know, savers, would sort of bid on resources like they would bid on workers or factories or steel to build things, and, you know, you would have this The people who could pay the most, which would usually be people who think that they can use this asset profitably, they would be the winners, and so they would build the factories, and then, you know, the economy grows. The only difference when you get fractional reserve is that now you've got this random flood of essentially fake notes that are flooding in and competing with the real savings. You're not getting any actual new growth because now you've just got more tokens, competing Sort of more bidding tickets competing for the original resource. So the fractional reserve didn't create more workers and more steel, right? The only thing you're getting is this redistribution. You're getting it according to whatever the priorities of the banks are, who are issuing the tokens, and then of course, you know, that then sort of disrupts, right? Rather than having like the best entrepreneur bidding on the asset, or, you know, making deals with the savers, now you've got this noise flooding in where you've got like just a bunch of random tourists who, who You know, sucking investments away from others, and the end result is that, you know, you get entire industries, in the dot com era, for example, you know, you would get Pets dot com or something that's just squandering enormous amounts of money, because they could outbid the sustainable businesses using effectively, fiat, using loans from banks, that was conjured out of thin air as opposed to actually having to access, the real savings markets.

Yeah. And so effectively, it's a distortion of the real- Resources, as we were saying at the start, it's the Cantillon effect. It's those people closer to the money printer, they are the ones who win out, because they're getting the new money first. Everyone else who gets the money towards the end of the process, they are the losers in that process, because they-- and so typically savers are getting wrecked there, because you, you know, you've just got this fiat and it's just, it's going down in purchasing power. So that's, a real problem. And so I think the other aspect of it is,

"Quote unquote free banker debate," you get this argument of, "Oh, but the market chose it this way, right?" Like they get this kind of, you know, but at the same time, I bet you if you, you know, if you just went out onto the street and you asked the average person and you asked him or her just on the street, "Hey, that money in the bank account, is it fully and unrestrictedly yours?" Or is it more like this kind of lottery ticket, you know, claim or like a fraction of a money market fund? Which one, which one do you think it is? Obviously, most of them would answer, "Yeah, I, I thought that thousand dollars in my bank account was, you know, my money, exclusive of my money." But, but it's not the case, is it?

Yeah, and I think for people who, believe in the free markets, it kind of takes a moment to understand the issue here. the question isn't like government, To do or like banning frictional or, fractional reserve per se, the question is what constitutes fraud, right? And free marketers, you and I are both free marketers, we deeply believe that, you know, if you're ripping somebody off, like if you're scamming with a shitcoin, that is fraud and that should be prosecuted as fraud. We're not saying the government regulators come in and write some law against shitcoins, what we're saying is that is fraud, and so we should use the existing thousands of year old legal system, to prosecute that. And You know, when it comes to the question of, fractional reserve banking, it's exactly as you say. Does the customer, does the depositor actually understand what's happening? If they don't understand what's happening, if they aren't competent to have effectively signed a contract, parking their money in this bank, then it isn't an invalid contract. This is thousands of, many, this is forever, standard in, you know, if you make a, contract with the five-year-old that's not legally enforceable, if you sell a structured finance product to an eighty-four-year-old who, who has dementia, that's also not enforceable. And if you keep it up, right? If you know this person is not competent and yet you keep trying to sell them something, that is absolutely considered fraud, has been considered fraud forever. And, you know, if we look at fractional reserve, it's very common in many countries that, banks will lobby for laws criminalizing contributing to a bank run. So to me, that looks very, very intentional. That looks like they know darn well what they're doing. This isn't, "Oh, I accidentally sold an eighty-four year old, you know, some complex product." This is, "I know exactly what I'm doing." So at that point, I say confidently, "That is fraud." you know, surveys of depositors, about seventy-four percent are not aware that their money's not there. They aren't aware that the money's been passed on in the form of loans. They think the money's just parked there, sitting there. Banks are essentially, leveraged bond funds, right? So Grandma thinks that her bank is a coffee can, that she's got a bunch of dollars just sitting there, if she needs 'em, she'll, she'll swing over. but the truth of it is that that money's been lent out, maybe to sovereign loans to, you know, Mexico or maybe to tech bros, you know, doing the next big, green energy project. That money is out, you know, in exotic places doing exotic things. And now, if you sat down with Grandma and

Safe, it's over in Wells Fargo. If you asked her, "Wait, why are you investing in a leveraged bond fund that buys sovereign debt?" and, you know, she would say, "What? What are you talking about? It's in the bank, it's perfectly safe." She isn't aware how fractional reserve works. maybe someday in the future we'll get rid of government schools and people, you know, will actually be taught this. But at any rate, at the moment, empirically, voters don't know what's happening. that fractional reserve, then if the bank ran out of money, right? Like if I go to the grocery store, I understand that sometimes they don't have eggs, and I'm annoyed, but sure, I just come back tomorrow and get more eggs. So why don't we do that with banks, right? So the bank, you know, they hang up a sign, they say, "Sorry, all out of money," and so maybe we try tomorrow, maybe they'll get a new shipment of money tomorrow. Why do people not behave that way? Because they don't know how it works.

Right.

It's not there, or it's not yours, it's not there, and it's not money, right? And so it's like people just don't understand the situation, the relationship they have in most Western world typical banking arrangements, because it's just they've set it up like this all around the world. There's no real alternative, and that even if you were to say, "Oh, I'm gonna leave out of Wells Fargo, I'm gonna go to Chase," well, you-- that, it's, it's entirely a fractional reserve system, and you cannot opt out because the US dollar The fiat token is, you know, has been defined as the inflationary thing that's constantly being devalued over time. So there's no real escape. I mean, i-i-in small ways you can sort of escape with taking physical cash, but, you know, and that there's the kind of proverbial cash under the mattress, but you're still interacting in this broader system where the US dollar is going down over time. You're still interacting in the sit-in the system where most of the transactions are being done digitally. It's hard to do everything with physical cash and coins. So So i-it's just kind of people are trapped into a system without even understanding the legal circumstances under which they are there. And I think the other kind of rejoinder I've heard from, you know, fractional reserves is they try to say, "Well, what if it was all upfront? What if it was all very explicit? You know, like what if, you know, Chase Bank or Wells Fargo very explicitly said, 'Look, Peter, we're gonna give you this account and it's kind of best effort. You know, there's no kind of guaranteed claim to your money, to your money.'" "Quote, unquote, your money. What about that? How, how would that be okay or would that be wrong still?"

Yeah, and, and I think that would be a solution. we have that in, you know, financial products. So for example, if you wanna trade options, naked options or futures, at least in the US, the-- your broker will give you a sort of a test and they'll see if you actually understand how these things work, and that's called a suitability, requirement, and those are written into, you know, rules it's generally the same all over the world, right? Again, if the person is eighty-four with dementia and they're trying to buy a structured finance pr- right, this is the reason why, because the financial institution knows that, it will be liable, it could even be prosecuted for fraud, if it is selling products that people don't understand. So we could just use that system where, you know, you would literally have to undergo like an exam, you'd have to like answer questions on a test, you know, maybe you'd have to have a A lawyer present to indicate, you know, so like George Soros can absolutely fractional reserve, the man understands how fractional reserve banking works. Despite his advanced age, I am confident that George Soros knows what he's doing on that count. but, you know, Grandma with the coffee can You know, if we simply used a suitability requirement, or rather a suitability standard which is used in the rest of finance, then pretty clearly she doesn't understand what's happening. And so what that would do is that, you would most likely have fractional reserve still existing for rich people who understand how it works, and the rest of us, you know, would use full reserve. And then when that risky fractional reserve bank went down, it would take out a bunch of rich people with it, and who cares? But the issue with today's fractional reserve, where everybody's forced into it, is that everybody includes widows and orphans, and widows and orphans are politically sympathetic. So it is inconceivable to have a fractional reserve system where everybody is in it and it's, devil take

the hindmost. Yeah. And I think one other point I would add from a full reserve perspective, I think the other answer I've heard is that people say, "Look, at that point, if it's best efforts and it's like a lottery ticket, are we even talking about money at, at this point, right? It's just not money." And I think that's the other key point to make, that, okay, yeah, if you wanna try to trade these, You know, if you're a rich person, you know, buyer beware, caveat emptor, etcetera. Let me disclose, let me kind of push off all the risks onto you. Even then, it's still not money, and these to-- these tickets, these tokens, don't not- Circulate at par with actual money. And so in a Bitcoin standard, we would be, you know, you've got your Lightning node, and I've got my Lightning node, and we can transact in a fully reserved system. I, you can say, Stefan, here's my invoice for one hundred thousand sats, I pay that invoice, it's a fully reserved system, we don't even have to-- There's no question of, oh, am I transacting on the frac-fractional system here or the full res-- No, it's just, you're in the Bitcoin system

And we are just natively, without really having to think about it, because all the work is being done at, at the software and the hardware level, it's technically ensuring and keeping us at a full reserve in a full reserve system. And I think that's the crucial difference, right? Because it's not that, you know, I think put it this way, let's say there's, you know, a Kraken IOU and a Binance IOU and a, you know, some other Coinbase IOU, they're not all gonna be treated equally. Right? And if that were the case, then it kinda helps us show this idea that Bitcoin is obsoleting fractional reserve banking or fictional reserve banking. We are, you know, you know, once you've withdrawn those coins from the service provider, whether that's wallet of Satoshi or Cashu or Fedimint or Bitcoin Beach Wallet or Blink Wallet, as they are now called, you know, or your own wallet, ideally, you know, in that moment, whether the withdrawal request or the payment request has gone through or not has not, and then you know at that moment whether something is wrong.

Yeah, well, I think this is important, you know, there, there's a perception I think especially among non-bitcoiners that Bitcoin is this really esoteric, complex, weird thing. And actually, no, Bitcoin is what grandma thinks money is. It is the equivalent of a physical coin, right? Yeah, I mean, it's got underlying technology, but, you know, there's a lot of things in my life that have underlying technology. I don't understand a coffee maker, okay? I just know if you push this button and it's plugged in, it's gonna do something. I don't need to understand, I don't care. I'm interested in the coffee itself. And so, right, in this case, y-- you know, what, what And, you know, what, what you have to follow all kinds of people and master is the fiat system. The fiat system is absolutely insane. It is baroque, it's this Rube Goldberg machine, and of course, it's built that way because of the fraud we were talking about before. That's, that's not by accident. It's not that complicated, you know, 'cause they tried their hardest and they just couldn't simplify it. No, it is an intentional fraud. It is to deceive people. So I think, you know, partly, as more understanding of I think that, you know, a lot of us, sort of e-evangelize, Bitcoin, but I think that that's, that's an important detail. Bitcoin is what you think money is. Fiat isn't.

That's a fantastic spot to finish up there. Peter, I guess, final question. What are you looking out for? I know, you know, I'm sure you're gonna keep on, going with the videos, I hope you do. What are you looking out for in terms of things coming,

from, The, the, the banks, inflation and recession, and all three of those are gonna be interacting here. Banks all over, sorry, all over the world, they broke a lot of things all at once, and I think there's gonna be, gonna be a lot of consequences to that, not just in the US. I think we're gonna s- start seeing those in more and more countries. So, I think it is going to be an exciting year, not necessarily in a good way.

Yeah, I think that's, I think that's a great Great content. He's got some great videos. He's got a Substack, so go and subscribe to that. and Peter, thank you for joining me.

Thank you. It's always a pleasure to be on.

Show notes are available at stephanlivera dot com. Make sure to share the show with family and friends if you are enjoying it and if you are learning something here. Thanks for listening, and I'll see you in the citadels.