Latest / What Bitcoin Did / The Dollar Endgame Is Not What You Think | Peruvian Bull

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The Dollar Endgame Is Not What You Think | Peruvian Bull · What Bitcoin Did

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  The U.S. is the sole issuer of currency, and the rest of the world needs that currency.
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  And so because of that demand imbalance, the U.S. has to decide whether they want to print
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  more money or if they want to not do that, and the global system starves for liquidity
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  and everything starts to seize up.
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  That's an issue of a centralized issuer and a global demand.
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  Bitcoin is a decentralized issued currency.
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  Bitcoin doesn't suffer from this.
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  If any country wants to earn Bitcoin, they can do it.
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  And so that means that in the long run, not only is Bitcoin a better reserve currency, it's the perfect reserve currency.
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  Again, you look at the numbers, you look at how Fed does QE, you look at the debt load and you say, OK, they're going to print the money.
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  There's no way out. Everything's going to get inflated away.
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  We're going to see 5% inflation, then 10, then 20, then 50, then 100.
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  And then, you know, within five years, the dollar will be dead.
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  A harsh lesson that a lot of people might have to learn.
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  Like, I think if we're moving into this sort of multipolar world, Bitcoin is the best money.
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  Like, it just is.
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  all right let's get into it roberto good to see you man we've been talking about making this show
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  for a very long time so it's good to have you here yeah thanks for having me so we're gonna get into
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  uh the dollar end game the thing that's always funny about this is like people have been talking
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  about this for a long time way before bitcoiners gold bugs have been talking about this forever
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  um and then over time like with the 2007-8 financial crisis like money printing all this
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  stuff happens and the dollar just seems like stronger than ever. So what is the dollar end
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  game and is it actually coming? Well, I would say, you know, my idea of what the dollar end game is
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  also has evolved in the last like eight years setting macro, because I definitely started off
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  on that same path that you, you know, initially mentioned, right? You listen to Peter Schiff,
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  you listen to Mike Maloney, you listen to basically all of the dollar doomers and the
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  hyperinflation camp. And they give you this story of, you know, unsustainable U.S. fiscal deficits,
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  insanely high debt to GDP ratios compounding to the future, right? Huge unfunded liabilities
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  that are unsustainable, an overextended American empire and military state that is creating
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  conflicts all around the world. And it makes you believe that the dollar, you know, is going to
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  collapse tomorrow. And so you think, wow, gold, silver, you know, bullets, this is what I should
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  be investing in because the U.S. is going to become a zombie wasteland and the rest of the
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  world is going to be fine, right? But as I've dived down into the macro rabbit hole over the
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  last eight years, I've found that the story is much more complex than it initially seems, right?
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  And that dollar doomerism, while it's correct on certain bases, like we could say an absolute
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  basis against scarce assets, it's not true on a relative basis. And this is what Brent Johnson's
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  pointed out with the dollar milkshake theory. And that relative basis actually matters a lot.
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  Because when you think about like where capital flows in a modern digitized, globalized world,
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  relative strength really does matter. If you're a Chinese investor, if you're a Japanese investor,
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  if you're a German investor, if you're a UK investor, and your stock market goes up 5% a
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  year, and the US is doing 12% a year compounded. Well, over 20 years, that's more than double
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  total capital growth, right? And so why would you even invest in your local stock market if
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  the U.S. has much better growth? And so those capital flows, those investment flows, commodity
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  flows will influence, obviously, the global economy, but also the U.S. economy and give us
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  that, you could say, like a buoy, artificial boost, which allows us to maintain this
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  exorbitant privilege of the world reserve currency. But yeah, we can get into it. But
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  I think the dollar in game is still obviously in play, but I think it's going to play out much
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  different than most people think. Yeah. I mean, it's funny that you say that if you're in another
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  country, the US stock market performs so much better, so you may as well just invest there.
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  And I live in Australia and that 100% happens here. I don't think very many people are investing
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  in the Australian stock exchange. Instead, it's either real estate or the US stock exchange. So
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  that money does end up in the U S. So how do you think this does play out then? Cause like you
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  mentioned Brent Johnson then, and I've had him on the show a couple of times. I think he's really
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  smart guy. Um, but he basically thinks that everything does fail, but the dollar is the
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  last one to fail. Yeah, I think, I mean, I think that's broadly correct. Um, what I would say is
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  that, you know, there are certain things even during that failing period, right? There are
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  certain things that are going to outperform other things. And there are certain, you could say like
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  signposts on the road towards that global monetary collapse that we need to be looking out for and
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  will give us hints and clues on what's going to happen next and you know part of the reason why
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  i study japan is because japan has been not only obviously the forerunner in in global monetary
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  policy they've been the ones who created qe in march of 2001 they're the first ones who did qqe
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  in september 2013 and they have first ones who did yield curve control in in 2016. um
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  But not only are they the first ones to do it, they're also the most, you could say,
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  you know, bleeding edge in terms of their creativity when it comes to monetary policy.
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  And when I first started in the macro space, I thought, you know, again, you look at the numbers,
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  you look how Fed does QE, you look at the debt load, and you say, okay, they're going to print
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  the money. There's no way out. Everything's going to get inflated away. We're going to see 5%
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  inflation, then 10, then 20, then 50, then 100. And then, you know, within five years, the dollar
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  will be dead. But what that ignores is the ability of central bankers to create new forms of liquidity
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  and funnel that into the economy and, you know, design new ways that that liquidity won't
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  necessarily impact consumer price inflation, at least not immediately. And so it's basically like
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  can kicks that they've invented. And you look at the last, you know, 10 years, or especially the
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  last six years in the US, and you can see that happening, like, very, very clearly, right?
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  Again, you ask Peter Schiff, you ask Mike Maloney in 2018, hey, we're going to have a global pandemic.
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  We're going to have massive fiscal stimulus, right?
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  The Fed's going to run up their balance sheet from $4.5 trillion to $9 trillion within 18 months.
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  We're going to have 0% interest rates.
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  And the Fed is going to cut reserve requirements on banks down to zero.
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  What's going to happen?
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  Well, they're going to tell you, okay, well, within two or three years after that, the dollar is going to be dead.
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  Dixie is going to be at 60.
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  And inflation is going to be at 40%.
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  Well, you look at what actually happened and that's not how it played out at all, right?
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  Which tells you obviously they're wrong.
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  But why is that?
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  Well, it's because the Fed not only did traditional QE, which is obviously the invention of the
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  Bank of Japan, but they also used new monetary tools to create liquidity without creating
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  the same side effects that traditional QE does.
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  And so one great example would be the BTFP.
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  If you remember in March 2023, a bunch of regional banks started to fail.
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  obviously Silicon Valley Bank was the largest one of those,
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  but First Republic was also on the chopping block.
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  And as these regional banks began to fail,
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  the Fed began to get worried about this duration issue
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  that was probably isolated at these smaller regional commercial banks
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  where they had overloaded themselves on treasury bonds.
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  And the treasury bonds had now fallen 40%, 50%,
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  especially with the long-end ones,
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  ever since the Fed started hiking in March of 2022, a year earlier.
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  and that had left a hole in their balance sheet.
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  And so the Fed said, we're going to open up this program.
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  It's going to value all your bonds at par
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  and we're going to lend that money to you
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  at OIS plus an interest rate spread
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  of like 20 bips or whatever.
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  And this will help you get liquidity
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  as if the bonds were valued at face value
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  even though they're 40% lower than that.
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  So you can deal with any liquidity concerns you have
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  and then once the liquidity issues blow over,
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  you can worry about the solvency issues
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  in the long term on your own. And guess what? It worked. But it didn't obviously have the same
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  effect as QE because it wasn't stimulative in the same way that QE was, even though it was a
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  liquidity creation. And the same thing is true, by the way, of the push to eliminate the treasury
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  exemption from the SLR. In 2020, during COVID, the Fed issued this... The Fed has a bunch of
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  regulatory rules that they can influence and also create, obviously, right? And one of them is the
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  SLR, and that's called the supplementary leverage ratio. And it basically means a bank has to hold
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  a certain amount of capital against its own assets. So it's a leverage ratio. So let's say a bank has
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  $100 billion of treasury bonds. It has to hold, let's say, $5 billion of cash in case those treasury
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  bonds fall in value. Now, treasuries are obviously a large part of a bank's assets.
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  And if treasuries get exempted from the SLR, then that means that the bank doesn't have to hold
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  capital against those treasuries falling in value. So it basically means that they get to hold the
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  treasuries with infinite leverage, right? And during COVID, because again, all the banks are
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  loaded up on treasury bonds, treasury market is collapsing. It's freaking out. The move index
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  spikes to over 100, right? We see huge volatility, not only in stocks, but obviously in bonds as well.
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  So they create this exemption. They say, okay, you don't have to hold capital against these
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  treasury bonds anymore. And that lasted for like a year and a half. And then it ended in 2022.
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  But by March 2023, the banks were starting to get nervous. And then they started a petition with
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  the CFTC and ISDA, which is the International Securities and Derivatives Association,
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  And in early 2024, they submitted a formal letter to the Fed asking for that exemption. And so far, the Fed looks like in November of last year, they made some moves to lower the SLR requirements. They haven't completely eliminated it. But the point is, like, that was another move that they made, right, that basically increases liquidity in the system without actually printing money.
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  It frees up capital that's on bank balance sheets without traditional QE.
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  And this will never show up in a press release.
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  This will never show up on a Fed minutes meeting or meeting minutes.
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  It'll never show up on their balance sheet on Fred, but it will have a real impact on
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  the financial economy especially.
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  And so all these different tools that they're creating are allowing them to have way more
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  optionality than most people think.
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  I mean, the question I would have on that is, if you explained everything that happened
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  during COVID or even with the BTFP program, like a rational person might look at that
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  before the event happened and be like, yes, that's going to be a massive hit to the dollar.
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  Like maybe this is the end of this fiat system, but you can understand the rationale behind
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  thinking that. And then in reality, it's like you say, it's very different. Why is that? Is it,
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  is it people underestimating like the resiliency of the market or is it something else?
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  I mean, I think it's obviously, like you said, it's, it's a couple of things. So for one, it's
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  the amount of U.S. dollar debt that exists in the world, not only, you know, obviously in the U.S.,
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  but internationally is massive, right? The euro dollar market, which essentially includes all
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  dollar linked deposits globally, plus, you know, you can, if you expand it to derivatives, to FX
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  futures, forward swaps, is somewhere north of $200 trillion, right? It dwarfs even the U.S.
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  dollar market. And all that debt needs to be paid, right? What that debt represents is a
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  demand for future dollars. And so just because there's a global shutdown doesn't mean all those
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  debts are erased. And so all those foreign entities that need those dollars, well, what do they do?
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  They have to sell their domestic currency. They have to sell whatever capital or cash they have,
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  whatever equity they have in order to get dollars, and then use those dollars to finance their debt
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  obligations. And so that means that, you know, that dollar demand is kind of embedded into the
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  system globally on a scale that most people don't realize. And the other, you could say, like,
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  worrying factor in all this, right, or like confounding factor in all this, is that the
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  system continues to perpetuate itself, right? It's that old saying, like, that we have in Bitcoin,
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  right, there can only be one currency. Well, that's true with the world reserve currency as
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  well. So when we boil it down to like FX pairs, right, nine out of 10 of the top most liquid and
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  most traded FX pairs are dollar linked. So it's, you know, USD JPY, USD EUR, USD GBP,
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  right? USD CAD, the Canadian dollar, like the US dollar is basically the linchpin of the global
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  economy. And it's the oil that greases the wheels and the cogs of the global engine,
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  you know, the global market engine. And so whenever, you know, whenever that debt
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  uh, rolls over and people pay it off, then the bank, the banks, those Eurodollar banks,
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  those derivative banks, what they do obviously is once they get paid with dollars, they want to
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  create more, they want to get paid on that, you know, those dollar reserves. So they lend them
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  out again So they create new debt and the system perpetuates itself And this also has to do with obviously like you know interest rate risk derivative risk If you a Pakistani you know textile manufacturer
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  or you're a Saudi oil manufacturer, oil producer, you can get a loan in your own currency and you'll
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  pay 10%. If you get a dollar-based loan, you'll pay 7%. And for a company dealing in billions of
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  of capex a three percent difference in interest rates is everything and so no basically you know
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  not no but very few international large global conglomerates want to borrow in anything other
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  than dollars just because the rates are lower the liquidity is higher and um you know the the
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  ability to transact that dollar and to earn that dollar in global trade is is so much higher and
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  and so with like the everything that's happening in the stable coin market now do you think that
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  that's going to sort of just accelerate the timeline in terms of dollarization across the
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  world. Yes, I think it will. I mean, so did you see Brent Johnson's most recent report on the
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  stable coins? Yes, I did a podcast with him about this. Oh, you did? Okay, awesome. This was like a
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  few months ago, right? Or has he done a new one again? He did do one. I think he did do one a few
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  months ago, but I'm pretty sure he released one on a sub stack like two weeks ago. Okay, no,
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  I've not covered that within that. Okay. Okay. Well, basically he lays out, right, like stable
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  coins are essentially the crypto euro dollars, right? They are the same mechanism, but more,
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  you know, more transactable and more native to the 21st century rails. And what that means is
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  that the velocity of money for those stable coins and for those digital euro dollars is much higher
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  than it is for traditional ones, right? You don't have to wait three days or five days for an
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  international SWIFT transaction to come through, you can settle stablecoins within seconds.
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  And what that means is that the dollar dominance can continue to expand globally at a much faster
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  rate than was previously thought, right? And so in the short term, you know, that adds two to
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  three trillion dollars worth of treasury demand on the front end from global stablecoin demand.
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  But if the stablecoin, you know, industry continues to penetrate, especially the global south
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  and emerging markets, you know, we could see significantly more demand than even that
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  start to appear. And that demand is very important, right? Because this is the categorical difference
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  between, you know, the old, you could say, dollar-based, debt-based system and this new kind of
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  stablecoin asset-based system, which was pointed out to me by Matt Dines. I don't know if you've
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  heard of him, but he's a CIO of Build Asset Management. The key difference there is the old
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  system, right, was secured with bank reserves. And the only way you perpetuated it was by
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  originating more debt, right? So you create more debt in order to, you know, create more dollars,
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  and then those dollars flow out into the global economy, get paid back to you with interest,
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  and then you do it again. This new system, this new stablecoin, you know, you could say
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  paradigm that's being created, is more of an asset-backed system. And the asset is the U.S.
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  treasury bond. And so if we are able to, you know, basically manufacture demand for U.S. treasury
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  bonds, what does that do for the U.S.? That lowers domestic interest rates, that increases the
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  government's spending power, that increases, you know, our ability to project power both militarily
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  and economically globally. All in all, it's basically a way to, you know, turn this nothing
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  stops this train meme from a doomerist meme, like a pessimist, oh no, we're all going to go down the
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  hill to a more optimistic view of like, we can have the global economy help to drive treasury
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  rates down even more than they already have, and then use that to hopefully get ourselves out of
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  this fiscal situation. Because obviously the debt, you know, no one would argue that that's
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  not unsustainable. It is. But there could be more ways to get out of it than we previously thought.
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  It's funny, I struggle with the stablecoin thing, because like on one hand, I obviously think
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  Bitcoin is the best money and I want the people in the global South to be adopting Bitcoin as
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  quickly as possible. But in the same time, I understand that there is still volatility in
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  Bitcoin and people just understand the dollar fundamentally differently. And so I would never
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  say that someone who's living under a high inflation currency shouldn't move to the dollar
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  because fair, I would do that in their situation as well, potentially. But the thing that I'm really
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  interested in is if you look into the future, stable coins will usurp some foreign currency
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  at some point. That's inevitable. I'm really curious what the timeline is for that. When do
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  we start seeing the US dollar destroy other global currencies because of the stablecoin?
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  Yeah, I think it all depends on institutional adoption. The main problem with stablecoins
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  is that, yes, do retail investors, do retail users, a mom and pop living in Colombia or living in
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  Argentina or some high inflation country, Venezuela, do they have a huge reason to use
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  stablecoins and pick up a MetaMask wallet and like transact? Yes, absolutely. Right. But does
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  a large global GSIB like JP Morgan or, you know, Bank of America or Wells Fargo, do they have a
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  reason to adopt it? Not really because they're plugged into Fedwire. So they're literally sitting
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  on the heartbeat of the global financial system. So their need to use these like, you know,
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  tacked on appendages that are created by these crypto you know crazy crypto people is pretty low
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  and so i do understand that like in america there's no reason to use a stable coin but if
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  jp morgan can go out and address a huge audience that they otherwise can't and they can start
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  selling dollars offshore like that that would make them do it yeah no i think that would create a new
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  business line i mean and i mean um i don't know if you've seen this but i saw that just earlier
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  in this month in june uh jp morgan and several other banks were putting forward proposals to
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  create basically stablecoin versions of their own deposits yeah so you know digitizing their
• 19:30
  own deposits so that they're tradable on on a you know decentralized ledger but i don't think that's
• 19:35
  obviously that's obviously like them becoming the issue where they they're becoming their own circle
• 19:39
  of their own tether and trying to control it and not allowing you to you know necessarily move uh
• 19:45
  tokens outside of their own network um but it is still interesting i mean obviously it's a new
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  opportunity new frontier for them but i'm also worried like as a bitcoiner i'm worried on the
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  censorship and the, you know, you could say ideological side because stablecoins, although
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  they're obviously not CBDCs, they have the same centralized control mechanisms that a CBDC would
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  have. And since there's a centralized issuer and, you know, holder of reserves, you know,
• 20:14
  and those people are audited by regulators, like there's room for failure, there's room for risk.
• 20:19
  And that, to me, that's what's concerning there. Yeah. I mean, that was one of the coolest things
• 20:24
  that came out of the whole situation in the Strait of Hormuz is Iran started taking payment
• 20:30
  in stable coins and then had them frozen. And so their only option left was Bitcoin. And
• 20:34
  it's like a harsh lesson that a lot of people might have to learn. I think if we're moving
• 20:38
  into this sort of multipolar world, Bitcoin is the best money. It just is.
• 20:42
  Absolutely. Yeah. I mean, I don't know if you saw this, but there was probably 20 to $30 million
• 20:48
  a day, potential Bitcoin transactions happening for the Strait of Hormuz. And it was obviously
• 20:54
  like pointed out by, I think it was the Bitcoin Policy Institute and several others as one of the
• 20:58
  key, you know, inflection points in this whole Bitcoin narrative. And I think obviously now as
• 21:04
  the Iran war starts to wind down as announced last night and, you know, seems to be progressing today,
• 21:09
  you know, that immediate story may fade, but the broader picture of the U.S. using our hegemony
• 21:16
  over the global dollar and the global financial system to punish other nations and to whack them
• 21:21
  on the head whenever they act out from what we would like them to do. That would push more and
• 21:27
  more sovereigns to use some sort of non-censorable money, which obviously Bitcoin is the premier one.
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• 24:03
  Should we talk a bit about Japan?
• 24:05
  Because you do a ton of work on Japan
• 24:07
  and I think I know the reason why.
• 24:08
  I imagine that you look at Japan as like the end game,
• 24:12
  the future point that every fiat system is going to come to. I don't know, start off by just
• 24:18
  outlining why you concentrate so much on Japan. Sure. So, you know, I started researching Japan
• 24:24
  for macro back in like 2019, 2020. And then I really started realizing the importance of it in
• 24:29
  2021 as COVID started to grind on. And, you know, we saw the Bank of Japan continue to reaffirm
• 24:35
  the 0% interest rates, even though the rest of the world started to hint at hiking.
• 24:40
  But Japan is like one of the most interesting stories because this entire, you know, eight
• 24:44
  years, nine years I've spent in macro researching Keynesian economics, Austrian economics,
• 24:50
  Japan was the one outlier, right?
• 24:52
  And this was brought to my attention by a Heisenberg research report that was made in
• 24:55
  2018 that found there's, you know, 55 nations that have gone above 120% debt to GDP.
• 25:02
  and 54 of these 55 nations in the past 150 years have either hyperinflated, you know, inflated,
• 25:10
  or defaulted on their currency, right, in some way. 54 to 55. The one exception is Japan.
• 25:18
  And so I was asking, you know, why is that? What happened there? And the story is really,
• 25:24
  really fascinating. So in the 1980s, obviously, Japan had a huge, huge stock market and real
• 25:30
  estate bubble fueled by low credit and a strengthening yen that they had agreed to
• 25:35
  under the plaza court in 1985 and the low the low interest rates and the huge amounts of credit
• 25:42
  that was being funneled into the general economy was enabled by the bank of japan and their window
• 25:47
  guidance system that they were able to impose on the local commercial banks so basically they would
• 25:51
  call up commercial banks and tell them we need to make 100 billion dollar 100 billion yen loans
• 25:56
  this week in the auto sector, go make them. And it didn't matter about the credit of the borrower,
• 26:00
  it didn't matter about the actual demand, it didn't matter about, you know, any economic
• 26:04
  fundamental, they would just go make it make those loans. And so the amount of debt issuance,
• 26:08
  and the amount of obviously credit creation in the late 80s exploded. And then by December 1989,
• 26:15
  the bubble was starting to become apparent, you know, there's tons of stats we can point to, but
• 26:19
  you know, there's things like the Imperial Palace of Tokyo was worth more than all of California.
• 26:24
  um there's obviously like um the u.s the japanese stock market was worth i think um more than yeah
• 26:33
  two times the american stock market at the time even though japan was you know a third of the
• 26:37
  population or half the population and had way less economic activity like there's all these
• 26:41
  uh little point things you can point to but the bank japan hikes december 1989 1990 begins and the the nitgate starts to roll over And it keeps rolling over it keeps rolling over and begins this slow motion deflationary crash that lasts for basically an entire decade And everything
• 27:01
  that Bank of Japan did basically was like giving morphine to a cancer patient, right? It didn't
• 27:08
  really solve the situation. The first thing they did was obviously like way too late in 1998,
• 27:15
  they finally got independence from the Ministry of Finance because the two had been linked
• 27:19
  previously under the post-war reconstruction government.
• 27:24
  And they decided to lower interest rates to zero, right?
• 27:27
  They'd already been cutting rates,
• 27:28
  but they hadn't had the ability to lower them
• 27:30
  all the way to zero and then to the negative bound.
• 27:32
  And so by February 1999, they were able to do that.
• 27:34
  And they thought that that would simulate growth.
• 27:37
  It didn't.
• 27:38
  And then March 2001 turns around.
• 27:42
  They say, we're going to try something else.
• 27:44
  Let's start QE.
• 27:45
  Let's create this new method of creating reserves
• 27:46
  and will buy government bonds off the balance sheets of these commercial banks.
• 27:51
  They start doing that.
• 27:53
  Nothing happens.
• 27:54
  2008 rolls around.
• 27:55
  And then they say, you know, growth is still very low.
• 27:58
  And by the way, the Nikkei is still less than half of the price it was at the peak in 1989.
• 28:03
  So we're still technically in a bear market.
• 28:06
  And the real economy in Japan has basically been, you know, zombified for the last, you
• 28:12
  know, 15 years, 18 years by 2008.
• 28:14
  And then they have the global financial crisis.
• 28:17
  They have another excuse.
• 28:18
  So they create even more QE.
• 28:20
  They print even more reserves.
• 28:22
  Nothing happens.
• 28:24
  And so the question becomes, what's going on here?
• 28:27
  All our MMT models, all our Neo-Keynesian models tell us that this bank reserve creation
• 28:34
  should, by default, buoy up stock prices, buoy up bond prices.
• 28:39
  and then that, you know, capital gain
• 28:42
  should flow as a wealth effect
• 28:44
  into the general economy, right?
• 28:45
  People start to feel richer.
• 28:47
  And the problem was the people kept,
• 28:49
  you know, falling back to this liquidity trap
• 28:51
  of believing that, you know,
• 28:53
  the growth was sucked out of the economy
• 28:55
  and that the only way to make money
• 28:57
  was to invest in bonds, right?
• 28:59
  And so that's why the Japanese retail investor became,
• 29:01
  and the Japanese institutional investor
• 29:03
  became the world's biggest creditor.
• 29:06
  They started lending to the French,
• 29:07
  you know, the French government,
• 29:08
  the British government, the US,
• 29:09
  They're obviously the largest holder of U.S. Treasuries, the largest holder of British Guilts, one of the largest holders of French GEBs like German Boons.
• 29:20
  You look at the global sovereign debt market, Japan is basically the funder of first resort to all of it because they've been searching for a yield for all these decades.
• 29:31
  And as the years rolled on, again, more and more crises come up and the Japanese respond by creating more and more ways to print money. And they start doing by 2013 under Abe and his three arrows, Abenomics plan, they want to be even more, you could say, assertive, aggressive with their monetary policy.
• 29:54
  Let's not just buy government bonds.
• 29:56
  Let's buy stock ETFs.
• 29:58
  Let's buy real estate ETFs.
• 30:00
  Let's buy corporate bond ETFs, right?
• 30:02
  So they switched the regulations for the Bank of Japan that previously had excluded them from doing so.
• 30:11
  And by late 2013, they're buying wholesale equity ETFs.
• 30:16
  And again, that helps a little bit, doesn't fix the situation.
• 30:20
  And so all these years, and then the yield curve control comes on in 2016.
• 30:24
  And all these years pass and they've basically been unable to do anything to ignite growth.
• 30:29
  And it all comes down to the same fundamental problem.
• 30:32
  The issue that was created in 1989, which is over collateralization, over debt, over indebtedness,
• 30:41
  and inability to repay that debt with any productive economic growth, had never been resolved.
• 30:47
  All the companies that had become zombified, that had basically taken on way too much debt
• 30:51
  and then were allowed to survive
• 30:53
  by rolling forward on 0% interest rates,
• 30:55
  those companies were still running.
• 30:57
  The employees were still working there.
• 30:59
  And again, you can think about it like a hospital patient.
• 31:02
  It's like a comatose person, right?
• 31:04
  The lights are on, but nobody's home.
• 31:07
  There's entire companies and industries in Japan
• 31:09
  that don't really produce a profit,
• 31:11
  that just produce enough money to pay off the interest
• 31:15
  on the loans that all these companies have taken on.
• 31:17
  And the banks that issued those loans
• 31:19
  were too embarrassed to admit
• 31:21
  that the companies wouldn't be able to repay them.
• 31:24
  And so they changed their repayment schedules
• 31:26
  and changed their repayment terms
• 31:27
  so that the company could just kick the can indefinitely.
• 31:31
  And so that's created this unique situation
• 31:32
  where basically the debt is at 263% debt to GDP, right?
• 31:36
  The growth is basically at zero.
• 31:38
  The inflation has been at zero
• 31:39
  for two and a half decades up until recently.
• 31:42
  And the entire, you know,
• 31:44
  you could say entrepreneurial market is basically gone.
• 31:47
  There's no entrepreneurs in Japan.
• 31:48
  They have lower,
• 31:49
  to put this in reference of the 50 top GDP per capita countries, they have a lower GDP per capita
• 31:58
  than all of them, except for one. And the one is Croatia. And Japan is a first world country that's
• 32:06
  obviously extremely wealthy. And so for them to have a lower entrepreneurship rate than Croatia
• 32:11
  is insane. Or like being the lowest of all of them, except for Croatia is insane.
• 32:16
  So why would Japan, what were the demographic issues or whatever it was, why were they able to do so much QE and have zero or negative interest rates and not have any inflation? Because that seems like a huge outlier.
• 32:29
  Sure. So again, the fundamental issue was that there was so much credit created in the 1980s and the early 90s before the crash that even the QE that they did wasn't fundamentally resolving the real issue, which the real issue was the debt overhang.
• 32:48
  So, you know, they print yen, they buy JGBs off the, you know, Japanese bank balance sheets, right? Those banks were so conservative and so worried about, you know, running into issues that all they did is just invest those proceeds abroad.
• 33:06
  And so the two decades of Japanese QE essentially became a conduit for capital to move from Japan out into the rest of the world, especially the U.S.
• 33:15
  So the QE that they did didn't even stay in their own financial system.
• 33:18
  And the problem that needed to be solved was like those banks and those zombie companies needed to default, right?
• 33:25
  We saw a couple of defaults in the late 90s.
• 33:27
  In 1997, there was a famous string of defaults in October of that year that resulted in an actual bank run.
• 33:34
  And the Bank of Japan announced a bank holiday that month and closed like 15 banks and then reopened them in like, you know, a week later and recapitalized them.
• 33:44
  But it was pretty limited.
• 33:45
  And to kind of explain the situation even further, like there's a very strong cultural element here as well, right?
• 33:51
  The Japanese are very ethnically and culturally homogenous.
• 33:54
  So, for example, when the Nippon, which is their local CNBC financial news outlet reporter, was reporting on this in 1997, reporting on the bank runs, a Bank of Japan official ran out into the street in Tokyo and asked him, hey, can you not cover this? We don't want to spread panic.
• 34:13
  and he said okay they cut the broadcast the t the station destroyed all their tapes and decided not
• 34:20
  to air any of it and that that's like the perfect encapsulation of what japan is right it is all
• 34:27
  about saving face it's all about uh cultural honor and dignity and the idea that like you would you
• 34:33
  would oppose an authority that's telling you to do something different is completely completely
• 34:37
  ludicrous so um yeah no one ever questioned the bank japan doing qe and the bank japan never
• 34:42
  questioned why the commercial banks weren't re-loaning or trying to simulate growth. They
• 34:46
  said, okay, they're just doing what they're doing. And all the money just flowed into the banks and
• 34:50
  then into the retail investors. And those retail investors just lent it out into the world.
• 34:56
  At the very start of the show, you said Japan was doing QQE. What is that?
• 35:01
  QQE is qualitative quantitative easing. So it's another crazy word, but it basically means
• 35:08
  instead of doing general QE,
• 35:11
  which is basically like shooting a shotgun,
• 35:12
  you know, at a problem,
• 35:14
  like saying, oh, I'm just going to buy
• 35:16
  a bunch of treasury bonds.
• 35:17
  I'm going to buy a bunch of mortgage bonds.
• 35:19
  They decided we're going to like specialize it, right?
• 35:21
  So we're going to buy, you know,
• 35:23
  corporate ETFs, corporate stock ETFs.
• 35:26
  We're going to buy real estate investment trusts.
• 35:29
  We're going to buy, you know, individual equities.
• 35:33
  I mean, at one point the Bank of Japan owned like,
• 35:35
  you know uh of the top country of the because they have their uh nikki index of the top like
• 35:42
  500 companies in the nikki the bank of japan was the top shareholder in 70 of them and the bank of
• 35:48
  japan owns like 10 of the total uh stock market capitalization of the of japan so um yeah it's
• 35:56
  insane i mean they just went out and bought everything they could so i just looked up the uh
• 36:01
  the countries with the highest debt to GDP ratios, and the only country above Japan is Sudan,
• 36:07
  which is probably not a great company to keep in terms of this.
• 36:11
  Will they survive this? What's happening now? Will Japan get through this?
• 36:17
  Sure. So I guess I'll give you a little more update on what's happening right now.
• 36:21
  So obviously, they've been running this 0% interest rate, zero growth, zero inflation
• 36:28
  playbook for decades. And again, they didn't really understand why they were stuck in this
• 36:32
  trap, but they have been. And so they've just been running with it. Well, a huge problem emerged in
• 36:37
  2022 because a little institution called the Fed started to hike. And that hike resulted in a huge
• 36:44
  interest rate differential opening up between the US and Japan. So it's the yen carry trade.
• 36:49
  Yeah. And the yen carry trade blew out the yen from 110 to the dollar to 160 over the course of
• 36:54
  2022. Do you want to just explain the dynamics of the yen carry trade for anyone that's not aware?
• 36:59
  Sure, sure. So the yen carry trade is essentially, you know, borrowing in a cheaper interest rate
• 37:07
  currency in order to invest in a higher interest rate currency. So it's a rate arbitrage. But it
• 37:12
  can get obviously more complex than that because you have FX problems to deal with, right? And
• 37:17
  there's obviously different ways to play the yen carry trade, right? But the simplest one would go
• 37:23
  like this, you know, a Japanese investor or even an American investor goes to a Japanese bank,
• 37:28
  you know, opens up an account, they deposit some collateral, or they can even in some banks,
• 37:34
  they can get unsecured loans, they get it for, you know, 50 basis points, half a percent of
• 37:38
  interest or 0% interest, if you're talking prior to 2024. And then they loan, they take that,
• 37:47
  those yen, they take it to the foreign exchange market, they convert it into dollars or into,
• 37:51
  Australian dollars or into British pounds. Then they go invest in British gilts or US treasuries
• 37:59
  and they profit from the interest. And so for many years, it was literally 0% was where Japan was at
• 38:05
  and wherever the US was at, 4%, 5% was the yield you would make. And so that 5% may not sound like
• 38:12
  a lot, but when you multiply it by hundreds of millions or billions or trillions of dollars,
• 38:16
  that's a lot of money and hedge funds institutional traders uh retail traders right family offices
• 38:22
  banks all take advantage of this and it's estimated the yen carry trade is you know somewhere north of
• 38:28
  four to five trillion dollars um and if you include all the derivatives it's probably north of 10
• 38:33
  trillion so it's a huge huge trade and um it's one of the driving factors that's pushed the yen weaker
• 38:40
  for the last three or four years.
• 38:43
  And so what's the state of that?
• 38:45
  So what happened when the US started raising rates?
• 38:47
  Like have Japan followed suit?
• 38:50
  So, okay, so initially they decided to,
• 38:53
  you know, try to fight the fire with more fire, right?
• 38:56
  So let's go back to where we were talking,
• 38:59
  you know, earlier.
• 39:00
  The Fed starts hiking in March of 2022.
• 39:03
  The interest rate differential starts to explode, right?
• 39:07
  And not only does Japan have rates at 0%,
• 39:09
  in 2022, but they also haven't moved rates since 1999, February. So they've literally had 23 years
• 39:19
  of never changing their interest rate policy. It's been basically zero to slightly negative,
• 39:24
  to like negative 10 to 20 bps for two and a half decades. And so for interest rate traders,
• 39:30
  which have to also worry about interest rate risk, right? Like what if Japan hikes?
• 39:33
  This is the clearest signal. They borrow as much yen as they can, and they all convert it to USD.
• 39:39
  and they start buying US treasuries.
• 39:42
  The problem is what that functionally does
• 39:44
  is they're selling yen,
• 39:46
  which lowers the value of the yen
• 39:48
  and they're buying dollars,
• 39:49
  which inflates the value of the dollar.
• 39:51
  And so by doing that directionally all year,
• 39:55
  the yen goes from 110 to 160 by September of 2022.
• 39:58
  Now on September 18th of that year,
• 40:02
  the BOJ starts to panic
• 40:03
  because the yen starts to reach the 160 mark,
• 40:06
  which is one of the red lines of
• 40:08
  like, you know, very severe currency depreciation.
• 40:11
  So they decide to initiate a currency intervention
• 40:15
  to the tune of like $38 billion.
• 40:18
  And it whacks the yen down to 151 You know the yen slowly recovers In October they follow it up with more interventions more 30 billion billion clips
• 40:27
  firing ammo clips at the market,
• 40:28
  trying to blow out traders.
• 40:30
  And what it does is it just buys them time
• 40:33
  because they're using,
• 40:34
  they're burning their reserves to do that, right?
• 40:36
  And meanwhile, while they're doing all this stuff,
• 40:39
  and this just shows you the insanity
• 40:40
  of Japanese monetary policy,
• 40:42
  they're still doing QE.
• 40:43
  They're still running yield curve control.
• 40:45
  So they're burning literally $30 billion a month
• 40:49
  on the foreign exchange interventions.
• 40:51
  And on the other hand,
• 40:52
  they're printing like $20 billion USD a month
• 40:55
  for their yield curve control program.
• 40:57
  Because the more yen they print,
• 41:00
  the more JGB yields go up
• 41:02
  because obviously people get worried,
• 41:03
  oh no, JGB yields are going up.
• 41:05
  And so because they have this yield curve control,
• 41:08
  which is basically this cap on interest rates
• 41:10
  and at the time I was set at zero,
• 41:11
  So anytime the yield starts to threaten to trade out of the negative zone, they just print infinite yen and buy enough JGBs so that the yield goes back down to the negative bound.
• 41:24
  And so it just happens over and over again where in the same months, they're literally like, oh, let's go buy yen over here.
• 41:30
  And then let's go, oh, print yen over here.
• 41:32
  And they're just like doing the same thing, burning the kettlehead belt ends for months.
• 41:37
  And then, you know, obviously they start to panic because the interventions aren't doing enough.
• 41:41
  So December 2022, they do their first move, which is they change the band of yield curve control from the negative bound up to a range of zero to zero and a half percent. So they finally move it like kind of out of the zero bound. Not really, but like it's no longer pinned at exactly zero. Right. It can go up to half a percent for the 10 year. We're talking about the 10 year JGB. Right. This isn't their T-bills. This isn't their short term debt. This is their 10 year bond. They're like, OK, maybe we'll let people earn half a percent over 10 years.
• 42:11
  you know, a year on 10 years. And then, you know, that buys them a little bit of time that causes a
• 42:17
  margin call for the Japanese securities clearing corporation that in December of that year.
• 42:23
  By the next June, the yen is back at 150 again, and they start panicking. So they move the yield,
• 42:30
  the band again. And then that like, you know, causes a bunch of carry trade unwind and panic.
• 42:35
  And then their stock market, you know, falls 12% in a day. And then they, you know, the situation progresses over 2023, 2024. 2024 comes around, they do more interventions in May and June, and then they move the band again.
• 42:48
  and you know by you know there's a lot of obviously like i could list every single date and what they
• 42:54
  did at every single point but the long and short of it is by you know 2024 they had burned through
• 43:01
  120 billion dollars of interventions and they'd lifted the caps on yield curve control higher and
• 43:06
  then eventually um they had completely eliminated uh yield curve control altogether by 2025 um and
• 43:14
  then they also obviously hiked out of the zero bound uh starting in in um 2024 they'd gotten
• 43:20
  in march of that year they'd completely gotten out of the zero bound and then they did a half
• 43:24
  point hike uh or up to half a percent and right now they're actually having a meeting because
• 43:29
  they're they're considering hiking again to 0.75 percent um and so well actually i might have that
• 43:37
  wrong i think if they're at 0.75 they might hike to one percent so they might hike another 25 bits
• 43:41
  um and so the point is like they basically tried they threw everything but the kitchen sink at the
• 43:47
  yen uh carry trade they threw all they could at the at the weakness the yen weakness and none of
• 43:53
  it worked and so now they're finally trying their last bazooka which is actually hiking rates and
• 43:57
  trying to normalize with the u.s the problem is that long term that is completely unsustainable
• 44:02
  because their debt to gdp is so high yeah yeah so i mean it seems completely unsustainable i i
• 44:09
  none of this makes sense when you look at it.
• 44:11
  Like, will Japan be able to survive this?
• 44:14
  Well, not in its current state, right?
• 44:18
  Like, the Japanese economy is still, like we said,
• 44:23
  still dealing with the repercussions of what happened in 1989.
• 44:26
  And it hasn't fleshed that out.
• 44:28
  And unfortunately, as you know,
• 44:29
  like the only two ways to deal with a massive debt overhang
• 44:32
  is default slash deflation or hyperinflation
• 44:37
  or financial repression, right?
• 44:39
  if you don't want to cause hyperinflation, let's burn the debt off at 15% inflation a year and
• 44:46
  cap yields at 5% a year and just burn everyone out over 20 or 30 years. That's basically the
• 44:52
  sovereign playbook. That's what Japan will have to do. And that's not something they want to do,
• 44:58
  but it's unfortunately the grim reality that they're facing because with 260% debt to GDP,
• 45:04
  120% private debt to GDP with the oldest and most aged demographic in the world and the lowest
• 45:13
  birth rate in the world, they don't really have an option to grow their way out of this.
• 45:19
  That they could have maybe had an argument for that in the 60s and 70s. Their only option is to
• 45:26
  financially finagle their way out via inflation or deflation somehow. And so with the debt to GDP
• 45:31
  where it is. I mean, we're talking two to three decades of five to 10% inflation to really get
• 45:38
  this thing done, probably 10%, 10, 10, 15. And that just means that the average Japanese person
• 45:45
  who's invested in bonds is going to get absolutely destroyed. This is a bit of a tangent, but do you
• 45:50
  think the fact that they've got one of the lowest birth rates in the world is down to the lack of
• 45:54
  growth and sort of nihilism within the country? That's definitely part of it. You know, there's
• 46:00
  this really good subsec post i read a while back called no country for young men um which is
• 46:06
  obviously a play on the movie title no country for old men and it was about the bank of japan
• 46:10
  and how the bank of japan and central banking in general has kind of emasculated young men
• 46:16
  by eliminating uh risk taking but also obviously eliminating the you know the penalty for excessive
• 46:24
  risk taking and so um what they argued in that piece was that the average japanese young man
• 46:30
  And basically, instead of having, you know, a severe depression where everyone lost their job and, you know, young men are forced to go out on the street and find work or create work or create businesses or do something, right?
• 46:41
  Like we had our Great Depression and we, you know, enrolled hundreds of thousands of young men to rebuild our national parks and to build trails and the Hoover Dam.
• 46:50
  And we did all these public works projects.
• 46:52
  Instead of doing that, the Japanese took the comfortable way out, right?
• 46:56
  They just said, we'll lower rates to zero.
• 46:57
  we'll do enough QE so that the stock market stops falling
• 47:00
  and everyone can go home and play video games
• 47:03
  and we'll just relax
• 47:04
  and what that did is just completely emasculated
• 47:08
  and eviscerated the vital life force of that entire generation
• 47:12
  and so there's actually a word
• 47:14
  I can't say the word in Japanese
• 47:15
  because I don't speak Japanese well
• 47:17
  but there's a word for these people
• 47:19
  but it translates to the lost generation
• 47:20
  so anyone born in the 1970s
• 47:23
  who was basically graduating college by the early 90s
• 47:26
  uh, they basically stayed at home. They didn't get a job. They didn't get a career. They didn't
• 47:30
  get a girlfriend. They didn't get a wife. And obviously that, that kind of dominoes down,
• 47:36
  downstream the society, because when people don't get married, don't have kids,
• 47:39
  then their kids don't have kids. And that just means the demography rapidly, rapidly changes.
• 47:46
  And, uh, you know, it was, this was basically equivalent to almost a war, right? Um, if you
• 47:52
  look at the birth rates and their collapse in the 90s and 2000s it was basically just as bad as as a
• 47:59
  as the world war was initially um and the problem is you know until this financial situation economic
• 48:04
  situation is resolved we're not going to get that baby boom uh like we did after world war ii it's
• 48:09
  crazy it's like instead of facing sort of the harsh reality of life they've just been sedated
• 48:13
  through this period yeah the key word that kept coming back to me was zombified or like it's like
• 48:18
  that just very well encapsulates the entire Japanese economy.
• 48:24
  So people might be listening to this being like, why is Japan so important here?
• 48:27
  Why are you talking about Japan?
• 48:28
  This is a Bitcoin show.
• 48:29
  Most people listening are in America or the UK or in Australia.
• 48:33
  Do you see this sort of Japanese playbook coming to these other countries?
• 48:38
  I think, well, that's what I'm worried about.
• 48:39
  I think it could, right?
• 48:42
  You look at the zero interest rates, the QE, right?
• 48:46
  and then obviously the subsequent inflation
• 48:48
  and all this financial engineering
• 48:49
  that's gone on in the West.
• 48:50
  And it's basically a derivative
• 48:52
  of what's happened in Japan.
• 48:54
  So like we mentioned at the outset of the show
• 48:56
  or maybe right before the show,
• 48:58
  Japan is the monetary experiment lab of the world, right?
• 49:02
  QE was created there.
• 49:03
  Yield curve control was created there.
• 49:05
  0% interest rates and negative interest rates,
• 49:07
  that was created there.
• 49:09
  The Eurozone, the US, right?
• 49:11
  Canada, like the entire global monetary system
• 49:14
  was basically just copying what Japan had done 10 to 15 years earlier.
• 49:18
  And so whatever, you know, whatever playbook that Japan chose the world
• 49:22
  is a potential playbook that other central banks could try to implement.
• 49:26
  And it might sound, you know, harsh.
• 49:27
  It might sound cruel, right?
• 49:29
  Because especially if you look at the human cost,
• 49:31
  you know, suicide became the leading cause of death in Japan by 1993.
• 49:36
  And there were, you know, tens of thousands of suicides
• 49:39
  every single year in the country.
• 49:42
  It was obviously became one of the highest suicide countries globally because of the economic malaise, because young men suddenly weren't able to find a job, weren't able to find a girlfriend, weren't able to provide for themselves or anyone else. And especially as a young man, like when you lose that life purpose, when you lose that reason for being, it can be extremely debilitating and depressing. And for many people, it's just too much.
• 50:04
  But that cost, right, that cost on society, it may sound like it's too much.
• 50:08
  But when you look at it from a central banker's perspective, their worry is security and stability.
• 50:14
  And what they would say is, hey, if we allow a deflationary collapse, if we allow 40% of the banks to fail and M2 to shrink by 30%, 40%, and a huge Great Depression event to happen, there might be crowds coming with pitchforks for the central bankers.
• 50:31
  Yeah.
• 50:32
  Right?
• 50:32
  For the people in power.
• 50:33
  They don't want that. So what do they do? They say just same thing as like kind of more liberal
• 50:37
  socialists say, let's socialize the cost. Let's make everybody feel the pain. Let's sedate
• 50:42
  everybody. Instead of isolating the pain to the few people and the specific people who took on
• 50:47
  way too much debt and absolutely wiping them out, we're going to just make everyone hurt a bit and
• 50:52
  make them hurt for the rest of their lives. And so that's just the playbook. And unfortunately,
• 50:56
  I think that's what the West was doing for the 2010s and 2020s. If we're not careful,
• 51:02
  is what they'll try to do in the 2030s as well.
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• 53:57
  So when you look at like the US situation now, obviously, like the very recent news is that it
• 54:02
  looks like everything in Iran is sort of coming to a close. Like we'll see if that actually happens.
• 54:05
  But like, what do you expect to happen in the economy there now? Do you think rates will continue
• 54:10
  to go up? Like I know there's been a lot of talk about that with Walsh. Do you think inflation is
• 54:14
  going to be sustained for a long period of time? What do you see happening?
• 54:18
  Well, I think obviously long-term, my view is similar to all the other macro analysts.
• 54:23
  It's undeniable.
• 54:24
  Inflation is going to have to creep up just because of the fiscal situation, right?
• 54:28
  And the Fed is going to eventually have to start QE.
• 54:30
  What Warsh wants to do, which is to lower rates and decrease the size of the balance
• 54:35
  sheet, is kind of a paradox, right?
• 54:38
  It's an oxymoron.
• 54:40
  There's been basically no central bank governor for the last 30, 40 years that's been able
• 54:45
  to do opposing monetary policies in the long term, right? For short term, sure. But, you know,
• 54:52
  Powell did the same thing. Yellen did the same thing. Yellen wanted a higher stock market and a
• 54:57
  lower Fed balance sheet in 2018. So they started laying off, you know, U.S. Treasuries started
• 55:02
  shrinking the balance sheet. By October 2018, the U.S. stock market was having, you know,
• 55:06
  four or five red days every single week. And by December, it was officially in a bear market. And
• 55:12
  we had the worst December Christmas since 1934 in December 19, 2018.
• 55:18
  So it was a horrendous crash.
• 55:20
  And then, of course, what happens in January of 2019,
• 55:23
  they reverse course, right?
• 55:27
  And by September 2019, COVID starts.
• 55:30
  We have the repo madness.
• 55:31
  And then QE comes in wholesale in early 2020.
• 55:35
  So we reverse that very quickly.
• 55:37
  And that's the same issue I see with Warsh
• 55:39
  with every other central bank governor
• 55:41
  that's gone before him.
• 55:43
  You know, they may want to lower inflation
• 55:46
  and lower rates and, you know,
• 55:48
  thread this needle any way they can.
• 55:51
  The problem is the numbers won't let them, right?
• 55:54
  The U.S. Treasury debt is growing way too rapidly.
• 55:58
  The interest expense is growing at 12% a year.
• 56:00
  The U.S. economy, you know,
• 56:01
  the last FedNow forecast was 1.6%.
• 56:04
  Federal tax receipts or interest expense
• 56:08
  as a percent of federal tax receipts is now 24%.
• 56:13
  So basically a quarter of all your tax dollars
• 56:14
  is just going to pay the interest on the debt.
• 56:17
  Interest is now the largest line item.
• 56:20
  And I think it's very close to defense.
• 56:22
  So some months it's less than defense,
• 56:24
  but a lot of months it's more than defense.
• 56:26
  It's at 1.2 trillion a year.
• 56:28
  And if you don't get rid of that, right,
• 56:31
  the US fiscal situation continues to worsen
• 56:33
  and more money needs to be created to pay that off.
• 56:35
  And so that just causes secular inflation.
• 56:37
  now for the for the iran war ending i think that's obviously a good thing short term that
• 56:43
  lets some of the pressure and the steam out of the bag um but the long-term issue still hasn't
• 56:48
  been resolved and uh the the money we've spent on this war right 300 billion dollar reconciliation
• 56:54
  deal which trump is saying that not all of that is going to be paid by us it's going to be paid
• 56:58
  by the gulf states which yeah i good luck convincing them and to pay for war that they
• 57:02
  didn't even fight in and didn't they didn't want want you know i i don't see how that that plays out
• 57:08
  i mean there must be something in that deal for them as well that probably comes from the u.s but
• 57:12
  um it's like it's funny because obviously people talk about the big print in bitcoin all the time
• 57:17
  and and it does seem inevitable that at some point that'll happen but is your take really that even
• 57:22
  if the big print happens it won't be just straight up qe like we've had in the past yeah yeah um i
• 57:29
  think it'll be a mix of liquidity measures, right? Capturing of retail deposits, the BTFP
• 57:37
  reimagined, right? Yield curve control. Yield curve control. And they'll even probably invent
• 57:44
  new things, right? Like these people, although we are Bitcoiners and we don't like central planning
• 57:49
  and Keynesian economics and people inflating our money away, I agree it is immoral. But it is
• 57:54
  important to understand like who your opponent is. Like these aren't stupid people. These are
• 58:00
  people with PhDs in economics. And if they're at the helm of the monetary system, they can probably
• 58:05
  figure out new ways to, you know, create liquidity or to kick the can down the road further than you
• 58:10
  think they can. You know, the prime example I think of is something I found very early in my
• 58:15
  macro research, which is in, you know, 2013 and 2014, after the, you know, huge fallout of the
• 58:21
  Great Recession and the global financial crisis, you know, banks were looking for new types of
• 58:27
  high-quality liquid assets to hold on to, and mortgage-backed securities were obviously not
• 58:31
  one of them. And the Fed and the CFTC and the OCC and other institutions decided, hey, why don't
• 58:39
  we create new laws that basically make money market funds invest, you know, have a section
• 58:44
  of them called government MMS invest 99 of their you know total fund AUM into government bonds Because before they were just optional but now let make it a regulatory requirement And then let also make it a regulatory requirement
• 58:58
  for banks to hold treasuries as well.
• 59:00
  So that forced, obviously, a lot of bank capital
• 59:03
  into treasuries that wouldn't have otherwise gone there.
• 59:05
  And who's to say that they're not going to do that
• 59:07
  in the future with deposits?
• 59:09
  That they're not going to say,
• 59:09
  oh, hey, every bank deposit,
• 59:11
  the $19 trillion of bank deposits in the US,
• 59:13
  they all have to be backed one-to-one
• 59:14
  by US treasury bills, four-week bills.
• 59:16
  So banks, you got to go out and buy all this treasury debt.
• 59:21
  They could do that.
• 59:22
  And that would be another way to increase demand for treasuries without necessarily,
• 59:25
  you know, printing more money immediately.
• 59:28
  I mean, the inevitable thing is the fuckery is going to continue.
• 59:32
  And like the good thing about Bitcoin is you can just buy Bitcoin and kind of ignore all
• 59:35
  this stuff.
• 59:36
  Yeah, absolutely.
• 59:37
  What is your take for Bitcoin?
• 59:39
  Like get over a long enough time frame.
• 59:40
  What do you think Bitcoin becomes?
• 59:42
  I think, you know, Bitcoin is such a fascinating topic because as you know, like when you look at it from different perspectives, it can go into so many different, you know, it can go and fit into so many different disciplines and applications from philosophy to, you know, cryptography and cyberpunk culture to, you know, future spacefaring energy money, right?
• 1:00:08
  But the main problem that I see, which is something that kind of Brent Johnson has pointed out to me and some others as well, is that the current system favors inflationary currency with a continually expanding supply.
• 1:00:23
  And Bitcoin, being a scarce asset with a finite supply, is going to suffer from what's called Gresham's Law, which is that bad money drives out good.
• 1:00:31
  right and Gresham's law applies up until basically complete monetary collapse at which point it flips
• 1:00:37
  into tier's law and tier's law is the opposite good money drives out bad so like in a hyperinflation
• 1:00:42
  in Weimar Germany what do people do they all by the very end they're all burning wheelbarrows of
• 1:00:47
  cash and they're all trying to get their hands on dollars and pounds and gold bars right but that
• 1:00:53
  doesn't happen till the very end because in the beginning the the slowly depreciating currency
• 1:00:59
  The currency dealing with 2% inflation a year, that is actually much more spendable in the real economy than the currency gaining 5% a year, like let's say gold would be or Bitcoin would be.
• 1:01:11
  And so that means that people, like the market generally, doesn't have much demand to spend it.
• 1:01:16
  And again, if you go around and ask Bitcoiners, you know, how much Bitcoin do you spend?
• 1:01:22
  Most of them are going to be like, why would I spend it?
• 1:01:25
  This is an investment.
• 1:01:26
  This is going to go up 10x.
• 1:01:27
  you know
• 1:01:28
  Taylor says it's going to go to a million
• 1:01:29
  right
• 1:01:30
  and whether or not you believe that
• 1:01:31
  I think all of Bitcoiners
• 1:01:32
  obviously believe
• 1:01:32
  it's going to go much higher
• 1:01:33
  you know my target's
• 1:01:34
  300k in the next two years
• 1:01:36
  but
• 1:01:37
  even if
• 1:01:39
  you know
• 1:01:39
  or especially if you believe that
• 1:01:42
  you'll want to hold on
• 1:01:43
  to every sat you can
• 1:01:44
  and so
• 1:01:44
  spending a little Bitcoin
• 1:01:45
  here and there
• 1:01:46
  might be optional
• 1:01:46
  but you would never want to
• 1:01:47
  spend your whole stack
• 1:01:48
  and so that's going to prevent
• 1:01:50
  Bitcoin from being
• 1:01:51
  truly adopted as a currency
• 1:01:53
  especially in the short
• 1:01:54
  to medium term
• 1:01:54
  up until we see
• 1:01:55
  very severe
• 1:01:57
  fiat collapse. Because Bitcoin, I think, to be adopted as a money and as a true, true medium of
• 1:02:03
  exchange, it's not only going to require the attractive force of it being superior, it's also
• 1:02:09
  going to require a repellent force of the old system dying. Which, by the way, this is exactly
• 1:02:16
  how every reserve currency has taken place. It wasn't just, you know, the US dollar didn't become
• 1:02:21
  the US dollar just because the US is a great country. Oh, it's amazing. It's such a good,
• 1:02:24
  you know, a good idea to buy U.S. dollars. It's also because the British were decimated by World
• 1:02:31
  War II, decimated by World War I, and they started losing all of their colonies within 15, 20 years.
• 1:02:37
  And so you look at the, you know, the rates of the British pound and the U.S. dollar and the amount
• 1:02:41
  of trade volumes they had, it started collapsing, not actually right after World War II, it started
• 1:02:46
  collapsing in the early 50s because that was the point where all of the British colonies started
• 1:02:52
  announcing independence from, you know, Great Britain and the endemic, you know, demand that
• 1:02:59
  they'd created, the structural demand they'd created started falling apart. And then obviously
• 1:03:03
  with that power vacuum, it all flowed to the US dollar. So until we have those two things happening,
• 1:03:08
  not only the attractive, you know, pulling force of Bitcoin being the superior money, but also the
• 1:03:14
  pushing force, the repelling force of the old fiat currency really falling apart. I think Bitcoin
• 1:03:20
  being a true currency is not going to happen. I mean, that's a very long road to getting to the
• 1:03:26
  point of being sort of the global reserve currency, but do you think it can become
• 1:03:29
  like one of a, maybe a basket of global reserve assets before that?
• 1:03:34
  Absolutely. Yes. And so this is where like, I have the caveat, right? And where I piss off
• 1:03:39
  both the Bitcoiners and the fiat MMTers and like everybody, oh dude, you should see my Twitter,
• 1:03:45
  dude. Anything I say, everybody gets pissed at me. I have Bitcoiners saying, oh, you're
• 1:03:49
  a total shill.
• 1:03:50
  And I like no guys I just think I more realistic and more level headed because I am a Bitcoiner and I do think obviously in the long run Bitcoin will win right The scarce assets will win The question is how do we get there
• 1:04:01
  And the idea that the dollar hyperinflates tomorrow and we all are using, you know, basically like relays and Moon Wallet to zap sass to each other tomorrow is not realistic.
• 1:04:15
  Now, a Bitcoin as a store of value is obviously it's proven its use case and it's going to
• 1:04:19
  continue to prove its use case over the next decade.
• 1:04:22
  And so for it to be a reserve asset is definitely valid.
• 1:04:28
  And that's something I pointed out in one of my recent subsec articles.
• 1:04:31
  I made the case that like, okay, you look at current reserve currencies, right?
• 1:04:36
  And you look at former reserve currencies and how they lost reserve currency status and
• 1:04:41
  how it changed.
• 1:04:42
  Well, where most people would look at like the trade data, right? Like how many dollar transactions are happening per month? You know, what's the total notional volume of British pound transactions happening in April 1951, right? That was like the last indicator of collapse.
• 1:04:58
  the first thing was that people started to divest from the bonds of the reserve currency.
• 1:05:05
  So the total rate of investment in British gilts, right,
• 1:05:10
  started to collapse in the 1930s and then more in the 40s, obviously,
• 1:05:14
  then increasingly in the late 40s and early 50s,
• 1:05:17
  even before the trade data started to show it.
• 1:05:19
  So I was looking for that in this, you know, for the U.S. dollar,
• 1:05:23
  for the U.S. treasury market, and we started to see that same thing play out.
• 1:05:26
  And this is something Grohman has pointed out many, many times.
• 1:05:28
  Um, you know, from 2008 to 2015, we had a net issuance of $8 trillion of total, uh, net new government debt, right? Foreigners bought 71% of that. They bought around 6 trillion of it. Um, from 2015 to 2022, we issued around $10 trillion and foreigners bought 15% of that.
• 1:05:52
  So we went from foreigners buying the majority of net new debt, so China, Japan, Russia, all these other countries, buying a ton of U.S. debt to basically finance our deficits to basically them not financing us on net at all.
• 1:06:07
  That's not to say they're all going to sell it all tomorrow, but you look at the trend, and in August of 2025, there's that famous chart that total value of global central bank gold holdings surpassed the value of their treasury holdings.
• 1:06:22
  And China, Russia, obviously, have been off-laying U.S. Treasuries for years.
• 1:06:27
  And they've been trying to divest from the U.S. Treasury market for years.
• 1:06:31
  And it makes sense because what are U.S. Treasuries?
• 1:06:35
  They're basically long-dated U.S. dollars.
• 1:06:37
  And so if you're going to get rid of, if you're looking at the entire U.S. dollar complex,
• 1:06:42
  what would you get rid of first?
• 1:06:43
  Your most liquid, easily tradable dollar that's like a cash deposit at a bank?
• 1:06:48
  No.
• 1:06:49
  You'll get rid of the thing that's locked up for 30 years, right?
• 1:06:51
  You'll sell your U.S. Treasury bonds, the long bonds, and then you'll move down the curve.
• 1:06:56
  Especially when you add what happened with the Russia's Treasuries and these assets getting frozen.
• 1:07:00
  That's another risk to add onto the top of that.
• 1:07:04
  Yeah, exactly.
• 1:07:05
  So it's much easier, ironically, obviously, it's much easier to freeze U.S. Treasury bonds than it is even to freeze dollar-linked deposits.
• 1:07:15
  Because there's only so many U.S. Treasury bonds, but there can be as many U.S. dollars as they want to lend into existence.
• 1:07:20
  And so the system kind of encourages this way of transitioning.
• 1:07:28
  So watch the 30-year bonds, watch the 20-year bonds on foreign central bank balance sheets.
• 1:07:32
  That will tell you if they're truly deciding to move away from the dollar.
• 1:07:35
  And they are.
• 1:07:36
  You know, they've been making those moves.
• 1:07:38
  But it is a slow process because, as Brent points out, like 55% of global trade still
• 1:07:44
  invoicing dollars, 80% of interregional trade invoicing dollars, 59% of global forex and
• 1:07:49
  reserves are still in dollars.
• 1:07:50
  It's basically been flat for the last five years, even despite all the de-dollarization talk.
• 1:07:56
  So the real movement has been happening in the treasury market, not in the actual FX trade data.
• 1:08:03
  I mean, it's no wonder that the current US admin are so keen on stablecoins,
• 1:08:07
  because that's like one last chance to save the bond market, I guess.
• 1:08:11
  Yeah, yeah, yeah.
• 1:08:12
  But my concern with that, obviously, is even though, obviously, like I said, it's better,
• 1:08:16
  because you can manufacture demand for treasuries
• 1:08:18
  rather than just allowing infinite debt growth,
• 1:08:22
  you know, better is still a relative term, right?
• 1:08:27
  That, even with the size of the stablecoin market
• 1:08:31
  where it is now and where it's projected to be,
• 1:08:33
  it still has to grow significantly more
• 1:08:34
  for it to actually make a big enough difference
• 1:08:37
  in the total rate path
• 1:08:41
  and the total debt path of the US government.
• 1:08:43
  And the bigger problem is like the real issues
• 1:08:45
  that need to be solved are the fiscal problems,
• 1:08:47
  which obviously no politician wants to touch.
• 1:08:49
  Oh man, it's going to be interesting.
• 1:08:51
  Just buy Bitcoin and sit on your hands
• 1:08:53
  and wait this thing out This has been really cool We should definitely do this again Is there anything else we not touched on though that you want to cover today um i mean i would just say like you know i think
• 1:09:05
  bitcoin what's so fascinating to me about it is that again most people view it as like this
• 1:09:11
  negative it's a negative thing that institutions and that global central banks that are you know
• 1:09:17
  Ron was accepting Bitcoin as payment for global trade. I view that as a massive positive. And the
• 1:09:26
  reason why is because the way that you will win with Bitcoin, the way that you'll take over the
• 1:09:32
  global financial system is not by creating an entirely separate one and forcing everyone at
• 1:09:38
  gunpoint to come to yours. It's by infiltrating and basically co-opting the existing mechanisms
• 1:09:45
  into yours, right? This is how the U.S. dollar gained permanence over the British pound is we
• 1:09:50
  basically copied the U.S. British or the British rails and we just did them with the dollar and we
• 1:09:56
  encouraged your dollar loans and encouraged your dollar deposits and just kind of proliferated
• 1:10:01
  their own system of, you know, gilt and British pound lending and improved upon it and did it
• 1:10:09
  again. And I believe that that is the way that this is going to play out. The main issue of macro,
• 1:10:17
  the main issue of especially US macro is that Triffin's dilemma, right? The US is forced to
• 1:10:23
  send out money to the global financial system to ensure that there's enough liquidity. Bitcoin
• 1:10:27
  solves that, right? Bitcoin actually obviates the need for that because Triffin's dilemma requires
• 1:10:33
  a centrally issued currency.
• 1:10:36
  Triffin's dilemma says,
• 1:10:37
  you know, oh, the U.S.
• 1:10:39
  is the sole issuer of currency
• 1:10:40
  and the rest of the world
• 1:10:42
  needs that currency.
• 1:10:43
  And so because of that demand imbalance,
• 1:10:46
  the U.S. has to decide
• 1:10:47
  whether they want to print more money
• 1:10:48
  than would otherwise be justified
• 1:10:50
  by their, you know, gold peg, right?
• 1:10:53
  Their peg of dollars to gold.
• 1:10:55
  Or if they want to not do that
• 1:10:56
  and the global system
• 1:10:57
  starves for liquidity
• 1:10:58
  and everything starts to seize up, right?
• 1:11:00
  That's an issue of a centralized issuer
• 1:11:03
  and a global demand.
• 1:11:05
  Bitcoin is a decentralized issued currency.
• 1:11:08
  Bitcoin doesn't suffer from this.
• 1:11:09
  If any country wants to earn Bitcoin, they can do it.
• 1:11:13
  If any country wants to trade Bitcoin, they can do it.
• 1:11:15
  There's no censorship rails that exist
• 1:11:17
  like that do with fiat.
• 1:11:20
  And so that means that in the long run,
• 1:11:22
  not only is Bitcoin a better reserve currency,
• 1:11:25
  it's the perfect reserve currency.
• 1:11:28
  And so I don't see how that doesn't dawn on people
• 1:11:32
  over a long enough time frame.
• 1:11:33
  I don't see how that doesn't make people realize,
• 1:11:35
  wow, like instead of buying gold,
• 1:11:37
  which is a good store value that can hold in my bank vault,
• 1:11:41
  I could buy Bitcoin and I can transact it digitally anywhere.
• 1:11:44
  And then if the Reserve Bank of Russia
• 1:11:47
  wants a payment from the Reserve Bank of China,
• 1:11:50
  I can just send a Bitcoin payment on chain
• 1:11:52
  and it can be verified by the entire global system
• 1:11:55
  in two or three blocks.
• 1:11:57
  And it's immutable and unchangeable.
• 1:11:58
  wow this is like this is better than than gold this is digital gold um and so i think that that
• 1:12:05
  once that starts to dawn on people especially people at the high level i think things will
• 1:12:09
  really start to change but again we're thinking about central bankers we're thinking about people
• 1:12:13
  who are boomers they're old they don't understand technology they don't understand bitcoin
• 1:12:18
  unfortunately um so i think it's going to take a while but i do think that that's the future and
• 1:12:22
  i'm obviously long run very bullish on bitcoin i do believe we're going to get to a million dollars
• 1:12:26
  a coin. I just think it's a matter of how we get there. I mean, Bitcoin is going to win. It's crazy
• 1:12:30
  that you can send billions of dollars for less than one sat per VBite. You spend fractions of
• 1:12:35
  a dollar to send a billion dollars. We are going to win. I think Bitcoin is already winning. It's
• 1:12:40
  just going to take some time. We're still so early, man. Absolutely. We are. We are. Roberto,
• 1:12:45
  this has been very cool. We'll have to do it again at some point for sure. We've been talking about
• 1:12:49
  making this show for a very long time, so I'm glad we finally did it. But tell everyone where
• 1:12:53
  they can find your sub stack and everything like that before we close out sure so i have a sub stack
• 1:12:58
  it's called dollar endgame and again that's where i kind of flesh out this like evolving theory of
• 1:13:03
  macro that i have um you can just go to dollar endgame.substack.com or you can go to my twitter
• 1:13:10
  profile which is at peruvian underscore bull i used to go by peruvian bull um and you'll find
• 1:13:16
  everything there i'm the only verified roberto rios peruvian bull account so if you see a bunch
• 1:13:20
  of clones, please don't pay attention to those. And I also have a brand new YouTube channel,
• 1:13:25
  and that's called Peruvian Bull as well. We have new mid-length, 15, 20-minute
• 1:13:31
  deep dive macro videos coming out. So go subscribe if you're interested.
• 1:13:37
  Awesome. I'll put all of that in the show notes, but thank you so much, man. I will
• 1:13:40
  definitely speak to you again soon. Awesome. Sounds good. Thanks for having me.
• 1:13:43
  Thanks, man.
• 1:13:50
  Thank you.