On the latest Debased podcast episode Jeff Deist, Peter St Onge, and EJ Antoni discuss the US and the potential for capital controls and their consequences. How would bank runs, dollar hegemony, and risk premiums change? Will foreign investment into the US fall?
Connect with EJ @RealEJAntoni and Peter St Onge @ProfStOnge
Connect with Jeff and Monetary Metals on Twitter: @JeffDeist @Monetary_Metals
Additional Resources
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
2:53 Stock Market Update
5:52 NVIDIA and Volatility
07:53 BTC ETF
11:54 Capital Controls
15:30 Bank Runs and Smartphones
17:05 Internal Capital Controls
22:58 Digital Dollar Enforcement
26:21 Fed Machinations
30:36 Federal Debt Service
35:13 Crisis and Recessions
36:58 Reserve vs National Currencies
38:07 The Different Dirty Dollars
42:13 Foreign Demand
46:50 The Dollar Reservoir
51:14 Bitcoin and Gold
1:03:22 Unearned Wealth
1:04:25 Friday Afternoons
1:05:41 Subscribe!
Transcript:
Peter St Onge:
Happy Friday at last. And we’ve got Juneteenth to look forward to here on Monday. So it is a long weekend for us.
Jeff Deist:
So Juneteenth is actually a Texas holiday, which has now been made into a fake national holiday. And I believe largely so that federal workers can have another day off every year. But nonetheless, Peter, we are more much more importantly, it’s Father’s Day. And I know you got a couple of kiddos, so it’s Father’s Day weekend.
Peter St Onge:
That’s right. I completely forgot about the kids. Thanks, Jeff. No, good point. Yes, but you’re right. That is the ultimate goal is that federal workers will have every single day off. It will be National Secretary’s Day. We’ll just keep going. And eventually, if we give them the entire year off, we can just give them the salary and they can stay home.
Jeff Deist:
So I want to take care of a couple of housekeeping items, first of all, before we get into this topic, which is capital controls. First of all, I wonder if you and EJ have noticed, but the S&P is up 16 % year to date. It’s on track to have its best first six months of a year ever. The Nasdaq is up 32 % year to date. And here we are, AustroLibertarians on Twitter moaning about how everything’s coming apart. So what’s going on with that?
EJ Antoni:
A couple of things come to mind right away. The first of which is that once you adjust market gains over the last couple of years for inflation, you realize that things are nowhere near as rosy as the nominal numbers are. In terms of why are they going up right now, though, I think some of that has to do with the fact that investors are still pricing in a much more doveish Fed than we’re likely to see. However, Powell is the same guy that said a 75 basis point hike was off the table and promptly delivered four in a row. So who the heck knows what this Fed is actually going to do. But as long as we have the easy money, we sometimes forget that stocks are not priced in real terms. They’re priced nominally. So if you continue to have the money printers rolling, you’ll continue to see asset bubbles everywhere, I think, including in stocks.
Jeff Deist:
Yeah, that’s so important. People think talking about about returns net fees and taxes, but really returns are net of fees and taxes in inflation. I was talking to Peter St. And he said something, he said, Oh, yeah, I was seeing all the hype on NVIDIA and I bought some options. And I just about had a heart attack because being the pessimist I am, I assumed he had shorted NVIDia and then he quickly assured me he had not and it’s on the other way. So Peter’s calling us. Peter’s calling from term is yacht, I think today.
Peter St Onge:
No, NVIDia
Peter St Onge:
Okay, Jeff, EJ, good to see you guys. This is my first time hosting a space so apologies if anything screwed up here at the time.
Jeff Deist:
Peter, happy Friday. Happy Friday at last. And we’ve got Juneteenth to look forward to here on Monday. So it is a long weekend for us.
Jeff Deist:
So Juneteenth is actually a Texas holiday, which has now been made into a fake national holiday. And I believe largely so that federal workers can have another day off every year. But nonetheless, Peter, we are more much more importantly, it’s Father’s Day. And I know you got a couple of kiddo s, so it’s Father’s Day weekend.
Peter St Onge:
That’s right. I completely forgot about the kids. Thanks, Jeff. No, good point. Yes, but you’re right. That is the ultimate goal is that federal workers will have every single day off. It will be National Secretary’s Day. We’ll just keep going. And eventually, if we give them the entire year off, we can just give them the salary and they can stay home.
Jeff Deist:
So I want to take care of a couple of housekeeping items, first of all, before we get into this topic, which is capital controls. First of all, I wonder if you and EJ have noticed, but the standard and poor is up 16 % year to date. It’s on track to have its best first six months of a year ever. The Nasdaq is up 32 % year to date. And here we are, Australia Libertarians on Twitter moaning about how everything’s coming apart. So what’s going on with that?
Peter St Onge:
Let’s see. Okay. Hey, EJ, you got to take yourself off mute there. Okay. Ej, do you have thoughts on what’s happening to the market?
EJ Antoni:
A couple of things come to mind right away. The first of which is that once you adjust market gains over the last couple of years for inflation, you realize that things are nowhere near as rosy as the nominal numbers are. In terms of why are they going up right now, though, I think some of that has to do with the fact that investors are still pricing in a much more doveish Fed than we’re likely to see. However, Powell is the same guy that said a 75 basis point hike was off the table and promptly delivered four in a row. So who the heck knows what this Fed is actually going to do. But as long as we have the easy money, we sometimes forget that stocks are not priced in real terms. They’re priced nominally. So if you continue to have the money printers rolling, you’ll continue to see asset bubbles everywhere, I think, including in stocks.
Jeff Deist:
Yeah, that’s so important. People think talking about about returns net fees and taxes, but really returns are net of fees and taxes in inflation. I was talking to Peter St. And he said something, he said, Oh, yeah, I was seeing all the hype on NVIDIA and I bought some options. And I just about had a heart attack because being the pessimist I am, I assumed he had shorted NVIDIA and then he quickly assured me he had not and it’s on the other way. So Peter’s calling us. Peter’s calling from term is yacht, I think today.
Peter St Onge:
No, NVIDIA covered my losses in Bitcoin, so I just broke even. No, one of my first mantras is every time you hear something is a bubble, get some options on that thing because most bubbles go on for a while. And so I confess I am a gambler. I’m a degenerate. I make fast money, but most of my money is in Bitcoin and gold. So I’ve broken even.
EJ Antoni:
Well, Peter, to your point, though, Tulipa mania went on for a very long time to the point where flowers were selling for some multiple of the average laborer’s annual wages. So the idea that you can’t make money on these bubbles, I think that’s silly. But at the same time, if we’re going to go down the road with the greater fool strategy, eventually, you might get caught with your pants down.
Peter St Onge:
Yeah, for sure. That’s why the options to limit the downside. But historically, probably the two biggest factors, I think investing anyway is number one, you need to know where you are in the cycle. For me anyway, that’s where Austrian economics is an absolute godsend. It can tell you, are you in the boom phase, in the bust phase. And we know it’s a cycle. Mainstreamers, all these things just fall out of heaven. My God, has this ever happened before? Everything they see, it’s like for the very first time, it’s like somebody with just horrible amnesia. They can’t spot any of the patterns. And to me anyway, that’s one of the most horrible things for an investor anyway in Austrian economics is understanding that this is a cycle. It will go on. The actors are going to play their parts like they have for a century. The Fed is going to do its thing and the government is going to do its thing with the fiscal. And it’s all extraordinarily predictable.
EJ Antoni:
But here’s the problem, Peter. When the cycle continues and then you’re dead. Timing is everything.
Peter St Onge:
Oh, for sure. Yeah. Well, that’s why, hence, most of it is in gold, which is basically agnostic. I think if you’re parking your money in gold or real estate, you’re basically saying, look, the water is too chop. I’m not going to go swimming in this one. I’m going to take a pass and swing at the next pitch.
Jeff Deist:
Here’s the thing about investments. When you die, you don’t want your wife and kids to be too happy. You want them to be happy and taken care of. But I just wanted to ask you guys, have you been following this new iShares Bitcoin trust? An application has been made to the SEC by our good, good friends at BlackRock, who apparently are batting nearly a thousand when it comes to SEC applications.
Peter St Onge:
Yeah, that I think is going to be a game changer. There have been a whole bunch of outfits that have tried to come out with Bitcoin ETFs for a long time. And the SEC’s position was that Bitcoin is too volatile or it’s manipulated. Which commodity is not manipulated? Even gold, which is an enormous market. There’s a lot of discussion about London banks and there’s a lot of games going on. Once you dig into the smaller commodities, things like coffee and copper, I mean, there’s manipulation, there’s volatility. Gold itself has doubled or dropped in half within a year or two period, several times since Nixon. That’s pretty darn volatile. So these were excuses so far. And I think in the Bitcoin community, people just felt like the SEC was trying to punt. They just don’t like Bitcoin, and so they’ve been trying to deny it. But of course, now we have an immovable force in the form of BlackRock, who I have to assume has paid everybody who needs paying. So this time it may actually happen.
EJ Antoni:
I’m actually told that some of the people at SEC have worked at Goldman Sachs and BlackRock and vice versa. That’s the rumor, Peter.
Peter St Onge:
That’s stunning. I don’t know if I.
Jeff Deist:
Believe in conspiracy theories. Well, we’ll leave it at that. But SEC and BlackRock, there’s just nobody to root for here. And I hate to see Bitcoin taking anything centralized in any way. I understand that this is an ETF. It’s really a trust, but it’s an ETF. So I understand it’s just not a welcome development from my perspective. But I wanted to just frame things really quickly. It promised to show at capital controls, which to a lot of people’s ears probably sounds farfet. That’s the thing that happens in Venezuela or Argentina or during World War II. But in fact, I would argue that it’s much more possible, much more likely here at home than we might care to admit and that we ought to be cognizant of it and prepare ourselves and protect ourselves from this thing. So last week’s show, my co host, Ben Naderlstein, is not with us today. He was with me for that show. I won’t disclose where he is. I’m just going to say he’s visiting his ancestral home in Eastern Europe, which is pretty cool, but I’ll leave it at that. But Ben and I had a conversation about what the deteriorating situation with the so called rule of law in the US means in terms of our own wealth and prosperity, because I think Americans are pretty clueless about the extent to which capital flows into the US, both in terms of people, foreigners and foreign banks and foreign governments buying treasuries, but also just capital investments in the private sector in large part because we are seen as having a relatively stable society in terms of our economy, in terms of our infrastructure, our banking system, our energy systems, but also due to the fact that if you
EJ Antoni:
enter into a contract in the United States, you generally expect it to be performed upon or at least enforced or remedied by a court of some kind. And so when you start to have a series of events, let’s say the crisis of 2008, which resulted in all kinds of unprecedented steps by not only the US Treasury in terms of bailouts, but also the US Central Bank in terms of asset purchases. When you have things like COVID come along and you have business lockdowns and shutdowns and supply chain disruptions basically by force of law, when you have things like rent moratorium, people buy properties thinking that they’re going to be paid rent by their tenants or that those tenants will be evicted. Well, that was off the table for a while. You saw a mortgage interest moratorium. You saw huge payments made to businesses who weren’t doing anything, weren’t producing a good Earth service as a like airlines during COVID. You saw all kinds of restrictions on movement. These kinds of things are not costly. And now I would argue that when you have an increasingly politically polarized US. You have red team and blue team viewing, for example, the indictment of Donald Trump through a very different lens that all of this bit by bit, 1,000 cuts is doing injury to the perception that America is run by the rule of law.
So if that’s true, capital might not be so interested in flowing into the United States. We’ve already seen attempts, the Bricks Nations, of course, are getting together in August to try to come up with some alternatives to this US dollar domination in the global financial markets. You see all kinds of reasons why the rest of the world might not want to be under Uncle Sam’s dollar empire. But the question becomes, as things get wiggier in the United States with respect to the dollar itself, and I would also argue with respect to entitlements, I would argue with respect to congressional spending and deficits, what might that mean for people wanting to do what they will with their capital who are already here? There’s a lot of different ways that could go. And what we consider capital controls, I think we should discuss, perhaps for starter’s peer, what are capital controls, but then what are some forms of capital controls that we don’t normally associate with the term?
Peter St Onge:
Yeah, well, this is something that’s been very topical. There’s been a lot of discussions, even on Bloomberg or Financial Times. You’ve got mainstream commenters now talking about the possibility of capital controls. In fact, the Fed has been talking about it. Since the March bank crisis, the Fed has been putting out paper after paper complaining how dangerous it is that bank runs go so fast. They keep blaming smartphones. And one of the most dangerous phrases you ever hear in politics is that they come in and they say, this time is different. Technology has changed. This is new reality. We can’t do what we’ve done for a century because whatever, fill in the blank. And in this case, it’s iPhones. So iPhones are apparently causing bank runs. Now, the difference here is that in 2008, bank runs took weeks. And now, indeed, because of cell phones, bank runs are taking hours. Now, the problem is not the cell phones, the problem is the freaking banks. That the banks are not supposed to be in solvent. But the problem here is that the Fed is putting out paper after paper about this existential problem, implying that they’d like to do something about it.
So what do you do about the fact that bank runs are taking hours? And the answer is called capital friction. You introduce some tool that discourages people from moving their money. If they don’t obey those tools, you can make it more difficult. You can have approvals on it. There’s a great book called American Default that talks about the whole episode in the 1930s where FDR seized the gold and basically nationalized the banking system. But in that book, he talks about the kinds of controls that used to exist in banks. Because remember, banks have been fractured or reserved for a long time, meaning that they’ve been essentially bankrupt for what about 150 years, ever since the tuffing system. And what banks used to do is that if the bank was in distress and you wanted to take your money out, literally what would happen is that you would take your money out, and then if you wanted to put it in another bank, the other banker would ask you for a letter from your previous banker indicating that you’re a good customer. And your banker would not issue that if the bank was in distress. So banks have been playing this game for a very long time.
And now what we’re looking at is you can force it. Because of the Bank Secrecy Act of 1970, that has given, really, government, fundamentally, regulators, complete control over your money. Now, allegedly, they do it because of money laundering and tax evasion and, of course, terrorists. But the end result is that they have total control. Your money is permissioned. It can only move if you get permission. And if there is some a bank crisis, there is a very real possibility that they’ll do what Justin Trudeu did last year in Canada. He froze all those accounts. Now he did it because he was alleging. Well, anyway, he didn’t like the protesters, but they can absolutely do that if they feel it’s necessary. So they could freeze your money in. Luke Groman had a… He did not mince words. He said that capital controls could amount to chaining the feeder doors shut before lighting it on fire. It could lock you in.
EJ Antoni:
And to be clear here, when most economists or political scientists use the term capital control, they are referring to cross border international transactions. In other words, some limitations on the open movement of capital across international borders. So that would be tariffs, taxes, prohibitions, volume restrictions, whatever that might be between two separate countries. But I think we could view capital controls a bit more narrowly than that for our discussion. I mean, anything that distorts or limits or affects your use of your capital, and that’s generally government or central banks, could broadly be construed. So when you mentioned the Bank Secrecy Act of 1970, which imposed a reporting rule, any transactions of $10,000 or more had to be reported to the Treasury Department by banks. And later on, with amendments to that bill, also with the Patriot Act itself, that was expanded to automobile dealers, jewelers, pawn shops, all kinds of non bank institutions. And of course, $10,000 in 1970 is something like $80,000 today. So you should be able to go buy a Lexus in cash and not have anybody report that. So I would argue that something like the Bank Secrets Act in and of itself, the fact that a cash transaction is actually above $10,000 report is a form of capital control.
It’s an attempt to steer your behavior in effect.
Peter St Onge:
Right. And then that brings us to the question of dedollarization, because if they put these kinds of controls on, like if they panic to a series of bank runs and start trying to put controls on, those controls are not only going to be on Americans, they’re going to be on foreigners. So at that point, it is a game changer for foreigners to start deciding where to park their assets. So all the trillions of dollars that foreigners have currently in US banks because they’re thinking the US is secure, it’s a rule of law, of course, my money is never going to be seized, it’s never going to be frozen. That completely changes the calculus for them at that point. And then we’re already seeing massive flight from the US dollar if capital controls are a reality in the US. And if they do it once, they will likely do it again and again. And at any rate, f ootballers will expect them to do it again and again. That could be catastrophic for the dollar. Ej, I want to get your thoughts on this, though.
EJ Antoni:
I think in some ways it’s helpful to view this from the standpoint of risk, at least when we’re discussing how are people going to react to things like capital controls. Anytime you have a risk of loss, you are always going to price in a risk premium. It doesn’t matter if we’re talking about something as simple as buying a bond or if we’re talking about some much more complicated financial or even other human interactions. So if you have a risk that a government is going to step in and somehow confiscate your private property, and they’re able to do that because that particular private property is, let’s say, priced in that government’s currency, you now attach a risk premium to that transaction. Again, whether it’s an investment or something else, it doesn’t really matter. But you’re going to attach a risk premium to that, which means that unless it somehow gets cheaper to compensate for that, you will engage in that transaction less. And a very practical example of that is simply reduced foreign investment in this country.
Well, I wonder if people understand the extent to which sanctions themselves are a form of capital Detroit. I was talking to an acquaintance recently, and in his online trading account, I don’t know if it’s ETrade or Schwab or whatever it was, one of the assets he owned over the past several years was Gasprom, the big Russian once formerly state owned oil company, which is now publicly traded. And so he can’t trade his shares. Those are frozen him. He’s a US citizen. He’s operating in the United States. So that’s a very small example of how this stuff begins to come home. But you could really take, I think, a bigger lens and argue, really, since the 1940s and 50s, after Bretton Woods, there’s been a variety of ways that at least the banking level, maybe not always on the individual level, that capital inflows and outflows have been controlled. Now, the US was the big winner coming out of World War II. We didn’t have the hardships and the rationing postwar that places like the UK had. Obviously, Germany was devastated. So we’ve had it relatively good. And part of that devastation in Europe, of course, and the capital controls imposed to try to, I guess, in a very cumbersome way, stem the bleeding on that.That’s in part the reason why the Eurodollar arose in Europe, because people are always looking for a way around this. And I was reading something last night that I didn’t know was very interesting. As late as the 1960s, there were weekend limitations on how much a Brit could take out of the bank for the weekend, like 50 pound limit, which I suppose was a pretty sum in the 1960s enough to go to the pub or the seaside or whatever you might want to do. But boy, oh, boy. Fast forward to today, I would argue something like a negative interest rate, which was very prevalent in the past decade on all kinds of Euro bonds. I mean, we’re talking about sovereign government debts trade nominally, not just real terms, but nominally negative interest rates. To me, that’s a fear of capital control on holding money and cash as opposed to forcing you to go out, perhaps, and use it to make a purchase or to invest in some stock or bond or something. If we look at the FABCA regime in the US, anyone who’s got a foreign bank account will be familiar with this little dental drill exercise every April when you’re doing your 1040.
A FABCA filing is an informational report to the IRS that you have what’s called a financial account held in an offshore jurisdiction, which A, is under their business. We’re not taxing wealth every April. We’re supposed to be taxing income. But, I wonder how many people do not have foreign bank accounts simply because they don’t want the disclosure of a FATCA filing or just the headache of maybe needing an accountant or checking the right box or whatever it might be. So it’s really if we consider how capital controls have worked on cross border transactions since, let’s say, World War II in the modern context. And then we layer on the level of surveillance and digital monitoring and digital enforcement, which can take place now. I mean, talk about digital dollars. For the people on this call, virtually every payment you make, whether you’re monthly, I don’t know, your mortgage, your rent, your buying at the store, I would argue that probably 90 % of all that is already digital. You’re not actually transacting with cash. So a central bank digital currency.
Peter St Onge:
Would.
EJ Antoni:
Just be the next step, really, in terms of centralizing the issuance of that. And then that, of course, as Neil Kashkari himself has admitted, would be a very virulent form of control. I think that’s the next step. I think that is a way to basically present a capital control in a way that doesn’t feel like capital controls must have felt after World War II.
Peter St Onge:
Right. And this is one of the subtext. When we’re talking about CBDCs and how they give so much control to bureaucrats, that they can veto any transaction, they could force any transaction, they could impose negative interest rates. All of these tools are actually available now. They can homebrew it. A CBDC makes it a heck of a lot easier. It’s the difference between doing it by hand and doing it by machine. And that’s a significant difference. But the US government specifically, whatever Americans may think about our country, we are almost unique in how much we are controlled by our federal government. I think there’s like one or two other countries in the world that tax you on a worldwide basis, for example, like Liberia, somewhere random. So if you move to another country, from the IRS’s perspective, you’re still at home. The entire world belongs to the IRS from their perspective. You mentioned on the FATCA, the IRS thinks that they want information from every single bank in the world. Really, it’s liberating to be from some ridiculous little country where they don’t chase you around the world. And they’ve installed this step by step. Each time, it was either for the terrorists or the money launders or the drug dealers.
It’s the same excuse every single time. And what they’ve now built is terrifying. It gives essentially all of the functions that we fear, rightly, in a CBDC, it is all there. And if we look at what’s happening with the banks right now, I know EJ has been paying a lot of attention to the money flows going out into money markets. That is signaling that the bank crisis is not over. What they have done cannot fix it. The money that’s flowing is flowing because interest rates are too high. There is only one solution to it, which is to go back to Zirt. Zero interest rates. The Fed cannot do that because it would cause inflation. And the one thing that the Fed fears most in the world is inflation because it would lose its independence. That’s its true goal. Screw the economy, screw the American people. It needs to keep its independence so that it can continue acting as a counter trading cartel. But EJ, you may have thoughts on the money flows.
EJ Antoni:
There’s a couple of things we can say here, not the least of which is the fact that a lot of times I think when we talk about capital controls, we’re talking about legislation, we’re talking about actions by the executive branch. But Peter makes a really great point that the Fed’s monetary machinations are effectively capital controls. They are in their own way manipulating markets. When you do things like create asset bubbles, you create distortions of prices and you get misallocations of capital. So I think we should keep in mind that these things don’t always need to be done through legislation, that they can be done through other means, such as these unelected individuals at the Federal Reserve. In terms of what they’re doing right now, and I hope I’m not hijacking the conversation here, but it really is amazing looking at things like reverse repurchase agreements, reverse repose, the interest on reserve policy, the Fed right now has essentially sidelined $6 trillion, an absolutely unprecedented amount of money. This is Ben Bernanke on steroids to a certain degree. And they’ve done it all in the name of trying to prevent inflation, as Peter pointed out. That’s the mortal enemy, right?
Is inflation. But the downside here is that number one, they’re starving the private economy for cash. You’re giving government all the loanable funds they need, but denying it to the private market. And then at the same time, they’re paying $800 million a day in interest. They’re paying it to big banks. They’re paying it to hedge funds, to money market funds, etc. So the politicians are getting paid, the special interests are getting paid. Except how is this going to end. They can’t scale it because if they do, that money gets out into the private economy, it gets into the banking sector, and now the money multiplier kicks in. And by the way, the Fed, very quietly during COVID, got rid of the reserve requirement. So now a single dollar could theoretically create an infinite amount of money. It’s no longer that magical 10 to 1 ratio. So they can’t stop. But if they keep going with this, what happens? They keep paying interest, which means they actually grow the money supply, which means they need to tighten harder and faster as time goes on. There literally is just no way this ends well. As I like to say, the Fed has the wolf by the ears, and they can neither hold him nor safely let him go.
This is just, I think, one example of how when you get these unprecedented interventions into capital markets, whether in this case it’s the loanable funds market or anything else, you’re going to meet with disastrous consequences. You have a handful of individuals imagining that they can somehow design and master a market that is determined by the interactions of billions of people.
Peter St Onge:
Jim Grant has a great line, the author, and was a Grant Interest Rate Observer. He says, The Fed has a dual mandate, arsonist and fireman. It starts the fires and then it rides in and pretends to put them out. And what happened with COVID, they bought the lockdowns. They had to bribe the population to accept those. That cost them so much money. And then they had the power grab. And so that involved so much more money. I think it was about 6 trillion that they pumped out during COVID. They have started a fire that they cannot put out. And so now that they’ve put on their pretend fireman hat, it ain’t working. And so the only way that this is going to end, either in a catastrophic economic crash, which does the deflation, then they get back to the next bubble, or they’re going to have to step out the system and they’re going to have to look to something like, what is it, capital frictions, capital controls.
Jeff Deist:
Well, the interest piece on the federal debt is interesting because we have to remember that this five point spike or whatever in treasury debt has really only been since 2022. So this is all just in the last year or so. If you look at the total average weighted interest rate on all outstanding US treasury debt, it’s still at or about below 2 %. Up until 2022, the average weighted interest rate on all US treasury debt was only 1.6 %. So that was how it was very easy for Congress to maintain at that point high 20 trillions worth of debt because the service on that debt, which we might call the minimum payment on a credit card, by the way, was very low. So now, even as that number creeps up to 2 %, we get up into $800 million a day, as EJ mentioned, in interest payments, which means pretty soon, if that creeps up to 3, 4, 5, that will very quickly swap federal spending, become the single biggest line item in the annual budget, bigger than so called defense, bigger than Social Security, bigger than Medicare. So that’s a big enchilada. That’s a lot of money to be paying out.
So it just deteriorates. And of course, in the meantime, Uncle Sam’s promising to pay all these military people. He’s promising to pay all those seniors that are Social Security and Medicare. He’s promising to pay Ukraine or whatever he’s promising, the question becomes, could inflation become really stubborn, really durable in the US? I won’t use the term hyperinflation because I think that’s subject to a lot of different definitions and in many ways, least likely here because monetary policy and currency wars are a relative game in a very important sense. So I won’t use that term, but I will say, what if there’s just persistent, stubborn inflation, double digit inflation for a decade or so? And that’s not far fetched. We more or less experienced that, maybe not for a decade, but in a portion of the ’70s and into the early ’80s. Then capital controls become, I think, more likely because generally, we associate capital controls with times when the economy is out of control in places like Venezuela, in places like Argentina in the late 90s, early 2000s. Unfortunately, Argentina is back to something like that. We had some capital controls for a period when Iceland had its meltdown in 2008.
EJ Antoni:
So all of these things that make us very concerned about the broader economy and inflation are also the things that ought to make us concerned about Uncle Sam resorting to capital controls. I don’t know about you, gentlemen, but when I read FinT wit or when I even worse, hold my nose and go out into the Financial Times or God forbid The Economist or even the Wall Street Journal, which I consider an excellent business reporting paper, but a horrible editorial line. I mean, talking about capital controls would be like talking about Martians. I mean, it’s just not done.
Peter St Onge:
Yeah. And the fiscal trajectory that you’re talking about. So currently, one year treasury is paying 5.3 %, and the debt payments are not that high because a lot of the debt is old. They borrow around 30 year terms, and so it had rates from during the zero interest rate period. So just as a thought experiment, if the entire federal debt were running on today’s interest rates, then you’d be looking at about 1.8 trillion in debt service, which is astounding. The entire budget wasn’t 1.8 trillion in early Obama. Might have been around there. That’s just debt service. That’s not even all the rest of the crap. They keep handing out trillions like candy. So you have this Build Back Better, the rebranded Inflation Reduction Act last year. You had student loans for 600 billion. That was just like an afterthought like, Oh, hey, by the way, here’s a little something for you guys to buy some boats. They’re talking about what, 300 billion for Ukraine? Ej, I think you’d seen something on that earlier today. Oh, this is… Yeah, please.
EJ Antoni:
Sorry. No, this is just absolutely atrocious. Now they want to start sending Ukraine not only our tax dollars, which is bad enough, but now they want to take the dollars that they confiscated from Russia. To be clear, these are not American dollars. These are dollars owned by the Russian people, by the Russian Central Bank, and they want to take those and now just gift those to Ukraine as well and throw that on the bonfire.
Peter St Onge:
Yeah. So it’s just an endless stream. There’s no countervailing force. Really, the only way to stop them doing this is crisis. And if a crisis comes in, then given a choice between cutting their spending and cutting our spending. They’ve already shown that’s a very easy choice for them. And so the problem is that that predicts a 1970’s economy where you’ve got multiple years of double digit inflation. The problem is that 1970’s only stopped because of Paul Volcker. Paul Volcker was appointed by Jimmy Carter, and to everybody’s surprise, he did what it took. He had a huge pair. He walked in and he jacked interest rates. So I think it was 19 %. It caused a horrible recession, yes, but it ended, in fact, the pair, but it ended the recession. The problem is that Jimmy Carter lost the election. Washington, the uni party learned its lesson. That is not going to happen again. There will be no President who intentionally appoints a Paul Volcker because that’s the end of his career. So as lucky as we got with Paul Volcker, that took Washington by surprise. They didn’t expect that one. I think it’s very unlikely that it will happen again.
Jeff Deist:
Yeah. Paul Volcker was the last chance, the last gasp of an attempt to have a capital based economy rather than a debt based economy. So I think we won’t see that again soon. But there are examples. Last couple of days, I’ve been reading up on Argentina, what’s still happening there today. And of course, the difference is that all of our examples of hyperinflation and resulting capital controls, all of our historical examples, at least in the recent history, let’s say the 20th century, these have been national currencies, the Weimar Deutschemark. We saw this in the former Rhodesia. We saw this in Venezuela a couple of different times. We saw this in Argentina. Talking about this in the context of the world’s reserve currency, the US dollar is a very different thing. It’s basically unprecedented since maybe silver had its meltdown centuries ago. And so we don’t know what that might look like. That’s certainly above my pay grade. But nonetheless, if you go and take a look at Argentina just over the last couple of years, it’s really interesting what happens when the government limits the amount of foreign goods you can buy or messes around with the exchange rate with foreign currency and also limits the amount of foreign currency you can exchange even at a hellish penalty.
So as a result, I found a really interesting article on medium, which I guess is still around medium. Com by a woman who’s talking about all the different dollars there are in Argentina. There’s the official dollars. So this is like the fictitious price of the Argentine Pesso. It’s devalued like 30 cents a day or whatever. There’s a savings dollar which you go purchase at a bank. There’s what they call a blue dollar, which is a colloquial term that in the United States we call black market. That’s a dollar that’s worth what it’s worth. And of course, we had this for many decades in the former Soviet Union. People were buying and selling all kinds of goods on the black market in the former Soviet republics. So that’s nothing new. But the interesting thing is they have something called the Netflix dollar. And this is because you pay a premium for a foreign service like Netflix, courtesy of the government. And it appears to be constantly in flux and you don’t really know until you get your credit card statement. But something like 45 % of the payment is in taxes. So the Netflix dollar, the Netflix Pay so it’s worth more.
And then interestingly, they even have a phrase called the Cold Play dollar. So apparently Cold Play a couple of years ago had a series of concerts throughout the country, and there was the face value of the ticket. And then what you actually had to do to get a ticket to go see Cold Play, I would take a hard pass on that one. But apparently, even in tough economic times, Cold Play sells tickets in Argentina. Who knew? But the point is that governments can do all kinds of things, including, and most fundamentally at the foundation, just try to fix exchange rates between, let’s say, the US dollar and another currency. They can do that till the cows come home. But people, human beings, will always go out and effectively try to get around this in the marketplace.
Peter St Onge:
Right. And we do see already a two tier dollar in the form of dirty money. So drug dealers, for example, they’ll get a hold of a bunch of dollars, and then they’ve got to pay somebody to launder those. And there’s a big difference, I guess it’s like a third or something. There’s a big difference between those two. And of course, the reason why clean dollars are worth more is because they can interact with the rest of the US surveilled financial system worldwide. But if we go to a system where US capital controls are aggressive, where they’re essentially trying to hide the Fed’s mistake by forcing people into one for or one institution or another, the whole thing falls apart. Because at that point, dirty money would actually be more valuable. Of course, dirty money is only valuable because it interacts with the banking system. The entire thing collapses. I think you could see a massive erosion in the dollar. Now, of course, people have to hold something. One of the mysteries, I think, of currency history has been that even when a currency loses backing, people still hold the darn thing. They treat it like it’s a token at Chuck E. Cheese or Ethereum, which is probably the same thing where it’s like the token that you have to use if you enter this establishment called the US. So it doesn’t necessarily collapse the zero overnight. But what does happen is that every other dirty shirt in the world, and there’s a lot of them, from the Euro to the Swiss Franc to the Japanese Yen, even to the Chinese currency, all of those start picking up tons of demands. And I think that that’s where we come into that double digit inflation. That, of course, would hit the entire US economy. That is something that the Fed, once that set off, the Fed can’t do much to stop it. You can’t hike interest rates high enough if foreigners no longer want to hold the dollars. And the subtext here is that the number of dollars floating around in the world is far, far higher than the number of dollars that America actually needs. But because foreigners for so long have accepted dollars because they’ve been relatively stable and have had rule of law, there are way too many dollars in the world. Maybe there’s two or three times more dollars that are needed.
That, the Fed will not be able to stop. Those will float around. There will be leakage from the internal dollars. That I think would be a catastrophe for the US.
EJ Antoni:
But Peter and Jeff, I think that is exactly the time when the government would step in and impose these kinds of controls on capital. A great way to prevent the flood of 70 years worth of trade deficits all reversing overnight when dedollarization finally gets cranked up to 11, which could happen soon, who knows? But whenever that finally does happen and you have that flood of cash, it has nowhere to go but the United States and it comes back here. That’s a great point. That would be when the government steps in with these kinds of capital controls to do anything and everything they can to limit how fast that money can get back here because that’s the only way they would be able to stave off that inflation. And who knows if, depending on how good they are at that, at putting up a wall, if you will, around the United States. I know that’s a taboo subject in some circles, but if they can do that, at least financially, then you could get into this bizarre scenario where the dollars worth significantly less overseas than it is here in the United States.
Jeff Deist:
What does that look like at the outset, though? Let’s say things begin to unravel internationally. What’s the first step? What do you do here at home? Do you simply tell people they can only take so much out of their bank, for example?
EJ Antoni:
I think it’s going to have much more, I think there’ll be much more of an impact in terms of international transactions. In other words, where it says on the dollar bill, which, by the way, we don’t actually have dollars anymore, we call them dollars, but a dollar is not a unit of currency, it’s a unit of weight. A dollar meant a certain amount of precious metal. What we have today are Federal Reserve notes. But if you look on that Federal Reserve note, it says that this is legal tender for all debts public and private. In other words, if you don’t accept this in trade, you go to jail. If this is offered to you, you have to take it. You cannot say, I will only accept Bitcoin for my goods and services. You have to accept dollars if they are offered. Well, I mean, the government put that in place. The government can take it away. The government could very easily say, for settling international trade, especially only for our exports and putting no limitations on our imports, you have to pay in something other than dollars. Maybe that’s precious metal, maybe that’s something else.
But at the end of the day, I think that is a very powerful tool to reduce the inflow of dollars to the United States.
Peter St Onge:
No, it is. Given that you’ve already got this system going with the dirty versus the clean dollars, you’ve already got a whole bunch of dollars in the world that they… Even if they’re physical paper dollars, because their provenance is unknown, they’re contaminated, you’ve already got that. And so if you simply extend that out to include all of the dollars that are not currently in the approved official US banking system, then you could, at a stroke, reduce the money supply by half or two thirds. And you could do it by ripping off foreigners.
Jeff Deist:
Well, I wonder, we talked about… Maybe explain a little bit more what you mean when you say maybe there’s two or three times more dollars out there than need to be. Do you mean that we have run trade deficits and so foreign markets have absorbed those and soaked all those up in treasuries or other forms as a result of that over many decades.
Peter St Onge:
Yeah, current account. But right, so the metaphor I like is we have a reservoir of dollars and if you print more dollars, which both the Fed and the banking system do, as you print more dollars, the reservoir fills up and that’s inflation. And if it keeps going, we drown. We suffer the inflation. But what’s been happening since Brenton Woods for the past 80 years is that there is an almost perfectly matching stream that flows out of that reservoir towards foreigners in the form of foreigners wanting to store their money in what was a relatively safe currency. And so because those two rivers matched up, and they matched up on purpose, where basically the Fed would look at the level of the reservoir, and then based on that, they would adjust interest rates and increase the flow or decrease the flow into it. So if that’s the world that we live in, then the problem is that the total amount of water that has gone out those rivers to the foreigners, if you add all of that up, nobody knows how much it is. The Fed every so often takes a stab and writes a paper guessing how much money there is in the world.
There’s dollars that circulate in overseas banking systems. There are dollars that are hidden. Dollars are a very popular way of avoiding taxes really around the world. If you are a rich Mexican, you are not holding your millions in pesos. That would be insane. You’re holding them as US dollars. You’re just keeping enough pesos for walking around money. This is true for essentially every country, at least every risky country on Earth. Now, if those dollars come floating back, that’s the big fear in dedollarization is that those dollars start coming back. As they do, dollars then lose value, they become less attractive. And then even agnostic holders of dollars like Japanese banks, they start saying, Well, this thing’s too risky. They start dumping them. And then you can get that accelerate into a flow. And at that point now, you’ve got 80 years of the river flowing out of the reservoir, and all of that could, in theory, come rushing back. So that’s the worst case scenario. And really, the way to stop that is to somehow dramatically reduce the money supply. And that would have a catastrophic effect. I mean, if you’re trying to reduce the money supply by half or two thirds, that used to happen all the time back in the day before the Fed existed.
For example, 1921, you can get around it as long as the government doesn’t otherwise screw with things. But given our current system where the government does screw with things, that would likely be economically catastrophic. And so the alternative that they might turn to is exactly capital controls.
Jeff Deist:
Well, I would like to say, what are people likely to do? In other words, people want to maintain wealth or increase it. And if you’ve read Saffronin’s book, the terminology he uses is, you know, sale ability across time and saleability across space. You want to own things that hold their value and that can be transported across time to maybe future generations and also across space, whether that means within the United States or across an international border. Those are the two criteria. If you look at most assets, stocks and bonds are easily controlled. You can even shut down markets. Banks are easily controlled. Anything in a safe deposit box or any account that’s in a bank is quite easily controlled. Real estate isn’t portable, quite easily controlled by tax or deed. So for most people thinking ahead, they’re probably looking at either physical paper dollars outside of a bank, under your mattress or in a safe or something. They’re probably looking at Bitcoin and they’re probably looking at precious metals like gold and silver. So let’s just talk a little bit about what those might offer.
Peter St Onge:
Yeah. Ej, do you have thoughts there?
EJ Antoni:
Well, I think just like in days gone by, precious metals really take the cake here. They are incredibly dense. I don’t just mean by weight, but I mean by value. It does not take a large volume nor a large weight of these things to represent a lot of value. They are easily division. You can’t take a gemstone, for example, a diamond, cut it in half, and have two diamonds that are now somehow equal to the value of the previous hold diamond. That’s just not the case. You have lost value and you can’t reverse that. You can take a gold coin, melt it down, create two smaller ones, and then later reverse that. So they are much more transportable. Obviously, you have the issue today of it being illegal to hold these things, courtesy of FDR, right? I can’t have a giant hoard of gold in a trunk at the foot of my bed. But at the end of the day, it’s difficult to find something else that is as good a store of value as is easily division, transportable, etc. To precious metals.
Jeff Deist:
Well, I know that I saw that Jordan Shachtel was with us earlier. I don’t think he’s still with us, but I think Bitcoiners would vociferously argue that it is superior in transporting across space because it’s digital and you don’t have to lug a trunk full of gold that some customs official and international border is going to seize for you. I guess I agree in part and disagree in part, but I just want to say that’s the devil’s advocate argument for Bitcoin here.
EJ Antoni:
Sure. No, that’s a really great point. And I think the flip side to that is Bitcoin itself does not have intrinsic value. In other words, what can I use Bitcoin for? I can use it for transactions. Beyond that, that’s really it. What can I use gold for? We have a whole host of different uses for gold, whether it’s jewelry, whether it’s industry, etc. So I’m not saying either one is perfect. Both have their own drawbacks. But I still would say that it is difficult to find something that can complete the peet with precious metals. Would Bitcoin be a competitor? I think that’s fair to say.
Peter St Onge:
Yeah, I agree with that. There’s trade offs on both, which are… We’ve been through this many times through history. This is the basement of the currency in catastrophic collapse. And gold has done the job every single time. The only, I think, asterisk there is that, of course, we didn’t have a digital economy. So the last time that we faced this collapse, at any rate on a worldwide basis, people were not buying things on Amazon over a credit card. And so the problem with gold in a modern economy, you could argue, is that you need an intermediary. It has to be centralized somewhere. So you own your gold, you park it somewhere, and then let’s say you have a credit card that is backed by gold, that can absolutely work 100 %. And it would be far superior to the system we have today. But I think the fear that some people have is that, of course, if you’ve stored your gold behind walls and guards, the government is going to know how to find it. And indeed, I’ve been a gold bug my whole life. And one of the standard Fiat complaints is, well, if gold is so amazing, how come no country uses it?
And I think the answer is very simple, which is that governments are very enthusiastic about the violence they use. And gold has a vulnerability. Now, of course, if the government has completely fallen apart and it only has the resources to pay the praetorian guard, then good is good to go because we have a functionally deregulated economy where the custodians can take care of themselves. But at any rate, in that modern economy where almost all transactions are happening remotely, the intermediation, I think, is an issue. And that’s where people have confidence in Bitcoin. The flip side, the problem with Bitcoin is that the vast majority of people do not understand it. They do not trust it because as EJ said, it does not have intrinsic value. It’s modeled on gold, but of course, it doesn’t contain any gold. And so if we’re looking at a collapse that’s going to happen in the next 10 or 15 years, I think there’s no chance for Bitcoin to do it just because not enough people are comfortable with it. I suspect that the next candidate after Fiat would be gold. Bitcoiners would continue proselytizing and getting new converse and so on.
But we’re not going to go directly from Fiat to Bitcoin. If, on the other hand, the collapse we’re talking about is going to take 30 or 50 or 70 years, then we’ll have to see what Bitcoin and gold are doing at that point.
Jeff Deist:
Well, we’re almost out of time. I want to wrap up with a couple of things. A question for both of you. We have lived under a narrative since, certainly since the Second World War. We can broadly use the umbrella term of neoliberalism. I know a lot of people attack that on various grounds as a cop out term, but let’s just for purposes of this conversation, we’ve lived under this for a long time and that assumes that global trade and global commerce are beneficial, which is something with which I certainly agree and also that they’re inevitable. And as a result of that, there’s a pretty good argument that the world wants one money. Gold was that money for a long time but that national currencies impose friction and transaction costs and exchange costs wherever you go. And that ideally, we would have one money. Now, most people on this call are probably highly dubious, highly suspicious of things like the IMF or the World Bank, a monstrous centralized digital currency for the whole world or something like that. We would probably want to fight against that. But is the world actually going in the opposite direction?
Are we about ready to fall into regional currencies and currency wars, the Jim Rickards has written about in the past, as the dollars challenged because of our own prophecy. The Chinese, the Russians, the Indians, everybody else says, Hey, guys, we don’t want to live under this regime anymore. And it might be painful. It might take many decades. I don’t think de dollarization is nigh. But nonetheless, might we be entering an era where this neoliberal project, all centralized, all globalized, is actually going to maybe revert back to the e other way to more regional and national differences, and that’s going to have an effect on currencies.
EJ Antoni:
Yeah, I think if history is our guide, before the dollar really gained its supremacy in global currency markets, the forerunner to the dollar, we had the British pound, right? And that was really the supreme currency. And if you look at the interwar period, at least the first half of it, Britain was able to really introduce a financial domination on the rest of Europe through what was billed as a gold standard, but was actually a pound sterling exchange standard. And when that all fell apart, what essentially happened was instead of moving to a universal currency, nations did exactly the opposite. They entrenched in a perverse nationalism. And as one historian put it, the age of begger, thy neighbor economics had dawned. And you got into both competitions in terms of tariffs on each other, one nation on another, and then retaliatory tariffs. But then you also had competing devaluations. So you had problems both on the fiscal side and on the monetary side. And the result of that was actually a stagnation of international trade, increasing isolation, even among neighbors. And the only countries that were really able to do well were either countries that didn’t really rely much on international trade or nations like Germany, where you had the brilliance of Hjelmar Schacht.
And what he essentially did was he said to neighboring countries, especially in Eastern Europe, look, we will sell our goods and services to you at an insanely steep discount. If you promised to also sell some of your goods and services to us at that same insanely steep discount. So they essentially subsidized each other’s international trade to try to, again, force people to buy German goods instead of British goods, for example. But whatever the case may be, it was all about hurting others in order to benefit yourself instead of actually mutually beneficial exchanges. Again, that was 100 years ago almost. So times obviously have changed. But at the same time, history doesn’t repeat, but it certainly does rhyme.
Peter St Onge:
Yeah, I think you’re absolutely right, EJ. And we’re seeing a lot of signs that even now, trade and barter, China gives big discounts to countries that could lock them into bilateral trade. I think, zooming out, we’re living in an unsustainable age. And I think a lot of us understand that. I think that’s why a lot of us are interested in these historical episodes of collapse because globalization is not sustainable. That’s not the normal state of humanity. International socialism is not sustainable. That is not normal. Now, a lot of people, since I think the 1970s especially, have felt intuitively that we are living in an unsustainable age and that there’s going to be a comeuppance. It hasn’t hit yet. And I think the reason is because we’re still working off the liberties that we had built up over centuries where the bad guys are taking over, but they haven’t taken over completely yet. And of course, the people ourselves, we work hard, we build things, we are naturally deflationary. We build stuff, we don’t print money. The people build. And so we can outrun the bad guys. The problem is that every crisis that they come up with ratchets that up a notch.
And then there comes a point where the bad guys get the upper hand and we start going backwards. My entire life, just to give an example, life expectancy had been increasing, and I took that as just part of the ether. We have technology, we have digital this and that. Yes, it’s only natural that technology would advance. And since 2019, I think actually it’s about 2017, before COVID, life expectancy started going down. And for me anyway, that was shocking. That’s like a 200 year trend. And that, to me, was a canary in the coal mine that the system is breaking. The bad guys outran the good guys. I think that we’re going to start seeing that going forward here where all of our lives we’ve expected global economic growth. When there’s a half % growth in a country, we all think that’s horrible because we’ve had, ever since the Industrial Revolution, we’ve had almost unbroken growth. I think that we are now entering a point where it’s an inflection point and we’re going to start going backwards. And that, I think, is when the danger comes in and when things can accelerate.
Jeff Deist:
Well, I certainly agree with Peter that the idea of unsustainability, that we’re living on borrowed time, or that somehow we’re enjoying unearned wealth off the fumes of earlier capital accumulation. I think that’s something we as a nation feel we can’t always articulate it or understand it completely because obviously it’s complex. But the US government has abused the dollar. We’ve used it as a tool of empire. And we’ve all been a lot richer for a long time as a result of that. When we go to Walmart and there’s a bunch of cheap stuff in there that doesn’t bust our budget, that’s been an exorbitant privilege, as they say. And if it starts to come to an end, I would fully expect Uncle Sam and these vampires who do things like run national treasures and central banks in the West are going to respond very negatively to that. And so I think it’s good that we’re all thinking ahead that we’re talking about things like Bitcoin or gold or debating these things and not just having our heads in the sand. So we’re going to continue doing the Monetary Metals Debased podcast live on Friday afternoons and then just recording it.
So please stick with us. Look for us on Fridays. I want to thank both Peter and EJ. And let’s just say, folks, that we’re living in a golden age of the Heritage Foundation. Kevin Roberts is the new president. With people like Peter and EJ, it’s a different world than Heritage 20 years ago. The Heritage I knew was primarily, I guess, a social conservative organization, and it was very much part of con inc. And I don’t think that’s the case anymore. And I think this is really healthy that the Heritage Foundation has had the courage to go out and hire people like Peter and EJ and shake things up. Because call it what you will, call it broadly the left or progressivism or whatever it is. It needs more skillful opponents. And I think the Heritage Foundation is providing that. So if you have any questions, go ahead and just message me via Twitter Messenger, and I’ll try to find them out if you have any topics, any guests, or anything for the future. Peter and EJ, thanks a million. Everybody, have a great weekend and great Father’s Day. And we’ll see you next week. Thanks, everybody.
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