In this episode of the Gold Exchange podcast, two experts on monetary mechanics debate de-dollarization.
Brent Johnson, head of Santiago Capital and the creator of the Dollar Milkshake Theory argues that systemic de-dollarization without chaos is nearly impossible due to the entrenched dollar-based debt system.
Robert Murphy, a Senior Fellow with the Mises Institute and the chief economist at infineo, argues that a shift in preferences away from the US dollar is already underway without causing major defaults.
Bob and Brent explore the implications of these perspectives on global finance, the potential role of gold going forward, and the resilience of the US dollar amidst rising geopolitical and monetary tensions.
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Podcast Chapters
00:00 – Intro to the Gold Exchange Podcast
01:00 – Guest Introductions: Bob Murphy and Brent Johnson
01:50 – Overview of De-dollarization Perspectives
03:41 – Brent’s Perspective on De-dollarization Impact
04:56 – Bob’s Perspective on De-dollarization
06:50 – Clarifying the Exogenous vs. Endogenous Debate
08:01 – Brent’s Explanation of Systemic Deleveraging
11:08 – Bob’s Rebuttal: Asset vs. Liability Dynamics
13:44 – The Role of the US Dollar in Global Markets
18:53 – Discussion on the Dollar’s Resilience
25:18 – The Euro-dollar Market and Network Effects
32:19 – Market-Based Solutions for Currency Alternatives
39:12 – The Role of Gold and Other Assets
45:02 – The Future of the Dollar and Financial Systems
57:40 – Closing Remarks and Future Outlook
Transcript
Ben Nadelstein:
Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein of Monetary Metals. I am joined by two guests today. First is Robert Murphy. Robert Murphy is a senior fellow with the Mises Institute and the chief economist at Infineo, a financial technology company that’s putting life insurance on the blockchain. Robert Murphy is also the author of many economics books for with a layperson like myself, including the politically incorrect Guide to Capitalism, and he is the host of the Bob Murphy Show. On the other side of your screen will be Brent Johnson. Brent is the head of Santiago Capital, the inventor of the Dollar Milkshake Theory, and is the co-host of the Milkshakes, Markets and Madness podcast, and the research service, Macroalchemist. Thank you both so much for joining us on the Gold Exchange podcast to discuss these very crucially important monetary mechanics that we’re going to dive into today that are usually quite misunderstood. So before we start, I’m going to do the difficult job of attempting to explain both of your core positions, and then we’ll get into some questions.
So, Brent, let’s start with you. From my understanding, your perspective is that de-dollarization would entail a painful de-leveraging, which, ironically, would actually increase the dollar’s strength against other fiat currencies in the process. In a debt-based monetary system like the one we have, money or debt must grow exponentially to avoid defaults, which benefits gold, the US dollar, and US equities. Since debt carries interest, demand for the dollar always exceeds supply structurally, making it nearly impossible to pay off US dollars when liquidity isn’t growing exponentially. In a contractionary period, the value of the dollar increases because of the limited real supply. But in expansionary periods, the dollar’s foothold increases and the network effect strengthens, making the future deleveraging all the more painful. Your point is that without addressing these monetary mechanics, the chances for de-dollarization are slim. Next is Robert Murphy. Bob, you think the de-dollarization involves individuals and institutions simply shifting preferences from US dollar denominated assets to non-US dollar denominated assets, a trend that you say is already occurring. This shift naturally reduces the nominal value of US dollar assets due to decreased demand. A painful deleveraging is not necessary. BRICSs country for example, can repay their US dollar denominated debt without catastrophic events, similar to how individuals or institutions manage their debt themselves.
You think the trend of de-dollarization is currently ongoing without major defaults and can continue to erode the dollar’s dominance. So let’s start with Brent. How did I do summarizing your position, and do you have any points that you would like to add before we start?
Brent Johnson:
First of all, thanks for having me on here. I’m a fan of Monetary Metals. I’m a fan of Bob Murphy, actually. His work was fundamental in my learning journey, I guess is the right way to say it. And I think you did a great job of summarizing my position. The one thing I might change a little bit is that the system doesn’t have to grow exponentially. It just has to grow. But any system that always grows will eventually go exponential, and all exponential systems eventually eventually crashed. I don’t have the slightest idea of the timing of all this. I just know that mathematically, that’s correct. But overall, I think you did a great job of summarizing it, and I look forward to talking to you guys.
So a slight edit would be that, yes, there does need to be growth structurally, but the exponential part is maybe up for debate. So, Bob, now let’s go to you. Did I make a straw man of your perspective, or is there something you’d like to straighten out, or should we dive right into questions?
Bob Murphy:
Let me also just take this opportunity to thank you for giving us this forum. I also was very happy to interact on this topic with Brent. And when you gave us the opportunity, Ben, to come back on and hash it out, I was happy to do so because I think in previous exchanges, there are sound bites and whatever. So this is good to be able to explain it more. So it’s going to sound like I’m trying to hedge myself like a classic economist. Yeah, I have no problem with what you said about me. Let me just mention, though, to make sure people don’t misunderstand my position. All along, I have just been arguing that the logic that I thought, Brent and then also George Gammon has been saying a similar thing. I don’t want to lump them together. I think their positions are distinct, but the argument- You can bump us.
Brent Johnson:
It’s okay.
Bob Murphy:
Okay, fair enough. You’re much better looking than he is, put it that way. And so what I have, my only concern was it seemed like they were saying, oh, necessarily because of the way fiat money creation and bank fraction reserve lending works, necessarily, there’s no way foreigners could get out of their reliance on the dollar or holding so much dollar exposure. There’s no way that could be unwound without causing at least a short term crisis in the dollar to split like in the foreign exchange markets. And I’m saying I disagree with that. Having settled that, though, if there is a calamity, a recession starts, especially if more of a hotter war breaks out, it wouldn’t surprise me at all if the dollar strengthens against all major currencies. And it is hard for people with USD denominated debt to service the debt. But I’m just saying if that happens and people are running victory lapsing, Aha, Murphy, you were wrong. I wasn’t denying that that could happen. I’m just saying the reason is not because, Oh, there were some people trying to unload their dollar assets, foreigners, and then that caused the cycle. That’s what I’m saying.
It would take something else that independently made the dollar strengthen. And then, yes, that could put a squeeze on people who have USD denominated liabilities. I’m not that. I’m just saying the source of the squeeze would not be the people on the other side trying to unload dollar assets.
Ben Nadelstein:
That’s a great transition for me because my first question is trying to clarify. So is maybe the real disagreement the exogenous or endogenous question. So exogenous would be outside desire for US dollar exposure could lessen. And maybe that’s what Bob is pointing to. Versus Brent, you’re saying there’s an endogenous or maybe a Fed Fed-induced contraction. And that’s the main difference, which is that if there’s tightening dollar liquidity by the Fed, Brent’s milkshake might come into play. But if you thought, Hey, all L’s sequel, things are fine. We’re just going along. There’s no election year, there’s no major wars, and people decide, let’s just try to gradually de-dollarize. That, Bob, you would say, I don’t see any reason for some calamity to happen. Is the inside versus outside where this issue begins? Brent, where do you see that?
Brent Johnson:
Well, I think there’s a couple of things here. I think if I understand Bob’s side correctly, he’s saying, if an individual, if a company, if a country changes their preferences, and there’s not some external crisis, and they have enough growth, they can de-dollarize over time. I wouldn’t deny that that’s possible for an individual, for a company, or potentially even a country. It would have to be a pretty special country, but potentially. But my point is on a system-wide basis, you cannot have systemic de-dollarization and come into a new system with a new dominant currency without chaos. Unless the entire world all agreed at the exact same time and in the exact same way what they replaced the dollar with. I think that’s a very, very big stretch. It’s not impossible. Nothing is impossible, but it’s very impossible improbable. And so, and part of the reason is the nature of the system. Because we have a debt-based monetary system, because money is currently, and this could change, but right now, the way it’s set up is the way money is created is it is loaned into existence. Now, it doesn’t matter if it’s coming from the Fed or if it’s coming from a bank or coming from a non-bank entity, or if it’s just me extending credit to my neighbor and I do it in dollar terms, that’s how money is created.
And that That is a loan-based exchange, or it’s a loan-based process. So to de-dollarize, in other words, to get dollars out of the system, it would cause… So the point is, that’s a leverage system. We’re leveraging the monetary base. We’re creating new money by loaning at an individual distance. So the opposite of that, going from the dollar to a non-dollar system, we would have to de-leverage. In other words, if creating money requires leverage, then getting away from that monetary system is going to, by definition, necessitate a deleveraging. And while maybe one or two countries or one or two companies, or maybe even a couple of families here and there, have the discipline and the assets and the fortitude and the knowledge of how to do that on a system-wide basis, it can’t work for the same reason that not everybody can go down to the bank and withdraw their money on the same day. There’s not that much money in the bank. And so if everybody tries to get their money out at the same time, you get chaos. And when that happens, the value of the individual dollar rises because there’s not that many of them to be withdrawn.
Now, that’s a very simplified explanation of a very complex system, but that’s essentially my argument.
Ben Nadelstein:
Bob, I want to send it your way. It sounds like what Brent is saying is, Hey, we’ve You got a debt-based, leverage-based system. If you want to go to a different system, you got to unleverage and take out that debt. And that’s going to be really difficult. And in the bank run scenario or the bank run analogy, yeah, maybe Joe and Bob can go down and grab a couple of dollars And okay, maybe they lent out more than they really have. But it’s fine as long as not everyone comes down and does a bank run. In a similar way. Okay, yeah, if some people need to get some dollars, and some people need the real supply, and some people just need some credit, everything can go along as planned. But if everyone actually desires US dollars to pay down their debts, that’s when you run into a problem. Where do you agree and where do you disagree?
Bob Murphy:
Okay, sure. Let me just say, again, as we’re still relatively early in this discussion, my goal here I’m doing this so that people understand these issues better. It’s not that my goal here is at the end for people to say, oh, yeah, Murphy beat Brent. If they say that, good. I mean, I’d rather that than think the opposite. But the goal here isn’t for me to win in or whatever. It’s just to make sure I’m getting this point across so that maybe people who are big fans of Brent and possibly George Gammon are like, Oh, okay. I see what this guy’s point was. And that’s more the issue. So on the analogy or the illustration of that that Brent just said, So right. I think what’s going on here is people are saying, oh, yeah, I know if there’s a leverage situation, it’s riskier, it’s more fragile. And if there’s a shock to that, the more levered up the system is, the more chaos that can happen. I agree with all those statements. What I’m saying, though, is the shock is not that the asset that’s on the other side of the loans people want to have less of it.
So in the specific bank run situation that Brent just said, under the examples we’re talking about here, the issue isn’t… Just picture the US right now, domestically, the commercial banks engage in fractional reserves. If everybody next Thursday tries to empty their checking accounts and turn their checking account by balances into currency in their hand, that won’t work. But notice what happened there. That would be if everybody wants to get more US dollars in currency, the system’s in trouble. I’m not denying that. Yeah, if foreigners around the world wanted to hold hundred dollar bills instead of having some French bank say, You have a hundred dollars in your account with us, I agree that would cause the dollar to rise, but that’s not what we’ve been talking about. We’re talking about, What if foreigners say, We don’t like dollars, period? So in our analogy, it would be if people said, Not only do I not I want to get US cash, I want to get euros, or I want to use my dollars to buy some gold for monetary metal. I want to get out of the dollar and into gold. That’s no reason that mortgage holders would find it harder to make their mortgage payments, quoted in dollar terms.
No, The dollar would fall. So in general, you would think your wages would rise eventually. And so it would other things equal. It’d be easier to make your fixed dollar mortgage payment each month in a world where a bunch of Americans were fearful of the future and said, I want to get out of dollars and move into gold or something. That would make it easier to service existing dollar-denaminated debts. So that’s the mismatch I’m seeing here.
Brent Johnson:
Can I respond here? Because I think you’re onto something here. So I think if you’re identifying somebody who has decided, they no longer have a preference for dollars, and they prefer euros or yen or whatever it is, and they do not have any dollar debt, then I agree with you. But again, on the whole, the system, and the countries, and the individuals, and the institutions outside the United States owe an incredible amount of debt in US dollars. It doesn’t really matter what they prefer. What matters is what they owe, and they owe dollars. They cannot leave that system without satisfying that debt. If they do decide to leave the system without satisfying that debt, that then causes a default. If you have two many, and again, if one or two people do this, it’s no big deal. People default on their loans every day. But if it gets to be too many people doing it, so this is where I get back to a systematic level, if too many people decide, We’re not going to pay that debt. We’re going to default on it, then you get a credit contraction. And in a credit debt contraction, you get a money supply contraction.
But all the debt stays there. If you default on it, it disappears. But if you get into a mass default scenario, the supply of money or the supply of dollars falls even faster than the demand falls that was associated with that debt. That is what we saw in 2000. It’s what we saw in 2001. It’s what we saw in 2008. It’s what we saw in 2020. It’s what we saw in 2022. That is what a credit contraction is. If a credit contraction wasn’t painful, nobody would be scared of them. And so, again, I don’t disagree with Bob. If there is somebody who is debt free, owes nothing in dollars, has no allegiance to the US, doesn’t have to pay tax in the US, doesn’t have to transact on the global market using dollars, then they can go do something else. But the system as a whole cannot do this. And the reason I think this is important, and so where I I think perhaps Bob is talking about a case-by-case basis, and I’m talking about on a systemic level, maybe that’s why we’re passing each other in the lanes. But the reason I make this distinction is Because I do a lot of these podcasts.
I go to a lot of conferences, I speak to a lot of investors, I’m very active on social media. And there is this very popular narrative that the world is going to de-dollar price, not the individual, not the company, not the country. The world is going to de-dollarize, and all of those dollars are going to flood back to the United States, and there’s going to be this surplus of dollars in the United States, which is going to create hyperinflation, and the rest of the world is just going to go chugging along and a new hegemon is going to rise, and the US is going to end up in a pile of flames. And it’s that narrative that I very much tried to dispel, not because I’m an American, rationalist, not because I think the dollar is the greatest thing in the world, not because I’m a jingoist who thinks the US military is the greatest thing that was ever invented. This is just reality. And I’m trying to very hard to explain the mechanics of the system that make de-dollarization so difficult. The desire is there. I do not deny that there is a desire to get out from underneath the thumb of the dollar system.
But I have a desire to play on the PGA tour, but I don’t because I’m not able to. And that’s what I would say here. There’s a lot of countries that would like to de-dollarize, that would like to get out from underneath the thumb of the US government policy or US geopolitical policy or the monetary policy that the US can force on the rest of the world. But it’s just really, really hard to do. And I think it doesn’t do you any good to storm the castle and fight against the king if you don’t understand how strong the walls are. I don’t want people to storm the walls and get killed in the process. And so that’s part of the reason why I think it’s important to have these conversations and why I pound the table as hard as I do, not because I want the system to say the same. I just think it’s very, very difficult to change without this pain that’s typically involved in a deleveraging.
Ben Nadelstein:
Bob, it sounds like what Brent might be saying is that, yes, okay, all else equal. If you had no debt in dollars, it might be easy to change your preference from one currency to another, one asset to another. But there has to be, because so much dollar debt is out there on everyone’s balance sheets, institutions, individuals, countries, that, well, okay, first they have to go through this dollar debt before they can make that preference change, which might not have any issue. So where you see the debt issue and the network of US dollar debt that these countries will have to get through, changing the argument a bit.
Bob Murphy:
Okay, great. Yeah. And I’m glad we’re having this discussion because I think we are narrowing the range here, the disagreement. I agree with most of what Brent said, but let me just respond quickly here and try to show the flip side and why I still think we’re not quite connecting here. So I I think just for the purposes of exposition, it is useful. Let’s keep working with the US-based example just for the moment, because I think a lot of this is analogous to the other foreigners holding USD assets and liabilities. So again, imagine the typical American, he’s been watching Peter Schiff, maybe some Murphy here and there. And he’s just like, I think the dollar is going to tank. I need to get some gold. I got to, jeez, where’s my Rolodex with monetary metals? I got to get that and have it work for me as well. And I’m not getting paid to say this, folks, even though I have advertising for them elsewhere. So maybe they’re going to do that. And now the person also happens to have a mortgage on their house. And let’s say there’s 27 years left. They bought the house three years ago.
Is that person going to rush to say, I better pay off this mortgage early and get out of this because I hate the US dollar? No. If anything, they’re going to just do the bare minimum. Whereas maybe before, if they were listening to Dave Ramsey, they were trying to knock that out. But no, if you become convinced, relative to what you thought a month ago, if now you think there’s probably going to be more price inflation in the US than I thought a month ago, other things equal, that’s going to make you less aggressive in paying off your mortgage because you’re going to say that mortgage debt is going to get weaker over time. Now, on the other hand, if you hold mortgage-back security, you’re a portfolio manager, you have mortgage-backed securities and things, and you’ve got a bunch of dollar-denominated cash flows coming in, you might want to sell those off. And so that’s the distinction here I’m trying to make is that the people holding the asset. The people that are going to have dollars coming in are the ones who are going to sell that. And so for a given European, especially if it’s an institution, maybe it has both.
That it has some assets and some liabilities. They’re both denominated USD. But I’m saying that, Okay, so if they now think that, oh, jeez, with what the US has been doing with Russia or whatever, we like less exposure to the USD than we had before, that means they’re going to sell their assets off. It doesn’t mean they’re going to be more aggressive in trying to knock their dollar the debt down. And now I get that, hey, it’s like a mirror image. It’s like, well, no, for every dollar denominated liability, there’s got to be the corresponding asset. I get that. So my point is, as the people holding the asset side want to get rid of it, that’s going to push other things equal. That makes the dollar weaken. And so then for those people who do want to also let the liability shrink, it’s now easier to go ahead and unwind that. So there is that accordion effect, but that’s the process. And then the last thing I’ll just say here is, Brent was listing 2008, 2020. I forget the other ones. I didn’t jot them down in terms of these crises. It wasn’t that in 2008, all of a sudden people said, I really want to get out of the US dollar.
That’s not what happened. No, people panicked for other reasons and then said, I want to rush to safety, including treasuries and the US dollar. So again, like I said, it would not surprise me at all if there’s a crisis at the end of this year or going into next year and the dollar strengthens against the Euro and the Yen and whatever, I’m not denying that might happen. My only point is the reason for that happening is not that a bunch of foreigners say, Wow, we really don’t like how heavy-handed the US has been with Russia, and so we’re going to reduce our holdings of treasuries. It’s not like people trying to dump treasuries that would suddenly make the dollar strengthen. No, that makes the dollar weaken. All right, so that’s what I’m saying.
Brent Johnson:
So I would take exception with your last sentence. Okay. Now, there are exceptions to this rule. It’s typically a crisis is the exception. But in general, if people sell treasuries, that would mean if more people are selling treasuries than buying, well, there’s always a buyer for a seller, but if more people want to sell than want to buy, then the price of treasuries falls. If the price of treasuries falls, then the yield on treasuries rises. As the yield on treasuries rises, it also Also, it influences the other yields in the United States, and a higher yielding currency becomes more attractive. And so as people are selling their treasuries, it’s pushing up the interest rates in the United States. And then you can do a carry trade where you can borrow cheaply overseas, and you can deposit it in the T-bill and get three, four, or five %. And so, again, all you have to… This is not me making… Just go look at a chart. Go look at a 20-year chart. Graph the dollar index versus the price of the 10-year bond or the yield. And if you do the price, you’re going to see an inverse relationship between the dollar and the bond.
And if you do the yield, you’re going to see a positive correlation between the dollar and the bond yield. And again, this is pretty standard in currencies. I got the higher yielding currency is more attractive. And then when you remember that there’s also this dollar demand. Again, I agree with Bob. If we are in a, let’s call it a normal environment, it’s hard to say what’s normal these days, but if we’re in a normal environment and there’s not a crisis and there is a preference for… And people believe that the European economy is stronger than the US economy, and that the US has and they start to move assets away from the United States into Europe, then you could see the dollar fall. Maybe the Dxy goes from 103 to 93, or whatever it is. Maybe it goes to 88. But what’s not going to happen is that that continues down to 70, and to 60, and to 50, and then one day everybody just de-dollarizes because you can’t. The system, overall, overall cannot de-dollarize. And that is the point that I’m making. If we got to the point, let’s say that that does happen.
Let’s say that Europe somehow comes out of this mess that they’re in, Japan somehow gets their act together. China gets out of this death spiral that they’re in. And everybody thinks that we’re choosing between Kamala Harris and Donald Trump, and who wants any part of that? But there is no Somehow, they start growing. These other countries start growing. There is a preference to invest overseas compared to the United States. Then as a result, the United States goes into a big recession, and the dollar starts to lose value on the global stage, and then our politicians start getting in trouble because things aren’t good here at home anymore. What do you think they’re going to do? As the dollar falls on the global stage, and as the US power falls on the global stage, and people at home are no longer content with what’s going on here, what do you think the United States is going to do? Are they just going to surrender global hegemony and let things just go? No, they’re not going to do that. They will put sanctions on, they will use their political influence, and If necessary, they will use their military.
And I know people do not like me saying that, but that is the way the world works. And so the idea that we are going to have an environment where the dollar just slowly erodes over time and When competitor countries are allowed to develop non-dollar systems unabated, and the US won’t try to do anything about it, is fantasy land. That’s largely the point I’m trying to make is, theoretically, this all works. But in the real world, we are not going to have just a calm scenario where the US loses global influence. The US will do everything in its power to maintain its place atop the pyramid. And it doesn’t mean that they will be guaranteed to be successful, but they’re not going to go down without a fight. And in that fight, now we no longer have this nice, calm, economic, normal environment. Now we have the crisis. And in that crisis, I don’t know for sure, but I’m fairly certain that the dollar rises in that scenario because there is no substitute right now. Now, the one substitute that everybody I think will agree is gold. I think that’s probably why we’re on this channel.
Monetary Metals has been a big proponent of gold for a long time. I think Keith has probably done more work than anybody to try to get gold back into the monetary system. I know Bob has spoken at length about gold, and in a free market economy, gold rises. And listen, I’ve said for years that gold is going to go to $5,000. It’s probably going to go a lot higher than that. But that doesn’t necessarily mean we’re going back to a gold standard, and it doesn’t necessarily mean the countries around the world, just because they own gold, are not going to feel pain. And so I think it’s important to understand that we could have this tug of war back and forth between the dollar going up and the dollar going down for another 10, 15, 20 years. There’s nothing that says this all has to culminate in a big ball of fire in the next two or three years. I know there’s a lot of people think that it will, and I admit that it might, but this could also… We could have several more cycles before we get to the end of this monetary end game that seems to be such a popular conversation.
And I think I’m probably rambling at this point, but again, I think it’s important to understand the difference between partial de-dollarization by a few countries or a few institutions versus wholesale dollarization dollar, de-dollarization by the BRICS or by the large part of the world. And while the US suffers, it’s a lowly fate. I think that’s really unrealistic.
Ben Nadelstein:
So, Bob, let me see if I can get this question now to you, which is that Brent says, listen, within some reasonable band, 80 to 120, the dollar can move around. Okay, maybe a little less, a little more. Oh, the Euro strengthens a bit. Okay, the The ruble has gotten a little bit weaker. But you have to address the real politique, which is that the US dollar will never go down without a fight. And so to just say, Oh, the dollar will go the way the dodo birds, and there’s nothing the US can do about it, is naive at best. And in Brent’s theory, if that even were to happen, the process, the scenario in which that eventually does happen, the dollar will actually rise in value in the meantime. So investors should think, okay, yes, maybe we’re going back to a gold standard or I want to have gold in my portfolio. But they should not be unaware of the fact that in the meantime, there are many scenarios where the value of the dollar can rise.
Bob Murphy:
Yes. Okay. Just make some quick points here in response to everything you guys have been saying. So first, just on the narrow point, I don’t want the bond traders out there to be like, oh, my gosh, this guy calls himself an economist. He doesn’t even… Just to clarify what I meant. So I I agree, Brent. Yes, textbook. Everything else equal, all of a sudden, the Fed tightens and raises interest rates. Then, yeah, that makes investors around the world more interested in US bonds, including treasuries. And so that would tend to strengthen the dollar. I agree with that. But I’m saying, just like it’s easier to do the other way. So in a crisis, everyone’s panicked and they rush to treasuries. What happens? You see the dollar strengthened, but also treasury yields fall, right? Totally agree. So I agree in general, people dumping treasuries doesn’t mean the dollar falls, but in the scenario of if they’re dumping it for the reason I said, if it’s just the opposite of up, panic subsides. And so, okay. Also, I agree that, yeah, the US government might do things that violate the non-aggression principle if they see people around the world taking steps, especially like political officials doing things that they can look two steps ahead and say, Oh, we better nip this in the bud.
I don’t know if this stuff is true, but there’s lots of, I’m sure you You guys have both heard the conspiracy theories about like, Oh, you know what happened with Gadhafi? It wasn’t that they cared about his weapons or something. It was because he was trying to get them out of the dollar system. So whether that’s true, I don’t know. But I’m just saying, yeah, those types of things maybe And to the extent that the US authorities use military power or whatever to shore up support for the dollar-based system, yes, I agree with you that they certainly would be willing to do that if it made sense in a situation. So again, I’m just saying in terms of the possible roadblocks between here and the dollar no longer being the dominant currency of the world, I don’t think one of them is, oh, this feedback mechanism of the dollar debts and assets and that thing. That’s the one little point I’m making on that. Along those lines, though, maybe this will help clarify my position and maybe bring us closer together. I agree that the fact that there’s money created in the act of granting loans, that is relevant.
So just as when the US, as foreigners around the world, as they gained exposure, like as the Euro dollar market expanded, that didn’t make the dollar strengthen as much as it otherwise would have. Because if, put it this way, if foreigners around the world had to use actual US currency, then for them to be holding as many US dollars as they do right now in their balances would mean that money would left the US literally, physically. And so prices here would have been a lot lower. But that isn’t what happened. When we say foreigners are holding a bunch of dollars, a lot of that just means, yeah, like some French or German bank has made the loan denominated in that. It’s not that that money got sucked out of the US. So likewise, if the demand to hold dollars abroad falls, it doesn’t necessarily mean that you’re going to see, oh, there’s all these trillions of dollars flowing back to the US, and that’s going to make gasoline $30 a gallon. No, No, a lot of that stuff could just disappear for the reasons Brent said. So I do agree that there’s this accordion effect.
And so the impact on the dollar against the Euro might not be as dramatic as some people might think that I’m saying. So I could imagine 20 % of earthings who right now are holding dollar assets, not holding it. And that doesn’t mean there’s a huge impact in the price level in the US. I guess that’s what I’m trying to say. And the last thing I’ll just say is I agree If foreigners, other things equal, yet they’re getting uncomfortable holding dollar denominated assets given what the US authorities are doing and the Treasury’s fiscal position and stuff like that. But where else are we going to go? I agree that’s an issue. And to that extent, it’s relevant to say, what’s the alternative? I do think, though, the stuff I’m doing in Infineo here that we’re building a lot of blockchain rails and even gold, people are now able to have the convenience of digital currencies or tokens that have gold bars stored in Switzerland or whatever. I think as that develops, that is going to open up a more market-based that’s not the jurisdiction of any one government or something. So it’s not that the BRICS countries all have to get together and have a summit in order to give plausible alternatives to the US dollar.
Brent Johnson:
You just touched on something, and I think this is where it’s really interesting. And I’m going to explain something that helped me understand my point of view. And it was a historical thing that I didn’t realize. But once I figured it out and once I learned about it, it changed my perspective. And I’m not… Listen, I don’t want to come across as being smarter than anybody else. That’s not the point that I’m trying to make here. But it was something that I didn’t know. And when I realized it, it helped me come to the understanding that I currently have. And that is the whole development of the Euro-dollar market. I think that there is this largely accepted narrative that after World War II, at the Bretton Woods conference, there was a couple of different competing scenarios. One of them was Keynes’ bank or and the other one was the US dollar, backed by gold, and then every other currency was pegged against it, and the US used its influence to negate the bank or and install the US dollar as a global reserve currency. That is factually, historically correct. But then I think there’s another step that’s put on top of that that says, and then the US forced the dollar on the rest of the world for the next 100 years or 80 years, whatever the number is.
And that’s not exactly. It’s not incorrect, but it doesn’t tell the whole story. Now, they obviously forced the dollar on US citizens because that’s what legal tender laws are for, and that’s how the system works. But nobody in the United States forced an Indian manufacturer to buy or to to borrow in dollars from a Philippine trade counterpart. Nobody forced Russia to hold dollar balances in Eastern Europe so that they could fund their operations in Europe post-World War II. Nobody forced Japan to buy strawberries from Brazil and invoice it in dollars. This was the free market business people actually operating in the real market coming to the determination that that was the best solution, the most efficient solution, the cheapest solution, and most productive for their business. And that started slowly, but then it built up, and it got more, and it got more. And then in 1972 or ’71, I forget the actual year, when the United States and Saudi Arabia formed this alliance, for lack of a better way of saying it, and Saudi Arabia agreed to price oil in dollars. And since every country needs dollars, they started holding dollar reserves because they needed to buy energy in dollars.
And as a result, then that really turbocharge the development of this Euro-dollar market. And now the Euro-dollar market is orders of magnitude larger than the dollar market inside the United States. And again, this wasn’t forced on anybody. This was businesses choosing to do this. And it is now, I would call it the biggest market-based network in the history of the world, the dollar system. And so I think there’s a lot of people who think that the only reason the dollar has value is because of the US government and the US military. Now, I’m the first to say that that does give it some value, but that is not the only reason. The development of the Euro dollar market gave the dollar an incredible amount of demand outside its borders. And it’s this demand for dollars outside the US borders, which has allowed the US government and the Fed and US monetary policy makers to, quote, unquote, get away with the profit spending and the bailouts and the printing of money and the stimulus. However you want to describe this, the Euro dollar market has acted as the drain that kept money. All this money that they print doesn’t just stay in the United States.
It goes to China, and it goes to Turkey, and it goes to South Africa, and it goes to Russia, and it goes to Britain, and it goes to Argentina. That’s the drain. And so if all the money that the US created just stayed in the United States, we would have significantly higher levels of inflation. But because there’s all this demand for it outside the United States, it drains out of the US market and it dissipates. And that network effect is what makes it so difficult to de-dollarize. And I’m going to give you just one little example. Now, this is not perfect, but I’m going to use this to explain why it’s so hard. So before I started my career on Wall Street, I worked for a company called Philip Morris. And Philip Morris owns all these different food packaging companies. They own a bunch of tobacco companies. They own liquor companies. They own capital-raising companies. But one time, I got put on a project in Germany, auditing a coffee manufacturing plant in Germany. And so I learned a little bit about the coffee business doing that. And the thing is, when the coffee manufacturer in Germany wants to make coffee, he doesn’t just pick up the phone and say, Send me some coffee from Colombia, and it shows up the next day.
Well, it actually does work that way, but there’s many steps in between. So there’s somebody owns the farm, and then there’s somebody that he hires to work on the farm, and they pick the berries, and then somebody puts those berries on the back of a motorcycle and rides it 100 miles to the nearest substation where they grind the beans. And then it gets packaged there, and it gets put on a truck, and it goes to a ship, and then the ship goes from Colombia to Germany, and then it gets put on another truck, and then it gets put on a smaller truck, and it finally, after two weeks, ends up in Germany, and now they can package it. But the point is, is everywhere along in that process, the dollar is being used. And so it’s one thing to stand up and say, We are no longer to use the dollar. We are going to force you now to use the unit or the new BRICS currency or gold or whatever it is. It’s not that it couldn’t work. It’s just that getting that whole process to re-invoice and agree to new payment terms and agree to be paid in this new currency or this new commodity or whatever it is, it’s not easy.
And even under the best of circumstances, there are going to be problems. And when those problems develop, that’s when inefficiencies start, that’s when volatility picks up, that’s when it starts to spread. And so think back to Y2K, or something like that. They tried to redo the whole system, and it ended up being nothing. But the problem was so big, Everybody was worried that the whole world was going to blow up. Now, if the politicians can somehow say, this is the new currency we’re going to use, and this is how we’re going to use it, and you have to do it or you’re going to end up in jail, maybe it will work. Maybe it will. I have my doubts. I don’t think it will be efficient. I think it will be very inefficient. And I don’t think everybody will just automatically… I don’t think everybody that’s owed dollars will just automatically accept this new currency or this new commodity or whatever it is to pay off their dollar debts, especially if this new system isn’t running smoothly. And so the The point of all of this is to disabuse people of the idea that the only the reason that the dollar works is because the US makes people use it.
That is not the case. The market chose the The global market chose the dollar, the Euro dollar, as global money. And the market could choose something else at some point. But so far, they, on their own accord, have chose the dollar, and that gives incredible power.
Ben Nadelstein:
Bob, I want to give it to you. Brent is saying there is a market-based network effect that’s been voluntary, where people, entrepreneurs, individuals, institutions have chosen over time this Euro-dollar system, dollars outside the United States. They transact it with themselves, they invoice with themselves. It’s the unit of account. Everyone is thinking in dollars, speaking in dollars, invoicing in dollars. It’s all dollars, dollars, dollars. So if you want the financial plumbing to suddenly become a different type of plumbing, that’s going to take a lot of work, and it might not go smoothly. And in a process like that, the milkshake theory would say, Yeah, if that’s not going to go smoothly or before it starts to go smoothly, any bumps in the road will actually help the US dollar. So where do you see that network effect? Do you agree with this theory in the pitch that, Hey, listen, there’s a lot of financial plumbing that needs to be rejigered if we’re going to switch to an entirely new system and market-based systems do a pretty good job of figuring that out, a top-down BRICs currency or some new world government coin probably won’t go so well.
Brent Johnson:
Let me say something real quick before you respond, Bob, because I think the stuff that you’re working on and other people. I think that is what is needed. We need a market-based solution. We don’t need five politicians going to a meeting every year saying, We’re going to do this someday, for 15 years in a row. We We need people like you and the other entrepreneurs figuring this out in the real-world marketplace as opposed to a stage with a bunch of flags behind us. Anyway, I just wanted to make that point.
Bob Murphy:
Okay, yeah. So I agree wholeheartedly with everything you said, except the idea of drinking German coffee sounds gross to me. But even though I know you’re saying it. So, yes, I’m glad you made that because I say that, too, that even legal tender laws and stuff, I think a lot US-based libertarian types believe that, oh, yeah, the only reason on a day-to-day basis we still use the dollar is because the government has a bunch of guns. And I try to disabuse them of that, not just because of the truth or because I’m a stooge for the CIA or something, but because I think that’s showing a lack of understanding of monetary theory. No, you don’t understand how money works if that’s what you think. Just to give an example, the thing you’re talking about, the power of network effects. One time somebody asked, a student asked me, oh, when you guys come and give talks to the Mises Institute, do they pay you in gold? And I said, no. And they said, why not? I said, well, I would have to sell it to then be able to buy my food and pay my rent and stuff because I use dollars in my day.
If I want to buy gold on the side as an investment or something right now, I can do that. But it would have to just be very coincidental that exactly what they paid me, I was about to go buy that much gold anyway, and so it’s saving me the hazard. So anyway, I know you guys get the point. But even though we can all agree, if we all use gold in the US instead of the US dollar, that would be a better system. But yeah, any one individual trying to deviate and do that, given that that’s how you’ve grown up and that’s what everyone else is doing right now, yeah, it’s hard to switch. And like you were saying, Ben, that you see this, too, in the Bitcoin community, where sometimes people get mad and they say, no, one Bitcoin is worth one Bitcoin because they don’t want people to say, oh, do you think it’s going to hit $80,000? You think it’s going to hit? And they’re saying, no, stop thinking of a dollar. That’s it. No, it’s Bitcoin. And so it’s the same deal that, yes, if planet Earth could switch and everyone used Bitcoin, the new kids growing up in that world would think that way.
Bob Murphy:
But until you get there, still everyone defaults back to keeping score in US dollars. And so I totally agree with that. And I also agree that, yeah, the viable alternative to this is probably not going to be a bunch of states getting together. What I don’t understand is why, and I don’t know if you guys have an opinion on this, I would think if I the Chinese authorities or something, I would just announce that our currency was backed up by some gold or something. Maybe they don’t want to tie their hands, and so they’re not doing that. But anyway, I don’t see why some strong state doesn’t do that just to bolster some support. But yeah, I don’t have a problem with anything you said there. I guess all I would… This is the last point I’ll make on this pass is, even though there are a lot of network effects and so on, sometimes I get… I’m not saying you’re saying this, Brent, but I do get the sense some people are saying it is It’s really impossible the dollar’s king forever because of this. And I want to say, no, if it gets pushed enough, and it is bleeding on the edges already, and I think it’s going to be the deal where once it starts going, it’s going to go fast because once the idea that everyone’s using the dollar, if people start doubting that, especially in foreign countries where the day-to-day currency isn’t necessarily the US dollar, then I think you could see a lot of people switching more quickly than might now seem possible.
Brent Johnson:
Well, certainly, there’s a lot of people who think that I’m a Bitcoin hater. I’m not a Bitcoin hater. I just don’t think it’s the greatest invention ever that has blessed the Earth. So you’re a Bitcoin hater is what I’m hearing.
Bob Murphy:
That’s what I’m hearing. So what you’re saying is- But the point is these alternative currencies, whether it’s gold, whether it’s Bitcoin, whether it’s silver, whether it’s some other store of value, it doesn’t It means that these things won’t rise dramatically in price, even though the dollar doesn’t go away.
Brent Johnson:
It’s very possible that these things will go up much higher in price. But I think people need to get off of this de-dollarization as a threat to the United States way of life mantra, because I think it’s to fundamentally misunderstand the way the system is designed and the the system works. Now, there is no doubt that the US benefits from the system, but in many ways, the rest of the world did the United States a huge favor by building out this Euro dollar network because it allowed the US to live above its means. It allows the US to have global seniorage, for lack of a better word. And And it allows the US to export its monetary policy to the rest of the world. It allows the US to use the dollar as a weapon. And one of the things I’ve said many times is the rest of the world built this prison. They built their own prison. They didn’t realize. They thought they were building a beautiful house, and they found out many years later that they built a prison, and now they can’t leave, or at least they can’t leave without knocking the walls down.
And it’s just really, really difficult.
Bob Murphy:
Yeah, again, it’s more of a pedagogical point than I’m making, but I do think it’s important, obviously, to guide investors that they’re not relying on mechanisms that don’t exist in reality. So as Brent was saying there at the tail end, he was like, Oh, it’s not going to be this nice smooth, orderly deleveraging, and the US just recede slowly and the other powers rise. I mean, I agree with that. I would be shocked if over the next 10 years, planet Earth didn’t have a bunch of chaos and tumult. My only minor point on this is that the source of that would not be that the mere fact of several institutional holders of USD assets abroad trying to reduce their exposure to it, that that would set in motion some feedback cycle or chain of events that meant it would be harder for foreign-based holders of dollars-anominated liabilities that, Oh, no, shoot. Now, because the supply supply of dollars is shrinking, how do we come up with dollars to pay off our debt? And I’m saying that that’s not… The mere act of somebody selling off the asset doesn’t reduce the supply of dollars. That just transfers it to the new owner.
Then what does shrink the supply of dollars is the process of the debt being paid off. And so I’m saying just the mere fact that people holding on the other side of that loan dollar creation transaction, if they decide we don’t want our assets to be so heavily dependent on for various reasons, geopolitical, what have you, or just looking at the fiscal position of the treasury, they start selling that weakens the dollar, other things equal. And so it’s easier for the holders of the liabilities to pay down their liabilities And then if that happens and the position slowly unwinds and they slowly deleverage, that’s fine. And then it’s true, that’s a quantity of dollars measured worldwide, and some broad index does shrink, and that’s fine. That’s That’s the point I was making. So it is true. If there’s some other reason that people default on their dollar-denominated liabilities, that also would cause this quantity of foreign dollars to shrink and would be associated with a spike in USD against the Euro and Yen. But again, those are different scenarios. So that’s the the minor, but I think important point I’ve been making through all this.
And I do agree with Brent’s broader point that I think in the long run, the way humanity is going to wean itself from relying so much on the dollar is because of the development of market-based alternatives. And just in general, stuff you guys are doing at Monetary Metals, the stuff we’re doing here at Infineo, other people, of course, around the world, blockchain technology more generally, I think that’s going to be the way that the dollar system gets eclipsed, not because Russia and China come up with some alternative.
Brent Johnson:
Like I said, I have tremendous respect for Bob, and I love what Monetary Metals is I’m a huge fan of gold. I know sometimes when I talk about the dollar, people think that I have ignored the possibility of using gold. That’s not the case at all. I think everybody should absolutely own gold, and I think gold has a very bright future. That said, I just think that the US dollar is more entrenched in the global economy than many people realize. I think it is strong for reasons that are very underappreciated. I think if people had a better education on how the system developed and how it actually works, I think their belief that the dollar is just going to fall off the cliff one day would perhaps not be totally gone, but it would maybe not be as strong in their mind as it is right now. I think because of all the craziness in the world and everything that we’ve seen over the last 25 years, certainly over the last 15 and definitely over the last five, people have increasing awareness that we’re moving towards the end game of this monetary experiment that was started 80 years ago or 50 years ago, however you want to define it.
And that’s very possible. I think people need to be prepared for big changes to the system. Unfortunately, I don’t think you’re going to be able to figure out how these changes to the system are going to affect markets just by reading a financial textbook or listening to central bankers. I don’t want to get too dark, but I think you’re going to learn more about how things are going to go down by watching Game of Thrones than by going to the Jackson Hole conference. That said, there are certainly forces out there that want to de-dollarize, and there are going to be attempts to de-dollarize. I believe that when those attempts are made, we will have increased volatility. And I think when that volatility happens, I think the dollar rises. It doesn’t fall. So while I think everybody should absolutely own gold, everybody should absolutely be prepared for volatility. I think that they should have just moved to a mountaintop, buy some gold and come back 10 years. I think this could go on for a very long time. And I think you have to have an appreciation for the strength of the dollar system in order to navigate the waters that are to come.
Ben Nadelstein:
Bob, I hate ending podcasts on a sad note. So maybe you can give us some hope on our monetary future. What are some of the solutions? What are some bright spots? Obviously, fans of the US dollar, we may not be, But we do want to talk about the system factually and accurately and get down into those monetary mechanics. But where do you see the future lying? And is there a positive note for us to end on?
Bob Murphy:
Sure. So even given my overall view, just clarify, I don’t think the dollar is going to crash next April or something like that. Again, like I said, I think if war breaks out or if war continues to flourish, that some people might argue that we’re in World War III as we speak, that I think, yeah, that will probably make the dollar strengthen. And it wouldn’t surprise me if Europe goes down and the Fed bails them out. And maybe then it’s like the next crisis is when the Fed finally meets its match. I know that’s very similar to what Brent says with his, What’s the movie, Brent, that you talk about? Is it The Highlander?
Brent Johnson:
Highlander.
Bob Murphy:
Yeah. Where it’s going around. So it’s like the final boss or something. So I agree with Brent on that part of his analogy or his analysis. So what that means then for Americans is that, yeah, even if I have convinced you and others that, oh, yeah, a long term fate of the US dollar is bleak, that doesn’t mean, like you said, you got to revamp everything right away. This is more of a long term thing that you do have time to respond to. Also, just in general, with technological advancements, the financial sector is being revolutionized. The stuff I do in my day job, I was just surprised as I got more into this space of how much household name financial institutions already are building blockchain-based assets and distribution and so forth. I mean, that’s the thing that I focus on. But just in general, AI and all that, despite whether you think it’s overhyped or not, it clearly is revolutionizing certain segments of the economy. And so, yeah, I think it’ll be easier for humans 10 years from now to just have a portfolio of currencies and other types of assets. And there probably will be digital tokens that will mimic a basket of household supply KPIs in this country, to do its own private sector CPI, and for people who want to hedge themselves against local currency risk and so forth, I think it’s just going to be a lot easier for people to deal with the uncertainty.
And those tools certainly are a bright spot in the future, amidst all this other chaos that the States are unleashing on us.
Ben Nadelstein:
And for those interested, what we do at Monetary Metals is we pay a yield on gold and silver, paid in more ounces of gold and silver. For those interested learning more about that type of financial plumbing, they can check out monetary-metals.com.
Brent, where can people find more of your work since this conversation was fascinating, but I don’t think we got down to the final word on who’s going to win in terms of the USD or the milkshake. So, Brent, where can people read more if they just want to get everything milkshake related?
Brent Johnson:
Yeah, we do a weekly show. It comes out every Sunday. It’s called Milkshakes, Markets and Madness. You can find that on YouTube. We also have a research service. It’s not a newsletter where we’re saying, Hey, do this trade, or put on this hedge, or this is going to happen on December fourth, or some specific date in the future. It’s really more big think piece stuff. That’s at macroalchemist. Com. You can go there and you can sign up, and we send something out three or four times a month for people to read. And then I’m very active on Twitter. If you look up Santiago Capital, a white seashell is the symbol. Santiago AU fund is the Twitter handle. And then santiagocapital. Com is a website. It just has my contact information. And my overall business is wealth management. I act as the financial quarterback for a number of high net-worth families and individuals, and also do my best to help educate people about the financial system as I go along.
Ben Nadelstein:
Brent, thanks so much for taking the time today. Bob Murphy, where can people we’ll find more about you, your work, and some of the financial products you guys are working on?
Bob Murphy:
Sure. So I would point people first and foremost to infineo. Ai, and there it talks about the things I’ve been alluding to. And also we do have a weekly podcast there called the InFi podcast, where it’s either me going solo or I’ll have a relevant guest talking about some development in the financial markets related to technology. I host the Human Action podcast. So if you go to Mises.Org and click on the podcast, you’ll find the Human Action podcast, where you’ll get Austrian economics into your veins every week if you want to do that. And then I’m also on Twitter @bobmurphyecon, where there’s some fun times there.
Ben Nadelstein:
Bob Brent, I want to thank you so much for coming on the podcast. It was enlightening, and hopefully the dollar will not collapse before the next time we get to see you both. Thanks so much.
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