Jeff Snider joins the Gold Exchange Podcast to discuss the challenges of replacing the dollar and where alternatives stand. Keith and Jeff discuss the need for infrastructure to support the widespread adoption of an alternative currency, the limitations of indicators like the yield curve, and why the economy doesn’t work the way you think it should.
Additional Resources
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Podcast Chapters
[00:00:00]: Jeff Snider
[00:01:10]: The Eurodollar system
[00:02:05]: Triffin’s dilemma
[00:04:11]: The dollar shortage
[00:07:12]: Dollar strength
[00:10:37]: Misguided solutions
[00:13:02]: The Rise of Wealth and Capital
[00:15:09]: Capital Flight
[00:16:16]: The Closed Loop System
[00:17:22]: The Dominance of the Dollar
[00:18:54]: The Issue of Non-International Currencies
[00:25:39]: US dollar reliability
[00:26:08]: Crypto
[00:32:29]: Gold
[00:39:26]: An alternative currency system
[00:40:21]: The lessons from Uber
[00:46:40]: The complexity of credit structures
[00:47:50]: The limitations of the yield curve
[00:51:52]: Analyzing the complex system
[00:54:50]: Eurodollar University
[00:56:14]: Monetary Metals
Transcript:
BVN:
Welcome back to The Gold Exchange Podcast. My name is Benjamin Vern Nadelstein. I’m joined, as always, with founder and CEO of Monetary Metals, Keith Weiner, and our special guest for today is Jeff Snider. Jeff, how are you doing?
Jeff Snider:
Great. Thanks for having me back, Ben. I’m really looking forward to it.
BVN:
So Jeff, if people don’t know who you are, clearly they just don’t know anything about the Euro dollar system, the monetary system, or I don’t know, maybe their head’s under the sand. So can you quickly tell us who you are, what you do, and why people should care about euro dollars at all?
Jeff Snider:
Well, the last part is pretty complicated, but I have an outfit called Euro dollar University of a YouTube channel and a website subscription services where, as your introduction implied, we talk about the monetary system, what it is, what it’s supposed to do, why it isn’t doing what it’s supposed to do and all that stuff, because contrary to most popular perception, the global reserve currency is a little bit different than what they teach in the textbooks. So Eurodollar University aims to fill in that gap, which means if we’re talking about a global reserve currency, there isn’t a spot on the planet that isn’t touched by the Eurodoll system, whether it’s behaving or misbehaving. Therefore, it impacts everything that we do, not just in terms of economics or even financial markets. It has had a major role in a lot of other things too, politics, society, all that stuff. So global reserve currency is pretty important. It’s as important as it gets.
BVN:
And Jeff, I want to start with a question that actually you had for me and all our future guests going forward, which is from yourself. Will you think more deeply about the monetary system, about how the plumbing actually works and the international nature of it? You said, Keith, you agreed. The dollar is really everything. It’s not a national currency, it’s an international currency. And so thinking about how impacts not just individual domestic economies, but how it can impact everybody. So I want to start with that question. I think that is in some ways talking on Triflin’s dilemma, as well as how an international and domestic currency can affect other countries, other nations and other central banks. So, Jeff, let’s start with you. Is Triflin’s dilemma playing out? And how are other central banks and other international currencies dealing with the international currency, the dot?
Jeff Snider:
Yeah, we’re back into the same territory. I mean, Triflin’s dilemma was essentially that we needed more money for a globalizing economy after World War II, and the US reserves of gold was just not enough for that to happen. So the banking system got together outside of governments and said, We’ve got a lot of dollars floating around Europe anyway, so why don’t we just formalize the structure? Although it was more informal at the beginning, ad hoc, but essentially let’s create a way to solve Triflin’s dilemma without having it be a dilemma. So it was in response to the tightness of global money, the use of just US reserves of gold that led to the euro dollar system, which created an era of prosperity and globalization that lasted for quite a long period of time. But everything has an expiration date. Everything, especially humans can come up with. It’s never going to last forever. And that expiration date was August ninth of 2007. And ever since then, the euro dollar has been tightened up. It’s been malfunctioning here and there sporadically and intermittently. And so we’re back in the situation where we have not enough money for the rest of the global economy to continue to grow at the rate it did before.
So yeah, we’re right back in the same boat again, the pendulum swinging all the way back in that direction. And so the question is, what do we do about it? Now we have a dollar system that isn’t functioning the way it really needs to. Something needs to be done at some point, except most people don’t even realize this is how it is and this is what it’s been. So the first step to trying to fix it is to get people to realize what the euro dollar is and how important it is.
BVN:
And Keith, I want to go to you later in the episode asking, what can we actually do about this issue? And I have a feeling you have something in mind. But before we get there, do you see Trippin’s dilemma playing out in a similar way? And how is the dollar affecting other currencies around the world and even our own currency?
Keith Weiner:
I was just thinking as Jeff was talking, I spent a lot of time in the Middle East and not just in Dubai, but in other countries there as well. And some of those countries peg their currency to the dollar. And that’s another one of those areas where most people don’t really think about what’s the mechanism of that. They think, well, it’s a quantity of currency problem, right? So if the dollar increases in quantity by 10 %, then we have to increase the quantity of our local currency by 10 % and somehow magically stay apart. And what it is? It’s an interest rate game. If their currency showing some signs of falling, they jack the interest rate as their currency is rising too much or lower the interest rate, and they’re trying to tune the balance that way. So somebody said to me, he said, yeah, our currency is absolutely table flat against the dollar for 20, 30 years. But he said, So it’s like the dollar, but we don’t have the benefit of your lower interest rate. To maintain this table flat thing, we have to have much higher interest rates. So it’s tripping dilemma in reverse.
In order to maintain a stable currency, we completely would play havoc with the local economy, jacking the interest rate up and crashing it down and jacking it up and crashing it down. That must destroy banks, pension funds, insurance companies, corporate borrowers, business borrowers. I don’t know how anybody borrows money to buy a car or a house in a place like that. And of course, there’s a lot less of a credit economy. There’s more cash by its nature. And then this is a family office. I was there with the principal and his advisors, also an attorney. And I said, if you hold the local currency, it’s table flat against the dollar, but it’s a proxy for dollars. And I said, but the problem is there’s always a risk that currency peg will snap. And they do snap from time to time violently. And so if you want to hold the dollar balance, aren’t you better off holding real dollars versus local currency proxy dollars? They looked at each other, looked back at me and said that’s our investment strategy exactly. We don’t want to hold local currency, we want to hold real dollars. And so there’s this incredible demand for real dollars that just keeps the US dollar strong against all the predictions on Twitter, at least.
Jeff, you’d appreciate that somebody said to me on Twitter this morning, I was talking about the debt and rising interest rates or something like that. And he said, Well, now the government owes this much in interest and blah, blah, blah. It’s not sustainable unless a dollar loses 70 %. I said, Are you saying if the DEXY were 35 instead of 105, that the debt levels would be sustainable? What are you even talking about? People just say these things. They’re just almost.
Jeff Snider:
They just repeat it because somebody said it somewhere in the past and maybe it seems relevant or something.
Keith Weiner:
Right.
Jeff Snider:
It’s amazing, though, you’re right, Keith, because it is an interest rate game. The other side of it since 2007 is dollar providers are very risk sensitive. And so they look at say, Turkey, for example. Do I want to provide dollars to Turkey? Well, no, not unless I’m going to get like 20, 30 % return. And even then I’m still leery about doing it. So in a dollar shortage situation, it really wreaks havoc on the other side. I mean, it seemed to work really well when dollar providers were like, we don’t care. We don’t see any risk. Let’s just provide dollars everywhere. Up until 2007, really got out of control there. But still, that’s when everybody seemed to flourish. And now that the pendulum has swung in the opposite direction, it leaves everybody always scrambling for dollars, which the other side of that, what you’re just getting into, Keith, is that because there’s always demand for dollars as reserve currency, the dollar is never going to go to zero. It’s going to continue to be, quote unquote, strong, if only because the system itself is weak. And as the system itself is weak and doesn’t supply the currency that’s necessary, the exchange value goes up and it wreaks havoc on a lot of places.
And of course, Americans don’t see the other side of that. We were privileged in that respect. We don’t see what happens to other places around the world that experience this dollar shortage firsthand. So they don’t realize how it would be beneficial to actually do something because they don’t see the symptoms anyway. So it’s really this massive blind spot domestically. So you hear comments all the time. Oh, the dollar is going to be replaced tomorrow by China’s Taiwan. Wait a minute. Where does that actually come from?
Keith Weiner:
So you appreciate this comment. So this came from a wealthy Indian businessman who spent a little of his whole life, certainly his whole adult career in the Middle East, not in India, but very nationalistic towards India, very patriotic, very loyal personally to Prime Minister, Modi, not necessarily a friend of US government, foreign policy or currency. And the topic of the Bricks, so-called currency came up. He just started to laugh. He said, have you seen a chart of the Indian ruby? He said, it’s down whatever it was, 60 % in the next number of years. Have you seen a chart of the ruby? He went through all these currencies. And he said, So you’re going to take four small, falling currencies and combine them into one big, falling currency. What’s the point? And he just started to laugh.
Jeff Snider:
I think to be sympathetic somewhat to the counterargument. I think they’re looking in the wrong direction thinking the dollar is going to be replaced by the bricks or China or Russia. One of these countries are going to find a solution. But to be sympathetic to the argument, they all realize that there is something wrong here. They have their finger on the wrong thing. Like, okay, this doesn’t work, but they don’t know why it doesn’t work. And that’s what leads them into all these ridiculous solutions.
Keith Weiner:
It would work if only the DEX Y were 30 instead of 105. That would make it work.
Jeff Snider:
Exactly, or something like that. And you’re right, India is a country that’s probably the perfect example because the rupe keeps hitting record lows. It was a record low, I think, the other day. And India’s profile is probably the best of all the emerging market economies out there. So there’s really no other reason why the rupee should be as weak as it is, except for it’s on the other side of the dollar, sledgehammer, really.
Keith Weiner:
There’s some structural problems in India as well. I’ve been just visited there. I think if you wanted to design the government to just maximally cause chaos and go to everybody’s lives, it would be the Indian government. So you’re driving along on a four lane in each direction. I dare not necessarily call it Super Highway because there’s a lot of issues on it, but four lanes in each direction. And then there are these metal gates, like the kind that you’d see at a concert or event, the kind that get chained together. And they have a whole bunch of these blocking the highway, except for one lane. And then through that, you have to go through this like zig -ag, like a snale entrance into a bathroom or something in a public airport. And then there’s signs that say, Slow down for safety. And all the cars are veering and honking. And even at 3:00 in the morning when I came from the airport to the hotel, it’s not that much traffic, but all these near misses and all this craziness going on because this is for safety. They put this there. It’s such chaos that I could see why…
There’s a lot of non-monetary reasons why their currency is just a basket case.
Jeff Snider:
I think that’s an underappreciated aspect of why the euro dollar lingers as much as it has is that, say what you want about US policies and US politics, the dispute mechanism and arbitration, we know we’re getting out of US courts and US law. So that’s an underappreciated aspect of US. I mean, if you have a global reserve currency that maybe is under Indian law not to pick on India or God forbid, Chinese law, I mean, there’s something to be said about that legal tradition that is really supportive. It’s really predictable. And that’s one reason, one key reason why we’re stuck with the dollar system, because that’s a big one. That’s not a small one to to just ignore.
Keith Weiner:
Yeah, absolutely. And that’s what ultimately led to the rise of England versus all the other European powers. As you knew that if you put your gold into an English bank, an English bank would have to honor the contract to redeem your deposit on maturity or else be taken down to receivership and bankruptcy. And in France or anywhere else, it seemed highly likely that if the banker was a friend of the king, you’d be the one who got screwed rather than the bank going out of business. And so that allowed the banks to be less sound. The French people had just as much gold at one point in time as the English people, they just didn’t bring it to the banks. And so that allowed the English banks to then have a lot of capital, which meant when something really capital intensive came along, which was railroads, the English banks were able to finance such a massive project that the French banks, the German banks, the Italian banks couldn’t. And then because they had the railroads, that allowed them to then get into the age of iron, steel, ships in industrial scale and just bury the rest of the world in technology ultimately.
And then there was no comparison anymore by the late 19th century between England and all the other countries in terms of wealth or their capabilities to put an army in the field or a Navy, et cetera, because they have the ability to raise capital, which was the consequence of the high trust of the English in a court system.
BVN:
Keith, I want to ask you a question about capital. So a lot of the times we’ve been on the podcast, we have a lot of guests talk about inflation, we talk about debt. A lot of times we also bring up capital misallocation and of course, the destruction of capital. I have a question. We had Brent Johnson on who talks a lot about, Hey, as foreign currencies fall or devalue, local economies and local capital goes to the safest asset that they can, which is either the US dollar, US Treasury, or into the United States capital markets. How does capital fleeing from foreign countries into the US, how is that going to affect asset prices over time? And are we seeing that now with the Fed saying, hey, listen, asset prices remain? Is that because foreign capital is fleeing to the US?
Keith Weiner:
Each currency system is a closed loop. If foreign capital wants to come into the dollar, that bids up the price of the dollar against whatever currency they’re dumping to buy it. So I said many times, everybody in China has any degree of wealth is desperately risking their life because you break laws like capital control laws there. Where they can arrest you and disappear you to seek a prison and beat the life out of you, risking their lives to dump their yuan and buy dollars. So that’ll put the price of the dollar up against the yuan. But there’s always two sides of the trade. That means somebody with dollars brought the euro at whatever price. So the dollar is a closed loop system. Once you’re inside the dollar, there’s a set of assets. The asset price inside the dollar is not a function of the dollar’s price against the euro or the euro. It’s a function of merely of interest rates. So as interest rates go down, asset prices are an inverse. That’s a very rough thing. So not directly, but it will be very supportive of the strains of the dollar. People really only want to measure that in terms of its purchasing power, which reversely it will hold.
And then all the people who thought hyperinflation, look at how much money the US government is printing. It’s not printing anyway, it’s borrowing, but they don’t understand the other side of that equation, the demand side. And that’s what is not only holding up the price of the dollar, but I think going to drive the dollar much higher. Now, I have to say, I don’t think the dollar can be measured in euros or euro or yuan or Yen or pound sterling or anything else. That’s like measuring a steel meter stick in gummy bears. How long is my steel meter stick? That’s like measuring the altitude of the Lighthouse from the deck of a ship, which is slowly sinking and tossing around on waves. Why is the Lighthouse going up and down and mostly up? Lighthouse isn’t going anywhere. It’s the fact that you’re in a sinking ship is really the problem. You can’t measure the dollar against euros. It’s the other way around. The euro is a dollar derivative anyway. I think we talked about that last time, and that’s when you pointed out, was it 96 or is it 98 %, Jeff, that you said of all the derivatives out there in financial markets, 96 or 98 % has a dollar on one side of them?
Jeff Snider:
Yeah, it’s one of the two, depending on which one you’re talking about. We talk about FX swaps, it’s 98 %. So that’s really the key point about a global reserve currency is that we’re always intermediating through dollars from one place to another. So it almost doesn’t matter. There’s always, as you’re saying, Keith, there’s always that structural demand for dollars for reasons that have nothing to do with the United States oftentimes.
Keith Weiner:
So you’re saying that if a China man wants to trade with a New Zealander, there’s no robust, deep liquid market for Taiwan, Kiwi, dollar, par?
Jeff Snider:
Exactly. We see this in big and small ways. And think about it in terms of the Russian sanctions is a good example. So Russia has been able to sell a ton of energy, oil and natural gas to India because India wants to buy it and they’re always desperate for it, and I’m sure they’re getting a good price. And so that has left the Russian energy providers to get a whole lot of rubies. And so they have these massive ruby balances. I think at last check it was several trillion, which works out to about $150 billion worth of rubies that they can’t use. They have all these rubies. Their only choice, because India’s ruby is not really an international currency. Now India wants to make it one, but it’s not an international currency. So they have all these balances in India and Indian rubies just piling up and piling up that they can’t use. They can’t use them in Russia. They can’t really exchange them anywhere else. So they’re stuck with a non international currency. And that’s really the issue. If you want to transact with anybody around the world, you’re going to intermediate through dollars and you’re going to intermediate through the large dealer banks who do it, especially in the FX space.
Keith Weiner:
That was the funny thing is when that Russian, I don’t know, was their central bank guy or one of their actually said publicly, we’re not doing this anymore. We stacked up a pile of useless rubies that we don’t want. So forget it. We’re not doing that anymore. To me, as a gold guy, I’m like, well, it’s obvious that if you can’t use the dollar because you’re Russia and you’re locked out, there’s one thing you’re going to use, which is gold. And it’s obvious that gold is going to settle. I’m sure India sells stuff to Russia as well. You only have to settle the difference in gold. And that they’re going to rediscover element by element the use of gold, which in the 19th century is because the governments couldn’t agree on anything. Half the time they were at war with each other. There was no treaty that says we’re all going to be greedy to use gold. There was nothing else that anybody trusted. And outside the US, dollar, what currency is anybody going to trust? Are they going to trust Moody’s Rupie? Are they going to trust Lula’s real? Are they going to trust Xi’s Wang?
I just wrote an article for a German site they’re translating to German. And I was referencing that story that the owner of the New England Patriots was visiting with Putin, and he showed him his Super Bowl ring. And Putin tucked it and kept it. And then he went to reach for it. All of a sudden, these KGB guys interceded and escorted Putin out of the room. And he was just standing there flabbergasted and almost became an international incident until the US State Department told them, you have to announce that you gave it to him as a gift.
Jeff Snider:
Nice. I love that, the gift.
Keith Weiner:
Right. So who’s going to trust Putin with credit? Not even the right, they have capital controls.
BVN:
Yeah. Keith, you put up a poll on your Twitter at one point, which is, okay, which of the bricks’s currencies do you want to lend your money to? And of course, everyone was in the comments because no one wants to click whatever, Brazil or Russia, because everyone in the comments as well, This is unfair. They’re going to do all this stuff. And the point isn’t that to say any of the people in these countries are bad or anything about the actual countries themselves. The point is that there’s such a network effect of trust, of institutions, of currencies that it’s really hard to replicate in another currency or in another country or another economy, especially ones that are in some cases, dictatorships or very, very flawed. And so breaking through that network effect is just really going to be, if not impossible, incredibly difficult.
Jeff Snider:
And there’s another side of that too, Ben. Excuse me. That’s a big part of it too. But you also have to keep in mind there’s a tremendous amount of infrastructure, the banking system itself that has spent decades putting together financial utilities and payment systems and all sorts of standardized ways just to do basic payments. I mean, you can send a message from one end of the world to the other end of the world at speed of light. And because of all the infrastructure that’s there, because of the standardization that’s there, because of the legal framework and the trust that’s always there, you’re relatively certain that the payment request that you’re sending to the system is going to be honored. And so that’s the other part of it. You talk about replacing the Euro dollar or the US dollar, really the Euro dollar. It’s not just, hey, can we get somebody to trust the Riyal? It’s can the Riel actually undertake the functions of a reserve currency? Can it process so many payments? Can it actually intermediate between different currencies on other sides of the planet? Can it settle massive volumes of payment requests and financial markets all at once and do so efficiently and often very elegantly?
And nobody’s even thinking about that. They’re talking about this brick settlement system where nobody’s actually… I’ve never heard anybody talk about the actual infrastructure that’s necessary to put this together. So until somebody actually talks about that, we’re just wasting time with conversation.
Keith Weiner:
Reminds me of somebody who’s talking to Warren Buffett about businesses that have a moat around them, and he’s talking about Coca-Cola. And he said, if you give me a hundred billion dollars and said, replicate Coke’s business globally, I’d give you back to a hundred billion and it can’t be done. Because they have so many manufacturers and distributors and all the soda fountains and the soda-fountain repair guys and all the parts for all the soda fountains and just endless with that thing. To your comment about an intermediate, I have a friend, an investor who lives in Paraguay. And I think he was visiting Argentina, showed me a picture of some bank and their currencies that they would buy and sell. And of course, it was Argentina against dollar. And it was, listen, that… And then it was like, I think it was Argentina against Brazilian real. He’s like, look at the spread. Looks like 15 % or something. And the dollar one was a couple of percentage points. I mean, it wasn’t a narrow spread because it was against Argentinean pesos. But you could just see how the dollar is the currency par against everything. And if somebody in Argentina wants to trade against somebody in New Zealand, there probably isn’t a market at all for those to be to tradetreated directly.
You actually need an intermediate, what’s the term in currencies? Yeah, an intermediate good. So barter doesn’t work. We have to actually go to an intermediate medium of exchange to get from cotton to sugar. Well, it’s the same thing. If you want to get from Argentinean pesos to Brazilian real, you’re going through the dollar as the intermediate. Again, to your point, nobody even thinks about that stuff.
And the Brazilian real is going to replace the dollar as the US Reserve, right?
Jeff Snider:
Yeah. I was just at a conference in England, and they talked a lot about dollar dominance and how that’s a bad thing. And maybe it is a bad thing because it doesn’t work the same way. But there’s really no serious discussion about why the dollar maintains its dominance. And it’s not about US policies or US government or aircraft carriers and the US armed forces. It’s about the fact that the system just works. I tell the story not all the time, but occasionally the very first time someone used a credit card in a foreign country to access and get currency, it was 1984. This fellow from Arkansas went to Australia, put his Visa card in an Australian Bank ATM and actually got out currency. So there’s this usability to the euro dollar system. That’s why it has this supremacy. I think it’s Brent Johnson who always makes the comment, the South African farmer or the South African miner, he doesn’t care how it works. He just wants to know that does. And he wants to know that he can trust that it works. And because the euro dollar has had so many years of establishing this infrastructure, people don’t care about anything else.
The fact that it does work, it doesn’t work as well as it used to, but it’s there, it’s reliable. And to replace it requires replacing that reliability.
Keith Weiner:
That’s right. It’s easier said than done.
BVN:
Yeah, it does seem that there are a lot of people now, especially in the cryptocurrency space, who are saying, don’t worry, Jeff, we’ve got this all figured out. We’ve got a brand new currency or cryptocurrency, sometimes Bitcoin, Ethereum, whatever it may be.
Jeff Snider:
You can’t call Bitcoin crypto. They don’t like that.
BVN:
Okay, well, they can come after me. Okay, Bitcoin apparently is not a cryptocurrency. It is its own thing. But the Bitcoin people are saying, Listen, Jeff, Keith, you guys got it all wrong. What we’re going to do is we’re going to have Bitcoin be the currency and we’re going to have payment processing systems. We’re going to have different layers of Bitcoin. So you can process a Starbucks coffee versus on-chain and off-chain. And do you see that maybe crypto is the answer to this euro dollar conundrum that we’re in?
Jeff Snider:
I do. I think there is definitely some promise in digital technology. I don’t think we’re anywhere close to getting to that level of sophistication and reliability, but it’s moving in the right direction because when you stop and think about what the euro dollar is, it is nothing more than a distributed ledger system. It’s not a single distributed ledger system, but it is a bunch of distributed ledgers where banks keep the books and they balance with each other. And when it works, it works really well. So in one sense, we don’t really need banks to maintain a set of books. We can just put it on one single blockchain, assuming the blockchain is functional enough. So that part, that makes it simple. The question is, and the question that Bitcoin never has been able to answer certainly hasn’t yet after a decade and a half, almost a decade and a half.
Jeff Snider:
Usability. You can’t go anywhere and use it. You can’t use Bitcoin to start. Yes, they keep talking about these different layers and making it more of a medium exchange. But up until now, everybody’s been content to say Bitcoin is a store of value. When the dollar destroys itself, Bitcoin will just rise from the ashes and everybody will have to use it. And I keep saying, no, that doesn’t work. We look at the euro dollar itself. The euro dollar is a terrible store of value, but yet it took over the world because it’s usable. So I think that’s starting to dawn on some Bitcoin and definitely some of the stable coins and some of the digital projects are thinking, okay, how do we make this stuff more usable? Let’s stop focusing on store value, start talking about medium exchange, but that’s a lot more difficult than it sounds. It really is. It’s a very difficult task. It’s a capital intensive task. It’s a time intensive task. And as much as Bitcoin wants to do it, as much as any digital currency wants to get there, they’ve got a long, long way to go. So while I would agree that there’s potential and promise, I’m not going to hold my breath here.
Keith Weiner:
Well, and the irony of the whole thing when people say I used Bitcoin, the merchant accepted Bitcoin. Actually, what the merchant did is hire a third party currency exchange who found a fourth party with dollars, who wants to buy the Bitcoin, and they have this complex multiparty swap where the Starbucks get the dollars they want. So you think you use Bitcoin to buy the coffee, actually use dollars and your Bitcoin was traded to a guy who wanted to buy the Bitcoin, his dollars went to the Starbucks. And of course, some of those dollars went to the currency broker in the middle. And because computers run so fast, this is all pretty seamless looking to the user. It feels like I spent Bitcoin and bought a coffee. But the coffee is priced in dollars and the Bitcoin price is bouncing all over the place, plus or minus three % a day. Though the price of that coffee would be banging around all the… Throughout the day, there would be a real time change in the price of the coffee. So it’s not actually Bitcoin being used as medium, it’s Bitcoin being used as dare I say, sham.
Jeff Snider:
The dollar is still intermediating between Bitcoin and the ultimate user. It’s still acting as the reserve currency in that situation, too. It’s a great point because you have to get them to realize that they’re not actually using Bitcoin. They’re using some exchange. And we know how some of those exchanges have gone.
Keith Weiner:
The next problem is, yeah, Bitcoin is going to build all this infrastructure and replace everything. And by the way, don’t trust an exchange. You can only carry your own to self custody everything. And I’m like, do you have any idea how hard it is to self custody something, especially if you want to talk about even the time frame of a decade? That’s a lot harder. That’s another completely underappreciated problem of what it takes to be a reliable custodian. That requires a lot of infrastructure and a lot of thought, and a lot of internal controls. And what happens if you get sick? What happens if you’re unconscious and you have a $100,000 medical bill and your family doesn’t have your passwords, of course, because you didn’t trust them with that, because if you gave them the passwords, then they could steal all your shit. And now theoretically, you’re rich and you’re not going to afford your medical bills. In practice, you’re dirt poor and you’re broke because no one has the passwords. And so even there, that’s partially an infrastructure problem and partly an ethos of the whole space. It’s that fruity of turn your collar up.
Keith Weiner:
You can hunch your shoulders, trust nobody.
BVN:
And Keith, I think another point that you make, which is very interesting is that having a trustless currency can have some pros, but it also has a ethos of many cons, which is that our entire society, our capital, the reason that we got rich is due in large part, if not all, because of a trust-based society.
Keith Weiner:
We can trust based society. That’s right. And you look at a high trust society like what England was in 19th century or the US as today, and just getting back to that medical example, there’s something wrong with you. You willingly lay down on a table, let them put enough gas into you or enough drug into you to make you completely unconscious, where they can have their way with you, trusting that the only thing they’re going to do to you is exactly what they agreed in advance with you that they’re going to do, and that they were honest with you when they told you what the disease was, that why the surgery was necessary. If any of those things were broken, you’d rather take your chances and live with the cancer than have a surgeon put you under. So then to say, well, right, but the money will be trustless. The medicine will be trustful is also silly. Anyway, I don’t want to throw too much on Bitcoin, but my point was just simply there’s an infrastructure problem even there, that the exchanges are no good. The exchanges are not to be trusted. And so on the one hand, they’re saying, we’re building all the infrastructure.
On the other hand, the most basic building block of the infrastructure is completely untrustworthy. It’s a scam. Don’t go there. It’s going to be a rug pole for you. Well, which is that? Are you building the infrastructure or are you saying don’t trust any of the infrastructure? I have to carry my coins around in my own wallet.
BVN:
I want to now go to the other option that a lot of people are saying could be the alternative to the current Fiat currencies. It has a 5,000 year history and that is gold. It is an international money in a lot of senses. And of course, it has that, if you want to call it trust component built into it because it’s a physical good, it’s a physical commodity. And at the end of the day, if you don’t like an interest rate or if you don’t like a risk of some sort, you can simply take that actual physical commodity home. There is no trusting some ledger or any other computer coding. You can have that thing in your hands. So, Jeff, maybe I want to jump to you. Do you see people fleeing to gold as their local currencies fall or as trust in the system of the euro dollar falls as well?
Jeff Snider:
Well, I think there are some who do that, and I think that’s probably a wise tactic is a hedge against instability and uncertainty. But it’s the same issue with Bitcoin. How usable is gold in a micro setting? I think that’s where it really gets. I mean, gold has been demonetized for such a long time. Most people don’t have any familiarity with it at all. They think money is the funny little pieces of paper that the government prints up. Well, that’s not even money either. It’s all digital ones and zero. So I question how… I mean, there’s a lot to do, just like with Bitcoin, there’s a lot to do to get back to gold being a useful medium, which is where I really… I mean, for me, that’s what reserve currencies are supposed to be more than a store value. They’re supposed to be a useful medium. I think it’s a multilayered process, not to borrow the term from the Bitcoin people, but essentially can we start big and build infrastructure from there? Can you have, for example, a country’s intermediate through gold in a netting process, a trade process, the gold exchange standard a way, and then maybe work backwards from there?
But that’s really what it comes down to, is how usable is gold in a micro setting, in a daily setting? Because I look at it, if you want to have a gold standard, then it has to go all the way. You don’t want to go part way. We got to use gold in our pockets because as you just said, Ben, if you don’t like the situation in the banking system or the economy, you got to be able to take it out and hold it and own it some place else. So really, to me, it doesn’t make sense to go halfway. And then that brings in the question of usability.
BVN:
And Keith, I want to give you the challenge here. So a lot of people say, wait a minute, we’re not going back to a gold standard. We have iPhones, we have Venmo, we have Apple Pay. You want some leather sack with your coins jingling around and then try to shave off a couple of grams to pay for Starbucks, clearly that can’t work. So, Keith Weiner, what do you say to that?
Keith Weiner:
I mean, I think I agree with Jeff in that the infrastructure, the plumbing is the elephant in the room. That the gold people who think we’re going to go back to paying with gold coins have missed the point. People don’t want to carry around plastic credit cards anymore. They just want to take their watch and put it on the the scanner and go deep. And I said that to somebody I gave a talk recently and someone pointed out they don’t want to have to wear the watch. They actually want to chip embedded to their wrist to do that, or just have a retina scan. And coming back into the US, if you have global entry, you don’t need the passport anymore. It’s just looking at your retina and your fingerprint. It’s built into your biometrics. That’s the elephant in the room. There isn’t the infrastructure in gold. There isn’t even today the infrastructure that gold had in 1933, let alone in the last 90 years, I think the dollar infrastructure has invented a thing or two that made it a lot more sophisticated, obviously, over the decades than it was back in those days. And gold has retrogressed as even less infrastructure today than there was then.
Interestingly, the bid ask spread on gold is super, super tight, even lacking any of that, which I would argue gold still retained its moneyness. The government has no power to order back the tie that King Knut proved, but has no power to order that gold isn’t money. It can just order you not to use it. And so people just hold it. But that’s a whole different argument. Obviously, a big part of military metals is we have to think about what is that infrastructure and how is it going to get built? How can it be profitable? Valuable to build on? If you just look at it as this giant daunting, the United States is empty, how are we going to pave 150,000 miles of Interstate Highway or whatever it amounts to be? Okay, framing the question that way is impossible. Unable. Okay, how can you make money paving the highways one mile at a time? Well, you start where there’s a lot of demand, and you borrow money, and you put the highway in, and then you get all the toll revenue. And then now you have an asset to lever up to put in the next mile and the next mile and the next mile.
That’s what has to be figured out in the case of gold. And I think, Jeff, to your point about the countries netting out in gold, I think that’s a likely starting place. There’s going to be a real problem there. People are going to want to build solution. And then that solution, they’re going to want other features with that, obviously, a yield coming back to the monetary metals proposition. Nobody wants to pay for storage of their money. That’s just a non-starterhistorically, it always… I mean, historically, you always could have paid somebody to store it in a vault for you. And why do people deposit in bank, which is not a storage contract? Storage contract is bailment, bank is credit. Why do people choose credit? Because they don’t want to pay for storage. Yeah. They want interest. And we’ve got to replicate that today or else gold isn’t going to take over for the dollar or anything else.
Jeff Snider:
Keith, that’s the challenge, but it’s also the opportunity here because the world is screaming for an alternative currency system. I think that we’ve wasted so much time by we, I mean, the Royal we, we’ve wasted so much time to all the Fed and money printing and all that. We need a store value. I think we wasted so much time thinking about that rather than the usability argument, the infrastructure argument, putting together an actual medium of exchange that we had this conversation in 2009 would be so much farther ahead. And it’s the same as for digital currencies, it would be for any competing currency system, demonstrate usability and reliability, and the rest will take care of himself, take care of everything else, including politics, because politicians don’t really care. They claim they care, but if commercial power and financial power moves to a competing currency that’s a much better currency system, the political power will follow along. So the challenge is to make a usable currency system, demonstrate it, road test it, show everybody that it works, and everything else will come along once you hit that critical threshold. It’s really about reusability and reliability. And that is, as you’re talking about, that’s about a whole lot of investment first.
Keith Weiner:
That’s right. I was going to say there’s a lesson that we learned from Uber, which is Uber was actually breaking the law in most cities because there’s a taxi cartel, which is enforced by law. And Uber said, well, we don’t need to worry about those laws with the Jedi hand trip thing. And by the time that the city governments got around to trying to ban Uber, they had too many customers. As a politician, as a completely impractical, career-risking thing to try to ban a company that half your voters are using in love. At that point, the cat’s out of the bag. And now it’s only about how do you regulate Uber, or how do you tax it or something? You can’t get rid of it. It would be too unpopular. And the same thing with true, if everyone starts to switch to another money, you can’t ban it because everyone wants it. There’ll be an outcry and you’re going to lose the next election. So then at that point, the politicians have to live with it and say, okay, how to live with it.
Jeff Snider:
Yeah, it just flies under the radar and everybody likes it. It works really well. And then by the time they even realize what’s happened, it’s already too late.
Keith Weiner:
Right. Exactly.
BVN:
I do think that there’s an interesting a gauntlet that’s been put down for any alternative currency or alternative money. Obviously, Monetary Metals is every day working on that solution. Clients own gold, earning interest on gold, checking out of that Fiat system. Bitcoin people are going to try and other cryptos, apparently. People are going to try to make those work as well, whether that be payments, store value. Or apparently, if you can make cryptos earn interest, we’d love to see it. But I think the gauntlet is set. And now it’s just, okay, our clients of monetary metal is going to take over the world and people are going to just jump and people are going to say, wow, I love earning interest on gold. Or people are going to find a crypto and say, wow, this is really easy to pay for my Starbucks every day. I’m just going to use Monero, whatever that may be. So now I want to go to what actually might precipitate people looking for those alternatives. Jeff, I want to ask you about the yield curve. A lot of people, economists, market commentators, and of course, the political class, some are saying this Yield Curve is a monster.
It’s showing that we’re heading towards a recession. Others are saying yield curve, shmield curve. There’s just another day, or as our friend Paul Krugman says, it’s a surreal good economy. So where do you fall on the Krugman scale to reality?
Jeff Snider:
Yeah, the Krugman is definitely on the other side of reality, that’s for sure. The yield curve, I mean, it’s a reliable signal because it’s coming from the monetary system itself. It’s the banks and the dealers who operate in the system telling you what they’re doing and what they’re thinking and what they’re seeing. If they’re accepting a 10-year return, that’s a point less than short term money, that’s a pretty powerful signal. Even if rates are backing up here for a variety of potential reasons, the yield curve has been, I think the three months, 10-year spread has been inverted by a record amount of time, which to your point, Ben, some people say, well, that just means that this time must be different because the recession didn’t happen or the crisis didn’t happen. And I would counter that. Well, you don’t put a clock on this thing. Nobody has a crystal ball that can tell them exactly when something happens. And the longer the yield curve stays inverted, it’s not just the one yield curve, it’s actually many curves all over the world that are inverted. So we have corroboration amongst basically every place we look. And what it tells us is that it doesn’t matter how long it takes to get there, the destination is still in front of us, and it’s not a good one.
What does that actually mean? That’s difficult to say, but I would imagine we got a taste of it earlier this year. We started seeing a couple of banks failing for what we were told was underwater treasury bonds. And that’s not really the issue here is why were these banks forced to sell an asset they didn’t really want to sell? What the yield curve is saying is that there are other potential problems that could potentially come up and lead to further consequences, not just in the banking system, but really in the real economy, financial markets that volatility always comes with it. So I look at the curve and I have for a long time, and when they send these signals, these reliable signals, you tend to get really pessimistic about what they’re implying here.
BVN:
And Keith, I want to send it your way. I never was an economist formally trained, but when I think of the yield curve, I usually tend to think even using monetary metals as an example, I think, okay, if a lease has a shorter duration, which is less risk and the actual risks are farther along out on the time curve. So something like a gold bond with longer duration, it should make logical sense that closer to me in time, less risk, therefore lower rate, farther away in time, further risks, and therefore higher rate. So when you see a yield curve, do you think the same thing that the markets are saying something’s a brewing? Or is there something going on with the yield curve that we’re missing?
Keith Weiner:
There’s definitely something going on. And one of the first points, and when I first wrote my theory of interest in prices, I reread it. And I was like, man, am I being just so pedantic, so pedagogy, just pounding this point? And then I read it years later in a context like this, and I was like, man, I didn’t pound it enough, which is people assume that, let’s take consumer price level, the general price level is a simple linear function of the quantity of money. So it’s F of X equals some constant times X, whatever, and X is the quantity of money and F of X is the price level. And it’s a linear function. And I made the point that it’s not linear, but also it’s not stateless like that. People are very stateful. And you can try to flood people in 2009 with credit, they don’t behave the same way as they did in 2006 because they have memories and they have balance sheets. And so, yes, of course, if everybody was faced with a fresh choice, would I choose the English Imperial System? Would I choose the metric system? I can’t imagine anybody would say, oh, the English Imperial System is better.
I like twelves better than 10s, right? Because I have 12… Wait. But the reason why the Imperial System lingers is because everybody has a house that has studs on 16-inch or 24-inch centers. Everybody has a little skill saw with a half-inch arbor blade and what is it? An eight-inch blade and a skill saw, I think. There’s so many things. Everybody has a Chevy with half-inch bolts in it. There’s so many things that everyone knows what a mile is. Everyone knows what 60 miles an hour is in America. If you’re watching this from outside America, you think, what the hell is he talking about? But we’re not as familiar with centigrade and meters and things here. And so the switching cost is very high, so it’s stateful. The same thing and everybody has a balance sheet. So, yes, if everyone was choosing, what would I bid on a bond of each bill of 30-day maturity, a bond of whatever maturity all the way up to 30 years? Of course, the longer maturity, all those should be a higher rate. But that’s not what’s going on. There’s so much state there. Who borrowed what? Who had what leverage?
Keith Weiner:
Who borrowed short to lend long? And then there’s a structure to credit. That structure doesn’t just end just because everyone suddenly thinks that long term rate should be higher than short term. So to me, the question of, okay, the yield curve is inverted, should there be recession? Recession is so far downstream from the balance sheet action. I was trying to think of an analogy. The only thing I could think of is you have a party where there’s a big punch ball and there’s fruit and there’s whatever, some ginger ale in there and soda in there. And then somebody puts a turd in the punch ball. And downstream is like, how much are people partying and talking and having fun? And you’re trying to measure the effect that the turt and the punch ball by how much talking and fun there is. And what you find is, of course, there’s a variable leg and a non-linear effect. I mean, the punch ball might instantly shut down the party. It might cause more talking and more noise at first. Then people are leaving. You get all sorts of weird things. I think it’s a terrible way to try to measure how much turniness there is to the punchball, but how much noise volume there is to the party and how many people are hanging out in the hallway waking up the neighbors and giving the cops called.
It’s just a terrible proxy for measuring what you’re trying to measure. Yes, at the end of the day, it’s going to impact GDP and employment, but in weird ways with variable lags and unpredictable variable lags. And you can get weird booms in the meantime as somebody’s rushing out of one asset into another and suddenly, oh, they want to buy homes. And so then you get a boom in the home building sector, which causes a boom in all the commodities that go into homes like concrete and lumber, for example, maybe copper, but now we’re using plastic pipes for water. And you get all these weird ripples. You get all these weird resonances and positive feedback loops. It isn’t just, oh, injury to yield curve equals recession. But at the end of the day, suppose I’m a bank and I buy bonds with leverage, extreme leverage, because an environment of low interest rate doesn’t merely enable you to use leverage. It actually compresses all the returns. So in order to make you a nut, you actually must use leverage, not only enabling, but actually forcing you to use leverage. So I use a ton of leverage and I borrowed using some combination of customer deposits, Fed discount window borrowing, interbank borrowing, and commercial paper and all of which is very short term.
Keith Weiner:
I lever up and I borrow, let’s say, a billion dollars worth of that and I buy a billion dollars worth of, let’s say, three-to-year treasuries in summer of 2020. Now, if you look at the price of a three-to-year treasury, it’s down more than 50 % of what it was then. And the cost of your funding went from somewhere around 25-50 BIPs to somewhere around 550 to 600 BPS. So your cost of funding just went up, to say dramatically, is an understatement of the year. And the value of your asset just collapsed 50 %. Now what? What are you going to do? Well, you’re going to mark all this stuff as holds of maturity and hope nobody notices. But then to Jeff’s point about Silicon Valley Bank, you might be forced by other external factors to sell some of the stuff that you declared your intention to never have to sell and hope that you can wait until maturity. And by the way, with treasury bonds, there’s no credit risk. If you can hold it to maturity, you’re going to get back face value plus the interest rate. But with all the other assets, suppose it wasn’t just treasury.
Suppose that you bought commercial real estate-backed securities of some sort because they have a positive spread to treasury. So tenured treasuries were paying 0.6 % interest back in summer of 2020. Commercial back to securities were probably paying, I’m guessing, two and a half %, probably two % spread in those days. So you bought that for the higher interest rate. Those have default risk in addition to market price risk. So you’re holding the stuff desperately worried about what the default rate is going to be. That’s not occurred yet. The developers, most of them are still hanging on. And as all of this grinds forward, there’s going to be a horrific effect on the balance sheet. And then downstream in that balance sheet is going to be GDP. And we’ll see what the GDP effect is. That’s the only thing anybody’s paying attention to. It’s like you get cancer and everyone’s like, take the patient’s temperature, see if he has a fever. Yeah, but cancer doesn’t cause a fever. Now, cancer might compromise your immune system and then you get influenza and then you get a fever. So then they said, well, yes, look, eventually there was a variable lag and eventually he got a fever.
Yeah, but what are you measuring and why?
BVN:
Jeff, I want to send it to you. What are we measuring and why? And as Jeff Snyder and the Euro dollar university, I’m sure euro dollars are a big part of it. But what should we be looking for as investors, as individuals, as citizens of the United States, other countries as well? What’s something that we can be looking at? Because again, this is a complex system. What are your recommendations for people to keep their eyes open?
Jeff Snider:
Yeah, that’s why we start with the curves. As Keith said, you got to recognize the fact that what are we measuring here? What are we actually saying? Is most public perceptions of yield curves, as you guys have been talking about, is that, oh, yield curve inverts, that means recession. And that’s, as Keith was implying, it’s down the road and maybe that’s the case. It’s how do we get there first? All the yield curve really says is that the market is hedged in such a way that it pays off if interest rates go down from where they are. And there’s a number of reasons why that could take place. That’s really all the curves are telling us, and we have to do a bit of detective work to figure out what that actually means. But I think the turtiness argument and the punchball, which is a really good one, realizing that this is a discontinuous process. Everything looks fine until it doesn’t. And you can’t really define exactly, or know ahead of time exactly where that point is, because what a yield curve inversion is really saying is that we’re transitioning from one state to the next.
At least there’s a likely probability that we’re transitioning from one state to the next. And do we even know what state we’re leaving and let alone what state we’re heading to? So there’s a lot of work to go on here, a lot of work to tell. We got to look at the monetary system, we got to look at the economic system. We got to look at beyond just the United States, look around the rest of the world. Where are the hotspots there? There’s a reason we’re talking a lot about China. It could be that the Chinese economy triggers something that we’re not really anticipating if we’re looking just at the United States. So the yield curve is nothing more than a starting point that says phase transition or state transition here, now we got to figure out exactly what it is. And likely, as it has been in the past, at the end of that will be some recession or economic disruption. But it might be the part before we get to the economic recession disruption that actually is the more important part of it. Just call it financial volatility, if you like. It’s not going to be conducive to owning risk assets, which is one reason why the Yield Curve Inverted to begin with.
Everybody piles into safe and liquid. You want to get in safe and liquid before everybody else does, because that’sthat’s what’s going to be in demand during this transition period. So when you start thinking about it in that way, you can start piecing together what might be the likeliest path here. And I don’t see a lot of those paths that lead to something like, Jay Powell is talking about the soft landing where everything’s just perfectly fine. Consumer prices go down in disinflation. The economy seems fine. We don’t get a mass layoffs or any layoffs at this point. And the US is good. China is good. China figures a way out of it. Japan, Europe, everybody else, everybody’s just Goldilocks. The curves at the very least are saying that’s a very low probability. And historically speaking, the soft landing has never happened anyway. So that’s really what we’re looking at. What we’re really trying to measure is what are the probabilities that there’s going to be a state shift from where we are to where we’re going to be?
BVN:
So, Jeff, for the audience that listened to the end of this episode, they’ve heard a lot about yield curves, financial complexity, Euro dollars, gold, alternative currencies. Where can people learn more about all of this stuff, hear more about it from your perspective, and if they want to keep up with what’s actually going on, what’s the best way to follow your work?
Jeff Snider:
Well, I’m on YouTube usually every day six times a week. And it’s Eurodoll University is the channel. You also check out the website. It’s Eurodoll. University, where we have memberships and subscriptions. The memberships are about going through all of this stuff, the infrastructure. How does the Eurodoll system really work? That’s what we talk about memberships and research subscriptions are what’s going on today through the lens of our Euro dollar perspective and what does it mean. Talk a lot about curves, but not just curves and get into some of the nitty gritty details of macro and money.
BVN:
Jeff, I want to thank you so much for coming on to the Gold Exchange podcast. I think we should have a new thing, which is that every time the yield curve inverts, that means we need to have Jeff Snyder back on the Gold Exchange. Hopefully, we can have you more often than that. But I want to thank you again so much for coming on. And everyone should check out Euro dollar University.
Keith Weiner:
If the yield curve could just stay inverted for years and then that might not be the best formula.
Jeff Snider:
Put me on loop.
BVN:
There you go. Jeff, thanks so much.
Keith Weiner:
Thank you.
Additional Resources for Earning Interest in Gold
If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:
In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.
The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
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