Peter St Onge rejoins me to talk about whether the world is really dedollarising. What kind of timeframe are we talking about here? We also talk through some recent developments from an Austrian economics perspective: 

  • Dedollarisation
  • Cantillon Effects
  • Fictional Reserve Banking systems
  • Did the market really ‘choose’ FRB? 
  • How Bitcoin is really what most people think of as money



Stephan Livera links:

Podcast Transcripts:

Stephan – 00:00:08:

Peter, welcome back to the show.

Peter – 00:02:24:

It’s great to be back, Stephan

Stephan – 00:02:26:

You’ve been blowing up recently. I love the videos. You’ve been doing. So great job with that and just really helping explain things from an Austrian perspective for a lot of the people out there who I’m sure are very confused with what’s going on.

Peter – 00:02:39:

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

Stephan – 00:02:54:

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

Peter – 00:04:10:

Yeah. I mean, de-dollarization has been going on for a long time, but it’s been at a really sort of slow pace. And I think what’s changed now, sort of looking at it from an Austrian lens, meaning that you’re sort of cutting through it and analyzing it economically and what are the moving parts on the inside. And the last time that we had, I think a real threat to the dollar was the 1970s. We had double digit inflation for a number of years, but this time I think it’s very different from the 1970s. And there are a couple of reasons. Number one is what the US did last year, seizing Russian Central Bank assets as a form of sanctions over Ukraine. That really crossed the line for a lot of countries that had never been done. Even during the Cold War. The US did not seize dollars out of foreign Central Banks. The USSR kept their dollars at the New York Fed despite having proxy wars in pretty much every single continent. So that was really, I think, irresponsible. There had always been sort of a gentleman’s agreement that even if we’re having a fight over this, it was in the US interest to keep everybody in the world addicted to the dollar. And for whatever reason, they threw that away. And so now you’re seeing countries. Just this morning, ASEAN, the collection of Southeast Asian countries, the President of Indonesia, he was specifically saying, look what happened to Russia. We need to get away from the dollar. If you are in Indonesia, for example, the prospect that the US is going to be displeased with you for some reason, and they’re actually going to take your Central Bank assets, which is that’s the most important thing, that’s underlying confidence in your economy, that is a huge threat to them. I think Americans have trouble appreciating what a big deal, the bullying, using the dollar to sort of push countries around. And that was one thing when the US felt like they sort of had some control, you could sort of predict what the rules are. But I think Russia just caught everybody by surprise. The sanctions were so complete, so aggressive, so fast, they were done, I think really without consultation. So that put, I think, a big new risk on the dollar. A second related point is the US is retreating from the world. The Afghan debacle, I think, communicated to a lot of countries that even if the US wants to stay involved in your region, they’re not able to. They’ve lost their edge. And that threatens one of the main things that is underpinning the US dollar’s use internationally, which is the so called petrodollar deal, whereby Gulf countries, especially Gulf oil producers, they continue using the dollar in exchange, the US kind of handles their security, right? Those countries have long been threatened by Iran. Saudi Arabia and Iran are regional competitors, and they compete pretty fiercely. And so that was kind of the deal traditionally. And we can see already the result of that, where Saudi is now cozying up with China. They’re talking about joining China’s trade bloc. The Shanghai group. And then I think a third point here that sort of magnifies all of these is that the US is only half what it used to be. The 1970s, the US accounted for about 40% of world GDP. Now it’s more like 22%. So if the US is threatening countries, if it’s pushing them around on foreign policy, even sometimes domestic policies, things like union policy or sort of social policies, if they’re doing that in the context where the US. Is only 22% of the world, there comes a point where a lot of countries say, we don’t necessarily need to break up, but we should start seeing other people.

Stephan – 00:08:10:

Yeah, I think it’s well put. There are all these effects going against the US. Right, as you said. Now, maybe there are some points that are still in favor of the US. We could say. But I’m also curious to get your view on this whole idea. There’s been a popular notion promoted by various people, even people like Lyn Alden have said, actually it was not a good thing that the US dollar was the world reserve currency, that actually it hollowed out some of the local industry. Now, I think from an Austrian perspective, we could look at that and say, well, hang on a second. We’re thinking here about the Cantillon effect and if we’re thinking of the Cantillon effect, he who is closer to the monetary spigots is the winner in that scenario. So therefore isn’t the winner really those people who are close to the monetary spigot? And so couldn’t we argue then that American banks, American construction companies, anyone who’s getting that first loan or the American government is who has benefited? But I’m curious how you see that. Would you agree or disagree or do you have a different take there?

Peter – 00:09:13:

Yeah. So Lyn is brilliant. I love her work. She has a lot of amazing insights, knows a lot of stuff. And I think that’s correct that we’ve had sort of cantillon effects where the people who are producing the money, specifically the Federal Reserve and American Commercial Banks, they have benefited massively from this system. I think a second question is what happened to American workers, right? Whether the US dollar was sort of propped up and made too expensive and therefore those guys lost their jobs and the factories went to China. I don’t think it had a systemic effect necessarily on the dollar value. And the reason is that the Fed and the bank sort of collectively goal seek the dollar. The main incentive they’re responding to is that voters get upset if the dollar goes up too quick. And so they sort of start with the way the chessboard is. In other words, what is the price level right now? What is the exchange rate right now? And then they try to not disturb that too much so that they can continue siphoning resources from people. One of the metaphors I used in the videos is you have a reservoir and you have all of these new dollars flowing into that reservoir. Dollars produced by the Fed and produced by the commercial banks. And if that’s matched by a river flowing out towards foreigners, then the banks and the Fed can create a whole lot more dollars. And then of course, if you lose reserve currency status, in other words, if foreigners don’t want so many dollars, then that river comes flooding back in. But I think the question that Lyn is addressing is what is the level of that reservoir, right? Is that reservoir a high level or is it a low level where the dollar is paradoxically relatively strong? And I think that that question has a lot more to do with the Fed’s own sort of political goals. It wants to maintain its independence. The people who work at the Fed tend to go back and forth as kind of a revolving door with Wall Street. And so they know who butters their bread, they know who’s going to Janet Yellen was getting $67,500 for a speech at some point. There’s other incentives that intrude rather than them just trying to keep on the good side of voters, not make voters notice the inflation.

Stephan – 00:11:40:

Right? And I think you are certainly right to point out this whole revolving door factor that we see Commercial Banks and regulators often. There’s this relationship, let’s say, where maybe if you perform well in one of them, you may get a job in the other, and that if you play nicely, you can have a nice career in this. You can become a person who is well regarded in this industry, that you were senior in the bank, and then maybe you go and become senior in the regulator and you help from that perspective and maybe after that career is done, oh, now, you get a nice speaking tour, you get these nice you get given awards, you’re sort of praised. So there’s certainly a professional career aspect to what happens for these people, right? And so they want to keep the system going and then obviously, those of us who are, let’s say, outside the system, we’re trying to critique the system because we are against it for many reasons. Listeners of this podcast well aware, it puts you into a position where you are having to understand and explain all these different programs, right? So the latest one of which is the BTFP, Bank Term Funding Program. But there’s all these different programs and they have different effects. So then the challenge becomes, as an Austrian is trying to understand the scene and the unseen, right? It’s not just, oh, look, this government gave a bailout for this bank or this depositor and now look, oh, it’s all good now because they saved the depositors and oh, that’s the end of the story. Well, no, hold on, there’s no free lunch. That money or those resources came from somewhere. Someone somewhere is paying the price. So if you could, I guess if as you look at what’s going on, Bank Term Funding Program and what’s happening with rates, what’s happening with the Fed, who is losing out, where is the cost, where is the downside being taken and where is it being hidden?

Peter – 00:13:33:

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

Stephan – 00:15:58:

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

Peter – 00:16:51:

Yeah. And it’s disappointing. It’s like we’ve learned nothing. Something that we’ve been pushing since really the beginning of the inflation is leave the economy alone. Don’t try and crush it. Don’t try to wipe out businesses normalize rates. Obviously, they were bumping along at about 0%, and that is not healthy. You end up getting a lot of mal investments, a lot of crappy investments that have to be liquidated. But what we’ve been saying is, no, instead of doing that, simply rein in the government spending if worldwide, if Europe, if US, if Japan, if these countries would have cut their spending, then the inflation would have calmed back down. You would not have had as much money flowing into the economy and you wouldn’t have actually caused this collateral damage. You certainly would not have caused these kinds of bank panics. When we say there’s no free lunch, one pretty close to free lunch is cutting government spending. Government takes resources that could have been used for something useful. They could have done good in the world and instead it squanders it because of the political process where it sort of jumps up and then plunges and up and plunges. The government is a massive source of instability, even aside from the garbage that they spend the money on. So that obviously would have been the correct solution. That’s what the Fed should have done. There’s this popular narrative now that Jerome Powell, by gum, he tried his best and he’s just making the most of a tough situation that is complete garbage. He could have stood up from the beginning and said no, we are not going to buy all of these trillions of dollars of bonds. You government have to cut other garbage you spend. If COVID is such a deal, then cut the other crap and focus on COVID. But we are not going to enable your addiction. He didn’t do that. Instead what he said was there are too many jobs. In other words, he did not confront his master. He treated the voters like dogs.

Stephan – 00:18:47:

Right. He’s just selling them out and saying, well, you wear the cost, right?. It’s difficult because a lot of them don’t understand how they’re being screwed. They don’t understand the ways in which the resources are being transferred from the private sector to the government. And so even though we try to understand the impact of these different whether it’s a bailout or these government programs or making the depositors whole, because in each scenario there’s different ways things could go, right? I mean, in 2013 in Cyprus, it was bailians, it was depositors were taking colloquially or the nice word is a haircut is the nice term, but actually it means you lose money, right? Like if you were a depositor with a lot of money in the bank, you lost money. That was bail-ins and bailouts were this kind of 2008 scenario where the government and a lot of the financial press is saying, oh no, if we don’t step in now to ride in and save the people, the system is going to collapse. Therefore yes, you citizen, it’s correct for us to do this government bailout and save the system that way. So I guess these are some of the different ways that they can try to play it and spin it to socialize the losses, but there’s different ways and there’s a different person who wears the loss in those scenarios, right?

Peter – 00:20:07:

Yeah, there totally is, and the challenge for them is Central Banks and fractional-reserve currency have made the financial system extraordinarily fragile and extraordinarily vulnerable. There’s this great line from Jon Stewart during the 2008 crisis and he was complaining about all the perfect storms. If you remember those, there was like a perfect storm every week. And they kept telling us, no, this can only happen once every century or once every 7000 years or once every three heat deaths of the universe. And Jon Stewart was like, well wait a minute, why are these perfect storms happening every freaking week? And he said, I’m starting to think these are not perfect storms. I’m starting to think these are regular storms and we have a crappy boat and that is what they’ve built for us. If we go through sort of line by line when it comes to Silicon Valley Bank or Credit Suisse or Deutsche Bank or Signature, these were all regular storms. Deutsche and Credit have been pretty crappy banks for a long time. Everybody’s known this. Their stock price has not budged because everybody knew that the management was pretty bad. So the sort of larger question is why are all of these regular storms turning into anything? A light drizzle is now a perfect storm that requires trillions of dollars of bailout. And of course, when that storm comes, the financial system that has created this crappie boat, that has created this sort of permanent state of quasi crisis, they swing into action and their goal is to create human shields. They go on about, we need the financial system. Grandma will be eating dog food. They look out. You saw it with Silicon Valley Bank where a bunch of rich tech bros were going to be bailed out and you had all these venture capitalists and this entire PR machinery looking for some single mother in Ohio who has to feed her diabetic kids. It’s an operation. It’s a psy op. And the goal is to use their victims as shields to get you to pay for their gambling losses.

Stephan- 00:22:13:

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

Peter- 00:22:52:

Yeah, absolutely. Banks go down all the time. Usually it is a regular storm. What sort of shifted the ground on this Central Bank set the stage with their they had the fastest rate increases in 50 years. So that started things wobbling and then if you dig into each specific bank, you’ve always got colorful blurbs to put the newspaper. Silicon Valley Bank had some loans where they were taking yachts as collateral and things like this. But the point is that taking poor quality collateral on a bank does not crash the entire universe, right? So they’re sort of coasting along the edge post-COVID when they created the inflation and then sort of knee jerk backlashed against that, they put it even closer to the edge, like right up against the cliff. And then at that point, yeah, it doesn’t take much of a storm at all. Lend some money on a yacht and boom, the whole world collapses.

Stephan – 00:23:46:

And at the same time, we have seen over decades, the US government has been weaponizing its payment systems, right. They’ve been doing things like, okay, we don’t like what you are doing as a country, we’re going to sanction you, or we don’t like what you’re doing, maybe FADF will gray list you. If we don’t like what you’re doing, we’re going to cut you off totally from the Swift System payment system. So I think that has also been playing into part of this, right? So it’s not just the seizure of assets from other governments, it’s literally banning them from interacting with the payment systems that other countries and normal people, everyday companies and banks have been using for decades.

Peter – 00:24:32:

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

Stephan – 00:25:44:

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Peter – 00:28:02:

Yeah, absolutely. And there are extremely strong network effects in currencies. If you take stablecoins as kind of a test case, I think it’s 98.5 or maybe 99.5% of stablecoins in the world are denominated in dollars. Nobody forces them to do that. You’re free to make a dollar coin in Dirham or Yen or Euro, but in fact the market prefers dollars. Why? Because they are the most Liquid. So currencies trade, it’s very much a winner take all as sort of your base scenario. And then on top of that you’ve got different questions like are certain forms of transactions being sanctioned or are they raising red flags? So that kind of goes on top of it. And so I do think that. To say that other countries are diversifying away from the dollar. There’s not something that’s going to collapse overnight. I think it’s more that the network effect of the US dollar is getting weaker and there is some point where it begins to accelerate quicker and quicker. Right? So if people if 2% of world trade is moving away from dollar, that’s not going to have a significant impact. However, it is going to feed through to the value of the dollar. And the value of the dollar is that feedback mechanism where banks in Japan may not have an opinion whether they’re holding dollars or yen. What they have an opinion on is what’s happening to the price. And so you can get this sort of snowball effect where it’s getting bigger and bigger. So some exit from the dollar leads to a decline in price. A decline in price leads to a bigger exit from the dollar, which leads to more decline. You can get this vicious cycle, and I think if you sort of Zoom out in the world, in a sense, there are three times more dollars than are needed. Okay, so there are three main ways that the world uses the dollar. Number one, they use it in America to buy and sell stuff, go have a restaurant meal. Number two, it’s used in international trade. The amount of international trade denominated in dollars is roughly comparable to the American GDP. In other words, foreigners use about the same amount of US dollars among themselves as Americans do between each other. And then you’ve got this third hunk, which is savings. So in many countries, if you take a country like Mexico, rich people in Mexico, they’re not walking around with millions of dollars in pesos because it’s risky. So they will treat it a bit like a bitcoin wallet like on exchange or something, where you’ve just got a small amount on there that you’re hoping to use in the near future. And you may have one or two or three months worth of pesos in there. But the vast majority of their savings are going to be in something more solid. And today, partly because of those network effects, those are parked in US dollars. So when you take those three hunks, the picture is sort of the US. If it declines, it’s going to go slowly at first, but the thing is that it’s got a heck of a way to fall, right? There is no other country that has three times more currency in the world than it uses at home. So I think that it’s somewhere where Americans, we don’t need to panic, but we definitely need to be aware that if Euro or the yen, for example, have certain reserve currency aspects, they’re used in other countries, they’re used to park savings. But the mismatch between the amount of yen in existence and the amount of yen that are used in the Japanese economy, it is nowhere near 3x. And so I’d put it in the category of something to watch that could potentially get much, much worse.

Stephan – 00:31:42:

And one other point I’ve seen, and you might have seen this also, our friend Safety made a point saying it’s like that infamous Ronnie Coleman line, right? Everybody wants to be a bodybuilder, but anybody want to lift these heavy ass weights? And in currency and capital markets, he’s saying it’s one thing for people to say, oh, look, we’re just going to trade without the US dollar, but are there going to be credible alternatives where they also keep their inflation rate low enough and have open enough capital markets? So I guess they’re saying it’s kind of everybody wants to be the world reserve currency, but are you going to keep the inflation rate low and are you going to actually have open capital markets to facilitate that?

Peter- 00:32:21:

Right? A lot of that is transaction costs. Some of the de-dollarization at the moment is being effectively subsidized by China. This is sort of a long term goal of theirs, so getting discounts for using their Yuan. And the key here is going to be really, I think, monetary policy. So if a given country like China, for example, has about inflation rate, then people may use the yuan, they might use it almost like a coupon or like a Chuck E. Cheese token. Like a casino token. Yeah, exactly. But they’re not actually going to use it as a sink, right. They’re not going to park their savings in that currency, in which case the currency gets a very slight amount of demand. Savings are really what sustain a currency. If people are just kind of using it in order to transact and they’re not actually saving it, then that’s much weaker. And so that’s going to be the question. Historically, one of the reasons why the US has been so dominant is because the Federal Reserve has been relatively prudent, not what we’d hope for, but at any rate, compared to other countries, it’s been sort of the cleanest, dirty shirt. And so the question at this point is partly the costs of empire. There are certain costs that the US has that are somewhat unique and so are those collectively going to force the US to be less prudent than other competing currencies would? And if that’s the case, if the US. Actually runs around with a 5% inflation ongoing, then you would actually see durable demand and people would not only use the Indonesian or Nigerian token like they would today, but you could actually get to a point where some of these competing currencies could actually hold on to durable demand. At that point the US dollar would go in freefall.

Stephan – 00:34:18:

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

Peter – 00:35:21:

Yeah, I think you’re absolutely right. You know, most of the inflation, at least in the US. And I would imagine all over the world, most of the inflation, is actually coming out of the banking system. About 25% of the new dollars, the increase in the money supply, are counterfeited by the Fed, and the other 75% are counterfeited by the banks. And the reason is they have this exorbitant privilege where they can make loans and then put only a small amount of money away to allegedly cover those loans. And of course, they tell customers, bank depositors, they say, your money’s here waiting for you, Grandma. Don’t worry. Anytime you need it, I got your cash. But of course, the money’s out running around. So that I would call it a fraud. But that was really the source of central banking in the first place. The reason why we have a Federal Reserve in the US. For example, is because that exact hustle, that frictional reserve hustle, it caused the bank panic in 1997, and the banks got together and said, well, this was no fun. We had to pay for our bailout. Let’s fix this. And who could possibly pay for our bailout? And that’s where the taxpayers come in, so right. I think fractional-reserve is a big part of this. And what’s beautiful about Bitcoin is that gold I love gold. Gold is my first love. I will never say anything bad about gold. However, gold has a flaw, which is that it is physical. And this is paradoxical, because usually people like gold because it’s physical, you can drop it on your foot. And being physical means that it means two things. One is that it’s very vulnerable to government. If you have physical gold, you can only hide so much in your backyard. And in fact, if everybody’s hiding gold in their backyard, then you’ll have an entire industry of people who dig backyards for living to find the gold. Gold storage, like distributed gold storage, does not scale very well. So inevitably, you have to put it somewhere, you have to put armed guards, and now the government knows how to find it. Then, of course, the second problem with gold is that because it’s physical, it’s very difficult to transmit over distance. If you were to tally your monthly spending and to see how much of it was actually handed over hand to hand, in this day and age, it’s probably nothing. And so for that reason, gold necessarily in the modern age has to be centralized. There has to be some intermediary. For example, they give you a gold credit card and they’ve got the gold in their vault, and then you run around and use the credit card. You can use it online, that works just fine. But the flaw is that the gold has to be somewhere and the government knows where it is, they can find it. And so that means that, I think, one of the sort of debate points, for example, when you’re talking about gold, for years, I think you and I were both advocating gold, and one of the responses would be, well, if gold is so amazing, where is it? Why is no country using gold today? Why did, quote, unquote, the market choose Fiat? And my answer would be, the market didn’t choose anything. Violence chose. You know, in the 19th century, for example, most of your transactions were hand to hand. And so you could have a a decentralized currency that the government didn’t necessarily control. Once you’re into the 20th century, that was extraordinarily difficult. And at this point, this is part of why, again, I love gold, but this is really one of the killer apps of Bitcoin, is simply the distance. You don’t need a huge castle to store it in. Of course, you can transact it using Lightning Network, for example, far cheaper than you can even transact Fiat.

Stephan – 00:39:07:

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

Peter – 00:40:30:

Yeah, I think you’re absolutely right. It’s similar. During the 2008 crisis in the US. They were handing loans out to banks banks that were distressed, and some of the banks said, no thanks. I don’t need your money. We’re doing just fine. Famously, BB&T bank, they said, no, I don’t need it. And they were literally forced to take the money. The claim being that if everybody sees that you don’t need the money, but everybody else does, then you’ll have an unfair competitive advantage, and you could destabilize the entire financial system. That’s the human shields, right? Always with the human shields. And so that’s one of the speculations with Caitlin Long’s application for her fully reserved bank was that they were concerned that if they have one bank that is completely safe, where they actually have your money, there’s no reason to ever run because your money is just sitting there. Then all of the other banks, people would start to think they’re too risky, and they’re right. That’s absolutely correct. Everybody would conclude that the rest of the banks are garbage, and you should get your money out. So, again, it’s kind of a psyop. And of course, if you have bitcoin in there, you could imagine that some people might still use intermediaries for bitcoin for various reasons. People did. There could be services attached to it. You could want, I don’t know, escrow, or there’s like, sort of side things that you could want to happen to your bitcoin on its own. So you could imagine intermitter is existing, but the point with bitcoin is that you do not need it, right? It is a bearer asset. If for some bizarre reason, you’d like to go do fractional-reserve, you’re able to, but with bitcoin, you don’t have to. And something just in case there are fractional reservers. I know that a lot of sort of free marketers are fans of free banking, and fractional-reserve just kind of highlight under full-reserve, the idea is not that every single dollar has to be in the bank all the time. In other words, you’re not removing the banking as a function from society. What you’re merely saying is that there’s a difference between demand deposits, where you can come and get your money anytime, checking deposits. There’s a difference between that and time deposits, right? In a time deposit, you park your money for a period of time one month, three months, a year. And the difference is that if you are promising that you have money in this moment, then you actually have to have it in the moment, right? On the other hand, time deposits, you’d be free to offer any interest rate. In fact, you don’t have to back time deposits. If you look at, say, Ford motor company, okay, ford owes certain money right now, and it has immediate liabilities that it owes right now. Like, somebody’s paycheck that they’re about to come by and pick up, and then it has other debts that it owes in five years or ten years or 20 years, and it does not have to back up those other debts. Right. And so, similarly, a bank also should work on the same principle. So money that is immediately due should be immediately there. Otherwise the bank is technically bankrupt. And in practice, checking accounts make up about 20% of bank deposits, savings account make up about 80%. And so we might expect that would be roughly the ratio where most money would continue to be lent out. It would just be in time deposits, say a three month or one year CD. Banks would have an incentive to get you to park your money in a time deposit because they can relay the money. If we look at gold custodian fees to kind of get an idea of what the demand deposit, what the bank would charge to just park your money there, not lend it out, they run about a quarter percent a year. Right. This is pretty low. And indeed, if the bank knows that you’re going to park some of your money in a demand deposit and then it could lend the rest out, then the bank would likely just offer you free custodianship, just like banks today offer free checking accounts because they’re hoping to make money off of the cross sale onto that product. So if I had to guess what a full-reserve Bank World would look like, it would look an awful lot like the current one, but it wouldn’t have bank panics.

Stephan – 00:44:52:

Right. And so I also speculate that we’ll see a lot less credit, and I think you probably agree with that as well. I think most of us in the full-reserve camp would see there’d be a lot less credit than there is today because of all the rehypothecation, for obvious reasons. Right. Because as you said, there’s nothing precluding full-reserve credit, aka commodity credit. The issue we take is with circulation credit. And so this is credit that is created with nothing backing. And what we’re seeing today is effectively this banking system that has multiple people believe they are in control of the resources. And that’s where we come into the problem. Right. Because in a fractional-reserve system with circulation credit, what happens? If we’re thinking through the banking and the accounting and stuff, what’s happening is that bank has given, let’s say, $100,000 loan to you, Peter, and now you’re running around with that $100,000 thinking you can access those resources. Right. But let’s say on the other side, this other person who believes his money is there also, and he believes he has access to it in his bank account. And from both people’s perspectives, it’s like they both believe, no, this is a demand deposit, it’s not a time deposit. And that’s where we’re running into the issue, aren’t we?

Peter – 00:46:15:

Yeah, that’s exactly it. And I think that when we’re sort of considering what the world would look like, keep in mind that the part that matters is actually real savings. Right, and real savings doesn’t change here. So real savings means if you sort of ignore inflation for a moment so people would save a certain amount of their money and then they would go out and they might invest some of that in things like factories or they might lend it to other people. The only difference when you have this fractional-reserve which is printing all this money and remember, about 75% of new dollars are printed in the fractional-reserve. Ponzi they’re re-hypothecated. When you have that huge flood of money coming in now it’s like you’ve got this confetti that is bidding up the resources. So in other words, if it weren’t for that sort of new channel of counterfeits, then the savers would sort of bid on resources like they would bid on workers or factories or steel to build things. And you would have the people who could pay the most, which would usually be people who think that they can use this asset profitably. They would be the winners and so they would build the factories and then the economy grows. The only difference when you get fractional-reserve is that now you’ve got this random flood of essentially fake notes that are flooding in and competing with the real savings. You’re not getting any actual new growth because now you’ve just got more tokens competing, sort of more bidding tickets, competing for the original resource. The fractional-reserve didn’t create more workers and more steel. The only thing you’re getting is this redistribution. You’re getting it according to whatever the priorities of the banks are who are issuing the tokens. And then of course that then sort of disrupts rather than having the best entrepreneur bidding on the asset or making deals with the savers, now you’ve got this noise flooding in where you’ve got just a bunch of random tourists who are sucking investments away from others. And the end result is that you get entire industries. In the dot-com era, for example, you would get or something that’s just squandering enormous amounts of money because they could outbid the sustainable businesses using effectively fiat, using loans from banks that was conjured out of thin air as opposed to actually having to access the real savings markets.

Stephan – 00:48:48:

Yeah, and so effectively it’s a distortion of the resources. As we were saying at the start, it’s the Cantillon effect, it’s those people closer to the money printer, they are the ones who win out because they’re getting the new money first. Everyone else who gets the money towards the end of the process, they are the losers in that process. Typically savers are getting wrecked there because you’ve just got this Fiat and it’s going down in purchasing power. So that’s a real problem. And so I think the other aspect of it is in full-reserve versus fractional-reserve or quote unquote freebanker debates, you get this argument of oh, but the market chose it this way, right? Like they get this kind of you know, but at the same time, I bet you if you you know, if you just went out onto the street and you asked the average person and you asked him or her just on the street, hey, that money in the bank account, is it fully and unrestrictedly yours? Or is it more like this kind of lottery ticket claim or like a fraction of a money market fund? Which one do you think it is? Obviously, most of them would answer, yeah, I thought that $1,000 in my bank account was my money, exclusively my money. But it’s not the case, is it?

Peter – 00:50:00:

Yeah. And I think for people who believe in the free markets, it kind of takes a moment to understand the issue here. The question is not like government telling people what to do or like banning fractional-reserve per se. The question is what constitutes fraud? Right. And free marketers. You and I are both free marketers. We deeply believe that if you’re ripping somebody off, like if you’re scamming with a shitcoin, that is fraud and that should be prosecuted as fraud. We’re not saying the government regulators come in and write some law against shitcoins. What we’re saying is that is fraud. And so we should use the existing thousands of year old legal system to prosecute that. And so similarly, when it comes to the question of fractional-reserve banking, it’s exactly as you say, does the customer, does the depositor actually understand what’s happening if they do not understand what’s happening, if they are not competent to have effectively signed a contract parking their money in this bank, then it is an invalid contract. This is forever standard in. If you make a contract with a five year old that’s not legally enforceable, if you sell a structured finance product to an 84 year old who has dementia, that’s also not enforceable. And if you keep it up, if you know this person is not competent, and yet you keep trying to sell them something that is absolutely considered fraud, it has been considered fraud forever. And if we look at fractional-reserve, it’s very common in many countries that banks will lobby for laws criminalizing contributing to a bank run. So to me, that looks very, very intentional. That looks like they know darn well what they’re doing. This is not, oh, I accidentally sold an 84 year old some complex product. This is I know exactly what I’m doing. So at that point, I say confidently, that is fraud. Surveys of depositors, about 74% are not aware that their money is not there. They are not aware that the money has been passed on in the form of loans. They think the money is just parked there, sitting there. Lyn Alden, we were speaking about her earlier, and she makes a great point that banks are essentially leverage bond funds. So Grandma thinks that her bank is a coffee can, that she’s got a bunch of dollars just sitting there. If she needs them, she’ll swing over. But the truth of it is that that money’s been lent out, maybe to sovereign loans to Mexico or maybe to Tech Bros. Doing the next big green energy project. That money is out in exotic places doing exotic things. And now if you sat down with Grandma and you said, where do you keep your money? And she says, oh, it’s safe. It’s over in Wells Fargo. If you asked her, wait, why are you investing in a leveraged bond fund that buys sovereign debt? And she would say what? What are you talking about? It’s in the bank. It’s perfectly safe. She is not aware how fractional-reserve works. Maybe someday in the future we’ll get rid of government schools, and people will actually be taught this. But at any rate, at the moment, empirically, voters do not know what’s happening. That’s the reason we have bank runs. If voters understood fractional-reserve, then if the bank ran out of money, like if I go to the grocery store, I understand that sometimes they don’t have eggs, and I’m annoyed, but sure, I just come back tomorrow and get more eggs. So why don’t we do that with banks, right? So the bank, they hang up a sign. They say, sorry, all out of money. And so maybe we try tomorrow. Maybe they’ll get a new shipment of money tomorrow. Why do people not behave that way? Because they do not know how it works.

Stephan – 00:53:34:

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

Peter – 00:55:17:

Yeah, and I think that would be a solution. We have that in financial products. So, for example, if you want to trade options, naked options or futures, at least in the US. Your broker will give you a sort of a test and they’ll see if you actually understand how these things work. And that’s called a suitability requirement. And those are written into rules. It’s generally the same all over the world. Again, if the person is 84 with dementia and they’re trying to buy a structured finance, this is the reason why. Because the financial institution knows that it will be liable. It could even be prosecuted for fraud if it is selling products that people don’t understand. So we could just use that system where you would literally have to undergo an exam. You’d have to answer questions on a test. Maybe you’d have to have a financial advisor or a lawyer present to indicate. So like George Soros can absolutely fractional-reserve. The man understands how fractional-reserve banking works despite his advanced age. I am confident that George Soros knows what he’s doing on that count. But grandma with the coffee can, if we simply use a suitability requirement, or rather a suitability standard, which is used in the rest of finance, then pretty clearly she does not understand what’s happening. And so what that would do is that you would most likely have fractional-reserves still existing for rich people who understand how it works, and the rest of us would use full-reserve. And then when that risky fractional-reserve bank went down, it would take out a bunch of rich people with it, and who cares? But the issue with today’s fractional-reserve where everybody is forced into it is that everybody includes widows and orphans, and widows and orphans are politically sympathetic. So it is inconceivable to have a fractional-reserve system where everybody is in it and it’s devil take the hindmost.

Stephan – 00:57:17:

Yeah. And I think one other point I would add from a full-reserve perspective, I think the other answer I’ve heard is that people say, look at that point, if it’s best efforts and it’s like a lottery ticket, are we even talking about money at this point? Right. It’s just not money. And I think that’s the other key point to make that okay, yeah. If you want to try to trade these, create these kind of tradable claims that if you’re a rich person, buyer beware, caveat emptor, et cetera, let me kind of push off all the risks onto you. Even then, it’s still not money. And these tickets, these tokens, do not circulate at par with actual money. And so in a bitcoin standard, we would be you’ve got your Lightning node and I’ve got my Lightning node, and we can transact in a fully-reserved system. You can say, Stephan, here’s my invoice for 100,000 sats. I pay that invoice. It’s a fully-reserved system. We don’t even have to there’s no question of, oh, am I transacting on the fractional system here, or the full-reserve? No, it’s just you’re in the bitcoin system, you’re holding your own keys, you’re running your own bitcoin node, ideally. And we are just natively without really having to think about it, because all the work is being done at the software and the hardware level. It’s technically ensuring and keeping us at a full-reserve, in a full-reserve system. And I think that’s the crucial difference, right. Because it’s not that I think, put it this way, let’s say there’s a Kraken IOU and a Binance IOU and some other Coinbase IOU. They’re not all going to be treated equally, right? If that were the case, then it kind of helps us show this idea that bitcoin is obsoleting fractional-reserve banking, or fictional-reserve banking. You know, once you’ve withdrawn those coins from the service provider, whether that’s wallet of Satoshi or Cashew or Fedimint or Bitcoin Beach Wallet or Blink wallet, as they are now called, or your own wallet, ideally, you know, in that moment whether the withdrawal request or the payment request has gone through or it has not. And then you know at that moment whether something is wrong.

Peter – 00:59:24:

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

Stephan – 01:00:44:

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

Peter – 01:01:01:

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

Stephan – 01:01:28:

Yeah, I think that’s a great way to put it. So, listeners, make sure you follow my friend Peter. He’s got some great content, he’s got some great videos, he’s got a substack, so go and subscribe to that. And Peter, thank you for joining me.

Peter – 01:01:39:

Thank you. It’s always a pleasure, Stephan.

Stephan – 01:01:42:

Show notes are available Make sure to share the show with family and friends if you are enjoying it and if you are learning something here. Thanks for listening and I’ll see you in the Citadels.

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