The End of the Petrodollar | Luke Gromen

This episode explores the potential end of the petrodollar system, focusing on how energy costs and monetary policies could drive significant changes in global financial markets.

1. The petrodollar system's sustainability is under threat due to rising energy costs.
2. AI and robotics could lead to significant deflation, impacting the debt-backed monetary system.
3. Energy is fundamentally the base layer of money, affecting global financial stability.
4. Countries like China and Russia are shifting towards gold-backed currencies, reducing reliance on the dollar.
5. Understanding the interplay between energy markets and monetary policies is crucial for future economic stability.

1: Introduction

Overview of the episode's focus on energy and monetary systems.

• "Energy is the base layer of money." - Ryan Sean Adams

2: Historical Context of the Petrodollar

Explanation of the petrodollar system and its historical significance.

• "The US had to keep the dollar as good as gold for oil." - Luke Gromen

3: Energy Costs and Monetary System

Discussion on how rising energy costs could disrupt the current monetary system.

• "If energy gets too big as a percentage of the economy, it becomes impossible to pay back the debt." - Luke Gromen

4: AI and Robotics

Impact of technological advancements on deflation and economic stability.

• "Deflation is fundamentally incompatible with a debt-backed monetary system." - Luke Gromen

5: Global Shifts in Currency

How countries like China and Russia are moving towards gold-backed currencies.

• "China has gained the ability to buy energy in its own currency." - Luke Gromen

6: Future Predictions

Insights into the potential future of global financial markets and the role of energy.

• "Gold is re-becoming an oil currency." - Luke Gromen

1. Diversify Investments: Consider assets like gold and commodities to hedge against potential inflation and currency devaluation.
2. Stay Informed: Keep abreast of global energy market trends and their impact on the economy.
3. Prepare for Technological Shifts: Understand the implications of AI and robotics on job markets and invest accordingly.
4. Evaluate Currency Risks: Be aware of the risks associated with holding assets in currencies heavily reliant on debt-backed systems.
5. Monitor Geopolitical Developments: Geopolitical strategies can significantly impact energy prices and monetary policies.
6. Consider Sustainable Energy Investments: With the push towards renewable energy, investing in sustainable energy sources can be beneficial.
7. Understand Central Bank Policies: Central bank actions regarding currency and gold reserves can provide insights into future economic trends.
8. Be Flexible: Economic landscapes are shifting; adaptability in investment strategies is crucial.
9. Learn from History: Historical patterns in energy and monetary policies can offer valuable lessons for future planning.
10. Engage in Financial Education: Continuously educate yourself on financial systems and investment strategies.

“Energy is the base layer of money” - that’s how our guest Luke Gromen puts it in today’s episode.

Luke is an Author and Investor who gives us a completely new way to look at money, through the lens of energy costs.

The essential learning of today’s show is that you can’t understand money until you understand energy markets. Apart from that Luke explains why the price of oil is about to force a monetary system change, why the 60/40 portfolio is dead and much more.

People

Ryan Sean Adams, David Hoffman, Luke Gromen

Companies

Forrest for the Trees, Bankless

Books

None

Guest Name(s):

Luke Gromen

Content Warnings:

None

Luke Groman
Most people are still assuming dollar equals oil. They're assuming the denominator is the same. And I think they're different. And not even I think I know they're different. I can show it to you on the charts.

S and P 500 total return since January 1, 2020. In dollars, up 75%. In gold, up 15%. In bitcoin, down 81%. That's telling you the denominators are wildly different.

Ryan
Welcome to bankless, where today we're exploring the frontier of energy empires and maybe the end of the petrodollar. This is Ryan. Sean Adams, and I'm here with David Hoffman. And as usual, we are here to help you become more bankless. Energy is the base layer of money.

That's how our guest Luke Groman puts it in today's episode. We look at money and empire through the lens of energy costs, and we see why Luke says the price of oil is about to force a massive monetary system change. David, I really think this is essential learning for people on the bankless journey. We haven't often unpacked an episode that looked at money primarily through the lens of energy, which is what we're doing in today's episode. And I walked away from this kind of convinced that you don't really understand money until you start understanding energy markets and all of the forces surrounding them.

One of my favorite parts of this episode is, in addition to exploring these topics, Luke actually leaves people with, like, some actionable ideas on how to prepare, like what to invest in. And here's maybe a hint. The 60 40 portfolio is dead, folks. So that's a definite takeaway from today's episode. Understanding what Luke means when he talks about the relationship between energy and money is certainly interesting.

Sean Adams
I think any topic that unpacks a little bit of how money comes to be is worth discussing. I'm definitely learning from this episode. Before there was money in finance, there was just resources. And money in finance is, like, built on top of just commodities and resources. In the 21st century, we're kind of blessed to live in a sufficiently stable global economy that we don't really have to think about what's going on in the basement of financial markets, the trading of physical commodities, and that's relationship with geopolitics and financial markets.

But things aren't always so calm, and as we've been exposed to over the last, like, five years or so, the world's just getting, like, pretty crazy. So it's probably best to be kind of informed about how energy resources impacts economies. And that's what Luke gives us on the episode today. So let's go ahead and get right into the episode with Luke Groman. But first, a moment to talk about some of these fantastic sponsors that make this show possible, like Kraken, our preferred crypto exchange in 2024.

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Ryan
He is the founder and president for forest for the trees. That's FFTTT, where he helps investors see the big picture so they can prepare for the future. And we're going to be doing some of that preparing, I hope, on the podcast today, because Luke thinks there is a coming monetary system change up in the works, driven in part by high energy costs. It's going to shake up everything we know about markets, about investing. So we'll talk about that, how to prepare Luke welcome to bankless.

Luke Groman
Thanks for me on guys, great to be here. So let's start with a question, maybe just to frame up the entire conversation we're about to have. I think every good investor has a thesis for how things will play out. It's just like something that they believe the market is fundamentally mispricing. So for bankless, our thesis has been, hey, the world doesn't understand crypto yet, and they will, and it's going to have a massive impact.

Ryan
And so I want to begin this conversation by asking what your thesis is in the broadest strokes, like what do you think the rest of the market isn't seeing right now? I think the market is not seeing, I guess two things. Number one, the productivity enhancements implied by AI, humanoid robotics, etcetera, are, over time, exponentially deflationary and fundamentally incompatible as a result with the global sovereign debt backed and based monetary system. What does that mean? That means if AI and humanoid robotics do directionally what people think they're going to do over the next five years, ten years, global central banks are going to have to fully reserve consumer debt, sovereign debt, starting with sovereign debt, fully reserved.

Luke Groman
What does that mean? Buy it all with printed money. Can you illustrate? Why does it mean that? Simple.

Because, you know, I just saw in Korea there's a Starbucks running with two people and 100 robots. There was an article on rethink X last month, earlier this month actually suggesting that humanoid robotics wages will go towards a dollar by 2035 and $0.10 by 2045 an hour. Who can afford their student loan payments if global wages go to $10 an hour by 2035? The answer is barely anybody. Who can afford their car loan payments, barely anybody.

Who can afford their mortgage payment, barely anybody. Who can afford their apartment rent, barely anybody. Their credit card, barely anybody. Deflation is fundamentally incompatible with a debt backed monetary system, which requires exponential growth. So, practically speaking, those people won't be able to afford their payments.

They will default as they default, they'll take down banks. As they take down banks. Banks would sell what they can, not what they want to. What do they hold as their wealth reserves? They hold treasury bonds.

They'll sell treasury bonds. We saw that start to happen last March, and we saw what the Fed did. BTFP, more dollar liquidity, they'll buy it all. That is, I think, perhaps the biggest fundamental thing. It's quite the paradox.

Normally if I say, hey, there's something deflationary coming by bonds, you don't buy bonds. When debt to GDP is as high as it is, when sovereign debt is as high as it is when you have deflation, it becomes impossible to pay the debt back for the whole system. So that's number one. Number two is at the same time, it's getting much more expensive to find a marginal sources of oil, to find marginal sources of copper. We're going to build all this electric stuff to replace the use of oil, except it's going to require a lot higher prices of copper, a lot higher inflation.

Great. Who wants to hold $35 trillion in us government debt if inflation has to rise to get the copper to support the electricity transition, not me. And nobody has a 35. No one has a balance sheet to hold that except the Fed. So here too, you get to the same point, they're going to have to reserve much of the government debt.

And so these two things, and I guess the last thing is just per capita. People say, well, great, we'll electrify and then oil won't matter. China right now is a billion for people. They use one fifth the oil of the US per capita. India has 1.4 billion people, they use one 15th the oil of the US per capita.

Both of those numbers are 2021 numbers. If India goes from using one 15th to one 10th, oil demand will explode. If China goes from one fifth to one fourth, oil demand will explode. Because I'm talking about in total 2.8 billion people. And why would they begin to use more oil per capita?

Simple. Why does the US consume so much more? Is it because we're better? Is it because we're smarter? No, it's because we can print dollars for oil and we've been able to for 40 years.

And guess what China and India are starting to be able to do? They are in the pre game. They aren't even in inning one. They have just started be gaining the ability to print yuan and rupee for oil. And as they gain more of that ability through gold and through their own productive capacity, their economies, their per capita oil consumption is going to rise.

So there's this fascinating set of conflicting dynamics. One deflationary, one inflationary. All of which, though, point to the unsustainability of a sovereign debt backed system that's been in place for the past 50 plus years. And all of which suggests that we're going to continue this trend of higher rates. Rates get too high, cause a crisis, fed comes in, essentially caps rates with more dollar liquidity.

Or the treasury, it doesn't really matter. They're basically both the same at this point anyway. Fed and treasury, we get more liquidity, asset prices go up, wash, rents repeat and away we go. So that's what I think are the two biggest fundamentals, the energy side, and then this. Everybody's hyped up about AI, etcetera.

Maybe for good cause, but I know they haven't thought through the second derivatives because they wouldn't be doing what they're doing. Bonds, a ten year bond in the US wouldn't have a four handle. The Fed wouldn't still be selling bonds if that was the case, if people really understood what it meant. So Luke, you really think the market really hasn't priced these things in, and you're maybe front running this. I want to ask you to give us a energy lens on things, because this is something we've not really explored deeply in our content.

Ryan
We've explored all sorts of different lenses on, like, this question. Of course, that's very relevant to crypto, which is, what is money? But I don't think we've done the energy lens justice. And I know Helen Thompson uses this term, energy blindness, to describe policymakers who basically, like, make policy in a vacuum and don't consider the geopolitical, social ramifications, monetary ramifications, of seeing the world through the lens of energy. And I kind of fear that, like, maybe I don't see the world through the energy lens enough too.

And I have got some energy blindness here myself, and maybe some bankless listeners do as well. Can you give us the story of why energy matters so much? I noticed in the intro, and I asked the question of, like, what do you see that others don't see? Like, one was AI being a deflationary source, but the other answers was all to do with energy costs and energy demand. So why does energy price matter so much to the world, to asset prices, to empires?

Where should we start this conversation? Energy is the base layer of money. Why? Because human life is finite. As much as we'd all like to live forever, none of us are going to live forever.

Luke Groman
Okay, so if we have finite lifetime, during our lifetime, we work. How do we work? We expend energy. So when we work, we work for money. Money comes to us.

Work is just the expenditure of energy. Okay, so if work is just the expenditure of energy, when I borrow money to buy something more than I can afford today, a house, a car, whatever, I am promising to work in the future. I am promising the future expenditure of energy to pay my loan over time so I can afford something today. If the price of energy changes, if it goes up a lot, if my wages don't keep up with energy, I can't afford my house, the whole system, I default, etcetera. So really, debt is simply a future promise to expend energy.

The challenge within that, I guess, is twofold. Number one, in order for that to work, energy has to remain a small enough percentage of the overall economy. If energy gets too big as a percentage of the economy, it becomes impossible to pay back the debt because people are consuming too much of their own energy just to pay for energy. It doesn't leave the extra funds over to pay the interest on the debt. The debt starts to default.

Similarly, if you make a bunch of promises, unbacked promises, like governments do, sovereign debt, entitlements, etcetera, those are all promises to expend energy in the future. And once you promise too much, if you promise too much relative to the size of the energy market, you either in the future, in terms of what the energy market evolves to, you either have to default on those promises, which has a political and monetary and inflationary impact, or you have to inflate the energy market to be, quote, unquote, big enough to back those promises, which also has an inflationary monetary systemic impact. But either way, energy is just fundamentally the base layer, because debt is nothing other than a promise to expend energy in the future. Money is just nothing but a manifestation of the expenditure of energy. Okay, so do the central bankers know this?

Ryan
Does the Fed know this? Does treasury know this? Do the lawmakers know this? Does the president, like, know this? How come we have this energy blindness?

How come so many people, if energy is the base layer of money, how come so many people have had the luxury of not having to think about it? Like, you know, I would argue, I don't think about energy costs in my day to day life. Like maybe price of the pump, like just that sort of thing. But you're saying it's the base layer for money, which means it's also the base layer for the us dollar. And of course, the dollar is so central to, you know, us financial capital markets dominance as well.

So it must be central to the us empire. And yet we don't think about it. We have this luxury of, like, not having to worry about it, at least up to this point. Can you explain this? Sure.

Luke Groman
Because you get the media to tell people that you're not in Iraq because of the oil. It's because of freedom. It's because of weapons of mass destruction. You know, why does, why is there something called the carter doctrine, you know, that existed from the seventies up until just recently, which translates to no Russians in the middle east? Why does the US even care about the Middle east?

The answer is in plain sight. It's hiding in absolute plain sight. Why have we been at war in Afghanistan, in Iraq? And what, like, why have we done these things? Why do we prop up, if we're so pro free, if we're pro democracy?

Explain the 80 year relationship between Saudi Arabia and the United States. The answer is right there. It's all hiding in plain sight. The answer is, is that energy is fundamentally, that's why we don't think about it. We don't think about it, because the US military and people willing to do violence on our behalves have been doing it while we sleep comfortably in our beds.

Ryan
I mean, I'm gonna call the US an empire for a second. I don't know if you use that framing, but I've heard others use that framing, so let's go with that. To what extent do you think every empire in history has based sort of their empire on having access and securing a cheap source of energy? Is that a thing that is just central to the US, or have other empires done this throughout history? Is this just table stakes?

If you sort of like, you know, 101 if you want to become an empire? Like step one, go get a cheap source of energy, and then like, step two is secure it, and then make your population, like, forget how you secure it. And just like that fades into the background. But how central is this to empire in general? It's central to the life of empire.

Luke Groman
It's central to the life of every living thing on this planet. Right? Energy is just food. You stop eating, you're going to die, full stop. I can tell you within roughly a couple days when it'll happen.

So you have to secure enough energy. There's a concept called entropy, which is essentially, I'm going to misphrase it, but it's the amount of energy you have to expend just to kind of keep stuff together. And empires, the bigger and more far flung they get, the more energy they require just to avoid collapse. There's lots of ways you can do that. Lots of them are unpleasant, but they all involve around fundamentally mispricing or buying energy on the cheap.

You can do it with gigantic pools of slaves, you can do it with robots and productivity enhancers. You can do it by militarily enforcing a deal where the world has to buy oil in your currency, full stop, or else you invade it and replace the leadership. There's lots of ways you can do it. And like I said, this is what's true for empires, is true for humans. If we stop eating, all of us are going to be dead in under three weeks.

It's scientifically proven. If we stop fertilizing our lawns, our lawns will eventually die. It'll die a lot faster in Arizona than it might here in Ohio, but they'll die. Same concept. It's just natural law.

So I think ultimately it's just about how do you couch that? How do you achieve that? What are the various ethics, morality of the regime in question? What's your worldview what can you do culturally, etcetera. And that varies over time.

But empires require lots of energy, and that's the fundamental miscalculation. Most Americans and most people in Washington think american power comes from the dollar, but without the energy, without that dollar. Think about it this way. How many dollars do you want to hold if every gas station in the United States is empty? If you show up with your dollars to fill up your car and they're all empty, what value is the dollar?

We have at least a directional experiment we can refer to. It's called the 1970s gas lines. Dollar didn't do so well in 1970s. No fiat currency really did. The fundamental base layer for currencies is energy.

And look, that can change. That doesn't necessarily have to be oil. If we had a lot of foresight, we could build up an electrification and a domestic infrastructure and build up a bunch of nuclear power plants and run tens and hundreds of thousands of miles of electrical trains and completely in electrical vehicles where we didn't need oil. And, oh, by the way, this is what China's been doing for 15 years now, while we spend $7 billion for seven charging stations like the Biden administration just did. Energy is the fundamental layer.

It is understood at the highest levels of finance, at the highest levels of the us administrations, dating back decades. It's understood at the highest levels of us and global militaries. And all you have to do is watch what they do, not what they say. They're not where they are for freedom and democracy and all this stuff. Come on.

I mean, if that happens as a side benefit, great. That's not why they're there. We've done macro episodes talking about, like, the primacy of the us dollar. There's always kind of this connotation of an arc to the dollar. And like, growing up as a child, maybe it was just because I was naive, maybe it was because in the United States was in good times in the nineties when it had like, energy backing the dollar.

Sean Adams
And I just kind of remember as we invaded Afghanistan and Iraq, just the obsession around, like, the price at the pump, it turns into like a reoccurring news headline on, like, my local news. So, like, flashing red lights, price at the pump. And then, like, the price of gas would just be on the screen. And that was like a news story for all my childhood. Maybe it still is.

I just don't watch tv anymore. I'm wondering, Luke, if, like, the arc of the dollar, everyone kind of alludes to like a coming to an end of the arc of the dollar. And I'm wondering if, like, this is something that you are also similarly doing, just with the context of using energy to kind of frame that conversation. Is there like a collision course that the dollar is having with, like, energy? Is that kind of what you're alluding to?

Luke Groman
I think it's well underway. I think, again, when you watch the behavior of players at the highest level, I think it's been well underway for ten years. When global central banks stop buying treasury bonds and buy gold instead, they're telling you, in essence, we are nervous about the purchasing power of treasury bonds in oil terms. The deal, in essence, the US had with the world in 73. After this set up, the petrodollar system was never expressed, but you can see it in the financial prices of charts of treasury bonds and oil and rates, etcetera, which is the US had to keep the dollar as good as gold for oil.

They had to keep the treasury bond as good as gold for oil. If you go back 150 years, the price of oil and gold is remarkably steady. And if you go from 1973 to 2003, the price of a treasury bond in barrels of oil is fairly steady. If I'm doing the math right, you know, say it's $1,000 face value of treasury bonds and oil from 73 or 74 through 2003 or 2004, consistently traded between 15 and $30. Right?

So 33 barrels to, you know, 60 barrels per treasury bond, give or take. 33 to 33 to 50, something like that. Anyway, the dollar was as good as gold for oil. That was the deal. And so people didn't mind holding dollars.

Starting around 2004 2005, combination of factors, China entering WTO and growing. And so their oil demand was exploding. Geological realities where peak cheap oil was starting to bite as some of the world's biggest oil fields account for a remarkably high percentage of the world's daily oil production began peaking and rolling over. Things like Cantarell in the Gulf of Mexico, some other ones. The dollar stopped being good as gold for oil, the treasury bonds stopped being as good as gold for oil.

So much so that by summer of zero eight, oil was 150. Right? So now you've gone from a 30 year period from 73 to 0304, where oil is $15 to $30 a barrel, or 40 to 60 barrels per treasury bond. Now you're getting six barrels of oil, seven barrels of oil at 150 for your $1,000 treasury bond. That's not a good deal to hold treasury bonds anymore.

I think ultimately, the reason why central banks have spent the last ten years slowly and more recently, much more rapidly moving away from treasuries and holding gold instead. A big part of it is energy awareness. We have to have a reserve asset that holds its value in energy terms, or else we're dead. And you can see this with China, you can see this with Russia, you can see this, quite honestly, as far back as 99 with Europeans, with the structure of the euro, with how they treated gold. More recently, there's been some sanctions issues as well that I think accelerated this meaningfully.

But this fundamental monetary reality that nobody's going to hold paper if paper falls against the necessities of living energy for very long, and they will switch to reserve assets that hold their purchasing power in energy terms like gold, if that situation is violated for too long. It's really interesting when you're looking through an energy lens and you're looking at what is money? And you're answering that question. We often talk about money as a store of value, medium, exchange, unit of account. And you could just add the, I guess, the suffix for energy at the end of each of those.

Ryan
What is a good money? It's a medium of exchange for energy. It's a store of value for units of energy. It's a unit of account for energy. It's all of those things.

And the petrodollar has had that in the past. I want to ask this question, though, and this might be still like a 101 type question for you, Luke, but I think it's on many listeners minds when you talk about the price of energy, you were going back multiple times to a barrel of oil. And it's like, why a barrel of oil? I've got a chart open. This is from visual capitalists.

And so it's charting human energy use from the 18 hundreds all the way to 2020. And in the early days, in the 18 hundreds, we're using a lot of traditional biomass. And I imagine that stuff like wood as energy, like coal burning coal, you know, out of whale blubber, stuff like this, right, biomass. And now, of course, we're, you know, well into the two thousands. A lot of our energy comes from coal, oil, natural gas, nuclear and renewables.

That's kind of that energy mix. But you keep going back to barrels of oil. Are these things like composable? Are they like fungible? Like, why barrels of oil when our energy mix is more diverse than just oil?

Luke Groman
Oil is still, you can look at that chart, right? Especially if we take out traditional sort of biomass out of it. We're talking about coal, we're talking about oil, we're talking about gas and then there's nuclear, renewables and everything else. And it's oil eyeballing it looks like it's probably still 40% of the mix. Oil and gas is still easily a majority of the mix, particularly as they're phasing out coal.

So I look at it as it's still by far one of, if not the biggest marginal sources of energy. It is still the primary transport fuel by far, which in a globalized supply chain world is critical. So it's really still a very critical. It's the biggest marginal source, yeah. It's still 40% of the production and it's easily identifiable.

I mean, we could certainly use btus, a gas we could use, you know, I don't even know what we would use for uranium. You know, if you want to use, I don't know, whatever the thermal unit is that they're using. End of the day, it doesn't really matter. It's basically proxy for btus. And so I guess a follow up to this.

Ryan
One thing I've just learned in my investing journey, and this is probably one of the most important learning lessons in general, is pick your denominator very wisely for how you measure investment returns. It's like, what is your denominator? Is it dollars? Or maybe should it be something else? I remember a conversation David and I had with Arthur Hayes who said, like, if he could pick any denominator of wealth, right, he'd probably pick barrels of oil.

In fact, if he could, like, store enough oil, he'd have like a little oil can around his belt, he said, and just like store his wealth that way. E says hydrocarbons are essentially the denominator is units of energy. Any investment return, this is not enough to outperform dollars, not enough to outperform the stock market. You actually have to outperform barrels of oil or else you're better off holding energy. Let me ask you the same question.

When you approach investing, just in general, is energy your denominator or do you use something else? How do you think about this? When I think about what oil is, I think gold is just a proxy. I think about bitcoin. Bitcoin is just a proxy through the proof of work expenditure of energy, gold, you have to expend energy to mine it and refine it, and then you have it, you hold it, and there it is.

Luke Groman
So it is. I think about the denominator. I mean, I live in a dollar country. It's a dollar reserve currency world. And so I consistently have two things in mind what's the dollar return and what's the real return?

And that I think ties back to my initial point that I think most people don't understand what's happening still, which is most people are still assuming dollar equals oil. They're assuming the denominator is the same. And I think they're different. And not even I think I know they're different. I can show it to you on the charts.

I have a chart on my Twitter feed or x feed today. S and p 500 total return since January 1, 2020 in dollars up 75%. In gold up 15%. In bitcoin down 81%. That chart that's telling you the denominators are wildly different.

And yet most people are still viewing bonds in particular, but markets more broadly in general through this lens, that the dollar is as good as gold for oil. And demonstrably, empirically it's not. It hasn't been. And more importantly, the debt load of America. Unless we are going to slash defense and entitlement spending by probably 30% to 40% tomorrow forever and then deal with what would fall out of that, which would be a worse than the Great Depression probably times two, there's no way the dollar can stay as good as gold for oil.

It cant. So were watching in real time a breaking of that longstanding relationship of 73 to zero three or zero four where the dollar was as good as gold for oil. Then it broke down for a bit. I said oil went to 150 from zero four to zero eight. Oil went from 40 to 150.

Then we had the shale miracle. We had shale from 2010 through, I don't know, 2020, we'll say. And shale reestablished the dollar as being as good as gold for oil again at a higher rate. Right. So the new number wasn't, you know, oil didn't trade, you know, 73 to zero three.

Oil trades 15 to 30 most of the time, 20 to 30 most of the time. Post shale oil trades 50 to 90 most of the time. Really? Now the numbers play 70 to 90 most of the time. But I can look at shale production and most importantly in the mother of all shale fields, the permian, it's flat.

Us shale's flat to rolling over. And to keep it from rolling over really fast, they need higher prices. But to get higher prices means higher inflation, which is going to blow up the bond market, which we can't abide either. So what's happening in shale were basically in the early days of the second round of this dollar equals oil denominator being broken. It was broken in 0405 and then it sort of was reestablished by 1112, by shale and now it's breaking again.

And there isn't a shale fix coming for oil. The fix is, hey, let's all drive electric cars, except there's no chance we're going to have the grid for that any time in the next ten years. And that assumes we have the copper for any of that, which is a very low chance, anytime in the next ten years. And that we have the nuclear power base load for that anytime in the next 210 years. Assuming we could get the first two sooner than minimum of ten years.

There's no chance. There's no frigging chance. So I think we're again re entering this period of time that we last saw in 0304 where there's this recognition of, oh my gosh, the dollar is breaking its tide energy again. What do you own? Well then gold did awesome.

Gold went from 300 to 2000 in eight years. That sounds probably about right. Six x. It's probably about right. And now we didn't have bitcoin then, now we do.

So I think you're going to see that do really well. I think you'll see industrials do well. I think you'll see inflation be sticky and high. I think commodities will do well. But that's when you talk about the fundamental misperceptions.

That's it. People are still thinking that the dollar and a unit of energy are equivalent and they're not anymore. They can't be. We're watching the early days of that break down again. So you said a few things before.

Ryan
So it seems like gold is better able to preserve its oil, its energy purchasing power. And you've said this gold is re becoming an oil currency, which is interesting and maybe taking the place of the dollar and the petrodollar at just like the highest of levels. Luke, why does energy get more expensive in dollar terms and fiat terms? And then why does it get cheaper? Is it basically kind of like a supply demand type of thing where it seemed like energy prices in dollar terms decreased as a result of the shale boom because we got a civilizational unlock and we just discovered all of this shale mining, cheap natural gas resource.

And so that was a big unlock for us. So it seems like maybe a pattern here is technological unlocks can decrease the price of energy, at least relative to a fiat, so long as that empire is maybe like controlling that resource. So is that a pattern that plays out? And then why does it get expensive over time? So what are the puts and takes of why energy increases in price and why it goes down.

At least in fiat terms. We can go back to 1970. Us oil production was peaking and rolling over. We were the world's biggest oil producer. It was starting to roll over and you could see that it was going to leave us dangerously dependent on the Middle east.

Luke Groman
We were starting to see oil imports rise, what have you. You can read various takes on it, but remember, in 1970 the dollar was gold backed. So when we talk about the price of oil in 1970, it wasn't priced in dollars. Ultimately it was gold. So what's one way of dealing with a geopolitical situation where us domestic production, which we control, is rolling over?

It's going to leave us much more heavily exposed to cheaper production from places that are either very volatile, the Middle east, and which may not really like us, the Middle east, or that we were involved in a cold war and the Russians, how do we deal with that? Well, there is a view that american politicians at the highest level understood that oil liked gold. In other words, the Arabs liked gold. They liked the gold backed dollar. Great, close the gold window.

What happened when disconnect gold from the dollar? Disconnect the dollar from gold. Price of oil goes up a lot because it's no longer connected to gold. You can see that. So we disconnect the dollar from gold and the price of oil goes from about three to about twelve in a very short period of time.

That right there tells you the difference between oil and fiat and oil and gold geopolitically, strategically, it's brilliant on two fronts. Number one, if you're involved in a cold war with a major power, the Soviets, who derive a lot of their revenue and power from oil, and they have to expend the real energy to lift the oil, move the oil, refine the oil, blah, blah, blah, while you simply print the dollars because you've struck a deal with the biggest marginal producer of the Saudis, that it's all priced in dollars now everybody has to have dollars to have oil. You can just print oil, you can print dollars for oil, you're going to win the cold war eventually, it might take a while. And, and sure enough, 18 years later, we did, number one. Number two, it was strategically brilliant because the resulting price of energy increase made economic oil basins that were uneconomic.

Assuming a gold backed dollar, gold backed dollar oils at three UK North Sea they knew existed, it wasn't like they just discovered it, just couldn't afford to produce it. It's too expensive, it's underwater blah, blah, blah, Gulf of Mexico, same thing. Prudhoe Bay, Alaska, same thing. So as oil explodes through the seventies, guess what comes online in the eighties? Massive amounts of oil supply in very friendly areas.

Alaska, Gulf of Mexico, UK, North Sea. Great. Yes, you have an inflationary shock and blah, blah, blah, the seventies, but now you can print dollars for oil and the Russians can't. And now you bring on a bunch of oil supply at the higher price. Once you disconnect the dollar from gold and you bankrupt the Russians and you win the cold war.

Voila. So when you look at it through that lens like shale was a miracle. And the sort of the steerable length of the horizontal fracking runs, that clearly was a technological advance, no question. And some of the 3d mapping and all of that stuff, incredible. But they knew about shale in the early eighties.

They knew about those basins in the early eighties. They knew they were there again. When oil goes to 150, voila. Hey, guess what's affordable now? Us shale.

So then we fracked it. So it was a combination of currency devaluation. The dollar fell 90% against oil, right? From 98 through zero. 898, oil is $10 a barrel.

Zero eight oil is 150 a barrel, right? That's a 90% decline in the value of the dollar against oil. And what did we get for that? We got a big exploitation of the shale basin. When you combine it with some of the technology of improving and fracking.

Fracking wasn't invented in 2010, but some of the technological, the long laterals and the steering and the imaging and that stuff that clearly improved the productivity of those basins. The point is that the question is a big one, because you can make it do whatever you want it to do based on your geopolitical goals. Do you want cheap oil? Offer a deal where you'll send a couple grams of gold with every barrel, and then they'll take very little fiat. And on the QT, you send gold over and boom, oil prices will stay low.

Do you need more domestic production for geopolitical reasons? Okay, you're going to need more oil inflation to do that. So how do you do that? You shift it to a poorer currency, a weaker currency, fiat oil will get more expensive. So it depends on your goals of what you are trying to achieve geopolitically, domestic policies, etcetera.

The rule of thumb is it's a version of Gresham's law. If you're going to pay in fiat currencies, oil is going to be expensive. If you're paying gold, oil's going to be really cheap. I think this is part of the reason that many of us have an energy blindness, is because the last 40 years, energy has been relatively cheap. So weve just lived in that world.

Ryan
Weve never lived in a world of energy costs, spikes and this type of thing. But, Luke, maybe before we get into how this affects the monetary system and the US dollar as a global reserve currency status, I just want to ask a final question on energy, and that's this. It seems in the 2010s, we got this, like, shale type natural gas miracle, right? And you said as the price of oil increased, it sort of incented us to go, like, you know, extract some of this natural gas. Are there any other energy miracles out there just, like, waiting for us?

I mean, if the price of oil spikes, can we just not tap into some other natural resource? It's like, for the history of my life, something has always emerged as a technical solution to the energy problem. And it's just we've been able to continuously kick the can down the road. Like, why can't we just find another miracle? Are there others waiting for us here?

Do you think this time it's different? I think it's always a question of what's the miracle and what are the second derivative impacts. Right. So AI can be a productivity miracle, and what are we going to do with the 10% of population that's unemployed by AI? Or the happy version of that is, oh, they're all going to be artists and are going to pursue what they love and all these things.

Luke Groman
And that sounds good. And the reality is we have experience with that. China was a productivity miracle. China ended the WTO in December of zero one, and then the next nine years, 6 million manufacturing jobs were lost. They went overseas.

Those 35% of global manufacturing, we know all sort of how that played out. They didn't all become artists. Right. The reality is much messier. Are there energy things that could be classified by the government or that we have?

Sure, there's stuff that could happen. There's small modular nuclear reactors we've seen discussions of. There's probably stuff they have that they don't necessarily want to roll out unless they have to or want to. That wouldn't surprise me in the least. But again, what are the second derivative implications of that?

Nuclear fusion? Nuclear fusion's ten years away, and it's been ten years away for 80 years. We'll see. It depends on what you think the second derivative impacts might be. And those things can be pleasant or unpleasant depending on how they are allowed to evolve.

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So we have been in a paradigm of the petrodollar, which I'm sure bankless listeners are familiar with that term, like the formal coupling of basically energy, petrol and the dollar. And this has been like the equilibrium that we've been in for many, many decades. And we've been watching like over in the east, China's using the yuan to start to do some of their trade in violation of the petrodollar. And we've heard you say this line in other podcasts, the price of oil will ultimately force a monetary change. And I'm wondering if you can kind of unpack that, because I think what you're alluding to and what the world is heading towards is that, well, previously the price of oil backed the dollar, and now the price of oil is going to work against the dollar.

That's kind of like the vibe that I've been getting. I'm wondering if you can kind of unpack this take about the price of oil forcing a monetary change. Well, I think the dollar is going to remain the reserve currency, but gold is empirically replacing treasuries as a primary reserve asset, and that will force a repricing much lower of the dollar. Ultimately, in my view, you can understand why energy is forcing a change by putting ourselves in the shoes of the Chinese. Kyle Bass famously said, in 2019, look, the Chinese, they're importing a lot of oil.

Luke Groman
They have to pay dollars. They have a finite amount of dollars. Their oil consumption is up every year because they're growing. And sooner or later they're going to run out of dollars. And when that happens, they're going to have a late nineties Southeast Asia currency crisis and political crisis where they have to shrink their economy, they have to devalue the yuan, and they're going to have an inflationary debt crisis.

And then the Chinese Communist Party is going to tip over. He said that in 2019, none of that's happened. Why? Because China has gained the ability to buy energy in its own currency. Why not?

Because China necessarily wants to end the dollar or create problems for the treasury market. This is existential self interest. And, oh, by the way, this whole thing that Kyle's rooting for, if China tips over. Lehman had an $800 billion balance sheet. It went bankrupt.

It nearly brought down the financial system. China has a $37 trillion balance sheet. Like, if the China hawks think that China tipping over because of dollar shortages around their commodity import bill isn't going to blow up the system, they're kidding themselves. They're just kidding themselves. The Fed's going to have to buy everything, and in which case, the system's going to change anyway.

So, anyway, bit of a sidetrack. The best thing for China to avoid this currency crisis, that what Kyle laid out is 100% true, is switch the currency. You pay for it. Number one is exchange dollars. Stop buying treasury bonds, start buying oil fields, oil refineries, ports, coal mines, copper mines, gold, hard assets around the world, which they've been doing for 15 or 18 years with dollars.

Basically, every year, we send China $300 billion worth of stuff, and they use a bunch of that money to buy finite hard assets. And since 2018, at accelerating pace, they've been converting that into yuan denominations. So now what they do is instead of paying in dollars, they'll pay Russia and yuan for oil. Russia ends up with yuan, China ends up with oil. Okay, what does Russia do with the yuan?

Well, it turns out China's the factory of the world, and it's no longer making cheap plastic crap at Walmart. It's satellites, weapons, semiconductors, huawei, 5g, some actually the cheapest electric cars in the world, et cetera, et cetera, et cetera. They make some pretty good stuff. So Russia will take their yuan, they'll buy chinese goods, and with whatever's left over, they will buy gold in yuan terms. Except the gold that they buy in yuan terms can't be from inside China.

Chinese rules disallow any gold inside China from coming outside of China. So if they're going to buy it in Hong Kong, Dubai, Singapore, London, elsewhere, Shanghai's free trade zone. The gold has to first come from London or New York, which we can see happening. People have been saying, wow, look, gold's going up in price. But instead of how it always worked, gold ETF's in the west are losing gold tonnage.

London is losing gold tonnage. I wonder why this is. Hey, look, Russia's gold holdings are going up or China's gold holdings are going up. Hey, India's gold holdings are going up. What's going on here?

I can tell you what's going on here. China knowing that nobody wants the yuan, and China doesn't want to offer yuan denominated government debt because they don't want to end up like the US in 30 years, are net settling these yuan oil imbalances in gold that floats in price and yuan terms. And so it's a virtuous cycle, allowing this recycling of oil, this basically local currency denominated commodity trade being net settled in gold. And the issue is that the oil market alone in annual dollar terms is twelve to 15 times the size of the annual physical gold market. Gold has to get way bigger.

So you just have oil, this inexorable, monstrous bid. Oil, copper, gas, uranium, nickel, coal, local currency, net surplus is being settled in physical gold because nobody wants a paper promise of gold. They want the gold. The Americans made sure of that. When they seize russian FX reserves, they're going to take the gold, they're going to bring it home, or they're going to store it in a trusted third party area.

But at any rate, that's what we're watching happen as we speak. Gold is re becoming an oil currency. What does that mean for the dollar? Well, it means the rest of the world, Eurasia, doesn't need to store treasuries anymore and they've stopped. And so who buys the treasuries?

Well, in the short run, paradoxically, this is really good for the dollar, because what happens is there's too many treasuries, not enough demand relative to the supply of treasuries. And rates go up, dollar goes up. And that's allowed to go on for a bit. But the us government has so much debt, it can't afford much more beyond four and three quarters or 5% on the ten year. So what happens when it hits their treasury?

Market breaks. Fed treasury come in more dollar liquidity, wash, rinse, repeat. Gold goes up more. So this system is, it's a self reinforced and systemic transition that is being driven out of geopolitical existential necessity by the Chinese and the Russians. Who, people say, who cares?

Except the Chinese are the world's biggest commodity importer, the Russians are the biggest commodity exporter. That is a market, a free market. And so they can adjust terms of it, gold to oil ratios, so on and so forth, as they see fit, as they need to. That will keep this all going. And the Americans will turbocharge it periodically when the treasury market breaks again.

And they inject more dollar liquidity again because there isn't enough demand for treasuries, because foreigners aren't buying them, because they don't need to hold treasuries, as many as commodity reserves like they did for the prior 50 years. That was great. I want to bring some data points to what you're saying. The first is this New York Times headline, China is buying gold like there's no tomorrow. And as you're saying there, Luke, this looks to be mostly physically settled.

Ryan
The global price of gold has reached its highest levels as chinese investors and consumers buy the metal at a record pace. There's another tweet. I think I found this on your timeline as well. This is the start of de dollarization. This is a graph showing the share of China's trade that settled in RMB, China's currency.

And for the very first time in March of 2023, the RMB share of trade for cross border payments overtook the dollar in terms of the currency that China uses for settlement. And there's also this. China has a competitor to the Swift system, which bankless listeners will know what Swift is. It's basically kind of like the global payments system that is like, primarily US and allies controlled. China is a competitor to that, and they did last year in 2023, over 17 trillion in business volume.

So you could start to see the eroding of the dollar supremacy in this type of a world that is repricing currencies at the base level, at the energy level. I've heard you say this, too, Luke, and I want to ask the question of how does the US react to this in terms of its monetary system and what happens next. But you've said this, that the US has a choice to either bail out the currency or bail out the bond market. And this, to me, is kind of the crux of where we are today and what they choose or how much they choose, and one side or the other will probably determine many of the outcomes of what this monetary system change actually looks like. But what do you mean when you say the choices between bailing out the currency or bailing out the bond market?

Luke Groman
In essence, what this evolving new monetary system does is leave insufficient foreign demand for treasuries and exponentially rising supply of treasuries. And in any asset class, if you have more supply than demand, you're going to have the price go down. Well, when the price of a treasury goes down, rates go up. This wouldn't be a problem, except the United States has run up $35 trillion in debt, a lot of it doing things that, in hindsight, weren't very advisable. They weren't very good uses of money over the last 25 years.

Iraq, Afghanistan, bailing out Wall street the way they did Syria. I could go on and on. Anyway, the issue then is there is a rate where this supply demand mismatch of treasuries, that is being caused and reinforced by this monetary system change in terms of who's reserving what as a reserve asset for net commodity surpluses. Do the Fed and Treasury stand aside and let the market set the interest rate for them? If they do that, rates are going to go up and up and up, and everything else is going to go down and down and down, and the dollar is going to be the strongest currency in the world.

There's almost no limit to it. That is basically defend the currency. Now, the problem, of course, is that at some point, not too far down the road in that process, us interest expense will overtake us tax receipts, because us tax receipts, as it turns out, are very interest rate sensitive. So as interest rates go up and the dollar goes up, tax receipts are going to go down non linearly. Interest expense will go up non linearly, and not too far from here, interest expense alone will be more than us receipts, at which point either the United States will default on treasury bonds or they will print the difference, they will print the interest.

And that's also known as hyperinflation. That's if they stand aside and do nothing and let the currency be strong and let the bond market take the hit, that's not going to happen. What's going to happen? What has happened repeatedly and at ever shorter intervals since the repo rates, by September 2019 is rates will hit a point, bond volatility will hit a point, and then fed and or treasury will come in and cap US treasury market volatility to prevent further treasury dysfunction. They do that by injecting dollar liquidity, which then weakens the dollar, reduces rates.

Basically, it's sort of a temporary version of yield curve control, and in that case, the release valve is the currency inflation, asset prices, etcetera. And we've seen them. It's almost biblical, right, where Peter denied Christ three times? Well, the Fed and Treasury and or treasury have come in and capped bond treasury market volatility 12345 or six times since September 2019. At any point in time, they could theoretically not do it.

They're never going to not do it, they could let markets twist in the wind a little more than they have. But again, unless they're willing to let interest expense crowd out defense and entitlements and then ultimately overtake tax receipts where they have to puts them in a very bad position, that's not going to happen. So they will, in my view, continue to support the bond market at the expense of the currency. Support the bond market at the expense of the currency. So every time they're making that choice, are they sort of just like printing money?

Ryan
Like who wins and who loses in these scenarios here and the scenario you predict most, you could call up a. Chart of the S and P 500 over TLT, long bond ETF over the last five years. It looks like this. You call up Nasdaq over TLT. We're looking at hockey six going up for listeners.

Yeah, hockey stick up. Hockey stick up. Bitcoin over TLT. Hockey stick up. Gold over TLT.

Luke Groman
Ever since global central banks stopped buying, treasury started buying gold in 2014, it's an exponential hockey stick that describes who wins and how they win. Home prices over TLT over the last five years. If they're going to support the bond market over the currency, markets are reflexive and they learn they're going to figure out, okay, they've done this five times now. Why bother with treasuries? Treasuries underperform when markets are selling off.

Like today. Someone texted me this morning, zeros, long end, zero. Coupon bonds have four x the beta today of the Nasdaq, 104 times the beta on a down 300 Dow day. Right, okay, so stocks are down and treasuries are worse. Okay, well, when they inject money, what outperforms on the upside?

Treasuries are Nasdaq. Well, that's an easy one, the Nasdaq. So when stocks are down, then long bond does worse. When stocks are up, the long bond does worse. Same thing with gold.

Stocks are down today, risk off today. Gold is outperforming treasuries, long term treasuries. When they inject the money, which they inevitably will, gold outperforms on the upside. So you can see it reinforces and accelerates this sovereign problem, which is not enough demand for treasuries. So basically, what wins is everything but treasuries.

And what wins is inflation. What wins is nominal GDP growth. What wins is increasing political instability. What wins is the 1% and the 0.1%, the people with the assets. And that's what we've been watching for five years.

And I think it's going to continue accelerating. You said the US will be just like Japan, but feel like Argentina. Can you explain that? What does that mean? You can read any number of strategists and economists and investors who said, well, Japan's got way more debt than us and they're fine.

I know, of course, they've gotten a lot quieter in the last three to six months when all of a sudden the whole Japan's fine thing is not working out so well. But they had a point. As long as you don't dig into it at all, Japan does have more debt than us. But Japan has a positive net international investment position of like 65 or 70% of GDP. In other words, they have a foreign piggy bank of 70% of GDP.

They own more assets overseas than foreigners own of them. They finance internally. In other words, their own people finance them. So that's a really big deal, because if you've got a lot of debt and you pay them 0%, but you're in deflation, people are happy to make 1% or 0% on a bond if their cost of living is going down one a year. Your standards of living are rising.

No one's complaining. Your money, your bonds are buying you more money every year. Real rates are positive. The United States is externally funded. We don't have the option of having a 0% coupon on rates and certainly not having deflation.

We can't afford positive real rates. We need negative real rates, which means we need to steal money from the people who order our bonds. We need them to hold bonds while the real value of those bonds declines. In energy terms, like we've just discussed, that's very different. And then lastly, China runs a current account surplus.

They got more money coming in every year. We were on the twin deficit by virtue of the system structure. We got money going out. We got big deficits to finance every year. So there's a chart I've showed before.

It shows that the bank of Japan's balance sheet is a percent of GDP. Just hockey sticking. And people say, we're just going to be Japan. I'm like, yeah, sure. The Fed's balance sheet is going to hockey stick just like the bank of Japan's.

And the easiest way to frame up why it's going to feel like Argentina right now, the Fed's balance sheet is, I don't know, 35% of GDP, 30% of GDP. I don't know. Bank of Japan is like 110%. Imagine if I told you that in five years, the Fed's balance sheet was going to be 70% of uS GDP. So 70%, that's 1418.

Okay, so that's about 18 trillion more. Fed's balance sheets be $25 trillion in America in five years. Is that inflationary or is that deflationary? Is that Japan or is that Argentina? It's Argentina.

It's 100% Argentina. Sounds kind of bad. What's bad? What's bad, right? Like, what's normal for the spider is chaos for the fly.

You own a bunch of long bonds. Yeah. You're going to get paid every dollar you wrote if you own a bunch of long term treasuries, but they're going to go from buying you diamonds to buying you cubic zirconia to buying you cracker jack on a string because you know what? You didn't react fast enough. Look, I don't expect a lot of bankless listeners will own a lot of bonds, right?

Ryan
It's just I think they're hedged into different asset sets. You know, like, definitely skews younger skews skews crypto, not the bondholder type. But in all these scenarios you just described, bondholders take a massive haircut. I guess my question though is what if that's not enough? At some point, the demand for bonds has got to kind of like, like shrill up.

The market's smart enough to understand the play and what's going on. And like, is there are other measures going to be needed? We had a recent podcast episode with Lynn Alden where we talked about a world of capital controls as well. And we can already see some of that creeping in. Maybe not so much in the US, but maybe in some ways there's talk of a CBDC.

I think you've called that dangerous before. Do you think that things could ratchet up to a level where giving bondholders a haircut is kind of like not enough and the capital has to come from somewhere else and we move to a regime of capital controls. I've heard of this book. I've not read it yet. It's called the great taking, I believe.

I don't know if you've read that or have a preview of that, but that type of a world where the government comes and basically force confiscates, like some level of wealth or. I'm not sure exactly how this would turn about, but do you have any thoughts? So the financial repression side, we're already ten plus years into that.

Luke Groman
The Fed regulated us banks into holding more treasuries as high quality liquid assets. And we saw how that worked out last spring, right? With BTFP, the banks started selling treasuries, or they couldn't sell treasuries because they were so underwater they would have to take the earnings hit. So the Fed came in and basically swapped them out at par so that they didn't create a run on treasuries. As a result of the run on a few banks, 2015 money market funds in the United States were regulated into buying more t bills.

It crowded out private money market assets, sent Libor up, sent the dollar up. 2018 Trump tax reforms incentivize had contained clauses incentivizing us pensions to buy more treasuries. And they did. So you've seen all of this happen, and this is just stuff that, like Brazil and Argentina and various emerging market, latin american, southeast asian in the late nineties countries do when they have fiscal problems. And it's not been enough.

To your point. And so ultimately, there are extreme measures you can take. I've talked about this before. If you go to the financial accounting manual for Federal Reserve banks, you can google that. It's online.

It's a public document. Section two, period ten treasury secretary can instruct the Fed to revalue the gold on the us government's balance sheet. 261 millionoz. Every $4,000 is about a trillion dollars mechanically dropped into the treasury general account. Free and clear, no debt offsetting it.

$20,000 an ounce is $5 trillion. Yellen could take that 5 trillion. Wait, into the treasury bond market, buy back 5 trillion in bonds overnight. Increase basically the money supply by $5 trillion overnight. Voila.

Us debt to GDP. Wait, wait, you just revalue the gold because the US has a ton of gold, right? I mean, it's like the most gold reserves of any country in the world. It's like, what do you mean, revalue it? You could just, like, name your price.

Ryan
I mean, don't they have to go for a market value? What's the market? Men with haircuts like mine and guns tell you what the price is. Hmm. Wow.

Luke Groman
It's in the Federal Reserve operating manual. I didn't know the Fed has an operating manual. Right, there you go. There's a financial accounting standards manual. You can look it up, google it.

It's right there. So what happens is Yellen gets $5 trillion deposited into the TGA and she buys back 5 trillion in bonds. Boom. Overnight. Now, the us debt to GDP is between taking out 5 trillion in bonds and the resulting nominal GDP growth, which is going to friggin explode because you just increased the monetary base by $5 trillion.

So inflation is going to go nuts. Like that's in the cake. That's going to happen no matter what, because we've done a bunch of stupid stuff with borrowed money for 30, 40, 50, 60, 70 years. So now you end up with debt to GDP, 50, 60%. Now you can raise rates, take rates to eight, take rates to ten.

Nasty recession, who cares? You were going to put some private sector people out of business, but who cares? You're not going to threaten the solvency of the us government. They'll be able to pay 10% rates and I'll be happy to, if you buy back all that debt, I'll be happy to sell my gold at 20,000 an ounce and buy ten year treasuries at 10%. Great.

It's just a wealth transfer. Yeah, that's one extreme thing you can do. The great taking is an example of another extreme thing you can do. And what I can say is I don't know David Rogers web personally. I know he's a former Cleveland guy.

I know his firm was once a client of my firm that's the author. Of the great Taking. What is the thesis of that book? The thesis of that book is pretty straightforward, which, and it's very meticulously researched and annotated and footnoted, which is over the last 30 years, us and global policymakers have quietly converted ownership of most financial assets from legal ownership to, I forget the legal term, but it is basically like a general claim on legal ownership. So that in the case of a too big to fail bank or series of too big to fail banks failing under the way it used to be, you owned the stocks in your mutual fund.

Those were yours. Post these changes, quietly and surreptitiously made over the last 30, 40 years, you don't own them anymore. They now, in the case of a too big to fail bank failure or series of failures, your mutual funds, your 401K, your IRA, your pensions, the paper wealth of this country go into a general collateral pool to bail out the big bank's derivative books first. And then if there's anything left over, you get your 401K back, your IRA back, blah, blah, blah, blah, blah. And with a quadrillion plus in derivatives, the chances of you getting much of any of your assets back on net is slim and numb.

And slim probably left town a few years ago. That's the great taking in a nutshell. So they just take your assets, just confiscate the kind of the paper money? Well, no no, they already took your assets. You just don't know it yet.

That's the great taking was something that unnerved me in a way that I haven't been unnerved in some time. I'm adding that book to my reading list because it was just so fascinating when I stumbled across. You're like, Luke, maybe just two more things. We've talked about energy, we've talked about the monetary system change. Who's going to lose from that?

Ryan
Maybe who the beneficiaries of that might be. I want to talk to you about preparation, what we can do as individuals. But one quick topic before that is the US itself. Okay. It seems really weak right now.

At least the tenure of this conversation has been right. We got a terrible balance sheet. Debt to GDP at like historic highs is you have a tweet in your timeline somewhere that talks about the Baltimore Bridge. You know, remember the collapsing bridge, how estimates for that rebuild take ten years. We've got other countries like China outpacing us in every way.

The interest rates on the debt that we pay in the US are now starting to exceed and have exceeded the cost of military. Right, which is like also historic for the US. But yet you've also said you're bullish on the US over the next two decades. Can you square this for me? With all of the headwinds that we're facing, some of the issues we've talked about, and even just a few on the list I just listed out, why are you still bullish on the US for the next two decades?

Luke Groman
Why am I still bullish on the US? So the US has still, I think, the best legal system, property rights, etcetera, it's not using it to its advantage as I think it might eventually. And I think importantly, it's certain areas of the US I'm much more bullish on than others. And ultimately there's an apocryphal quote by Winston Churchill where he says, the Americans always do the right thing after they've exhausted all the alternatives and everything you just listed. And in particular that the interest expenses above defense spending were about out of all the alternatives.

So look, at the end of the day, what's the right thing to do? Bondholders are going to get killed on a real basis. We're going to go through a period of inflation that's really high and we're going to rebuild and we're going to do industrial policy and we're going to play catch up for a bit and wages are going to explode and things are going to be good. It's all a question of how does it look like between here and there and what have you, and look, there's ways it could go really pear shaped. And like I said, there are parts of this country where I'm not bullish at all on.

There's parts I'm very bullish on. So some of that depends on where you are in this country because some of the leadership is really, really bad and some of it's actually decent people who get it. And the people at Washington, there are people in Washington that absolutely understand what's happening, what has happened, what needs to happen, and they're brilliant. And we don't ever get to see those people. We get to see the weather people who are on tv all the time, the spokes models, and they're not very impressive by and large, and they haven't been impressive for some time.

But the people that are actually sort of behind the scenes, there are some that are very, very good and they know what needs to be done. They know. And so it's just really a question of sort of how that plays out where we clear the decks on debt, however we do it. And then we start playing to our advantages. Instead of trying to maintain the real value of the bond market to keep some Wall street guys and some dollar people happy, theyre going to be unhappy.

It is what it is. They had 40 years of fun. Its their turn in the spanking machine. Well, hopefully the US can take its turn in the spanking machine, swallow its medicine and come back stronger. It certainly seems like the necessary course of action and that it won't be the end of the world to go through that.

Well, yeah, I mean, look, the big part of the US has been in this banking machine for 40 years. The US has spent the last 40 years subjugating the us middle and working classes to support the bond market. Wall street and Washington DC and Washington DC has generally made horrible decision after horrible decision in trade policy, foreign policy, economic policy. And 40 years later they're now admitting that when you have the treasury secretary of the United States like Janet Yellen, come out and say, basically throw 40 years of economic orthodoxy in the trash in the Wall Street Journal like she did three weeks ago, I missed that. What did she do there?

She came out and said, for 40 years we were taught that if someone wanted to send you cheap goods, you should send them a thank you note. I would never ever again send ChiNA a thank you note. National security Advisor Jake Sullivan last year to the Brookings Institute went up and gave a speech. Us economic policy for the last 40 years has been wrong. Politico highlighted it in February.

The Biden administration is selling treasuries and buying uranium, semiconductor fabs, copper, nuclear power plants as of today. And yet there's still all these people. They want to own long term treasury bonds. They're telling you this paper is bad on a real basis. They don't want to hear the message.

And that's fine. They'll hear it sooner or later. Markets are starting to hear it. But like, there's not one Us, there's multiple USS and the part of the US that got subjugated, the middle and working classes for the last 40 years to support Wall street and to support certain Washington DC interests, as those DC interests sort of, you know, kicked the pieces all over the board in foreign economic and trade policy. Those interests are now going to lose on a real basis.

And who's going to win is America. And you can see this, the 0.1% against the bottom 50% total net worth over the last 30 years, it's done this. High inflation, high wage inflation isn't bad for America. Plumbers are making 20% more a year and they got a 3% mortgage that's called a debt jubilee on their house. So maybe this is exactly what the US needs then, Luke.

100% it is. Well, maybe to close this out. I guess the last question is for individuals when it comes to preparing. So we talked about a world of high energy prices at least denominated in dollar terms and fiat terms and this whole monetary system. Change the shift.

Ryan
How do investors prepare for this? Everything that you said, it effectively tells me that the old 60 40 equity to bonds, like stocks to bond type ratio, that is like dead. Deader than dead, at least for investors of our generation. This generation, is that true? What do we replace the 60 40 with?

What do we need to know? How do we allocate these storms and navigate this as investors? If I wanted to keep it really simple, I think 60 40 is dead. The 40% that's in bonds, I would keep 10% of the 40% or a quarter of it, maybe even half of it. If you're conservative in T bills, at 5%, a lot of T bills, I'm happy to clip a five and a quarter coupon and roll the paper.

Luke Groman
I see no interest in owning long term government bonds. That makes zero sense to me. And then I would take the remainder of ten or 20% in T bills. I would take the other 20% to 30% and I would put it in gold and bitcoin. And then I would go to the beach.

Ryan
That's it. It's not hard. Not hard. I mean, like I said, people say, oh, it's going to be so bad. What's normal for the spider is chaos for the fly.

And you keep the stocks. You think equities are going to perform okay in this environment? I think they'll be fine. I think they'll be fine. And I think low leverage and low leverage and low consumer loans.

Luke Groman
I wouldn't go taking out a huge mortgage to buy a house unless you're really cash flowing it and it's in some sort of luxury area or something like that. Don't go out and borrow a bunch of money to buy consumer goods because the odds that this is bumpy are very high. It's going to be fine on high volatility. High volatility doesn't matter unless you're levered. For the average investor, it's irrelevant unless you're levered.

Perfect example. I've used it before. If you look back, Dan Oliver at Myrmercane Capital is a great chart showing the price of gold overall and then month over month in Weimar, Germany. So this is one of the great hyperinflations of all time. You should be easy.

Borrow a bunch of money, buy gold in german Reichsmarks and get rich. Except if you were levered, you lost all your money four or five times in three years. Why? Because it was so volatile. Because the volatility is so volatile.

It really is. Equities will be fine. I personally prefer stuff that will invest in and benefit from the re shoring and reindustrialization rebuilding of us defense industrial base. I have a big personal investment in electrical infrastructure manufacturing. It's a private equity investment.

I like those types of investments. I like us industrials, I like us energy producers industrials more broadly. But I think equities will be fine generally because again, the bubbles in long term government debt, that's where the bubble is. Everyone wants to believe the bubble is where the last bubbles have been, and it's not. The bubble is in long term government debt.

That's still a variant perception that's starting to change, but that's still a very variant perception, in my opinion. I think that go to the beach part is essential too, because what that implies is you're just kind of buying and holding and just relaxing. You're forgetting it. You're not trading all that volatility. You're not like sweating those details and going on margin, right?

Ryan
Yeah. People think they can trade this. Why bother? Why bother? But even if you were inclined to.

Luke Groman
Okay, good luck. But what's your analog for what's happening? Peak cherry Boyle. First global sovereign debt bubble in 100 years. A quadrillion in derivatives.

The geopolitical situation, global monetary system change, western sovereign bond bubble. The reserve asset of the last 50 years is a bubble. The volatility is going to be face peeling. It has been face peeling. It's going to continue to be face peeling and highly political, no less.

Right? So, like, look, if you're Nancy Pelosi and you want to buy calls on Nvidia, great. But if you're not Nancy Pelosi's kid, for the average investor, most people listening are not. Yeah. So just, I think it's important, important to just understand that having low leverage is really, really important in terms of managing through this volatility for the average investor.

Ryan
And this is playing out now. Oh, yeah. How long will this take to play out? This entire thesis, does it happen quickly? Are we talking like months to years?

Are we talking still? They could continue to kick the can and get another decade out of this old rusty car. We're ten years into this shift US interest expenses above defense spending. You can see the geopolitical impacts. I think the world could look very different in a good way by the end of the next presidential.

Luke Groman
By the time we're sitting here getting ready for the election of 2028, I think the world could look very different. And the reason why is interest doesn't sleep. Compounding interest doesn't sleep. And at five and a quarter percent like the US has on 121% that the GDP, the exponential factor, the exponential interest functions at. Killer moves fast.

Ryan
Luke, this has been so great. Thank you so much for joining us. I learned so much about energy and some of these related topics. It was great to pick your brain today and I think bankless listeners will benefit as well. So we certainly appreciate you.

Luke Groman
Thanks for being on, Ryan. It was great being here. Also, bankless nation, some action items for you today. You know, what you need to do is go sign up for Luke's weekly report. It is absolutely fantastic.

Ryan
Dives in deep in some of the topics we've been discussing today. We'll include a link in the show notes for that as well as his Twitter account where we source a lot of the material and grasp for today's conversation. Got to let you know, of course, this whole finance thing is risky. So is crypto. You could lose what you put in.

But man, it's better than holding bonds. Right. We are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey.

Thanks a lot.