← The Human Action Podcast
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- [00:03]
A
This is the Human Action Podcast, where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy.
- [00:14]
B
Luke, welcome to the Human Action Podcast.
- [00:16]
A
Thanks for having me here. I'm excited to be here.
- [00:18]
B
Yeah, this is great. I've been looking forward to this. We got a lot of topics to hit here. But before we dive in, just on the off chance that some people have been living in a cave who are watching this, can you give just a brief background who you are, what your organization, and what you're all about?
- [00:34]
A
Sure. I'm Luke Gromen, founder of FFTT llc, which stands for Forest for the Trees, and it's a macro thematic investment research firm. I aggregate a large amount of publicly available data points into trying to discover and find what I call economic bottlenecks from our clients. As I've been in investment research for nearly 30 years, and over the course of that career, I found that excess investment returns accrue to those sectors that are positioned to either benefit from or be hurt by what I call economic bottlenecks, which are essentially something's happening, it can't keep happening because of constraints. And basically I try to highlight those constraints ahead of time, particularly vis a vis, when positioning is the other way against those constraints, and flag them for our clients. So that's the sort of the 32nd nickel tour of who I am and what we do.
- [01:36]
B
Okay, well, great. And yes, just, again, so just for your background, Luke, this is more of an academic thing, but just I've been following your views and your commentary and think this is going to be very useful for our listeners. So, economic bottlenecks, Geez, I can think of one over there, straight of her moves. Can you? And again, I've, I've seen your commentary. I saw you recently, you did a show. Lynn Alden was also a guest with you. Can you just lay out, you know, some. Like, for example, just to give you a foil right now, the line coming from many people who are, you know, pro the Trump administration and their stance on this is, hey, a lot of people are willing to pay high gas prices for a few extra weeks and in order to keep Iran from getting a nuclear weapon. Give me a break. And so what are your thoughts on all this kind of stuff?
- [02:27]
A
I would equate it to having your dentist say, here, you need a root canal. Take this shotgun, put it in your mouth and pull the trigger. And that'll get rid of the root canal. You know, that way I won't have to do a root Canal. It's a very, very blunt instrument that will ultimately be fatal to the global economy, the US Economy if it's, if it's allowed to transpire for too. And that is simply because we are in a globalized world now and you're in a globalized world and supply chains are very, very long and we're in a highly levered globalized world. And when you're making something, any product, the reality is if you are missing one component of thousands, you can't make that product. And as it turns out, the combination of the stuff that comes out of Hormuz, be that oil and gas most obviously, but then things that are less obvious like sulfuric acid for refining all sorts of critical minerals that go into our nifty little devices here, fertilizer, which to feed the world. And then when you connect that to Southeast Asia, China in particular, when they start suffering any kind of shortages of those inputs, then you know, this is a non linear breakdown in supply chains. If there isn't enough helium in China or Taiwan, this doesn't just hit a couple things. This hits, you know, a factor of 100 things more, which then hits a factor of 100 things more. And so we quickly now we've been saying since this war started, A, that I think it's going to last a lot longer than people think and B, we've got until about mid April until supply chains start breaking down nonlinearly. And so far on those two, I feel pretty good about both of those comments. It's lasted longer than most people thought seven weeks ago. And right on cue, right around mid April, we're starting to see much more acute breakdowns in supply chains. And so it's pretty alarming in terms of where things will go over the next month, six weeks if, if Hormuz stays closed as a result of these supply chain breakdowns. And again, even if they fixed it today, even if everything went back to normal today, there's again this sort of financial macro, policymaker view, it was like, okay, well let's, we'll just turn it off and turn it back on like we do our computers. And that's not how it works in the real world. In the physical world there are physical constraints, there are things that have to come back up that plants that take a while to be basically kind of restarted and re warmed up when you talk about things like aluminum, etc. So we're looking at very serious, very, very serious disruption best case at this point. And every day that it stays mostly or entirely closed from here It's a nonlinear worsening of the U.S. and of the global economy. And the U.S. economy.
- [05:42]
B
Yeah. And I mean that's consistent with the things I've heard from people that seem like they know what they're talking about. And also it's not like they have a dog in the fight that they're reflexively anti American or something. That just seemed pretty sober minded analysis of what's happening. Another point that I've seen people make too, as well, just to your point about even if they just flipped a switch and it all went if total peace broke out tomorrow, still like there's been some physical damage inflicted on various, you know, plants and so forth and refineries and whatnot. So again, it's not just that, oh yeah, they go back to how things were on February 27th or something. Just if they, if they stop tomorrow.
- [06:17]
A
No, that's exactly right. And it's, there's this, hey, it's just a little bit of inflation. You know, I think it was really telling, you know, yesterday Scott Besant came out, Treasury Secretary Besson came out and said, you know, hey, I think it's 50 or 100 or more days for 50 years of stability. And people said, oh good. I said, what? Wait, wait, wait, wait a minute, go back in time. March 22nd, same secretary Besant said 50 days for 50, 50 years of stability. Well, that was 23 days ago, sir. And there's not a single person that raised their hand in that audience and said, Hey, 23 days ago you said 50 days for 50. Here we are, 23 days of the 50 days later we are no closer to having anything worked out and now you're extending it. So now we're 73 to 123 days or more for 50 years of stability. Well, what happens in the likelihood that at day 85 supply chains start breaking down really nonlinearly? You know, oops. You know, Taiwan hits constraints on LNG or on helium or China is unable to produce components that Taiwan needs. So Taiwan's probably not going to be the first thing that breaks. But you just, you just one component somewhere. Boom. Ops 4 needs to shut down in Michigan because they can't get XYZ from or in all likelihood, hey, data center. You know, ABC is not going to get built till 2030 now because guess who makes a lot of the components you need for it that China and Europe. So then they have to shut down because they can't get the energy they need. So there's this. I'm astonished by the complacency at the moment in markets and amongst policymakers. And I'm an acutely aware that, I think part of, at least from the policymakers side, that it is a very cynical complacency. In other words, they want the markets complacent because if the bond market starts revolting or supply chains really start breaking down, they're going to have to, the US Is going to have to seek terms of peace in this, in this conflict that are not necessarily what they were hoping for. It will sort of cement a strategic loss for the United States in the Strait of Hormuz. So they're happy to keep, you know, keeping markets, you know, to let markets be of the mind that, hey, everything is awesome, everything is fine, this isn't a problem. And they're actively encouraging that view. I think that view is totally wrong. I think we're a couple weeks from really starting to see that happen. But that's what makes markets.
- [08:56]
B
Okay. Yeah, let's pull on that third for a bit. So I was surprised early and just to give you some of the background here, Luke, that I am an academic economist or I was, and I write a lot about like the social function of stock speculation and futures markets and forward contract things like that. And my go to example for decades has always been just because it was, you know, such a rich thing for people to just to focus on and say, oh, what if war broke out in the Middle east and, you know, all that oil stopped flowing for a bit and then, oh, if speculators see that coming, they would bid up the prices and blah, blah, and that'd be good because that's exactly what you want to happen. People economize, they start pumping, you know, domestic wells more rapid, finding more domestic wells, whatnot. And so I was surprised when my scenario that I've been writing about for decades comes true and oil was up like $3 a barrel or something in the beginning. And, and so it's in fairness because I, then I, my buddy and I were getting into, we were wondering like, well, gee, should we, should we buy, you know, call options on futures contracts or something? And the implied volatility was through the roof. And so it was pretty expensive to get in there, but still the spot price of, you know, WTI or whatever and even Brent for that matter, weren't near moving nearly as much as I would have thought. So were you surprised by that as well, or can you just comment on that?
- [10:10]
A
Yeah, I think it's exactly that we are. Last week for clients, I wrote the old ADAGE there's no atheists in foxholes and there's no free markets in wartime. We're in a war, but it's sort of Schrodinger's war. Right. We're in a war where it's useful to make policy, but we're not in a war as it relates to sort of markets and what have you. And it's sort of a continuation that we've seen under Bush and Obama.
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B
Others.
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A
Right. Is this, you know, hey, we're at war. This is very serious, but not so serious that you need to make any changes to your lives at home. Americans. And so, yeah, initially, you know, when Hormuz closes, you go, it's like 20% of the world's oil flowing through there. And oil just sat there and. And you go, hmm, am I crazy? And then the next week, the answer was nope. Nope, you're not crazy. Right. Because oil promptly goes. And you have very serious. People say, no, it'll be fine. It won't go over 70, won't go over 80, won't go over 90. Boom. 120. And then we get sort of active management, certainly from the policymakers. Right. Hey, we're going to unsanction Russian oil. We're going to unsanction Iranian oil in a war against Iran.
- [11:29]
B
Can you just elaborate on that just to make sure everyone gets that? Because, yeah, that's shocking in and of itself in case people miss that.
- [11:36]
A
Sure. So, yeah, the Treasury Secretary of the United States, we had sanctions on Russian oil. We had sanctions on Iranian oil. And in sequence, over the course of maybe seven or eight days after oil, it laid there, did nothing for the first week, and then exploded this higher the second week. And as it went over $110 a barrel, Secretary Bessant, unsanctioned Russian and Iranian oil, which was. You would run afoul of the US treasury if you were trafficking in Russian oil or Iranian oil. And that was effectively further tightening supplies of oil at a time when 20% of the world's oil just got taken offline. And so as a way to try to loosen oil supplies, the treasury unsanctioned. Even though the story had come out that the Russians were helping the Iranians target American assets on the ground. And even though we were at war, we're hitting. And, you know, he tried to spin it with some BS that, you know, some were jiu jitsuing the Iranians with their own oil. And it was all. It was bs. The reality was, as they oil markets finally did respond, it started threatening the functioning of the treasury market. We saw treasury market volatility explode higher to near levels. That has driven very prompt responses from policy over the last five years, usually in the form of additional dollar liquidity injected. You can inject dollar liquidity into the treasury market to calm it down. When oil is negative 37 like it was in Covid, it's much harder to inject dollar liquidity to save the treasury market when oil is 110 and going sharply higher. And so whether we saw the unsanctioning of Russian and Iranian oil, whether we saw various, you know, the Trump always taco or Trump always chickens out the taco, we saw jawboning of oil from Trump at key levels, from Netanyahu at key levels. Hey, the war is not going to be. It's going to be over soon. It's going to be over soon. It's going to be over soon. And we've seen indications that somebody has been front running oil markets in a big way. In other words, March 22, Trump tweets out that he's going to, you know, basically wipe out Iran's infrastructure and oil skyrockets as soon as it opens in Asia. And somebody shorts $500 million of oil and then he releases a tweet 6am on Monday morning, you know, oops, I was just kidding. And oil plummets. Who was that?
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B
Right?
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A
Now, in commodity markets, my understanding is there's no such thing as insider trading. If you would have done that in stock markets, you in theory would be in trouble. But in commodity markets, hey, all's fair in love and war. But did somebody, you know, did somebody get a heads up? Was somebody politically connected shorting oil in size, trying to help the administration manage oil prices? Fast forward to last week when they did the ceasefire. Somebody was short $950 million notional oil futures into the announcement of the ceasefire. Who was that? Why did they do it? Did they get a heads up? Look, if it was me, I would, if I was Bess and I would be calling buddies going, hey, short oil, you know, to help me contain this at key moments and I'll get you back. Right? That's how the Wall street works. How do I get you back? Well, hey, if key moment, you're short oil, hey, Trump's gonna release something about a ceasefire. You're gonna want to be short oil here. Boom. Now that all makes sense in the very short run. But you're indicting the sanctity of US Markets. People are, you're starting to. Market participants are looking at These types of activities. And this is purely speculative on my part about, about that. I mean, but it's what I would do if I was, you know, if I was, if I, if I was besant and I, you know, was watching sort of my economic platform get imploded by this war and then was instructed, hey, keep oil down. This is kind of what I would do. I like, I get it. But the challenge is you're eroding long term sanctity of US Markets. Long term faith in US Markets. Right. If this kind of thing happens, it's like, I'm not going to play anymore because it's a rigged game. People don't like to play rigged games, especially when they're rigged. So obviously. So these are the things they've been doing to try to manage. Jawboning, unsanctioning. Someone's in there playing with oil futures at key turns ahead of key announcements. My guess is they're politically connected in some way, shape or form. So, you know, it erodes the sanctity of markets over time. In the short run, it doesn't really matter. But, you know, the longer it goes on, the more people just say, I'm going to take my bongo home. This is B.S.
- [16:43]
B
okay, let me ask you one more on this. And then, because there are a bunch of other things going on as well that I love to hear you elaborate on. So what about the blockade? Of the blockade. So just again, the, the timeline, it's, you know, the, the threat was. And lots of analysts have been saying this for years, like, yeah, you, you can't go to war with Iran or if you do, it's going to be painful because they can just shut the straight up Hormuz. And so then they did that. And then, you know, Trump famously at a press conference or something was like, yeah, nobody's, you know, I can't believe they're doing, they're attacking the other people in the region. That's, that's crazy. You know, and people are we okay? And then he's, you know, open the effing tweet. Praise be to Allah, you know, that thing. Okay, so it, one would have thought the point was, yet we want it. And that's like, it was the thing that, yeah, we, we want them to open the straight. They can't hold the world hostage. And then it, and then it's, you know, and then things had been moving into a new equilibrium where Iran was, you know, charging up to what, $2 million a vessel or something. So it was like my joke There, Luke, was Iran should just call it a carbon tax. So this has nothing to do with geopolitics. We just care about, care about climate change. Okay, so, but the point being that, you know, I think the world breathes a sigh of relief like, okay, yeah, Iran's getting money, but $2 million for a big tanker just to get that stuff flowing out of there. Okay. And then I think I, presumably because the Trump administration was getting feedbacks from certain key people saying this is unacceptable, you look like a fool, like they clearly won, however you want to spin it. And so then now they, we blockade that. So I guess one question is, presumably they could have done that from day one, did they not? Because that would have been seen as too provocative. Whereas now with the sequential thing, it seems like, oh well, it was tit for tat and now we ended up in this spot. In other words, from day one you're, you're bombing around what the US presumably could have said with our navy. If anyone tries to buy their oil, we're gonna seize it. But yet they hadn't been doing that up until this more recent move. And there's more generally like, did he flip the tables now and Iran's, you know, got a few months left or, you know, because you keep saying you think this is going to go on for a while. So it's kind of an open ended question. Feel free to take whatever you want. I,
- [18:52]
A
I, I'm of the view that the blockade, of the blockade was done, I think, yeah, to manage perceptions. What I keep hearing from, you know, very credible rumblings on the ground, credible sources on the ground is that tactically Iran lost a lot of stuff. Strategically, Iran was winning. It's a much lower bar. They just have to survive and keeps closed. That's it. And that's what they were doing. There have been discussions, oh there was, you know, 5D chess, that trump wants it closed and that's going to choke off, you know, Europe and UK and you know, China and then they'll all come begging to us for our oil. And it's like that theoretically makes sense, but when you look at the actual amounts involved, whether that be, you know, what China needs, What Europe needs, etc. Doesn't really make sense. It's not going to work out before the global economy collapses. I think part of what happened was, you know, again, I began hearing that the Chinese may have recut off our exports of rare earths to us a couple, a few weeks ago. And if that's the case, war was over. It's just a question of when. Because we've run down interceptor missiles so fast. We're running low, as are the Israelis, and fast. We're running out of interceptor missiles faster than the Iranians are running out of offensive things. And so if China, and we can't make those things without Chinese rare earths. So if China tightens the exports on that, war is over. It's just, okay, we're just going to wait and see. And, you know, do the Americans want to completely run out and make it very obvious to everyone they run out, or do we want to have a cease fire and start talking? And what we've had is we've had a ceasefire and everyone started talking. And yesterday Besant came out or two days ago, said, hey, the, the Chinese are not being good partners in wartime. They're, they're choking off exports of certain goods. Is he complaining about plastic trinkets going to Walmart or is he complaining about rare earths? Again, I'd bet, you know, dollars to donuts, he, whether intentionally or unintentionally highlighted the Chinese have re cut off rare earths and we've gotten our ceasefire talks. In that world, if I'm Trump, I think blockading the blockade makes me look less like I lost and maintains some level of strength and, and certainly provide some leverage relative to the US and, or excuse me, the EU and UK around their energy supplies. Because, you know, Chinese energy supply has been flowing through the entire time and apparently, you know, tanker trackers this morning on X came out and I retweeted it. It's interesting. 2 million VLCC tanker flowed through. You know, it's transponder on and it's a sanctioned tanker and Americans didn't touch it. Why not? You know, and there's, where's it going? Why didn't it get interdicted? There's a lot of uncomfortable, you know, there's a whole bunch of potential answers to that, but none of them line up really well with the mainstream narrative about what's going on here. So, you know, it's fog of war. But I don't, I ultimately think the, the blockade, of the blockade is not the power move that, you know, some people are asserting that it is. I think it's more, you know, and optics. It's, it's putting lipstick on a bit of a pig.
- [22:29]
B
Okay. Yeah, I mean that people are, lots of people are wondering, okay, so, you know, a tanker goes through and they have a deal with Iran and it gets passed and it's a Chinese, it's headed for China and the US Is going to grab it. And then the Chinese say, you know, that's our ship, give it back. And, you know, we got to, you know, go to the brink of war with China over this. And that's just trying to think through like two and three moves ahead here, how this stuff is going to play out. It gets pretty dice. So, yeah, I could see your. What would make the most sense in terms of the position he's in is, is that, yeah, if they maintain officially, yeah, we're blockading the blockade and you got all the MAGA influencers and stuff. So, yeah, Trump's flipped it on him. Haha. But really they're letting it through partly to contain oil prices because that's. Yeah, that's on the issue of, you know, the US Doing it, if they had time to go develop it. But right now the US Is actually a net importer of crude. It's a net exporter if you include crude and all like refined petroleum products. But strictly speaking, in terms of. It's some of. It's like we send stuff to Canada, get bitumen and back. But this idea that, you know, right now they could just flip a switch and the US could just send barrels of crude and replace what's going on over there is crazy. That just the numbers don't work.
- [23:40]
A
No, and that's exactly right. There's a logistical issue there that is, that is number one, that doesn't make sense. But then again, if you start, you get. You just raised a point of are we going to go to the brink of war with China? Right. Like China cuts off pharmaceutical ingredients you met to the U.S. in response, you know, like one of, one of my best relationships in China. He's American, he's been there 30 years. Brilliant. And he's been very steadfast since Trump got back into office and still is saying this. The Chinese haven't even started playing hardball yet. They haven't even started. Right. So take away pharmaceutical ingredients. How many millions of Americans are dead in six months when their drugs don't come? Like, that's like, these are the things we hear sort of these, you know, the MAGA influencers.
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B
Like, hey, but it would fix the Social Security problem.
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A
Oh boy, you're going to go there. Yikes.
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B
Okay, so on this. So this leads into. We can move on to other things here that are also disturbing. By the way, I should probably mention Luke, just for everyone to know. We're recording this on April 15th, so I don't know exactly when this is going to drop. But in terms of, you know, there's a lot of current events, things are fluid. So in case it looks like we're ignoring something obvious, it might be because you're hearing this. After we recorded, you added a provocative phrase. You said that China has us by the short hairs. Can you explain? And you and I both have similar hairstyles, so that's relevant to us. Can you explain what you meant by that?
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A
Yeah, it is, ultimately,
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B
if you.
- [25:16]
A
They've boxed us in in a lot of different ways, right? They've got us on rare earths, they've got us on electrical equipment, they've got us on, you know, when we spend. The structure of the system that we've allowed to evolve has been based on a misapprehension, fundamental misapprehension of economics in the long run. And this ties into the Austrian, you know, I think it ties into the Austrian school pretty well, which is, you know, the, the, the Chimerica Bretton woods to whatever you want to call it, system. Well, all right. China goes into wto. We send our factories and jobs to China. China makes stuff, they send it to us. We send them dollars to pay for it. They take the dollars, they recycle them into our capital markets. People made more money and financial conditions loosened. They borrow more money, buy more stuff from China. Wash, rinse, repeats. It's a virtuous cycle. And it all worked great until, oh, eight when we blew up and the Chinese are holding all of our assets, all these bonds. And for 40 years, when a crisis such as the one that hit America in 08 hit anywhere else, whether that be Southeast Asia in the late 1990s, whether that be Latin America and the early 90s and the 80s, whether that be Russia in the late 90s, everywhere else, the recipe from the Americans via the IMF and the World bank was always the same. Austerity, cut, government spending, break up your oligopolies, break up your big banks, devalue your currency and change your political structure, you know, change your. Change your politicians that led you here. And what did the Americans do when it was their turn in the spanking machine? They're like, eh, we're America, our currency, your problem. Well, we're just going to print the money and we're not going to change a thing. So China, sorry, we're just going to devalue your bonds. Russia, we're going to devalue your bonds. Europe, we're going to devalue your bonds, but we're not going to do anything. We're not going to restructure a thing. And that was seen as a financial attack in Beijing and in, in Moscow and elsewhere. And those are not my words. Those are words of former CIA operative in 2014.
- [27:33]
B
So just to make sure people are. So you're saying like the rounds of qe, for example, it wasn't just Glenn Beck and me that was freaking out that people in Beijing were, oh, absolutely not the CIA.
- [27:42]
A
The former CIA senior level guys, guys have been in there for 25 years going, Beijing is pissed. And so the thing about China is Americans want China. They put their own views of how they would act on China, but that's not how the Chinese react. The Chinese are very passive aggressive and patient. So Chinese waited until the crisis ended and then they said, all right, we're done buying your bonds in 2013, late 2013, they phrased it nicer. They're going to say, hey, we're not buying more Treasury. They said, it's no longer in Chinese interest to grow FX reserv anymore. It's like we're done buying Treasuries. And they began, instead of recycling dollars into Treasuries, they started buying copper mines, nickel mines, Puerto Pareas, other ports around the world, invested in the Panama Canal. They started putting these dollars into hard assets because they saw that as the real value. And by virtue of not just that, but then in 2015 they came out and said, you know, we're also, in addition to buying up all the stuff, we're also going to invest in China. China 2025. We want to dominate in these industries of the future in 10 years. And at the time, most American, and certainly American investors like, oh, we're powerful, they're not idiots. Well, By China, by 2021, people like, Whoa, they've done it. They're being very competitive. And so now there's really only a few high end industries where they are not dominant, you know, semiconductors, few other things. And so by virtue of this long run investment in dominance, including subsidies, look, people like, oh, they subsidize their industry. Of course they do. They don't play fair. Of course not. But my ongoing point for this last 15 years is like, they're subsidizing their industry. We subsidize our industry. We subsidized our bond market. No wait, with qe, we subsidized wars of choice in the Middle east to the tune of 8 to 10, $12 trillion. You know, to spent what, $5 trillion in Afghanistan or $3 trillion in Afghanistan. Being there for 20 years to take Afghanistan from the Taliban and then give it back to the Taliban, like that is literally like they should have just handed out like coke and hookers to like the entire country, lit the money on fire. It would have at least been a fun party for America as opposed to what we didn't have. That's how much we wasted the money. And so while we were wasting tens of trillions of dollars on this stuff, the Chinese were investing in infrastructure and setting up the dominate industries. And so that brings us to today of why do they have us buy the short hairs? Because they were patient. And I wouldn't say they invested everything smart, but the bar is just so low. They invested. They didn't go to war in stupid wars of choice where they literally got nothing out of it and completely wasted the money. You know, they've got cities and rails and factories and, and they own mine, right? So now we're into this situation where the US has to either completely blow up the rules based global order, right? Because now China, you know, China took American dollars and said we're going to buy a stake in, in the Panama Canal fair and square. That's the rules based global. They had the dollars, the dollars, the reserve currency, it's accepted everywhere. They bought their investment, they made the investments there, they put the cranes up and made in China, blah blah, blah. And then the Americans are like, no, that's not the rules. Like wait, you use dollars, right? So they now have us in this position where, you know, if they want to go to Port au Piraeus, if they want to go to Africa and start seizing copper mines or whatever, they're, you know, they go down to Venezuela. You know, Chinese made a whole bunch of investments in Venezuela fair and square with dollars. Americans went down and said no, that's why they have us by the short hairs, which is America has to blow up the rules based global order. They have to discredit it by their actions, which they're doing in order to basically undo the folly of the last 20 to 25 years, which is we don't need to produce stuff, we can just print dollars, we can just focus on paper financial assets. But the problem is you can't fight wars with paper assets. You are not a sovereign country if you don't make your own defense base. It's gotten to the point where a quorum of the US military has its components made in China, which is a problem. If you're pointing, you're trying, hey, China, I need you to speed up the Rate at which you're making missiles for me to point at you.
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B
Right.
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A
And by the way, buy our bonds to finance the missiles that you're making so we can point them at you. That's how they have it by the short air.
- [32:41]
B
Yes, A lot, a lot there to unpack. I really like that because there is. There does seem to be this tension in, you know, right wing, free market, Austro libertarian circles where holding up the Chinese is like this, you know, lurking even not threat, but just this. This force like in cont. Is a foil to like our bumbling through, you know, people. What we're doing on our end, but yet underlying it. You know, I have some people say, but what are you saying? That centrally planned economies work if you just do it. Right. And I. But I think you kind of hit the nail on the head that. No, I think yeah, if the United States actually were, you know, a limited government, obeyed the constitutions and so forth, like, yeah, we'd be crushing and then there wouldn't be any animosity anyway. They'd have no reason. Just like Switzerland's not worried about the threat from China. Like why, you know, that's fine. They engage in commerce. So I think that, you know, that that's the. That for various reasons. Yeah. Given the intervention that the Chinese have in their economy, the government and what we're doing in ours, that theirs is. Is more farsighted. This might be goofy. Luke, tell me. I was watching like this was years ago. It was some movie. It was like a crossover. It was like Jackie Chan and Arnold Schwarzenegger, but it was like co produced in China or something. It was like trying to cater to their audience in the beginning of the movie where they're given the backstory so you understand like where the people are coming from was ridiculously long. It was like 15 minutes. And I was like, an American audience wouldn't sit through this. But the Chinese, no, they're willing to, they're patient, they're. Oh, okay. That's the background of these people. Now. I understand the story. Okay, so it again is probably a goofy thing, but it really was just telling me that, yeah, the American attention span and like we have our democratic elections and you know, you get there, you got two years till the midterms, you got to do something big. Whereas the Chinese can just kind of sit back and let America squander everything they spent 50 years building.
- [34:30]
A
No, that's. Sadly, that's how it's gone for the last 25 years. And you know, there, there is definitely an Action afoot to try to fix that. The challenge for me is that it looked like it was moving in that direction until this war hit. And there's sort of this view like, well, this is going to do it, right? Like we're going to get, you know, we're going to use war to re shore and re industrialize. And you go, are you familiar with any of the wars we've ever fought? Any, Any. You know, there's a reason why Sun Tzu, whatever, 2,000 years ago said there is no instance of a nation benefiting from prolonged warfare. Like what? What, How? There is no greater misallocation of resources than warfare. Right. You borrow money to build a bomb, you drop it once, it goes boom, and then you still owe the debt and the bomb's gone and it probably
- [35:30]
B
reduced productive capacity somewhere on the planet. You know, killing.
- [35:33]
A
No, that's it. Right? So like, literally, when you look at it that way, I mean, it is, it is, it's. It's like it's, you know, it's the exact opposite of what you're trying to do. What we should be doing is hiding and biting as to use the Chinese term, and in spending all this money we're spending on war, on domestic infrastructure, taking the hit to the bond market. If you're going to mess with free markets, which they already are for this war anyway, like, let's mess with them for a productive reason. Let's cap by. If we got to cap bond yields because we've run up so much debt, we can't afford to really do anything without the bond market revolting. You're going to have to cap it for some reason. Fine, cap it for something productive. Right. Have the Fed cap the bond market while we rebuild our industrial base. Great, that'll work. But you know, for this, this is just the very antithesis of that kind of. You're messing with free markets for the worst, for the least productive thing you can possibly do in economics and which hasn't worked over and over and over over the last 50, 60, 70 years.
- [36:46]
B
Yeah. So, Luke, can you give your thoughts on the. The fate of the US Dollar as the global reserve currency? Because just to some background on where I'm coming from, that with the rounds of qe and then certainly once, you know, the war in Ukraine broke out and then the US came in with, you know, penalizing people via the swift system and whatnot, that there were all these things that just kept piling up where. And I was making the case that various parties around the world, even if they don't have any inherent animosity with the United States. Just thinking there's a, they can just flip a switch and exclude us from global commerce. Like that's way too much of a club that they have and so looking for alternatives. But a lot of people over the years are just, there's nowhere else to go now where are you going to do, you're going to the, the Chinese yuan or something, what are you gonna do? So anyway, and my thought was with the rise of stable coins, for example, as, as the financial sector revamps to be able to have digital based tokens, currencies, call them what you will. Yeah, they can do it on a, you know, US based ones initially but then once you have that system up and running, it's easy to have a pull down menu and switch to a stable coin that's tied to a bar of gold, not one US dollar. So anyway, I know I'm throwing a lot at you here, but what are your thoughts on all that stuff?
- [38:00]
A
No, yeah, I think it's, it's, I think you're exactly right that the sanctions, et cetera, have undermined the dollar system in a major way and in a way that its biggest proponents downplay wrongfully. So in my opinion, when you go back to 2012, we kicked Iran out of the Swift system. To me that was like using an elephant gun to kill a fly because you know, had we not done that at the time, we would have still had that surprise in our bag. And when you look at how China reacted to that, you know, here too there is just not the appreciate you. We rarely hear that the Chinese were scared to death, Russians were scared to death. Like oh my God, they could hyper inflate our economy overnight by doing this. By 2015, China had the CIPS, China International Payment System up and running, second set of rails alongside Swift. Volumes on that have risen massively. I think it's doing, you know, what is it, 45 trillion yuan. So you know, $7 trillion a year now through there. They've had other. And you know, as a friend of mine said, it's not just like so much what the Chinese do, they don't invent it, but when they make their own version of it, it's better than yours. And that's what they do with CIPs. So it's not just a messaging system. It is also it's messaging, it's settlement, it, that's everything. And so they've set up this entire, you know, and then they set up yuan, offshore yuan, clearing banks in every major gold hub in the world. You look around, there's an offshore clearing bank in London, Switzerland, Dubai, Singapore, Hong Kong. And so they've, they, the rails are already all there. They've already have, you know, you know, the EU on has been being tested. Guess where they tested it first. In oil markets and gold markets. The project Enbridge with the BIS has been discussed. Some of the oil guys, you know, to me, I think there's maybe something there, I don't know. But I think your point is very, very valid, which that is wildly underappreciated in dollar circles, which is they can absolutely just hit a switch. There's no, you know, there's no more kicking them out. They've got all the factories, they're short energy and food on some level. But they're partnered with Russia and we've angered the Russians as well. I mean, to me, the history books will not be kind about the weaponization of the dollar unless the goal was getting rid of the dollar system and pushing Russia and China together. I mean, how foolish from a strategic standpoint? And so, yeah, I think ultimately when I look at dollars reserve status, there's a lot of debate around what that means. And to me, any debate, anytime people want to talk to me about that, I first want to define what are we discussing here? Are we discussing FX reserves? Because if we're the actual reserving of dollars, which is in my opinion, what mattered, the US Dollar is the reserve currency. It is the currency that is most reserved. Well, gold just supplanted treasuries as the biggest reserve asset of global central banks. If you would, you know, there was an article in Bloomberg last week or two weeks ago. If you make adjustments based on sort of, you know, sort of, it's an adjusted figure, so it's not a gross figure. As it stands now, the dollar is still bigger, slightly than gold in, in global FX reserves at $6,000. Gold. Gold's bigger than the dollar, so it's not that far, much higher than here.
- [41:44]
B
Right.
- [41:45]
A
But on an adjusted basis, gold has already supplanted, has already supplanted the dollar in FX reserves and so will dollar reserve status. What will happen to it? Well, it's already being supplanted by gold. Nobody wants to hold yuan. People say, oh, who's going to hold the yuan? Of course they're not going to hold yuan. Number one, back up. Anytime someone says to you, well, would you hold the yuan back up and ask them first? In order to reserve a currency, you have to run A surplus against that currency for them to pay you in that currency. Who runs a surplus against Yuan? Nobody, except for the, except for the Gulf Arabs and Russia. Sometimes every now and then the South Koreans do in semiconductors, okay? So that's the only way you could even get yuan starters. But then they've set up this system of it's our currency and it's our problem, which is if you do end up, you're a Gulf Arab. If you're a Russian, you end up with yuan payment for your oil and commodities. What can you do with that? Well, turns out they're the factory of the world. So there's a whole lot of really good stuff you could buy from them in yuan. And then if you have any yuan left over, take it to Switzerland, take it to London, take it to Dubai, take it to Hong Kong and exchange it for gold at any of these offshore clearing banks. And you want to take the gold home with you? Great. Take it home with you. You want to leave it in Shanghai, great. You want to leave it in Hong Kong, great. You want to leave it in Switzerland, great. And so what we're watching in real time is the supplanting of Treasuries as premier collateral by gold for this parallel system. And I think the dollar will always be the primary used currency, number one, because we're running the biggest deficits. Number two, it's reserve. But the dollar, when you talk about usage, oh, it's 90% dominate. Great. You know what? In Chuck E. Cheese, the tokens are 100% Chuck E. Cheese tokens in Chuck E. Cheese. And the world, the dollar is based on where we are. The world is Chuck E. Cheese, and the dollar is the Chuck E. Cheese tokens. But tell your kid, hey, just store all your money in those tokens. No, they want to win tickets and they want to go to the prize counter. Right? China's the prize counter. That's where the real value is. And I think what's going to happen is we're going to push this thing too far in Iran or elsewhere. And China's just going to go, look, switches on, boom. We're, you know, you want to cut off oil, great. We're now demanding yuan for rare earths. We're now demanding yuan for the components from xyz. Well, how's anybody going to get yuan? We saw this question around Iran, in the, in Hormuz, around. Well, people, you know, when they demanded yuan for payment, people. That's stupid. There's, there's, you know, China doesn't Run the surplus or the deficits to supply the yuan. Exactly. That's what the Chinese are doing. How do you get yuan? It's very, very simple. You sell dollars, you buy gold, you take the gold to the Chinese, you sell the gold to the Chinese for yuan, you take your yuan, you go to the Iranians and say, here's. Here's yuan, my oil. So when, you know, if we push this too far with China and they go, we're done here, you know, pay us in yuan like we did to the Brits, by the way, in World War II. Right. When the Brits needed money for us, needed weapons from us in 1940. Reserve currency, 150 year history, great relationship. What do we say to the Brits? None of that sterling, toilet paper, reserve currency, toilet paper. We want dollars and we want gold. Or you don't get your ships, you don't get your bullets. Same thing's going to happen. It's just a matter of time. What's the trigger? And so the Chinese are going to go yuan or it doesn't sell. Okay, what do we have to do? We got to go buy a bunch of gold with dollars, print dollars, buy gold with printed dollars, take the dollars to China or take the gold to China. Excuse me, Sell gold to China, obtain the yuan, here's your money. And so it's very interesting to me in the light of all of this, people say, oh, Luke, that is so far fetched. Guess what the number one export of the United States has been for four out of the past five months as the US Trade deficit has narrowed to the celebration of all the, you know, of the Trump administration. Non monetary gold. For the last five months, the United States, the mighty United States single biggest export has been non monetary gold. Bigger than airplanes, bigger than pharmaceutical preparations, bigger than the automotive industry, bigger. Where is it all going? China, Hong Kong, Switzerland, some to the Gulf countries. Where's it going from? Switzerland. The Swiss are very precise with their records. Guess who Switzerland's biggest export market has been over these past five months? China, Hong Kong, some of the oil countries. Like, I think we've worked. I think China may have already flipped this switch on some level, at least for certain goods. Right. I think they're already saying, we'll send you all the rare earths you want for gold. None of this toilet paper, dollar crap. None of these treasuries that you print at will. Forget that. Send us gold. And I think we've been forced to, you know, because what lines up with five months ago, that's when Besant and Trump met with the Chinese in South Korea. Oh, by the way, the fifth month, it was only the second biggest export. So anyway, that's a long winded answer. So, like, I think the dollar reserve, you know, is the dollar going to still be the reserve currency? Gold's already supplanting it as a reserve asset and I think that's going to continue and everything we're doing is going to keep pushing us in that direction.
- [47:30]
B
Okay, yeah, great. I know. I just have you a few more minutes here. Are you able to give a succinct explanation? I, I saw you, you were on Tucker's show and the, the headline, you know, the clickbait was the CIA doesn't want you owning gold. Can you give us the brief version of that thesis?
- [47:49]
A
Yeah, you know, it's hard sometimes, you know, you, you know, you don't get to choose the titles especially.
- [47:54]
B
That's what I think. I don't mean to put you in an unfair spot.
- [47:57]
A
Yeah, yeah, yeah, no, yeah, no, the conversation was, was simply because it was a very positive gold conversation. And you know, and, and by the way, it was at 2700 bucks, right? So it's almost doubled since then. And that wasn't that long ago. It was a year ago. So, yeah, it was really, the conversation was just going through the history of the parts of, the, of, of, you know, kind of how we got, you know, what is gold? How did it, you know, come to be the reserve asset? Why is it a reserve asset? Why did the US Move away from it? And then what are the different interests that, you know, there are some people who want gold back in the system within the US There are some who do not. And you know, the people that want it back in the system tend to be in favor of things like reshoring and smaller government and lower deficits. And, and the people that don't want it back in the system as a reserve asset tend to want financialization and unlimited debt and unlimited wars and unlimited entitlements. And that's really the fundamental, you know, gold is a pivot, right. As Alan Greenspan famously said before, you know, going to the dark side, as some would say, and becoming a central banker. Right. That it's the shabby secret of status is that gold limits their power.
- [49:22]
B
Okay, very good. So, yeah, people, if they want to see that elaboration, you can link to that in the show notes page. Well, I'll, I'll let you go here. So, folks, my guest has been Luke Roman. Luke, I'm sure people have been fascinated by your commentary. Where can they go to hear more of you?
- [49:38]
A
Oh, thank you. Yeah. Fftt-llc.com for more information about our mass market and institutional research products. And if they are on X, they can follow me. Follow me. Excuse me. At Luke Gromen L U K E G R O M E N okay,
- [49:53]
B
thanks so much for your time, Luke.
- [49:54]
A
Thanks for having me on.
- [49:55]
B
Thank you everybody for tuning in. We'll see you next time.
- [50:00]
A
Check back next week for a new episode of the Human Action Podcast. In the meantime, you can find more content like this on nieces.org.