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- [00:03]
A
Hi everyone, I'm executive editor Steve Ehrlich and I'm here today with Willem Boutter. Willem is a longtime practitioner in the financial space. He was a member of the UK's NPC which is basically the equivalent of the FOMC here. He's a former chief economist at Citi and has had a long distinguished history career in the financial industry. So welcome Willam.
- [00:27]
B
Thank you. It's a pleasure.
- [00:29]
A
Let's get right into it. You run an op ed in the Financial Times a couple of weeks ago that really caught my eye and basically the gist of it was that central banks should get out of the gold game. You started it by pointing out, I guess your belief that gold is in what you call, I believe a 6,000 year bubble. And I think that's a great place to start. Can you just explain what you meant by that?
- [00:55]
B
Gold is valued mostly for the belief that it is a good store of value. It has very few intrinsic services that it yields either as a consumption. Good. Yes, I can hang jewelry around my neck, but most much of the jewelry even is viewed as an investment rather than something than for its beauty itself. And of course there's some uses in dentistry. Some advanced technology may make use of gold, but it basically has very little intrinsic value. So this $4,000 plus value that we see today is that high simply because people believe it will be a valuable store of value. And these beliefs self fulfilling. Anything can be fragile. It's very much like Bitcoin. Bitcoin actually has a proper use as a means of payment, often for illegal transactions of course, but that makes it desirable. Gold used to be back in the middle ages and before 3000 years BC viewed as a means of payment. They have a store of value but nobody really these days exchanges gold when they go to the shop. So gold's value is what people think it will be. And that is incredibly fragile support for the value of that intrinsically very low value commodity. And no central bank should simply because historically we've had the gold standard and the Mesopotamians used gold as a store of value means of payment. You don't want to be a slave of history. You have alternative superior means of payments and store values. And central banks should hold their assets in a diversified portfolio of real and financial instruments. The U.S. has more than 8 metric tons. The U.S. government in gold reserves worth at current market prices over a trillion. This is completely insane. It's a very risky bet. They should get rid of the gold, sell it to people that can afford to lose the value that they buy. And you don't want to sell it to people who are financially fragile. But don't just sell it to the speculators who believe it will go up and can survive financially if it doesn't. And you invest the trillion in a diversified portfolio of financial real assets. This protects the taxpayer.
- [04:00]
A
Okay, so a few things to unpack there. I know some of the crypto people listening here will love one of the things that you said and will strongly disagree with one of the things that I'll begin with the latter. The statement that most bitcoin payments are used for illicit purposes. We could have an entire other conversation. I've had plenty with data pushing back on that statement. That's not what we're going to do here though. But the idea that bitcoin has more intrinsic value than gold, I know the industry will love. But let's just unpack what you said a little bit more here. Gold is in a 6,000 year bubble and in a way that sometimes could almost seem like an oxymoron a bit to me because bubbles just don't last that long. I mean there may be boom and bust cycles over the years like tulip bulbs, the South Sea railroads in the US list goes on and on and on. Gold though, keeps going up through through millennia. And how does that square with your it might only be worth what people are willing to pay.
- [04:58]
B
Gold has been a very risky commodity in the past. Remember when we had the gold standard in the 30s, 40s and all that gold was priced at $35 and before we got the gold standard, gold prices in the 16th, 17th century were significantly higher than that. So bubbles can last forever. They have ups and they have downs. And so gold could probably go on as a bubble for another 6,000 years. But the willingness of people to hold something simply because they believe many other people, including central banks, bill, view it as a valuable investment instrument. Reliable store of value with very much upside and very little downside. No, that makes no sense.
- [06:06]
A
So let's get to it then. Say the US sells its trillions gold. What should they buy? You said a diversified portfolio. I guess various stocks and commodities. Should they just purchase diversified index funds? Is there a case to put some bitcoin on the central bank balance sheet?
- [06:24]
B
I myself consider bitcoin to be extremely risky investment and I don't think that even in that risk portfolio central banks should invest in it. Central banks can afford the loss if the price of bitcoin were to go to zero even. But this is not something that I think should be part of a well structured portfolio. The portfolio of a central bank could include exchange traded funds, holding commodities, stocks, shares and other financial instruments. It should just be diversified and without any crazy exposures like gold and Bitcoin.
- [07:16]
A
Let's just talk a little more about the world we live in today. The debasement trade is sort of all the rage. I mean fears, I mean the US dollar I think is down 11% or so far this year. It's had one of its worst starts a year in decades. There's easing pressure all across the UK Eurozone and in some circles there is a fear that we might be seeing a transition away from the dollarized economy. And in this period of inflation that's where people are, that's why people are running to gold. Where do you see the current cycle with relation to gold? And with central banks continuing to acquire it, should they sell right away? Is there more room to to run before they do so?
- [08:00]
B
What is interesting about this debasement game is that in the past doubts about the security of the dollar led to flight into other currencies. The euro sterling, the yen, now of course the renminbi or yuan. But this particular depreciation of the dollar has been not quite matched but has been not that much larger than the weakening of other leading currencies. People have doubts about either the credit worthiness or the inflationary debasement that will come in countries with unsustainable fiscal situations. The US is one of them, but so is the uk, so is Japan. So our most advanced economies, even China, when you add in local government and all that has potentially material public debt challenge which could lead to inflation in some cases. When the US Congress were to fail for I think for the seven to raise the debt ceiling entirely but even have a technical default. So you want to be out of that. So the slide into gold is really a goodbye to all leading currencies. The reserve state of the dollar is threatened by so reserve status of most other rival currencies. But I hope and I expect that some fiscal adjustment, fiscal consolidation bill in lot of this should begin in all countries that need it badly. And so while I think an inflationary outcome is definite risk for the US for the euro, for, for the UK for Japan, I think it is probably even if I were to materialize, I wouldn't want to be in gold. I would want to be in a diversified portfolio of real assets or index linked instruments for that matter. It's the only serious inflation which of course you can cover with indexing instruments and not default, which of course would affect indexing insurance as well. So even if you are convinced that the dollar bill shrink in significance as a reserve currency and as a means of payment for cross border transactions, there's still the alternative investment will be a diversified portfolio of real assets, not a single highly risky commodity like and when.
- [11:04]
A
You say real quick, when you say real assets I mean you're talking about stocks, I mean companies that earn revenues and then also certain commodities as well.
- [11:12]
B
You could have commodities in an ETF of a wide range of commodities including if they were to be traded, claims on rare earth.
- [11:27]
A
I'm sure there's somebody working on that. We need to take a very quick break to hear from one of our sponsors and then we're going to be right back and talk some more.
- [11:35]
C
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- [11:53]
A
All right, so. So one of the things I appreciated about the article and our discussions even before this interview is your openness to Bitcoin and the understanding that it's meant to be a payment system. I want to get your thoughts on how that dovetails in the way that it's actually used today though obviously it was created to be a peer to peer payment system decentralized outside of the I guess the reach of any real government. But as I'm sure you're well aware today the mantra is hodl hold on for dear life. Michael Saylor, the personality behind strategy frequently says don't sell your Bitcoin under any circumstances. And with supply the emissions rates continuing to drop, the actual velocity of Bitcoin is falling. What is your sense of that? And then what might need to happen for Bitcoin regardless of whether or not it goes on a central bank balance sheet to become have more of an economy behind it either talking about just payments or an emerging trend of what we call BTC fire or like decentralized finance involving Bitcoin.
- [12:59]
B
I don't think that Bitcoin as a private fiduciary digital instrument without anything backing it other than to believe that it has value is desirable store of value or means of payment. It's way too volatile. So I'm a great believer in the future of blockchain based payment instruments stablecoins but they have to be fully backed by either central bank reserves or by claimed on short duration treasury that and so Bitcoin simply doesn't meet the criteria. There's also of course the point which I think never gets mentioned, but that while Bitcoin the total stock is Limited at 20 million units, right? That's why the issuance goes down. There is no reason why we could not simply introduce Bitcoin 2 exactly the same program or Bitcoin 3, 4, 5, 6 and 7. Right? And if people believe that a new Bitcoin is good as your Bitcoin, then it would be a massive increase in the aggregate stock of many Bitcoins. So the fact that Bitcoin is capped doesn't mean that you cannot create basically identical financial instruments at will.
- [14:35]
A
One thing I would say to that effect is, is, I mean there have, there must be tens, hundreds, thousands of Bitcoin clones, Bitcoin derivatives, there's various because all the code as you mentioned is open source, it's freely available. I could create Steve Coin that has the same emission schedule you could create Willem Coin, but sort of the community surrounding Bitcoin and the hash rate, the computing power that helps secure the network, all of that has proven to be an insurmountable sort of moat against any potential copycats from, from trying to, from, from trying to sort of steal Mindshare directly away from, from Bitcoin. So I mean I've heard, I've heard that retort that you've mentioned that people could just create more despite this hard cap limit. But for what it's worth, it really appears that everyone, governments, companies, individuals like they agree that there is a Bitcoin and then there are other Bitcoin type projects, products that might try to go after a different use case. But those are not seen as substitutes in the minds of most.
- [15:40]
B
They are not seen as substitutes because they are not seen as substitutes. If they were seen as substitute, they would be. So these things are again totally mindset driven valuations. There's nothing intrinsic in Bitcoin that makes it unique or irreproducible. So at some point, maybe not for a century, no somebody will people think why, why not? And why not would directly affect the valuation of Bitcoin. But I think not limit this discussion to Bitcoin. Really think that stablecoins are likely properly backed to be defense instead of the future. And I want the authorities to be able to finally agree to interest being paid on stable coins fully backed.
- [16:42]
A
Yeah, I agree. And that's the next place I want to take the discussion because I know one of the things I found really interesting when we Spoke last week is in the uk I think there are movements to try to limit the amount of stablecoins that people can hold. I know lobbyists in the United States on behalf of banks are trying to limit stablecoin usage because of fears it will suck. Excuse me, because it'll suck deposits and then potentially credit out of the banking system. And you pretty forcefully pushed back and said that was ridiculous. So maybe you could just expand on that.
- [17:19]
B
There is no doubt that well designed stablecoins, fully backed ones paying interest would be competitive with bank deposits. I actually would require bank deposits to be fully backed by central bank reserves or short raised Treasuries as well. Of course they're not. We have this fractional reserve banking. But so, but let's think that the way that would be. So we introduce the stable coins. They're technologically superior to bank deposits and people switch to them, banks lose deposits. That interferes with financial intermediation. Yes, but it doesn't have to because assume the stablecoin now is fully backed by central bank deposits. The central bank has to do something with these additional reserves it's issuing. It can simply put the money as long term investments back in the bank. So they can go as an intermediation between private agents. They simply take the monetary function out of the banking system. And unless the banks were to create subsidiaries legally distinct which just issued stable coins fully backed by central bank reserves and short duration treasuries. So there's absolutely no fear of financial chaos. Even if stablecoins were to cause the complete departure of bank deposits from the bank's balance sheet. The central bank and the government can always put it back in the banks if they think that intermediation through the banking sector remains important.
- [19:10]
A
One of the questions I really wanted to ask you and it kind of extends from what you just spoke about. I mean there's been a few different ways of creating like a blockchain based currency and you've mentioned each of them. I mean one, the traditional fully reserved one to one stable coin either backed by dollar in a commercial bank. Although I guess technically if those dollars are hypothecated, maybe it's not. Then there are tokenized deposits which are not fully one to one backed. This is interesting in fact because our former employer, I worked at Citi for about a year as well. Jane Fraser, the current CEO Citi's experimenting right now with stablecoins. While Jane Fraser actually said I think last week that she thinks tokenized deposits are a better way to go. JP Morgan's Also experimenting with tokenized deposits on blockchain by Coinbase. And then you mentioned central bank digital currencies. As I'm sure you know, those have fallen into disrepute especially here in the United States where there's even talk of bills banning the idea of a central bank digital currency because it fears over privacy. Maybe you could just. I'd love to get your thoughts on just those three different categories like what are the pros and cons of each? And then I want to get into privately issued stablecoins potentially paying yield, paying interest because that's a very hot topic of discussion in the United States now.
- [20:27]
B
Yeah, well tokenized deposits are basically partially backed stable coins. Right. They're on the blockchain, but they just treated from a reserve backing requirement as central bank as commercial bank deposits. I consider that undesirable because in the partial backing of bank deposits today and tokenized bank deposits in the future means there's always a risk of bank runs. So we have to have deposit insurance and we have to have the central bank to stand ready to act as a lender of grass resort. These two major and I would say financially unfair sources of support for financial support for the banks. Then I matched by tighter regulations to make sure that banks don't go crazy because the deposits are insured and the landlord is ordered there. But so this we can do away with both deposit insurance and there's the need for the central bank to act as a lender of last resort in the case of bank runs end with the restrictive and costly regulations of banks that are the other side of the equation and simply have fully backed bank deposits on the blockchain preferably in a legally distinct unit to the bank. And that means they would be stable coins. Well, partial partially backed stable coins are simply a way because they would be covered presumably by deposit insurance and lenders last resort. Is there simply a way of giving a financial edge to the banks at a cost authority borne by the taxpayer. So it's undesirable. CBDC central bank digital currencies as things are desirable. One reason is that if you make them easily available on chain and off chain for CBDC car that you can waive and make payments with. So retail availability as I said on chain and off chain and you also no restrictions on the size of the account or transactions and you allow them to pay interest then they will be superior to coin currency which could be abolished which would have the advantage of eliminating the lower bound on interest rates. Central banks cannot set interest rates meaningfully below zero because the zero interest rate on currency and paper currency effectively sets the floor. And so following the great financial crisis in the teens of this and following the COVID crisis, we should have been able the central bank to set the interest rate, the bank rate at minus 3 or minus 4% couldn't do that. So we had to do crazy things that expanding the balance sheet by trillions encourage the financial excess and speculation. So I think CBDCs are excellent idea that would require doing away with currencies and that means privacy goes away. But you couldn't have full privacy with CBDCs but you could have the pseudonymity right that you could have the wallets holding the CBDC being covered by appropriate crypto protections. So you could still chase of course transactions unless you can with Bitcoin, but you don't know who is the beneficial owner of the wallets that hold.
- [24:41]
A
And I've spoken, I mean I've spoken with congressmen and lawmakers more on the Democratic side because it's almost, it must be universal Republican opposition to the CBDC at this point in the US where they espouse a lot of the same arguments that, that you just made. And sometimes I studied privacy law prior life of mine and I always laugh at how surveilled our financial system is already just by private banks that have to work with the government anyway. So the idea that CBDC is going to introduce this Orwellian dystopian society, I think sometimes people need to realize how we're already living so far. And truly cash is I guess the only real anonymous way of making payments. But yeah, I understand that. One question I do want to ask. There's a growing number of companies here in the US that are trying to get Fed master accounts so they can interact directly with the central bank and not have to go through intermediaries. No one has been successful in getting one yet. A couple of people have gotten like federal trust charters, but that's more for just paying, not taking deposits. And the Fed Governor actually I think last week suggested the idea of a type of Fed Master Light account to sort of not give full access to some of these crypto companies that like a JP Morgan or Wells Fargo gets, but, but let them help disintermediate themselves a little bit. What are your thoughts on, on crypto, let's say stablecoin issuers directly interacting with central banks, be it the Fed or, or perhaps like even the bank of England.
- [26:13]
B
No, no, that's, that's exactly what I mean by, by having a CBDC that you and I and any corporation can have an account with the central bank. With the Fed say in this area, always another central bank. Yes, that's CBDC is simply a stable coin issued by the central bank. Right. So I think it's desirable. It's part of the retail cbdc. The wholesale includes commercial banks themselves. They of course have it already, but I would expand this to any legitimate first instance as a domestic resident. But there's no reason in principle why foreign entities should also not be able to to have an account with the central bank. Yeah, that would of course compete with this private stable coins. And which one you would use would depend on which one pays the better interest rates and which one is more efficient. I believe that progress in the speed reliability of payments is likely to be greater the private sector in the central bank. So I think stablecoins issued private entities should still be able to compete with CBDC which is available retail and wholesale.
- [27:51]
A
What do you make of sort of like the, the growing trend? I mean now that the Genius act is passed here in the US all to sort of set the rules for privately issued stablecoins. I mean there's circle, there's tether, there's some like sort of. I don't know if algorithmic is the right term, but there's like things like Athena. But now we're talking about the banks and some of the big box retailers like the Amazons, the Walmarts, they're kicking tires on their own stable coins. How many stable coins do you think the world can support at scale? And who do you think wins? Do you think it's going to be a more neutral party whose only business is a stablecoin like a circle or a tether? Or is it a world where JP Morgan comes in and launches JPM coin and just dwarfs all of them? Or is it going to be incumbent upon the banks to kind of work together and create a consortium where they have one stablecoin that is fungible across all of their different entities?
- [28:46]
B
Well these stable coins are fungible, except the issue is right at the moment we can transact between persons having accounts with different banks. Right. There is no reason caused by that should not be the case. If they're fully backed by central bank money or short duration treasuries, then they should be generally acceptable and interchangeable. Yes. Again, whether JP Morgan, assuming they have to abide by the same rules of having a fully backed stablecoin, no fractional reserves stablecoin here. So they work on the same terms as the Amazons of this world or whoever else wants to issue stable coins. I think we could see quite a lot of stablecoins. Depends on the magnitude of the fixed cost of setting one up and making it operational for domestic and cross border transactions. I think these setup costs could be quite high, meaning that not too many of them will arise, but that remains to be seen. Of course the key here that the stablecoins all be able to pay interest as well.
- [30:20]
A
All right, so we need to take one more quick ad break and then we'll start to wrap up with a couple of questions Looking at it Binance.
- [30:26]
C
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- [31:24]
A
I want to ask you There's a big FOMC meeting this week. Seems to be a virtual certainty that there's going to be at least a 25.
- [31:31]
B
No. The rate cut. Yes, yes, 25 basis points.
- [31:34]
A
I'm curious, what are your expectations? And I want to get your assessment of the economy because there's a lot of different opinions here. For one, if you're looking at the employment market, maybe there are some concerns, but overall the economy seems healthy. So there are those that say it doesn't make sense to be cutting into a strong economy. What do you think?
- [31:54]
B
It's most unfortunate that a number of public sector data on the real economy labor market production are delayed because of the government shutdown, but inflation is still running at 3%, both headline and core, which is above target unless the Fed is surreptitiously changing the actual target to 3% behavior in the last year or two.
- [32:29]
A
Do you think? I don't mean to interrupt, but do you think 3% might be the new neutral rate or do you think I.
- [32:35]
B
Hope not, but I think it is a risk. But I expect a Fed rate cut with 99% probability. I'm against it. I don't think we should raise rates unless there is evidence that the real economy, especially the labor market, is weakening significantly. And I haven't seen that evidence. The U.S. treasury has a triple mandate, as you know, maximum employment, stable prices and moderate long term interest rates. Right. And at the moment I think long term interest rates are moderate, inflation is above target and employment as far as we can see is still reasonably strong, although weakening. So to me the sensible course of action would be to wait even to raise the policy rate. But it has basis point. The last cut was I think a mistake. But this central bank must either have a different objective for inflation or have a very different view of the transmission mechanism, monetary policy. If they're going to cut as they will now and no doubt in the next two meetings as well.
- [33:57]
A
It's also, I mean it's hard to have this discussion and ignore just the immense amount of pressure being put on Jerome Powell and the Fed from Trump and the White House. I mean he's talking about like two 300% cuts. I mean the Fed may, may have cut, may have cut on its own last meeting and it may be, may have been planning to do it again here. But I mean putting Steven Moran on, on the fomc, the expectations for who's going to repay, replace Powell next year, it certainly seems like, I guess like sort of like the long tenet of an independent Fed, I guess ever since like Nixon that that might be a little bit tenuous at this point. So I wonder how much that pressure, I mean it's, it's probably hard to insulate yourself from that type of pressure on being put on by the White House.
- [34:51]
B
Well then we'll find out soon whether the President can fire members of the, of the Board of Governors. Right. When the courts rule on Cook's case, she was allowed to stay on while this dispute was pending. Clearly if the President, the interpretation of the President's ability to fire board members for cause means that they can be fired for whatever the every reason the President wants, then independence would be gone. But Moran, I don't know how independent he is. He kept his, yeah, he kept at the White House while at the Council of Economic Advisors he just went on unpaid leave for five or six months. I think about that was just very bad visuals because you don't want somebody who has still got a job commitment with the federal government to be a board member. But Powell when he ends his term as chair, Defense Bill can stay, of course, as a member of the war until 28. So and that means that the new governor cannot be somebody appointed instead of if power stays on, as I hope he will, of course there will be. And so for the time being, Trump doesn't have a majority of appointees among the seven governors and of course the 12 presidents of the regional reserve banks, five of whom vote at any one time, cannot be sacked or appointed by the president and they have to be approved, in fact, and can be fired by the board. So as long as Trump does not control the board, he doesn't control the fomc. Now, would the pressure be so severe that board members would cut rates easier? They think this is not compatible really with the mandate? I doubt it. I don't think we there yet. I just think that the Fed is wrong, but not that they've lost their independence.
- [37:39]
A
All right, great. Well, that's all I had. Do you have any final thoughts, anything you'd like to say to wrap up our discussion?
- [37:45]
B
Not, I think that we have to not give up despite the political opposition in Washington. Elsewhere on retail and wholesale central bank digital currencies, on fully backed stable coins that pay interest, and on enormous future I see for tokenized assets traded on the blockchain, both domestically and cross border. We're going to have many more participants potentially in financial markets than we had as a result of this new decentralized finance world. That creates new risks as well because some of the new investors will be deeply ignorant and the tokenized assets are just risky as assets bought and sold clumsily using conventional means of payment. But I do think that the web and the distributed ledgers can really help to democratize finance.
- [38:59]
A
All right, great. Well, thank you so much for joining us. We'll have to have you back. Goodbye.