Imagine if Elon Musk stood up one day and told the world, “My #1 goal is for Tesla stock to lose 2% of its value every year.”
First of all, people would probably rightfully conclude that Elon had finally lost his mind.
And second, everyone would dump the stock. Who would possibly want to own an asset where the management is TRYING to lose 2% every year?
Yet that’s precisely the stated goal of the people who manage our currencies. They tell us flat out that they WANT 2% inflation, i.e. they WANT the dollar, euro, etc. to lose 2% every year.
Obviously these ‘experts’ have completely failed to achieve their goal lately… but the larger point is that incentives are clearly not aligned.
In the case of businesses, managers generally have the same incentives as their shareholders. Elon’s wealth only increases if his stockholders’ wealth increases.
But the people who manage currencies (politicians and central bankers) do not share the same incentives as the people who own the currency (i.e. responsible individuals who save money).
Savers want the currency to be stable. Politicians want it to lose value. It’s a totally perverse incentive structure… but it may get a lot worse– at least for the United States.
And it has a lot to do with the war in Ukraine.
History is full of examples of former superpowers who lose their dominance. Egypt. Greece. Rome. France. The Ottoman Empire. Mongolia.
And quite often there’s a ‘changing of the guard’, a reshuffling of the world order, when a rising power and declining power are involved in a war.
Carthage was once the dominant power in the western Mediterranean. But after losing the Punic Wars, Rome asserted its dominance over the region.
Spain was once the dominant power in Europe. But after the Thirty Years War, it became clear that France was the new superpower on the continent.
The two powers don’t even need to be fighting each other; after World War II, for example, it was clear that the US had surpassed Britain as the dominant superpower, even though both nations were on the same side during the war.
Today we see the same ingredients that may result in another reshuffling of the world order: a declining power (US), rising power (China), and a war.
Today is the first and hopefully only anniversary of the war in Ukraine. And I spend some time in today’s podcast episode exploring the larger implications, specifically focusing on the US dollar.
I think it’s very probable that, whenever this war finally ends, China will emerge as a clear superpower.
That doesn’t mean America will vanish. But it would mark the start of a new era in which the US can no longer do whatever it wants… and quite possibly share the dollar’s ‘reserve status’ with China.
For decades now, the US has enjoyed the exorbitant privilege of being the primary issuer of the world’s reserve currency.
This gives the US the luxury of having endless demand from foreign investors who have to own US dollar assets, and specifically US government debt.
Because of this endless demand from foreigners, the US government has been able to get away with the fiscal equivalent of double-homicide: multi-trillion dollar deficits, a $31.5 trillion national debt, etc.
Yet despite such irresponsible spending, foreigners STILL buy US government bonds… simply because the US dollar is the world’s reserve currency.
Anyone who wants to participate in global trade, buy oil from Saudi Arabia, etc. HAS to own US dollars… and hence hold their noses every time Nancy Pelosi said “it costs nothing”.
But imagine a world where the US dollar is no longer king. Sure, the dollar would still be relevant. But not king. Maybe a duke or viscount.
Without its status as the undisputed king of currencies, suddenly the US government wouldn’t be able to get away with outrageous deficits anymore. The Federal Reserve wouldn’t be able to get away with printing trillions of dollars, or slashing interest rates to zero, while expecting absolutely no consequences.
Suddenly all the debt and all the money printing would trigger inflation… and even a loss of sovereignty.
We may be closer to this reality than anyone realizes.
Again, history is full of examples of global power reshuffling because of a war. History is also clear that reserve currencies tend to change when global power is reshuffled.
So we have all the key ingredients right now for some pretty big implications for the US dollar… and that ridiculous “2%” inflation goal.
I talk about all of this in today’s episode, starting with the story of one of the biggest parties in world history that took place in 864 BC. The dominant superpower at the time was celebrating itself. And they thought their supremacy would last forever.
It didn’t. It never does.
I also walk you through the rise and fall of empires and reserve currencies, and I explain how even a minor decline in reserve status will be really bad for US inflation and sovereignty.
But this is not a gloomy podcast. Remember the words of Marcus Aurelius: focus on the things that you can control. And we can control a LOT.
We talk about simple ways to think about the future, why diversification is so important, and why real assets make so much sense.
It’s not a question of “which is the best currency”. ALL currencies are bad. Remember the perverse incentive structure I talked about at the beginning of this letter?
It’s really a question of which are the right assets to hold that can stand the test of time… including a reshuffling of power.
You can listen to today’s episode here, I hope you enjoy.
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Today, we're going to go back in time to the year 864 BC, where one of the largest parties ever to be held in the history of the world was taking place, especially given world population. At that time, there were 69,574 people. I'll get back to that number in a minute. 69,574 people from all over the region, all over the known world, had to descended upon this city, this new city called Kala, located in what is today northern Iraq's Nineveh province. It's not far from the city of Mosul, if you know the region.[00:00:35.070]
And they were there to celebrate the opening of this city. Kala had become the brand new capital of the Assyrian Empire, what historian is technically referred to as the Neo Assyrian Empire. Now, the guy who was king, his name was Asher Nasirpal. Now. Asher NASA.[00:00:48.850]
Paul II technically. Now, he had ordered this new capital city to be built in 879. So it's about 15 years prior, and workers had actually managed to complete it in just 15 years. And when you think about it, that's really fast. Even by modern standards, kala had been a very small settlement a few hundred years prior.[00:01:07.180]
It had been sort of somewhat abandoned and in disrepair. And Nashvill NASA. Paul said, you know what? I want a new capital. The Assyrian empire had grown.[00:01:17.040]
It become the dominant power. I want a new capital. So they built this new capital, and it was really nice. They had very nice buildings, temples, luxurious palace, 8 walls around the city, botanical gardens. And this is Kala, a little bit south of Mosul.[00:01:34.180]
It's very close to the banks of the Tigris River. And so this is actually we think about a lot of people have never been to Iraq. If you've never been a lot of people think about it as it's just desert and whatever, but Iraq is actually this is one of the more picturesque areas. It's very lush. It's a very fertile river valley here.[00:01:51.750]
And this was a very, very nice city. And it was famous. It was referred to frequently in the Bible. I mean, this was a very, very famous place. And when it was complete, Asher Nasapal said, we're going to have the celebration to end all celebrations.[00:02:07.990]
And they invited 69,574 people to have this raging party to celebrate the opening of his capital. By comparison, Burning Man last year had about 66,000 people. And obviously there's a whole lot more people in the world, and it's a lot easier to, you know, have transportation and travel to places. So you can just imagine that number, 69,574 people. We know this is the case because they actually chiseled this on their stone tablet.[00:02:33.430]
They call these things steelies. And they wrote about the celebration, this long tablet, talking about the banquet and the celebration, and they said, we have 69,574 people there. According to the ancient Assyrian scribes chiseling this into their tablet. They went on and on about all the incredible food and the drink and just the big party that they were having to celebrate this new capital in the Assyrian Empire. Obviously, this was the peak that was the peak of the Assyrian Empire.[00:03:00.100]
Assyrian was the dominant superpower in the world, or at least their known world, what they consider the world. They couldn't imagine a world bigger than what they had conquered. They had subjugated nearly everybody in the region babylonia, Egypt, the Hittites, the Kingdom of Israel. And it was, at that point in history, was the largest empire that had ever existed up to that point in history, right? I mean, if you compare it to later empires, the Roman Empire, the British Empire, Mongolia, the Spanish Empire, assyria was like nothing.[00:03:32.580]
It was quaint. I mean, in total land mass, it was about twice the size of Texas, half the size of India. But thousands of years ago, that was unimaginably vast. I mean, people thought this was and this king thought himself king of the universe. I mean, nobody could imagine a world beyond what they had conquered.[00:03:53.780]
You know how royals they have often these long titles. If you think about if you watched Game of Thrones years ago, they would have Joffrey, first of his Name, king of the andals Lord Protector of the Seven Kingdom, blah, blah, all that sort of stuff's. Titles went out for hundreds of words, entire paragraphs. King of the world, no rival among rulers, heroic warrior, legitimate king. It's kind of funny.[00:04:18.630]
They felt it necessary to actually say that. Legitimate king. One of my favorites. They called them shepherd of all mortals, just on and on and on with all these names. And you got to feel bad for this poor Assyrian scribe that's got to chisel all these silly titles into the stone tablet just to placate this guy's ego.[00:04:36.730]
It reminds me of that great scene in Rocky Four where Apollo Creed is about to fight the the Soviet Beth fight Ivan Drago, the Russian boxer. And then they're introducing Apollo Creed. They've got all these nicknames. The Dancing Destroyer, the King of Sting, the Master Disaster, and of course, my favorite, the Count of Monte Fisto. And it's just all these names.[00:04:56.770]
This was Ashur, Nasirpal, and this is the sort of thing that happens at the Top. The rulers, they just, oh, they think they're so great. They are gods with no equal and whatever they've conquered, that's the world. And there's nothing else that could possibly exist in the world that's the top. And Assyria rode that crest for for quite some time.[00:05:14.550]
They actually remained at the top for, you know, really a couple hundred years, which is not unusual for dominant superpowers to last even a couple of centuries. But little by little, the cracks started emerging. They started losing territory. They had internal rebellion. Egypt, Babylon.[00:05:30.560]
It was a big deal when they lost Babylon. Smaller kingdoms started to form. These these loose alliances and standing together against Assyrian expansion and directly challenging the empire. And it was obvious that, you know, once Syria had been able to bend the world to its will and go around the region and say, you will do what I say. But now it had to ask, it had to plead, it had to negotiate with all these smaller powers.[00:05:53.080]
It didn't have the power and the authority that it once did to bend everybody, bring everybody to heal and bend the world to its will. And now, by the mid 600, 200 years or so after the party to end all parties, the Assyrian Empire was in full blown decline again. They had sort of ridden at the top, they'd had their ups and downs, but still were the dominant power. But at that point, by 200 years later, in the mid 600, they were in full blown decline. We could do a whole other podcast about that.[00:06:21.870]
But they had just the normal things, the weak leadership, the incompetence, the corruption, the bureaucracy, the inability to have a peaceful transition of power, the assassinations and the court intrigue and the suffering, humiliating defeat after humiliating defeat. And as well, there was a rising power, a rising power from the east. There was a people known of the as the Medeans, and the Medeaans were growing quickly and becoming their own empire. And eventually this Medean king, his name is Siaxares, who allied with the Babylonians and just literally wiped Assyria off the map in 609 BC. They just ceased to exist anymore.[00:06:59.850]
Poof. No more Assyrian. Syria is no longer the dominant superpower and is actually very quickly after that, that this guy, Cyrus, very famous historical figure, Cyrus the Great, who led the Achaemenid Empire, the Persian Empire, it's often referred to to completely dominate the region. Cyrus the Great of the Achaemenid Persians, came in and he defeated the Medeans, he defeated the Babylonians, the Achaemenids took Egypt, they took India, and the Persian Empire became the dominant superpower in the region in what they consider at least the known world. And they too refer to themselves as king of kings and gods among men and all these things.[00:07:36.240]
But the Persians themselves also, they rose and they peaked and they declined. We know the story. Xerxes, Darius actually in Xerxes, who famously fought and lost against the Greeks and ultimately got themselves wiped out by Alexander the Great. Poof. No more Achaemenid empire.[00:07:55.100]
This is the thing that happens over and over again throughout history. We see the same story, very familiar story. You've got a declining power and a rising power, and they sort of meet in the middle and they have a changing of the guard, and there's a reshuffling of the regional order, the world order, the power of of things. And this happens quite often as a consequence of war. And we've seen this again over and over again.[00:08:17.150]
There was a time where Carthage was the dominant power in the Western Mediterranean. We had did a podcast about that with the rise of Carthage, and Carthage was this dominant power in the Western Mediterranean, but they went to war against at the time, this sort of up and coming power named Rome. Rome was still a republic at the time, and Rome and Carthage went to war with each other. The Punic wars. Rome won, Carthage lost.[00:08:39.660]
Guess what? Rome's now the power. Carthage is no longer the power, and it was a consequence of war. Carthage out Rome in so many other examples of this, the 30 Years War, in the 16 hundreds in Europe, spain was the dominant power. France was the rising power.[00:08:52.730]
Spain was in decline. France was on the rise. The two went to war, spain was out, France was in. This ushered in a new era that made it possible for Louis XIV and all these things that was a result of the 30 Years War is one of the consequences. And what we also see throughout history is that war is a major factor in this.[00:09:10.580]
But sometimes the two powers don't even need to be at war with one another. World War II is actually a great example of this. Britain going into World War II was still the dominant power, clearly a power in decline, the US clearly a power on the rise. But US and the UK were on the same side in World War II. But after the war, it was just obvious the US.[00:09:30.380]
Was the dominant superpower. The UK was no longer the power. And this makes sense because wars are incredibly expensive. In money and manpower, in morale, public opinion, all these things. Wars are very, very expensive and declining powers have a really hard time footing that bill.[00:09:49.450]
Rising powers can handle it, it's expensive. And sometimes they struggle, sometimes they don't struggle at all. Sometimes they just, I mean, it's nothing. If you think to the Spanish American War, the United States waging war, a very aggressive war the United States waged against Spain in 1898. Spain was, spain wasn't the dominant superpower.[00:10:06.300]
Spain wasn't a superpower at all. But the US. Was clearly the rising power in 1898. I mean, Spain, spain did not want to go to war with the United States. They said, listen, we had nothing to do with sinking that bow.[00:10:17.050]
We don't know anything about it. They had to sell the royal jewels, practically. I mean, they were not in a position where they could afford to go to war. The US just wrote a check deck and beat the pants off of the Spanish in really just a couple of months. I mean, this was a clear showcase to the world that the US.[00:10:33.680]
Is an extremely powerful nation. And that leads us to today. Today is the 24 February. This is the one year anniversary of it's kind of bizarre to think about the anniversary of a war, but this has been a year now since the war in Ukraine started, and I think hopefully a lot of people probably agree that the start off is this completely idiotic, immoral, misguided, pointless invasion by Russia. But we're here to talk about the big picture, and this isn't about justice or righteousness or morality.[00:11:08.940]
I think it's again pretty clear that invading another country is not okay. But this isn't even about if you look at the really big picture, it's not about Russia or Ukraine or even Russian United States. It's really about the US. Versus China, because what has started off again is this pointless invasion sort of turned into this battle of who is the dominant superpower, because we're focusing on the big picture, and it's obvious in this scenario, we've got a rising power, a declining power, and a war. These are the ingredients that we've seen over and over again throughout history.[00:11:41.140]
So if we step back and look at that big picture, we can see well, in one corner, we have the United States, which has suffered humiliation after humiliation. You got a guy that shakes hands with thin air, who inspires confidence, and nobody you have the disgraceful embarrassment in Afghanistan from 2021 would say, oh, let's give $100 billion of military equipment to our sworn enemy, the Taliban, while we have people dangling from the landing gear of aircraft as we run away from this plan. It's just what a humiliating, horrible, horrible, shameful embarrassment all the way through today, which is the debt ceiling fiasco that they're desperately the Treasury Department has already said, hey, we're running out of options here. And, you know, they can't get their act together. They can't figure out how could we possibly live with them means, gee, we only we only collect $5 trillion in in tax revenue.[00:12:35.100]
How could we possibly manage to get by on a piddly $5 trillion? Never mind that that was an incomprehensible amount of money even just a couple of years ago, but now we can't possibly imagine how do we possibly get by with $5 trillion a year? It's just so completely ridiculous the way these people do business. And the other thing, I think we could also look at it let's call it the America Last Policy. You know, you got this guy who goes to Kiev.[00:13:01.730]
He says, we will not leave you, whatever it takes. Whatever it takes mentality. This whatever it takes. Sure, that applies to Ukraine, but it doesn't apply to people that are suffering through one of the worst environmental disasters in the history of the United States in Ohio. You got a guy that can travel to Kiev, but we can't do anything to those people in Ohio.[00:13:23.610]
But we can barely say a word about the people in Ohio that are suffering one of the worst community environmental disasters in history. And just to make sure they're very clear, the White House press secretary, the incredibly astute Kareem Jean Pierre, even announced yesterday that the President has absolutely no plans to visit Ohio, just to make sure there's no doubt that he doesn't give a shit about what's happening in his own country. They don't care about the border. They don't care about all this stuff, but hey, whatever it takes in Ukraine, because it seems pretty obvious to them that they know this is about superpower status. You got this guy who goes and shows up and gives this speech, all these speeches, speech in Kiev, speech in Poland, and it might as well have been him jumping him down, waving his hands, saying, we're still the dominant superpower.[00:14:13.130]
That's basically the message that he's trying to send. We're still the dominant superpower, according to me. According to the guy that shakes hands with thin air. We're still the dominant superpower. Meanwhile, in the other corner, you've got China.[00:14:24.680]
China is, I think, pretty clearly a rising power. It has risen so much, they are supremely confident in themselves to be able to do whatever the hell they want. They don't care. Oh, the US has imposed sanctions. We don't give a shit.[00:14:40.610]
We'll do whatever we want. We're not you're not the boss of us. We're not going to follow your your protocols, your rules, your policies. And just imagine your Chinese leadership and you kind of look back and you realize, you know, wow, we brought the world's dominant superpower to its knees over a virus. Widespread economic damage that happened in a lot of places.[00:15:02.040]
But when you think about some of the other consequences, it would say, like, wow, we caused you to completely vanquish an entire generation of young people who fell behind in their education, to cause people to be at each other's throats, screaming at each other over masks and vaccines and all these sorts of things because of a virus. The amount of chaos that was injected because this virus and they're sitting back like this going, oh my God, I can't believe that this is how these people react to this. You've also hacked your way across countless government and corporate networks with absolute impunity, no consequences whatsoever, showcasing some of those despicable incompetence. It was actually just a couple of days ago. The Defense Department acknowledged this week that they had an email server that wasn't even password protected that has been leaking terabytes of sensitive emails just out to the Internet.[00:15:50.420]
And you're the Chinese look at this, going, are you kidding me? How stupid are these people? Then you had all the other examples, the solar winds hack in 2020 and all there's so many different examples of this. And then you've got all these other things. You're spies who have slept their way to the top of the political elite in the United States.[00:16:08.410]
You got these female spies that are going around literally just having sex with high ranking politicians in California and whatever, and just stealing all sorts of secrets, and nothing happens. Nobody's held accountable nobody loses a job over this. Then you think about from the Chinese leadership perspective, you own a whole generation of young people who have become clinically addicted to TikTok, which might as well be published by the Chinese government. You had all these executives who can't even they hauled in front of US. Congress and can't even pledge, oh, no, we're not going to give any information to Chinese government.[00:16:47.570]
Of course they're going to give all this information to the Chinese government. The TikTok algorithms have figured everybody out. They know how you think. They know how you feel. They know what you want.[00:16:55.420]
They know what you want before you know what you want. And they're able to I mean, this is full blown psychological warfare, hardcore psychological warfare in terms of how they're able to get in the heads of young people and the things they're able to make people do and make people think and make people feel depressed and anxious and nervous and so forth. They have totally weaponized social media, and they're in complete control of it. They're also in the president's head, they've got this guy so paranoid that he scrambles fighter jets and launches $500,000 missiles every time there's a balloon in the air. And they go out and they say, look at these people.[00:17:28.910]
The US. Is hysterical and absurd and all these sorts of things, and they make this guy feel desperate to reassert his dominance, which is how we ended up with this Ukraine visit. The phony theatrics he puts on his aviator sunglasses and goes walking through Kiev, and all of a sudden, the fake air raid sirens go off. And the whole thing is so staged and so theatrical that even CNN called bullshit. Even CNN.[00:17:53.630]
The guy was like, I've been here for days. There hasn't been a rocket attack. There hasn't been so much as a gunshot. There's no air raid sirens. All of a sudden, Biden shows up and the air raid sirens go off, and it's kind of convenient.[00:18:04.000]
And of course, he's walking tall and isn't he's not afraid of the air raid sirens? I mean, it's just such bullshit. If it was actually real and the air raid sirens went off and they actually thought there was an imminent rocket attack, I mean, everybody knows the Secret Service would have been all over that guy in a second, and they would have taken him away to some undisclosed bunker somewhere. But instead, the air sirens going off, and nobody does anything about it because everybody knows that it's fake. It's just fake.[00:18:33.340]
It's this stage theatrical nonsense to make this guy look like he's still a strong leader. Nobody believes it. Everybody knows it's insulting that people like, they really think that we're that stupid, that we can't figure it out. It's really offensive that they think that we're that stupid. So where does all this go?[00:18:51.610]
You got the US. On one side, you got China on the other. You got a declining power and a rising power, and you've got a war. Where does this go? Who knows?[00:19:00.890]
It's impossible to make a prediction of that. These guys are when that guy win? I mean, who knows? That's not really the point. The point is that you got the Chinese saying they're working on a peace plan and all this sort of stuff.[00:19:12.350]
But the larger point is that this is very costly. Obviously, it's extremely costly for Ukraine. It's very costly for Russia. You can see a lot of the reports about morale of Russian troops and so forth. I mean, just really horrible for everybody.[00:19:28.630]
It's very expensive for Europe. It's extremely expensive for the United States. The United States, by the way, has given way more aid, military aid, financial aid, than anybody, including all these European nations. I mean, you look at the military aid the United States has given to Ukraine. I mean, it's multiples and multiples.[00:19:44.470]
It's like ten times more than what Germany and France have given. I mean, it's a joke. So it's very costly for the US. But this is not even a blip for the Chinese. It barely registers.[00:19:57.560]
They've barely had to lift a finger. They barely had to put a penny into this. And so based on that, if you just look at sort of cost benefit, there's a very good chance that the Chinese come out of this again. Rising power, declining power, very expensive war, very costly war in the Chinese. They might even come out and be the peacemakers.[00:20:16.390]
They actually have the ability to convince the Russians. I mean, Putin gave this speech the other day, and he said, we will never lose on the battlefield. He didn't say that. There's no end to this war. The Chinese could quite possibly say, hey, man, just stop.[00:20:31.630]
Let's figure it out. Have a peace, whatever. The Chinese come out of this looking like they're the peacemakers, or at least they put a peace plan on the table and dare the US. To say, okay, we've got the Russians willing to do a deal, willing to end this whole thing. Let's see what you're willing to do.[00:20:46.740]
And make the US. Look like the idiots, make the US. Look like the aggressors. I mean, there's a lot of permutations here and it's silly to sort of say this is what's going to happen, but at a minimum, you could probably imagine there's a good chance, there's no guarantee of anything, but there's a good chance that the Chinese come out of this possibly looking like the Peacemakers, clearly looking like a very dominant power. At a minimum, a power that can't be ignored, a power that has the power to create peace after a year of war.[00:21:13.720]
The US. Couldn't make a peace. All these other the Europeans couldn't make a peace. Who could make a peace? The Chinese.[00:21:19.350]
That's a real possibility. And that the Chinese come out of this looking like a major power, more so than they even are now, and really signals the end of an era where the US. Is just able to do whatever it wants, to whomever it wants, whenever it wants, however it wants. Those days are over, and it ushers in a new era where there's at least a multilateral influence. China has major influence, even veto power over the United States.[00:21:47.330]
Now, I've got to pause and say, every time I talk about China, there's always somebody friends of mine who give me the yeah, but, yeah, okay, yeah, but China's got this problem, and that problem. China isn't perfect. China has plenty of its own problems. Yeah, of course China has plenty of its own problems. People go, yeah, but China has lots of debt, and China has this, China has that.[00:22:06.170]
Yeah, I got it. The Roman Republic, when it was a rising power, had lots of problems. The Ottoman Empire, when it was rising, had a lot of problems. France, when it was rising, had a lot of problems. The British Empire had a lot of problems as they were rising.[00:22:19.700]
There's no place in history that's ever been, we're perfect. We have zero problems whatsoever. That's not a requirement. Being perfect is not a requirement for a nation or an empire to be on its way to being the dominant power, or at least being a major power or major superpower. That is not a requirement.[00:22:39.490]
I think with respect to China, if I'm honest, sure, they've got a big debt problem, their shadow financial system, all these things. I think a lot of those are are workable. The one that I used to think was just not workable was their demographic problem. I mean, there's just decades of the idiotic one child policy. Now they got too many old people, not enough young people.[00:23:02.240]
That is cancerous for a society. It turns everything upside down. You go, It's really hard to work your way out of that one, because you can't just create new people to fill that gap. But then you think about it, well, who are we dealing with here? We're dealing with the Chinese.[00:23:17.990]
There's actually nothing that says the Chinese can't create new people. Maybe they go out and just start cloning people. You have this whole sort of Star Wars clone army of Chinese people just to sort of fill in that demographic period. I mean, I'm just throwing it out there. Just think about who you're dealing with.[00:23:33.780]
All options are on the table here. But again, I'm not suggesting that even China becomes the superpower, the sole superpower, and everybody else shrinks to it. I think there's a lot of possibilities here. We did a whole podcast, actually, about something I call this Barbarian Kingdom Thesis. After the fall of Rome, there was a power vacuum.[00:23:51.310]
There was no dominant superpower. You had all these barbarian kingdoms, and you had Byzantium in the east, and so all these people that sort of shared power. There's nothing that says you have to have a single dominant superpower. What I am suggesting is that throughout history, there's always been instances where you have a declining power and a rising power, and quite often war is the signal that this rising power has to be taken very seriously and gets a seat at the table. Those are all the ingredients that we see right now.[00:24:20.150]
And the reason this matters, this is stuff that PhDs at the State Department write papers that get published in Foreign Affairs. That's not what we're talking about. I'm talking about this from the financial consequences, from the economic consequences. Because if the US. Loses its status as the superpower, which it has been for so long, really so long as the sole dominant superpower, the economic and financial implications are vast simply because if you lose your sole superpower status, the primacy of the US.[00:24:52.580]
Dollar cannot be far behind. This is a really big deal. The US. Dollar, and I've written about this before, I've talked about this before. The US dollar is known as the reserve currency.[00:25:03.570]
It's not the only, but the primary reserve currency in the world. What is the reserve currency? It's the currency of international trade. It's the lingua franca of economics that around the world. In the same way that if you got a company in Nicaragua and a company in Botswana and they do business with each other, they're going to settle that deal in US dollars.[00:25:24.200]
It's the reason why the price of gold traded in London is in US dollars. Oil in Saudi Arabia is priced and sold in US dollars. All these things, coffee contracts in Latin America, all these things. Rice contracts in Asia, all these things. There's so many of these contracts around the world, finance around the world.[00:25:43.390]
I mean, that gets traded, settled, closed in US dollars. Sovereign governments hold US dollars. Central banks hold US dollars. Commercial banks in Singapore and Australia and large corporations, they hold US dollars. Sometimes it's ridiculous, actually, the impact of this, a great example and one that's actually been pointed out by the French government, french Finance minister a couple of years back.[00:26:10.380]
You look at Airbus, right, which is a European aircraft manufacturer that sells planes to Air France. So you got a European manufacturer, European airline, and they price that deal in US dollars. Nothing about that deal takes place in the United States. Nothing has anything to do with the United States. But you got two European companies doing a deal in US dollars.[00:26:29.760]
So it gets actually, the concept of the reserve currency gets borderline ridiculous. There's this this concept has been around for a long time. Reserve currency has been around for a long time. You can go back to the ancient world. You know, the the Greek drachma, right?[00:26:43.380]
The currency in ancient Greece, coins that they had, I mean, they traded extensively around the region. And when you think about. It, it made sense. You've got some smaller kingdom somewhere. And they do business with the Greeks and another smaller, smaller kingdom, a does business with the Greek smaller kingdom.[00:26:59.260]
B does business with the Greeks, and A and B, then both they accept drachma because they do so much business with the Greeks. And the Greeks have this very large economy. And so they say, yeah, sure, we'll take your coin. We like your coin. And then you look at these A and B.[00:27:12.010]
They do business with each other. They do trade with each other. They say, well, you have drachma. I have drachma? So let's just trade our goods and settle in drachma.[00:27:20.000]
And this is the way things went for a very, very long time. The Byzantine Empire had this coin called the Solidus. And this Solidus became a major reserve currency around the world. Again, you had all these smaller kingdoms that were doing business with the Byzantine Empire. They were accepting and trading in gold solidus coins.[00:27:37.740]
And so they went. So all these other smaller kingdoms just started doing business with each other in solidus coins. But these things change in the same way that dominant superpowers change throughout history. They always have these reserve currencies change. And so why do they change?[00:27:54.380]
Well, when you think about it, throughout history with these reserve currencies in general, there's no formal rule. Nobody gotten together in a room and said, we're all going to decide to use the Byzantine Gold Solidus or the Greek Drachma or whatever as our coin. It just sort of happened organically. Again, people realize, well, hey, I'm sitting on a bunch of these solidi and you're sitting on a bunch of solidi. So let's get together and just trade our Solidi.[00:28:21.080]
Even though none of this has anything to do. Neither one of us is in the Byzantine Empire. We're not trading in the Byzantine Empire. Well, we'll just trade this coin because both of us have it right. It happens organically over time, and it follows logically that it would be the currency of the dominant superpower because they have the largest economy.[00:28:38.590]
Everybody has a lot of trust and confidence, and usually it means that the coin has good value. They're not playing funny games of the coins, but over time, the coin loses its stability. This happened with the Byzantine Empire. They started in the early 11th century. They started chipping away and debasing the coins and so forth.[00:29:00.670]
And so people get sick of that. It's a thing with the dominant power. The dominant powers always think that their position will last forever. There's always a level of arrogance. The dominant power say, you know what?[00:29:12.690]
We're the dominant superpower. We can do whatever the hell we want. We can debase our coins, we can inflate. And people will still accept our coins because we're the big boss in the region. Everybody's going to do what we say.[00:29:25.430]
And they think that that status is going to last forever, but eventually people get sick of it. And that's what happened in the case of Byzantium, is that all of a sudden their coins had been inflated and inflated and inflated, and people said, you know what? I'm tired of this. And wouldn't you know it, venice had come along and said, well, we have a coin. Florence had come along and said, we have a coin.[00:29:43.270]
And suddenly you start seeing trade in Venetian duckets and Florentine, Florence, and eventually Dutch gilders and Spanish pieces of eight, the real deoco, and eventually the British pound. The rise and fall of reserve currencies often coincides with the rise and fall of the dominant power. The reserve currency is often tied to the strength of the dominant power, and it changes when there's that reshuffling, that reordering of power, often not right away, right? I mean, the Byzantine Empire was by the 11th century, 12th century, 13th century was an obvious decline, but people were still using Byzantine coins until the Venetians and the Florentine said, okay, we're going to introduce our new coin. So it's not right away, right?[00:30:25.560]
History shows that there's sometimes a lag between when the reserve currency changes and the power changes. But both of these things happen. It's inevitable. It's there's never been a case where there's been some dominant superpower and some reserve currency that's lasted forever. Now, world War Two is an interesting example.[00:30:42.250]
World War Two people actually did get together in a room in 1944. They actually got together in a room at the Mount Washington Hotel in Bretton Woods, New Hampshire, and they signed an agreement that's known as the Bretton Woods Agreement in 1944 that basically made the US. Dollar the center of the financial universe. They said, everything is going to be pegged. There's going to be this fixed exchange rate between, you know, whatever the British pound in the US.[00:31:04.630]
Dollar. The Swiss franc in the US. Dollar, the French franc and the US. Dollar. Every currency is going to be is going to have a fixed rate to the US.[00:31:11.240]
Dollar, and the US. Dollar is going to be fixed to gold. So at any given time, the US. Dollar is going to be fully redeemable to gold. If you have dollars, you can exchange it for gold and vice versa.[00:31:20.790]
And because of that, there's a lot of trust and confidence in the dollar. There's a lot of trust and confidence in the United States because, like we said, after World War II, it was obvious the US. Was the dominant power. They're the only clear the dominant power, largest economy in the world, largest military in the world, the only country left standing, hadn't been completely decimated from World War II, the only nuclear power in the world. If they hadn't dropped the bomb yet in 1944.[00:31:42.770]
But they had. I mean, this was it was natural that the reserve currency went to the dominant sewer power. That was the US. And so it was the US. Dollar and it's been that way for decades.[00:31:53.750]
The thing about the reserve currency is that it provides and has provided, continues to provide the US. With an unparalleled financial advantage. The whole point is that, remember, the idea is that everybody's got to hold US. Dollars. Foreign governments, foreign institutions, foreign central banks, big corporations, commercial banks, they've all got to hold US.[00:32:12.940]
Dollars. And in order to hold US. Dollars they need some sort of liquid asset. Liquid US. Dollar asset.[00:32:19.790]
Right. We're talking about they need a way to hold dollars. Now as an individual, if you could say like, well, I've got €100,000 and I want to hold dollars, you just open a US. Dollar account at a bank and fine, they'll hold your dollars for you at a bank. But we're not talking about individuals with 100,000 or a million.[00:32:37.120]
We're talking about institutions with hundreds of billions of dollars. Central banks, governments, huge commercial banks, huge corporations. They're not going to put that money in a bank account. And even if they do, well, what is the bank going to do with that money? The bank's got to find some asset, us.[00:32:53.480]
Dollar asset to park that money. Right. So what do you do? Well, I guess, you know, you could buy apartment buildings in the US. You could buy whatever industrial warehouses and land, et cetera, beachfront property in Florida.[00:33:07.750]
But real estate is very illiquid. What do you do when you actually need that money for something? You got to go and sell the property. Real estate is very illiquid. It's expensive to sell.[00:33:16.670]
What else do you do? You put it in the stock market. Well stocks are extremely volatile. You need a way to hold that money. You hold those dollars that's really stable.[00:33:25.450]
Right. That you can get in and out of very quickly. That's stable. You can't put it in a collective. You're going to buy baseball cards.[00:33:33.900]
You're going to say, oh, we got all we're going to buy all these Mickey Mantle cards, right? Well that's a really small market. That's a really, really small market. You can't put hundreds of billions of dollars, trillions of dollars into the baseball card market. So you need an asset that's stable, that's risk free, that's not volatile, that's highly liquid and really big.[00:33:51.550]
So big that you can deploy trillions of dollars quickly and efficiently at very minimal cost. So what market is there? What asset is there? Government bonds. U.[00:34:01.180]
- Government bonds. It's a huge market. How big? 31 and a half trillion dollars as of this morning, which is right at the debt ceiling.
[00:34:09.330]
Literally. The market for us. Government bonds is the size of the US. National debt. U.[00:34:14.450]
- Government bonds are considered risk free. It's considered the ultimate risk free asset because it's backed by the dominant superpower in the world. They're generally stable. They're extremely liquid.
