Will the U.S. Leave the Value of the Dollar to “Market Forces”? — Live with Luke Gromen

ED HARRISON: Welcome to "Real Vision Live." I'm the host for today, Ed Harrison. And I have the distinct pleasure of talking
to FFTT Founder and President, Luke Gromen. Luke, welcome back to "Real VIsion." LUKE GROMEN: Excited to be here, Edward. It's great catching up with you– I always
love talking. ED HARRISON: Me as well. And as you know, I said right before this,
I was preparing, I was super pumped, I said, to have this conversation with you, and in
particular because I was reading one of your missives where you were going over the recent
change that you had with regard to how you're thinking about the dollar.

And when you're changing how you think about
the dollar, you're changing a whole narrative in terms of the reflation trade, and there's
a whole nexus of things associated with that. So let's go through your macro backdrop to
get an understanding of what's changed since the last time you and I spoke. LUKE GROMEN: Sure. So back on January 11, we wrote a report for
our clients entitled, "The US Dollar and Volatility Likely To Rise Until Something Breaks as US
Moves to Defend the Dollar System." And it's a tactical shift that we've made. I don't know how long it will last, but the
gist of it was that the Fed really came into this year cornered in a way that I don't know
was fully appreciated. What I mean by that is you had a situation
where the US needs more stimulus. You were seeing rates rise and the dollar
fall, which as my friend Louis Gav says, always sets off alarm bells in his head, because
that's a sign of a balance of payments problem.

It's a sign of a currency crisis when your
currency is falling and your yields are rising. You had the dollar already sitting at pretty
key technical levels in the 88, 89 range on the DXY. And so more stimulus, more dollar weakness
risks touching off a more chaotic decline in the dollar. And really, I think the Fed's biggest fear
is the combination of declining dollar, declining asset prices. Because that, then, suggests significant capital
flight in a real way. And so you're looking at this nightmare scenario
for the Fed where the domestic US government needs more stimulus, really needs the Fed
to monetize that stimulus, because the balance sheet and the global market foreign creditors,
et cetera, private sector, foreign official sector– the balance sheet doesn't exist,
really, to absorb very much of those deficits. Yet, the dollar's already at key technical
levels where you could touch off a chaotic decline in the dollar and capital outflows
driving US equities selling, at which point the Fed's only playbook would be to significantly
raise rates, brake the economy, basically run the Paul Volcker playbook in 1980.

And that's a whole separate issue. So our point was that it looked like the Fed
was cornered, and two things really grabbed our attention in December and January that
led to this tactical shift. And they were two op-eds written first by
former Treasury Secretary and Goldman CEO Hank Paulson back in mid-December entitled,
"China Wants to Be the World's Banker." And then another one by Kevin Warsh– former Fed Governor
Kevin Warsh in early January all talking about the same thing– that basically there's this
capital outflow to China. And they both highlight, to paraphrase my
friend Brent Johnson, that China was drinking the US' milkshake. China's rates were higher. You were seeing significant capital flows
to China. You were seeing dollar weakness. And so basically, these two op-eds were almost,
to us, an admonishment — PETER COOPER: Sorry for interrupting your
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it. LUKE GROMEN: flows to China. You were seeing dollar weakness. And so basically, these two op-eds were almost,
to us, an admonishment to policymakers to basically start paying attention to the dollar. And when we paired that with what we started
seeing in the fundamentals and the macroeconomic fundamentals– and what I mean by that is
in 2020, the Fed bought more than 100% of US Treasury net issuance.

The Fed effectively monetized US deficit in
2020. In 2021, the plan right now is for the Fed
to buy significantly less than 100% of US Treasury net issuance. And so when you look at those two things–
when you look at the admonishment from Warsh and Paulson, it sets up, actually, something
that was written about by Soros and Druckenmiller and was discussed early on in the Trump administration,
which was something we've referred to as the Soros Druckenmiller strong dollar playbook. Which is if you run tighter monetary policy
at the same time that you increase US deficits, increase fiscal, what you end up doing is
driving a stronger dollar, driving higher equity prices, driving higher interest rates
as you begin to bring capital back into the US, attract capital to the dollar.

And so in the context of what warsh and Paulson
indicated or admonished policymakers to do, to us, this sign that the Fed was not going
to buy enough treasuries in 2021 as opposed to buying more than enough in 2020 suggested
a near-term bottom in the dollar, particularly when you married it up with the factors we
laid out before. And so paradoxically, at a time when no one's
talking about the dollar milkshake anymore, it looks like the Fed and the US are starting
to run the dollar milkshake again, to use our friend Brent Johnson's phrase. And, now, this is a tactical move. Back in 2018 was the last time the US tried
to do this– back in 2Q '18 after you had the sell-offs in 1Q '18 in the markets where
the dollar actually fell and rates were rising– same kind of thing.

You saw the Fed basically move to defend the
dollar– same thing, tighter monetary, looser fiscal via the tax cuts. You crowded out global markets, you attracted
dollar capital to the US. US dollar rose, US equities rose, US rates
rose– that lasted for about four maybe five months until 4Q '18, and then all those factors
basically blew up risk assets. And I think the same thing's going to happen
again if the US tries to run this playbook for too long.

And critically, given the much greater leverage
in the system, I don't think we have four or five months. I think this is a brief bounce respite in
the dollar as we are effectively running the Soros Druckenmiller strong dollar playbook
for a period of time. But that was really the crux of our tactical
shift and view that we wrote about for our clients on January 11. ED HARRISON: Very interesting– a lot of things
to pick apart there. The first thing that I would say one of the
comments that you made that caught my eye was the fact that the Fed is buying less
than 100%– much less than 100%– of the US Treasury issuance.

I would say that's de facto tapering in that
sense. And what I'm thinking about is the de facto
tapering is, obviously, dollar bullish. How do you think about that? LUKE GROMEN: I agree. ED HARRISON: Yeah, so that's the first part
of this. Now, when I was on Twitter, I was saying to
you that the thing that I'm looking at as someone who follows bonds is the yield curve–
how the yield curve is going, and what are the reasons that it's going there. What I see is a two-year, which is basically
flat, since we've had the reopen.

In fact, it's probably slightly down. It's down to 11 or 12 basis points from anywhere
from 15 to 20. And the difference to the 10- year is expanding
over time. We got to 1.19% at one point, at which point
the equity market puked, and we backed off– we went down towards the 1% level. But it seems like we're in this new range
now with 1% as the bar at the bottom, and now we're trending up slightly– we're at
1.14%, 1.15% as you and I speak. Talk to me about what's happening there and
what's causing that. Is it related to this lack of soaking up of
US dollar deficits by the Fed? LUKE GROMEN: Yes, in short, I think it is. I think the narrative is primarily that it's
around reflation. And I think there's absolutely an element
to it. But to me, the under-reported side of this
continues to be this broader, this bigger picture dynamic that we've been talking about
ad nauseum since 3Q '14, which is foreign central banks have stopped buying treasuries
on net over the last seven years.

They haven't bought a single treasury on net,
foreign official sector. The global private sector, ultimately, can
pick up the slack, particularly now that the dollar has fallen the way it has. That helps make adjustments within FX hedging
markets that make FX hedge treasury yields more attractive to the foreign private sector. But ultimately, when you look at the size
of these deficits and the projected size of these deficits, there simply isn't enough
global private sector balance sheet to finance the US deficits on their own. And so you're seeing, basically, the price
of these bonds fall. You're seeing rates rise. And so I think that's the dynamic we're in. And I think the $64,000 question, to your
point, is, what's the level on the 10-year that causes things to break? Because really what we're talking about here
is a US balance of payments problem. It's not a relation– we're going to get our
reflation as a result of the Fed response to this US balance of payments problem.

But ultimately, that's what I think we're
watching in terms of this yield curve steepening, and particularly what's happening at the long
end. ED HARRISON: Yeah, by the way, as you were
speaking, we got seven questions already. And what I'm trying to do is just have a normal
conversation, and at some point, once we've given the macro view and we've expressed everything,
we can start to pepper these questions in. But the more questions we get, the less time
we have, because I want to make sure that people get a chance to pick your brain as

There are a number of things I was thinking
with regard to that– two things in particular, just in case I forget the second. The first thing that's always on my mind with
regard to balance of payments and yield curves is the dichotomy between what's happening
in the UK and the US. And let's run with this question– the concept
that just today the BOE told a UK bank that you have six months to prepare for negative
interest rates. And if you look at just sort of the macro
picture there in the UK, it's very similar to how it is in the US. They're running a current account deficit. They're running a massive budget deficit. They also have a fiat currency where the alignment
of the central bank and the government is 100% so they can finance those deficits through
quantitative easing or whatever else they wanted to do. But the yield curve in the UK looks very different
than the United States– both in terms of levels and also steepness. And now, the UK central bank is saying, prepare
yourself for negative interest rates. In fact, the short end of the curve in the
UK is negative, whereas in the US, it's not.

And we have a steepening yield curve. It sounds to me, just looking at those two,
as if the market is saying, actually, the UK, we believe you, Bank of England, that
you're going to do more to keep the Sterling low and to monetize these deficits. Whereas they're saying, no, we're sort of
on the sideline. We don't know if the Fed is really going to
come for [INAUDIBLE] bad things happen. So talk to me about how you look at this dichotomy
between what's happening in the UK with negative interest rates and what's happening with the

LUKE GROMEN: So it's a really interesting
question. It's a really interesting point. I think at least some, and maybe some big
part of the difference is tied to the dollar as reserve status and the Treasury bond as
global primary reserve asset– or at least incumbent global primary reserve asset. Which is to say, the Bank of England is, I
think, operating under a system of do what they perceive to be best for the economy,
and the country, and financing the government. And that's their sole mandate. And the Fed has really, in this context, not
just the domestic economy mandate, but the management of the global reserve currency
mandate. It's the old Triffin's Dilemma. In one of our recent reports, we referred
to a great line in the movie "Sweet Home Alabama"– my wife loves these rom-coms, so I've seen
it– but there's a great scene where the girl's trying to pick which guy to date. And her dad says, look, you can't ride two
horses with one ass, sugar bean. And so the Fed is trying to ride two horses
with one ass, and the Bank of England has already picked their horse.

They're willing to let the currency do what
it's going to do. They can move to negative interest rates,
because they don't have the reserve currency. The issue for the Fed is if they move to negative
nominal rates, they're $7 trillion-plus in dollar-denominated FX reserves sitting around
the world. And if they move into negative territory,
where that's basically the Fed declaring that we are going to start stealing back via negative
rates the accrued surpluses you have earned from trading with the United States over the
past 50 years under the dollar-centric system, it would
stand to reason that that $7 trillion would start bidding for 0% for high yield FX reserve
or reserve asset alternatives.

And on top of that list is gold, and you can
argue now as Bitcoin gets bigger, Bitcoin. And so what the Fed has to manage that the
Bank of England really doesn't is this reserve currency management dynamic. And if China was still a small player in the
world like they were 20 years ago, the Fed might be able to get away with doing it anyway–
with running the BOE playbook. But the reality is the Chinese are offering
3%-plus on the Chinese 10-year. And yeah, they have capital controls, and
yeah, there are rules of law differences. And it all comes down to we're at 1% and they're
at 3%.

Do you feel like that extra 2% pickup in this
world is enough to compensate you for those risks? And what we've seen over the last nine months,
six months, whatever you want to look at, the world is saying, on the margin, we're
willing to take that risk. You can see the capital flows moving. Eric Goldman came out a couple of weeks ago
and said they expect $140 billion of bond flows to China this year. That's $140 billion of capital that under
the way the system used to work belonged in the Treasury market. That's our money going to China.

And so that, I think, is really the dynamic. I don't know if it's so much that people don't
believe the Fed can do it. I think it is more that the Fed is trying
to ride two horses with one ass. And those horses are increasingly running
in diametrically opposite directions. And they're going to have to make a choice
really soon. And that ultimately ties back to why I think
this dollar bounce probably won't last all that long. ED HARRISON: Right. Very interesting. So why don't we pivot for a second. I want to get to the second thing that I was
going to ask you about was the stimulus package. But let's go back to that, because I want
to pivot to China since you're talking about China. I think that dynamic is interesting, especially
when you think about coronavirus, where the Chinese, that's where the coronavirus started. They seem to have done relatively well with
overcoming the problems associated with it.

And now they were actually the best country
in the world in terms of growth of the large countries in 2020. And they're back on track, allowing them,
by the way, to be able to not do massive monetary stimulus, massive fiscal stimulus in order
to support their economy, because their economy is still roaring along. And we're no longer at the point where they're
just doing stuff in order to keep output up. There's actually demand for Chinese goods
and services. So they have a 3% yield versus the 1%. Where's this headed in terms of China's role
in the global currency system and also in terms of the value of the yuan? LUKE GROMEN: So I think ultimately, this yuan
is going higher, and probably a lot higher. That's the easier part. The question– and it's a great question again–
is it gets to the heart of a discussion that I've been having for a long time.

And I think people are starting to really
see it play out– some of the dynamics we've been discussing. Which is forever, people tell me, Luke, the
yuan is not going to replace the dollar. And forever, I've been saying the yuan doesn't
want to replace the dollar. China has no interest in structuring their
system like the dollar system's been structured post-'71, because it requires them to hollow
out their manufacturing sector, send their jobs overseas somewhere else, run massive
deficits that in the long run bankrupt their economy. And the Chinese actually plan for the long
run, unlike our government which runs two-year election cycle at best, and from putting out
fire to putting out fire. And so what China's really been doing is managing–
they don't want the want the yuan to replace the dollar as the dollar was from '71 to the

They want to shift the system towards a multi-
currency system where, ultimately, the valuation of your currency relative to other currencies
is a function of your current account balance relative to those other currencies, and a
function of your pile of reserves relative to those other currencies. And two things about that– number one, that's
the way currencies worked for basically all of human history up until 1971.

And so what we think is normal is actually
the biggest aberration in probably 2,000 years, with the exception of very small eras around
worst. And number two, this isn't my speculation–
the head of the PBOC, Zhao, wrote about this in 2015, I think it was– might have been
2016. But he flat out said, currencies will increasingly
trade based on balance of payments, current account balances, and on reserves. And so when you look at that, what all this
means relative specific to your question is, people say, well, if I take yuan– if Saudi
or Russia take yuan for their oil, what are the Russians getting? The Chinese don't have a big enough bond market. And people are conditioned to think that that's
the way the world works is we have to have this big bond market to recycle the flows–
resolve it all in the capital account like the US has done since '71. And the reality of what China is doing is
they're resolving these imbalances in the trade balance, in the trade account.

And so what they're doing is basically, well,
what's backing the yuan? If I have yuan, what do I get for it? And the answer is, it's settled in Chinese
goods. And when you look around the world at all
of the nations that trade with China– number one, they're the number one or number two
trading partner with basically everybody on Earth. And there's this great chart that I have that
shows– I think it's from the FT– it shows in 2000, the countries that the US is the
biggest trading partner for in blue and the ones that China was the biggest trading partner
in red.

And the whole global map was blue. And 20 years later, the whole global map is
red, with a couple blues around Mexico, Canada basically. So they're the biggest trader with everybody. And if you look within who they're the biggest
trader with, the only areas they really run deficits in are with semiconductors and oil–
commodities. And so when you look at the tensions around
Taiwan, it makes sense that we're seeing tensions around Taiwan given this, as people are saying
it's the new oil– makes sense. And the old oil, we're seeing all these tensions
around oil. We're seeing this increasing move– this oil
contract that we've been talking about for years and was supposed to be dead on arrival
when it launched in 2018, it's not dead on arrival. There was an article earlier this week that
we tweeted– you can find it on our Twitter feed– that volumes continue to ramp up.

The Chinese are pricing the marginal barrel
of oil globally in yuan, not dollars. And that, again, pushes towards this balance
of payments system where you're effectively settling. And every nation's got to settle in goods. And if every nation has to settle in goods
for the production of their economy, what that suggests over time is every central bank
has to finance their own government's deficits. And when you line up all the governments'
deficits, there's two countries that are by far the worst whose central banks are going
to have to print the most. It's, to your point earlier, the UK, who does
not have to worry about managing the global reserve currency. They can just continue to print as needed. And that's what it sounds like they're doing–
and the US, who actually has to print way more than anybody else. And it's not even close. They have so much to print to finance our
deficits as a vestige of the old system, where that's how we settled was through the capital
account and treasuries.

But within this move that the US is going
to print the most by far, there are these periods of time where if they just straight
print the most, the dollar will collapse relative to these other currencies until it finds a
level where we can balance our current account via US production. That is several zip codes lower than here
in terms of the dollar versus where we would need the dollar to be to balance our current
account via trade. And so the Fed really has these two dynamics
where we need the weaker dollar, we need to finance the deficits, but we can't keep just
doing it. There are times we have to pull back on the

And we're going to try to jump over to this
whole now and ride this other horse. And like I said, those horses are increasingly
riding in these directions. And so the Fed's going to have to choose. And I they're going to choose here in 2021. ED HARRISON: Yeah. Again, a lot to unpack. Let me look at it this way– I'm going to
spin a narrative, and you tell me what you think of it. Because I want to synthesize a lot of the
stuff that you were talking about. The first thing that comes to mind to me when
you talk about the US and the UK and then you talk about China is a tweet that I had
on January the 6th, and I was thinking about the insurrection in Washington, DC.

I was thinking of it as the US' Suez– i.e.
this is the marker that you can put down where it's clear that people are just like, wait
a minute, why are we thinking that the US is the place where there's huge stability,
and we should be leveraged to the US? Let's go away from that trade slightly. And when I'm thinking about that, I'm thinking
of it in terms of the UK– obviously, because that was what happened to them– this was
in 1956 in Suez, even though it happened over a longer period of time. Suez eventually led to the UK going to the
IMF and saying, help me out. And the reason that they said that is because,
in order to deal with the it's deficits they increased over time and the debt
burden that they had that was a legacy to a certain degree of the Second World War–
even though they had some growth in their economy, a lot of it was because of currency
depreciation, and to a degree inflation.

And that came to a head, basically, in the
1970s after you had the oil embargo. It was even worse in the UK. And then the government had to decide, are
we going to allow our regime of currency depreciation and inflation to be upended even more by this
oil embargo? Or are we just going to say, stop? And they decided to say, stop. When I'm thinking about the whole thing, I'm
thinking about the United States in the UK's role, increasingly, in that sense. And a secondary, a corollary, of this is that
if you look at the US balance of payments, the US balance of payments were relatively
even in the period up until 1971. This explosion in the current account deficit
was a direct result of the US dollar not being tethered at all to gold, and the complete
fiat currency area with the US serving, unfortunately, in the Triffin's Dilemma as the world's reserve

So that's sort of the narrative I would spin
in terms of thinking about the moment in time that we're in right now. Give me your push-back or your thinking given
what I just said. LUKE GROMEN: I think it's a very fair and
I think it's a very good baseline metaphor. And I think from there, then, I think you
add to some addendums in terms of the differences, both internal to the US, and external to the
US. And so as we think about this– no offense
intended for any of my friends in the UK– it's a relatively smaller landmass island
relative to the United States. And so the US is a much more diversified,
larger economy than the UK was then. That's a big and important difference, I think.

ED HARRISON: Right. LUKE GROMEN: From an external standpoint,
the other thing that I think is different now in favor of the US and things not going
as quickly or as obviously as that metaphor is that when you compare the incumbent reserve
asset country issuer, UK, to the US, there's really not a lot of difference– rule of long-standing
tradition. We were a colony that broke away– Anglo-Americans,
there's a lot in common. We are very good friends.

Our allies were their allies. It becomes a really easy shift. If I go back and try to put myself in the
shoes of a reserve manager in 1955, '56, '60 and I say, OK, do I want money in the sterling,
or do I want money in the dollar? And I say, OK, well, same rule of law. They're allies, they've been allies, I understand
the way they do things. The Americans are a much bigger country, much
bigger economy, they're the world's biggest oil producer, they're the world's biggest
economy, they've got all the gold. It's a pretty easy choice– you go with the
Americans. This time, it's not as clear-cut. The incumbent system– the big competitor's
China. But China doesn't want to be the US. China wants a multi currency system to kind
of go back to really pre-'71, but really even pre-1922 at the Genoa conference–
really almost a multi-currency system, gold standard, a neutral settlement asset of sorts–
something like what Keynes proposed at Bretton Woods.

In fact, PBOC wrote about this is what they
wanted in '09. ED HARRISON: The Bancor. LUKE GROMEN: The Bancor, exactly– a neutral
settlement asset that floats in all currencies. This is what China wants. So on that level of externalities, it's already
different. So there's some adjustments that have to take
place. And one of the biggest would be multi-currency
oil. And the big five and the SDR get to price
oil in their own currency is a big one. And you've seen the world moving towards that–
that's a separate discussion we've talked about before.

But the other one, I think, is an important
externality that is very different, and that is culturally, politically, the Chinese are
very different than the United States. The Anglo-American tradition, rule of law,
et cetera, institutions, we're all very similar. The institutions and the way the Chinese see
the world versus how the Americans see the world are very different. And I don't need to expound on it more than
that. Everybody watching is going to understand
what I mean. But the point, then, is it's no longer quite
the, oh, well, it's the Americans or the UK. It's six and one half dozen. Now, it's six and one baker's dozen. So while from a purely analytical mathematical
framework, you can yield gaps, trade balance, trading partners, et cetera, you can see the
way the world moving. The inertia that's pushing in the other direction,
the other tectonic plate is you see what happened in Hong Kong. You see a difference in the way they approach
things. So that's another balancing factor that you
net against that. And at the very minimum, that tells me things
will take longer to develop than they did then, I think– all else equal.

And all else may not be equal, but that's,
I think, how I've thought about that sort of internal differences and external differences. ED HARRISON: Right. Yeah, and this concept that they're looking
for bilateral trade in the currencies of the trading partners, reducing the need for the
US dollar as the reserve currency makes a lot of sense. And I've heard that before. One wrinkle in this, I might add– just something
that came out– I don't have a personal view on it, but I saw we had a video with Pompe,
who's a Bitcoin advocate, and Mike Green, who has some doubts about Bitcoin. And Mike Green was making the case that, actually,
even though you might think that the Chinese would like to crack down on Bitcoin, maybe
actually they want Bitcoin to gain acceptance as a way of actually eroding the US dollar's
dominance within the existing reserve currency status. I think, obviously, that's easier to the degree
that they're not a completely open capital account.

But I don't have a view that's very strong
on that. Have you heard anything around that, and do
you have a view yourself? LUKE GROMEN: I have heard that. I think it's a fair point by Mike. I would take it one further– I think there
are significantly politically powerful elements in the US that want the same thing, up to
and including the US Defense Department, or elements of the US Defense Department and
national security intelligence apparatus. And the reason I say that is the dollar system
as it is currently structured– and I'm going to be blunt here, because you have to be blunt–
is there is a growing realization amongst defense and security apparatus, and even in
US corporations, that the way the currency system now works, this post-'71 dollar system,
because of how big China's gotten, this system now amounts to the Chinese using the euro
dollar system to borrow dollars, lend the dollars at a spread around the world to buy
and control finite, hard assets, increases their geopolitical power, increases their
economic clout.

Yes, they are short dollars, but only to the
extent that there is a spread on the loan. And they're lending it against hard asset
collateral. So if the weaker emerging markets they're
lending dollars to default because the dollar gets stronger, they end up with the hard asset
which is all they wanted anyway which further increased their clout. What's more, and it's crazy, is because there
is this dogma around the euro dollar system and the post-'71 dollar system must be defended
at all costs in certain circles– and this is sort of what Mike alludes to– it must
be defended at all costs– whenever the dollar squeeze gets too painful, because China is
now so big, because emerging markets are now so big, the Fed comes in and effectively bails
out China every time the dollar gets too strong. We saw it last March. So now you've got a Fed-backed Chinese takeover
of global economies increasing their geopolitical power.

And the cherry on top of this whole incredible
sundae of dogma I don't understand is that the US military defends the whole trade lanes
of the whole arrangement. So you've got the US military providing protection
for the trade lanes for China to bring back the hard assets of the world that are being
financed by US dollar euro dollar system and backstopped by the Fed. And I guess I would ask Mike, how on Earth
does that make sense for the long term United States? And what I know is there have been, and the
numbers are growing– the number of people in the defense establishment, in the intelligence
establishment are saying, it doesn't make sense. It hasn't made sense for a long time. And so I would say, as it relates to Bitcoin,
I think that there are a lot of people in the US, in Washington, in the defense and
intelligence establishments that want Bitcoin going a lot higher too for exactly the reasons
you say, which is it's going to break this post-'71 dollar system.

And when it does, yeah, the dollar is going
to fall, yes, maybe we go from spending $1 trillion a year on defense to spending $500
billion, which would still put us number 1 in the world by far– but this counterintuitive
relationship where basically we back stop the Chinese LBO of the world and defend the
supply chains while they do so begins to make more strategic sense than it does now. Because right now, it makes absolutely no
sense. ED HARRISON: Yeah, amazing comment, I must
say– very interesting. Let's go from the super macro back to the
short term. Because basically, all of this points to a
dollar that's weakening. But your tactical change is of the dollar
strengthening. And one of the factors, potentially, is the
fact that it seems to me, at least, that we're about to get $1.9 trillion in deficit spending
coming right now. Do you think that's going to happen? And how do you think that plays into what's
happening with the dollar in 2021? LUKE GROMEN: So I don't have a great view
on is it $1.9, $2.2, $1.4.

There's a lot better people to talk to you
than me in terms of the internal politics of it. But I think to your broader point that a lot
is coming– and what does that mean for the dollar? I think ultimately, it comes down to, does
the Fed buy enough of it? Or does the Fed not buy enough of it? And if they buy enough of it, which is to
say most, or all of it, or more than all of it then, I think the dollar weakens like we
saw in 2020. And if they don't buy enough of it, as right
now is the plan, then I think the dollar goes up. And I think stocks go up. And I think rates keep rising– it's this
Soros Druckenmiller strong dollar playbook– until something breaks. Because, again, because debt around the world,
dollar debt especially, is so high because that's going to eventually squeeze global
markets where they've got to start selling assets to raise dollars– either for working
capital purposes or to repay dollar debt payments.

The problem– and, again, this ties back to
how this system has evolved and why it's so dysfunctional at this point– and why we're
ultimately still very bearish the dollar– is the US net international investment position
is negative-60% of GDP– negative 6-0 percent after the COVID crisis. So in 1998, by way of comparison, it was negative-3%
in '08, it was negative-8%– it's negative- 60%. And so I won't say most, but many analysts
and economists are still evaluating this dollar- centric, emerging market weakness, squeeze
the emerging markets with the dollar playbook using the '98 lens of negative-3% net international
investment position for the US, or the '08 playbook, negative-8%. The reality is, it's negative-60%, which means
they have plenty of dollars, they're just sitting in US dollar assets. And if we make them monetize those dollar
assets to raise dollars because the dollar's gotten too strong, they're going to crash
our markets.

And that's exactly what we saw in March. All the postmortems discuss how they basically
were crashing the Treasury market, wagering money, because you saw what you can not what
you want to. And the deepest, most liquid market in the
world couldn't even handle the volume for a few trading days. And so that's the problem within all this,
because our economy is critically dependent on asset appreciation. And that's why I say this strong dollar playbook,
it's a countermove. I don't think it'll last very long. I want to be cognizant of it for our clients. But me personally, I haven't changed any positioning. I'm unlevered. I don't day trade it. But it's one of these things where you can
see, OK, we're going to this counter move in the dollar, but the structure of how things
are– how dependent we are on asset appreciation, how short foreigners are of dollars, and how
long they are of dollar- denominated assets– you can see the dollar's not be able to rise
very far before it creates a problem.

Then there's two choices for the Fed– you
let the whole system collapse, and that's a possibility. It's not a very high possibility. Or you come in again and you say, OK, guys,
we were just kidding about the whole, we're not going to buy enough treasuries. We're going to buy enough now, and
that's when we're going to get another $625 billion a week in QE kind of thing. Except it might be $1 trillion a week– I
mean, who knows? ED HARRISON: Right. I'm looking at the time here, and even though
we're only 40 minutes through, I have so many questions I'm going to start to introduce
some of them. LUKE GROMEN: Sure. ED HARRISON: And the first question that I
have requires a little bit of a background. There was a video with your friend Brent Johnson
who interviewed Russell Napier on the platform here in November. And basically, the gist that I get from it
is that Russell was saying that when you look at the low inventories that we're having,
and you also look at the money supply increase, there is the potential for inflation– not
high inflation, but 4%, which is relatively high.

And so the first question is from Thomas who
wants to talk about that thesis. Here's what he says– he says, my question
relates to the deflation-inflation debate. I wonder if Luke is aware of Russell Napier's
thesis which, by the way, he lays out in "Real VIsion" in conversation with Brent Johnson. Does Luke agree with it as the channel through
which inflation will eventually flow into the economy? If he could, also make comments on financial
repression as Napier sees it amid the chaos that Luke expects. LUKE GROMEN: So I agree with Napier. I agree with the financial repression. And I think the transmission mechanism is
not so much on the inventory side, although I think that will be a contributor, but I
think it is something else that Napier alluded to, if not in that interview, then elsewhere,
which was government has basically fiscal dominance.

The government is now basically increasingly
taking control of central banks, and that is ultimately inflationary. It ties into his money supply point. And that's where I think we're really almost
in between two trapezes in terms of the deflation-inflation debate. And it's not well understood yet, and that's,
really, I think the opportunity– ties back to your point earlier of higher yields at
the long end. But my point is if you look under the post-'71
dollar system, and particularly post-1980– so this encompasses basically everybody trading
today– we all only know that, hey, inflation rises when private sector lending rises. And so as long as the US banking system isn't
lending, as long as that loan growth isn't really growing– and it hasn't been since
'08, really– then we don't have to worry about inflation. That is true until you marry the Fed and Treasury,
and basically what we've been calling the Chinese economy with US characteristics. And we saw the US run that playbook in 2020.

And we saw plenty of inflation right away. You start handing money to people, they spend
it, you get inflation. We're seeing that in the metrics. The ISM prices paid highest since '11 this
week. ISM and non-manufacturing ISM, prices paid
near the highest since '11. So they've been able to not only fill in the
hole, but now we're back to 10, 15-year highs in inflationary readings. And so when you look at it that way, you need
to start– and that's why I say between the two trapezes– everyone's still holding on
to, well, we can't get inflation until we have private sector bank lending growth trapeze. And the trapeze they should be moving toward
is US bank loans to the US government were up 30%, 35% last year.

And they're probably going to be up another
30%, 35% this year, and the year after, and the year after. And US bank loans to the US government are
just Treasury purchases. You just watch the Treasury purchase– and
people say, well, that's just because they're being safe. They're afraid to lend. And, yes, they can't find things to lend to,
and that's part of the problem. But again, it's also because they're being
regulated into it when you look at the regulations. And at the end, it doesn't really matter. They're loans. There is no functional difference between
a bank loan and a bond. There's a slight structure, but they are both
effectively lending. And so the US banking system is rapidly growing
lending to the US government. And in the short term, they may not be growing
it enough relative to how much the US is borrowing. But ultimately, the Fed is going to have to
monetize whether they monetize.

And we can look out at the US' spending. And number one, tax receipts are rolling over,
which is disconcerting to say the very least. And in the aftermath of COVID in 3Q '20, if
you look at the big three expenditures of the United States– so defense, entitlements,
and interest expense and Treasury spending– those three were 140% of tax receipts– 135%
of tax receipts. So tell me what we're going to cut. Are we going to cut defense in the middle
of a great power competition with China? Are we going to cut entitlements when we've
got literally the Capitol being raided out of social frustration and our newer cities
burned all summer? Are we going to cut interest on treasuries? Are we going to cut the stimulus checks? OK, there's nothing to cut. And so I think the inflation transition is
happening real time– we're watching it.

People don't realize it yet. The game's already changed. And as the real impetus, the real fuel for
inflation is going to be government spending. All of a sudden, for the first time in any
of our careers, private bank lending is not going to be the warning signal. You're never going to see it. If you're looking over here, you're going
to get blindsided like a hockey player at the blue line, right– just boom. The real threat of inflation is US government
spending that the banks are effectively monetizing.

And so financial repression, yeah, that ties
back to our initial point, which I think is the $64,000 question in markets today. I've been thinking it, I continue to think
it, which is, what's the level on the 10-year where the Fed has to come in– number one,
where something breaks, and then the Fed has to come in and say, OK, we're not going to
let the 10-year rise above this, period, full stop. And [INAUDIBLE] going to be our balance sheet. And that's going to be– it's closer than
people think, and that's going to send real rates– one of my big things coming into 2021
was people think real rates bottomed in August at negative-1.1%. That was consensus coming into this year–
I still think it's a pretty consensus view. I think real rates are going to negative-5%,
negative-10%, maybe lower. I don't think negative-1.1% is even in the
right zip code for how low they're going.

And that speaks really well for Bitcoin, and
it speaks really well for gold if people let it off the mat. You've got record physical sales. You've got prices falling. So who knows? Real rates and gold are moving separate ways
right now, which shouldn't be happening. ED HARRISON: Very interesting. Let me take a pause in the questions, because
I have my own thoughts on that. It's interesting because Albert Edwards, he
was saying 1.50%– that's his trigger point, something to watch– so really not that far
off. When you were talking about fiscal dominance,
I was thinking, actually, about the consolidated balance sheet approach. That's this concept within the MMT circles
that says that, just look at the Fed as a agent of the government. Basically, they're doing the government's
bidding. And when push comes to shove, the government
will encapsulate them, and they'll move hand in glove. And that's what we're seeing right now– the
consolidated balance sheet. The question I have with regard to inflation
on that has to do with Japan.

Because arguably, Japan, they've been doing
consolidated balance sheets for years. And they're at over 200% debt to GDP. The Bank of Japan is the dominant force in
the JGB market at this point in time. And yet, they have not been able to get inflation
higher. What's different for the world's reserve currency,
the US, than has been for Japan when they've been trying to do this? LUKE GROMEN: So I think the world reserve
currency is one thing– the fact that we have it and they don't is one element of it in
the short run– in the intermediate run, even. In the long run, the thing that's different
can be seen by putting up a chart ranking countries, regions by current account balance,
right? So I'm going to have it backwards here on
the chart.

So let me see here, here. OK, so for the viewer, this should be left,
this should be right. OK so when you look at a current account balance
and you rank them by region, so you've got the EU is number one over here. They're the biggest. You've got Japan, which is like number two
right here. And then you've got China, which is the right
here. Then you've got a bunch of countries here
that are basically sort of slight current account surplus, and a bunch of countries
that are current account deficits. Then you've got the UK here, and then you've
got the US– and I can't even use my fingers– I'd have to use my whole forearm. The US is like here. The current account deficit is so big. And the point is that China has been running
a current account surplus this whole time while they've been doing this, right? And that's number one. Number two, they've financed internally. So they're running a current account surplus,
and they're financing internally with their own domestic savings.

Whereas the US is a massive deficit and has
historically financed externally. So we need the kindness of strangers, if you
will. The other thing that is different is we've
effectively provided a significant portion of Japan's military umbrella for them over
those years. And we have to finance our own military. And so that's part of the current account
balance equation, so I don't want overstate it. But the point is that in plain English, what
that means is the current account balance, as long as it's positive, keeps the amount
of monetization that they have to do, the MMT– it manages it for them. They have a counterbalance. We have no counterbalance. It is like gas to the floor, 100 miles an
hour off the cliff. There is no counterbalance with the current
account where it is. The only counterbalance has been the reserve
currency status. And really the governor on that– and this
is something I think a lot of the MMT in the US don't appreciate as much as they should
are the geopolitical angles, right– so the things we talked about before, where all of
a sudden, there's this competitor, China.

And they're a big economy, and they're offering
to 200 bips-plus to what we have. And then the multi-currency commodity complex
was sort of another big part of the enforcement of why the global reserve currency kept us
from having a problem. So you've got global central banks no longer
sterilizing our deficits, a competitor and this multi-reserve, multi-currency energy
commodity pricing, the expansion of this begins to shift it back to this, everybody's central
bank has to finance their own current account deficits. And the reality is, the Japanese don't have
a current account deficit to finance. They have a surplus.

We've got a massive one. And so to me, the people expecting that are
holding up the Japanese example as, well, it'll never happen to us– inflation won't
happen because we're 20 years behind the Japanese, and they still don't. I think they're going to be shocked. I think inflation is going to come much faster,
much harder. And maybe it'll get explained away, but I
think it's coming. And that's the difference, really. ED HARRISON: Right. Here's the second question for you. This is from Angela. She says, you previously described your fastest
way for the US government to deal with their massive 130% debt to GDP issue by increasing
the price of gold.

This solution is so logical, being a neutral
currency to devalue against. So what's holding them back? LUKE GROMEN: Dogma. It's dogma. It ties back to the point we talked about
earlier, about there is still a very big contingent in Washington that sees the dollar reserve
status as structured post-'71 the be-all end-all. I would too if, as the Washington Post said,
seven of the 10 wealthiest counties in America surround Washington, DC. So it's difficult to get a man to see something
when his salary depends upon his not seeing it, right? So Washington's salary depends upon this dollar
system, even though it's to the detriment of the United States now and has been, and
even though it's increasingly to the detriment of Washington, as I described before about
how we're effectively financing the Chinese and protecting it with our own military. But it's really what was called going into
the 2008 crisis, and when people started to see, it was called YBG, IBG.

Yeah, it's a dangerous position, but YBG,
IBG– you'll be gone, I'll be gone. And so that's this view in Washington. Well, dogma, dollar good, dollar good, dollar
good, and you can't argue that in some circles. And I think that circle is still in control. And this YBG, IBG– well, even if it does
go wrong, it's not for 20 years. So who cares? And so in the end, it's dogma. But it's very clean. It's very elegant. It would be very good for the United States. And just for the viewers that are unaware
of that, what I said was is the US fiscally is in an irrecoverable position. The Soros Druckenmiller playbook, we ran it
in the early-'80s, Volcker did– defended the dollar, took rates up, put us into double
severe recession.

The challenge is that they can't raise rates
in any real way, to your point earlier, without making it worse, because the debt to GDP is
so high. And so the first thing you need to do to fix
the situation is get the debt to GDP down to a level where you can significantly raise
rates without breaking the system. And the reality is that was sort of the playbook
discussed post-'08– well, we'll just grow out of it. Well, we didn't. We're sitting here at 130% now.

We were at, whatever, 80% back then and going
higher. So you need to get the debt to GDP down really
fast. And there is a portion that was pointed out
to me in the Federal Reserve bank operating manual that says that– right there in black
and white– if the Treasury tells the Fed to revalue the gold higher, the revaluation
amount gets put into the Treasury General Account, or TGA. And the TGA, they can spend however they want–
it's just an accounting creation. It's gimmicky, it's wonkish.

It's no different than Paul Krugman recommending
the trillion dollar platinum coin– [ED LAUGHS]
–except to move gold– I mean, platinum. But it's the same damn thing. So the challenges are debt's so high, you'd
have to reevaluate gold enormously. It's basically every $4,000 on gold is $1
trillion into the TGA, right? So if you took gold to $50,000 an ounce, as
incredible as that sounds, you would be putting $12 trillion, give or take, into the TGA,
and then you could build infrastructure, you could build education, you could do all these
things that would take GDP up enormously over the next several years. And at the end of that– not even over the
next several years– a year from now, debt to GDP could be 60%, 65%.

And now the Fed can normalize rates after
this de facto, significant devaluation of the dollar. And so it's really the only way out at this
point, in my view. You're not going to grow out of it, you're
not going to default on the debt. And so the question is, really, when does
the dogmatic crowd that doesn't want to do this, when do they see enough pain? When does it hurt them enough in their own
house to make the inevitable decision? It's ultimately the same decision in a different
way that Nixon made. It's the same decision that FDR made 40 years
before that. These things just happen. So that's why I think it hasn't been done
yet. ED HARRISON: Interesting. By the way, just as an aside, I remember–
I'm friends with two guys, Lee Quaintance and Paul Brodsky of QB Partners. And we had a post that I posted on my
website, Credit WriteDowns back in August of 2010, it was entitled, "QE Three– a Plan
to Stabilize the Global Monetary System." And they were talking about this revaluation

But back then, the numbers that they were
coming up with were $5,000– revaluing gold to a $5,000 level. So I would think that we're talking about
a much higher number at this point in time. LUKE GROMEN: It'd be a much higher number. Yeah, and both of those guys are brilliant. So yeah, they absolutely have influenced my
thinking over the years. I think I vaguely remember that post way back
then, so. ED HARRISON: So let me go back to this inflation
question, because, Cyrus, he has a question where he says, what are Luke's views on the
kind of inflation he expects. Re-shoring of supply chains and one-off supply
chain shocks are one thing and may well be temporary, but how does he interpret falling
velocity of money and lower bank lending to households and to SMEs when analyzing inflation? LUKE GROMEN: So for me, I think inflation
is going to be high.

I don't think it will be called high. I think we're going to be looking at 10%-plus
inflation that will be reported as 3% or 4%, which is a really good set up for stocks,
by the way. But to me, monetary velocity, it's derivative
of MV equals PQ, right? It's the amount of money times the velocity
of the money equals the inflation level times real GDP.

And to me, the problem with monetary velocity
is really twofold. Number one, professor Richard Verner has done
a tremendous job on "Real VIsion" and elsewhere talking about, really, you need to strip velocity
into two components. You need to look at asset inflation, and then
real economy inflation. And we simply, by virtue of the dollar's reserve
status post-'71 and how it's structured, we needed to not build factories and real stuff
here in the US. We needed to run deficits. And so the way the system worked was we need
everybody else to have high rates of real inflation, build stuff– factories, infrastructure
like China, Japan, Mexico, et cetera have done– to supply us. And we will have high asset price inflation. This asset price inflation, the velocity of
asset prices inflation has been very high, and continues to be very high. But it's not factored in velocity, so that's,
I think, problem number one with velocity. I think as we keep moving toward this multi-currency
system where everybody's central bank is responsible for financing everybody's government, velocity
and real stuff is going to pick up too.

With that said, velocity's a little bit of
a plug number, right? So we know the money supply sort of. It's a very dated view, and it doesn't account
for numerous things. And guys like Jeff Snider at Alhambra have
done a great job of highlighting how little the Fed really understands what's really in
money supply. So OK, so of MV equals PQ, we really don't
know m. Velocity's a plug. Inflation, we systemically under-report. We have to. You ask guys like Harald Malmgren who have
been around government for 60 years, he goes, we always do it. Everybody does it. So
you're under-stating inflation, which also really hurts that calculation, right– it
distorts the implied value of velocity. And GDP, we also really don't know. When you start talking about increasing productivity–
are we measuring it right? What's the value of an iPhone relative to
technology? So basically, people say, well, velocity's
falling and falling.

But we don't know m. We understate p. And we don't really know q. So what's really the value of v? It's directionally helpful. And that even assumes that we continue to
ignore asset velocity relative to real velocity. So to me, I think if we're waiting for velocity
to signal a sign of a pickup in inflation, I think, again, it's going to be like the
hockey player looking the wrong way at the blue line– you're going to get killed. Where I think inflation comes from is not
that bank lending, it's really the government, right? In 2020, we ran the Chinese economic model–
an MMT-type model where the US government spent, and the Fed and the banks bought the

And so you've got the Fed and the banks financing
the government– the government's deciding where the money goes. And we can have a whole political discussion
about how wise that is, how inefficient. I don't care– as far as inflation is concerned,
that's inflationary. And the problem with that model is– my favorite
band is Guns 'N Roses– it's like the "Mr.

Brownstone" song about heroin addiction, right–
I used to do a little, but the little wouldn't do it. So the little got more and more. What are we hearing? Well, we did it last year, but well, we're
going to defer student loans. And now Schumer wants to forgive student loans. And even Romney wants $3,000 a kid today. It was out hitting the tape, right? So this isn't even the far left recommendation
who wants moving– so they've opened Pandora's box. Increasingly, if you're looking for private
sector loan growth as a signal of inflation, you're not going to see it.

The signal for inflation is US deficits. And it's telling you inflation is coming. ED HARRISON: I'm looking at our time, we're
over. I usually leave it at an hour, but if you're
OK with that, we'll ask a few more questions. I'll try to combine some of them. LUKE GROMEN: I'll try to be a little bit or
short-winded. ED HARRISON: Yeah, let's do that. I have two questions that are related. OK, so the one is, why are higher us t-rates
not attracting more capital? This is from Jimmy Mac.

And a related question– and I think this
is the real question– Luke, what is your gut telling you is the breaking point on the
10-year UST? So combine those two that we're moving up,
capital is not being attracted, but because of the US t-rate, Jimmy Mac is saying. And then at what level do you have this breaking
point? LUKE GROMEN: So the reason it's not attracted
yet is I think you have to watch the FX hedge treasury yield, not just the nominal treasury
yield. And so after you adjust for the FX hedging
costs, which are ultimately a fluid function of relative currency rates, what that's saying
in plain English is after you hedge for the dollar, the JGB is still more attractive,
for example.

So to a Japanese investor after you hedge
for the dollar, you can still get a modestly higher yield on JGBs than you can on treasuries. And so until that changes, that's going to
continue. Now, the dollar keeps rising– the Treasury
will keep getting less attractive. And so that's why I think it becomes self-limiting,
ultimately. Treasury yield– I don't have a great feel
for it. What I would say is people whose views I respect,
ranging from Albert Edwards at 1.5%– I've heard others say 1.7%, 1.75%. That's probably a good a place as any.

But I just don't have a great framework, a,
for evaluating it, and, b, what I would say is that ultimately when something breaks is
the number. So it's a little bit of, when have we gone
too far? We went too far, we're already past it. ED HARRISON: And do you think that the velocity
of the move has any impact on where that level is? Meaning that if you go up to 1.50% over a
long period of time, that's a different case than ramping up to 1.50% straight away. LUKE GROMEN: I think it's a great point, Edward. I think anything that happens fast is destabilizing
given how much leverage there is. And we need to look no further than what happened
to GameStop last week, right, which is a systemically unimportant company. And yet we had chaos as a result of it moving
as fast as it did as much as it did.

And so I think if I was the Fed, I would be
trying to sort of walk the long end up methodically, slowly, very predictably so as to avoid exactly
what you say, which is a real sharp move that runs the risk of getting somebody offsides
and then forcing de-grossing like we saw last week across the leveraged complex, which then
creates more problems for the Fed than it solves. ED HARRISON: Here's a question on investing. Dan B is asking, as the dollar loses value,
do we continue to go long commodities and EM? LUKE GROMEN: The short answer is, yes. The longer version is– that's the short version,
that's the long version too. Ultimately, when you have a multi-currency
energy system, multi-currency increasingly pricing of commodities and energy specifically,
the pivot for commodity inflation increasingly becomes the cross-rate between the dollar
and other currencies. So if you want commodity inflation, you've
got to get the dollar down, and vice versa.

ED HARRISON: Great. Here's Gordon– so if it comes down to a face-off
between the Fed, big banks on the one side, and the DoD on the other side with regard
to what we were talking about with the current dollar system, how does this play out? LUKE GROMEN: I would bet on the guys with
the guns and the haircuts like mine. [LAUGHTER]
No, in all seriousness, it's a fascinating thing. I said this to a friend of mine last week–
when you look at Bitcoin as sort of a tech thing, if you will– if you make it a tech
thing, a technology a reserve currency, you look at the two critical elements of US soft
power, and over the last 20 years, 30 years, 40 years have been two things– banking and

And so the two critical elements of US soft
power, Bitcoin represents a fight between the two of them. And who's going to win? If left to its own devices, I think Bitcoin
and the tech guys win. But the challenge is when you look at what
the tech guys have disintermediated– when they've gone after disintermediating industries,
they are undefeated all-time. And when you look at the banking system and
leveraging the dollar, they, too, are undefeated all-time. And so you've really got like a Tyson-Holyfield
fight between two pillars of US soft power, with two very different ideas about what is
good for us hegemony and what is not. And I think the DoD comes down on the side
of really, implicitly, the tech guys, which is we're better off having high tech, neutral
reserve asset-driven productivity growth– real growth– than we are this trying to maintain
this dollar-centric system that benefits the banks first via the Cantalon effect, but which
hollows out and has hollowed out the US economy to such an extent that DoD has been raising
the alarm for five years, 10 years.

Listen, our supply chains are vulnerable. We are running the risk of being operationally
ineffective in certain theaters as a result of being too dependent on certain elements
from China, in particular, which is a function of the dollar system that the banks want to
keep. ED HARRISON: Yeah. Let's have two more questions. And I'm looking at what the questions are. Here are the two questions I want to ask you. The first question is here from Michael L.
Can you address the potential impacts of energy supply constraints, i.e. regulation, capital
investment, in the US and how it feeds into the inflation transition? LUKE GROMEN: It's a great question, because
when you see what Biden has done so far, it points to higher energy inflation, I think. And when you do that, then it starts a feedback
loop where part of what has supported the dollar over the last six, seven years has
been decreasing US energy imports, right? As we produce more of our own, that whole
trade was energy in, dollars out. And as we have fewer dollars out because we
had less energy in, fewer dollars out into a euro dollar system that requires a lot of
dollars just to keep going, you're creating this artificial dollar scarcity.

You're creating a dollar scarcity that supports
the dollar overall. And so if you run that loop in reverse, you
end up with more oil in, more dollars out. All else equal, it's negative dollar. And as that feedback loop happens, then it
supports more inflation, because we're still running a $500 billion trade deficit, right? So the price of those goods start going up
relative to other currencies. So I think what we're seeing in some of these
supply chains for energy are inflationary, and ultimately further inflationary, because
then it starts incentivizing the transition that they clearly want to make anyway on the
climate side, right? When I see ads with Will Ferrell saying GM's
going to have 25 new electric cars by 2025– that, to me, is really interesting, right? So you start seeing inflation in other commodities
that are tied into that supply chain. Again, it actually looks like probably a way
to touch off a smart, strategic move for the United States– and really, moving away from
incentivizing and moving away from sort of the traditional petrodollar system underpinning
of that whole post-'71 dollar system.

ED HARRISON: OK. So we've got only one more question for you. And I guess you could call this the ultimate
"Real VIsion" question, especially because we do a lot of crypto. So here it comes– this is from Chip and also
from Robert K. How do you allocate between Bitcoin and gold? And how has that changed over the last year? LUKE GROMEN: I am about half and half on gold
and Bitcoin. That has increased in Bitcoin pretty notably
really, I would say, since September, October time frame, and in particular when Bitcoin
broke out over $20,000 from just purely a technical standpoint.

But then further, about a week and a half
later, if you remember, FinCEN came out on a Friday night with what appeared to read
like a pretty stern regulatory document as it related to cryptocurrencies. And I said to my wife, Bitcoin should be down
20%, 30% tomorrow. And I woke up, and Bitcoin was up 6%. And just having been in this business for
25 years, the $20,000 breakout was like, OK, I'm not a big technical guy, but I've been
around enough to just know when you break a new high, OK, it's going higher– just technically. But then when you see something like that
where there's this narrative that the government's going to come down and they're going to break
it– and I read this thing.

I go, I'm going to be done a lot of money
in my Bitcoin tomorrow. And I was up 6%. That, to me, suggests that there's something
entirely different going on, and that need to respect that. And from a big picture standpoint, shame on
me. I should have been there the whole time, quite
frankly. But my thought process ultimately is– and
why I think probably half and half is the right thing– for me at least, my thought
process, doesn't make it right or wrong– is if the government really wants to break
Bitcoin, there's only one way they can break Bitcoin, in my view, without shutting down
the internet or really putting in pretty draconian capital controls now that it's a $1 trillion
market cap– and that is raise rates to 10%. Raise rates to 8%. I would be happy to take all the money I have
in crypto and gold and put it in treasuries at 8% or 10%.

I probably wouldn't have much money left by
the time they did that, actually. But the money I had left after they got done
crashing if they took rates to 10% a month, I would be happy to take that 10% coupon. The challenge, as I noted before, is they
can't do that without bankrupting the US government. The US Treasury interest expense would be
more than 100% of tax receipts. They'd be printing the money just to pay the
interest– no entitlements, no defense, nothing else.

And so the dollar would collapse, and Bitcoin
and gold would actually go crazy on a move to 10% yields, paradoxically. However, if we go back to that point, we made
earlier where if the government takes gold to $50,000 or $25,000 or whatever, before
it takes rates to 5%, or 8%, or 10%, or whatever they want to do it too, then you could do
it. And so I look at it as gold is a hedge. To me, Bitcoin is superior on every metric
of neutral reserve asset to gold except for two. Number one is that gold is final payment. I hold it in my hand, there is no additional
energy dividend needed, whereas Bitcoin has to keep the network going, electricity, et
cetera to keep it value.

The second is that Bitcoin at the moment does
not sit on the US government, the reserve currency issuer's, balance sheet in any place. And so if they do want to do a flash overnight
Sunday night surprise– which, by the way, has been the way the last two dollar-related
currency system transitions have occurred in 1933 in 1971– if they want to do an overnight
revaluation of something to reset the system, at the moment, they can't use Bitcoin. They can't. It's not on their balance sheet. They have to use gold.

And so to me, that's why I have both. That I'm probably good where I am right now,
because if I'm wrong and Bitcoin is sort of the heir apparent, and it just does what a
lot of people think it will do, I'm going to be fine. And if they do use gold, I'm right there to
sort of bring Bitcoin back under some sense where it's not hyper-inflating against the
dollar, like it literally did from October through December last year– it rose 50% per
month, which is the IMF definition of hyperinflation. Then they're going to need to use gold in
some way. So I balance those two out, that's where I'm
at. ED HARRISON: Great. Yeah, I think that was a very cogent response. And just all around, Luke, I just want to
say, thank you. It's been a pleasure to talk to you, pick
your brain. We have to do it more often. I really enjoy these sessions. LUKE GROMEN: Thank you very much.

I always enjoy talking with you. Always great catching up and great interacting
on all these topics, because it's a pretty exciting time. ED HARRISON: Yeah. And your analogies– the hockey analogy, the
"Sweet Home Alabama"– amazing, amazing stuff, Luke. LUKE GROMEN: Thank you. ED HARRISON: You take care. LUKE GROMEN: Thanks, Edward. You do the same, bud. NICK CORREA: Thank you for watching this interview. This is just a taste of what we do at Real
Vision. To learn more about the complex world of finance,
business, and the global economy, click on the membership link in the description. Give us 7 days to change your life. This will be the best dollar you'd ever invest.

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