EPISODES / WEEKLY COMMENTARY

Pay No Attention To The Digital Yuan, Taiwan, & Ukraine

EPISODES / WEEKLY COMMENTARY
Weekly Commentary • Apr 13 2021
Pay No Attention To The Digital Yuan, Taiwan, & Ukraine
David McAlvany Posted on April 13, 2021
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  • Timing is everything – Russia builds troop forces towards Ukraine
  • Asia heats up with military sabrers rattling at sea
  • Presidential personal interests play no role in pipeline politics – right…

 

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Pay No Attention To The Digital Yuan, Taiwan, & Ukraine
April 13, 2021

“In a world where no one cares about US carrots and the US cannot meaningfully use its sticks as sort of an enforcement mechanism. I wonder where we think the US dollar is going here. I think it is to some degree delusional to think that the status quo can be maintained where we are in a massive social restructuring on a domestic basis with a currency that has been a pillar of strength primarily reflecting weakness everywhere else.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. 

David, your dad’s back in town and you guys are talking geopolitics. And I was just thinking what a wonderful thing when McAlvanys start talking about geostrategy, geopolitics. And there’s plenty to talk about right now, not just in Asia, but in Europe.

David: Of all the things that hit the news headlines, nothing raises my blood pressure like my dad being in the same room with me. I love him dearly, but you have to know him to know just what kind of an impact, what kind of a whirling dervish he can be.

Kevin: He’s in from the Philippines.

David: Yeah. There are a few risks that are difficult to model. And the two things that come to mind, one, we get the South China Sea and the Taiwan Strait. There is Russia’s move with their troops into the Ukrainian border and the US responding by sending in military hardware. And why are we interested in either one? I mean, clearly the fact that you’ve got a Naval fleet of warships there in the Taiwan Strait in the South China Sea, my parents are keen on that as they’re just a few miles away in what may within months be a hot zone. 

Covid-related lockdowns and the growing likelihood of martial law in the Philippines have both my mom and dad back in the United States for a little while. Actually, the first time we’ve seen him in almost two years. So we’re very glad to have him.

Kevin: One of the things that you’ve brought out, Dave—and your dad for the three and a half decades that I’ve known him—is that war looks very different in geostrategy, and geopolitics looks very different if you look at it from a financial standpoint. And I know why Taiwan is particularly interesting to you. Your parents are over there, but you were talking about the digital yuan last week. And so you have military moves, but you really can’t do things with currency changes unless you’ve got the military to back it.

David: And which comes first, the chicken or the egg? Things of a geostrategic nature or of a monetary, economic nature? We covered some of the macro, monetary, and economic considerations last week in talking about the digital yuan. By the way, Bloomberg covered the Chinese digital currency story again, but from a different angle over the weekend. And the conclusions were fascinating. The central bank digital currency is not a workaround for sanctions, that there are no concerns on toppling the dollar as the world’s reserve currency, that it is not a threat to the US dollar as a reserve asset or as a currency in use for trade settlement. I mean, as I read through it, Kevin, basically the things that Bloomberg covered in a very dismissive tone shined a very bright light on all the issues of particular concern. It was the real issues. But the two most disturbing aspects of that article from Bloomberg over the weekend were Yellen’s discussion on financial inclusion, which is basically a commitment to kill the use of cash in the US economy. And secondly, the congressional interest being piqued in having a digital dollar for Americans. You had Jerome Powell who said in February, as recently as February, “We don’t need to be the first. We just need to get it right.”

Kevin: Well when Bloomberg’s coming out and saying, “Hey, listen, this is not a threat to the US dollar,” pay no attention to the man behind the curtain. I think of Hamlet when it says, “The lady doth protest too much, methinks.” Don’t you hear that? You had said last week that the currency that China’s coming out with would probably be a template for what we would see in the United States.

David: Yeah. And if you think in terms of a global currency reset, may not be what we could have imagined in any period in the past. But now with cryptocurrency popularity sort of opening the mind and the imagination to broader adoption of something that otherwise might’ve been considered suspect, we now have what it may look like not only in the Chinese context, but also in the US context.

Kevin: It seems that all of history is written by underestimating the opposition. And you look at the Chinese. And one of the things that we hear right now is that the Chinese couldn’t replace that 88% transactional use of the dollar. You had mentioned last week that 88% of world transactions were in dollars. And the attitude is that China’s not strong enough or sophisticated enough to start replacing that.

David: That was actually what was most disturbing about the article. I thought particularly asinine, stating that the Chinese financial system is too fragile and too weak to pose a real threat to the dollar status. Yeah, right. I mean, it sounded like from Bloomberg the kind of messaging that you would have gotten from Britain in 1930 or ’31, poking fun at the US dollar on the eve of the 1931 sterling devaluation. And you can poke fun all you want at someone who’s not quite your ilk, but one of the great historic power transitions was afoot there in the ’30s. 

And there was one other article I wanted to mention that I thought was critical coming out of this weekend, and it was also related to our conversations about cryptocurrencies and transactions and basically payment processing. And it dealt with the restructuring of the Ant Group, the affiliated business of Jack Ma’s Alibaba. We’ve got a powerhouse in Amazon here in the United States and Jack Ma has a powerhouse in Alibaba in China. And of course they were trying to launch an IPO for Ant Group, which includes Alipay. 

That IPO was pulled a day before the launch. This was late last year. And now all of a sudden you have, just today, Alibaba hit with a nearly $3 billion antitrust fine. Actually, yesterday. So the People’s Bank of China doesn’t like the accumulated power and the market control wielded by a retailer who has this vast treasure trove of social data, who’s also a payment processor, who’s also a lender, who’s also a virtual credit card issuer, right? And essentially, what they’ve become is a private currency creator. Not precisely, but the People’s Bank of China is sort of moving into smackdown mode. And I think it’s an illustration of what we spoke about last week, realpolitik applied by those with the money printing monopoly towards anyone who would challenge that monopoly.

Kevin: It’s interesting to watch these powerhouses, like China and Russia. And when something starts to encroach into their territory, they’ll push back. You remember the interview that you did? And we’ve done multiple interviews, Dave, with Dr. George Friedman. And he said once Russia had lost the Ukraine that it would be within five years that they would be back there because it played such a critical role in that buffer zone, that 500-mile buffer zone keeping encroachment from the West from happening, which brought back so many horrible memories for them over the last 200 years.

David: Yeah. And the discussion in Europe right now around Ukraine, there’s conversation about Ukrainian NATO membership. That of course is inflammatory to the Russians. Ukraine, I think, would like the protection. Russia has for many years now sought economic leverage via the energy markets, and doesn’t want to see the leverage that they’re gaining over Europe dissipated by strategic alliances. 

And as you mentioned, Ukraine sits in the middle of very distinctive and opposing historic European interests. Russians have always appreciated that the geographic cushion in Ukraine, vast geographic cushion in Western Europe, doesn’t have to go very far back into their memory to recall that the devils that existed in the logistical details, navigating that buffer zone in a time of conflict. And it gets even worse when it’s cold out. Not exactly a friendly environment. 

So probably nowhere on earth is the idea of warfare and logistics more referenced than in Ukraine. Napoleon’s thought to have said that amateurs discuss tactics. The professionals discuss logistics. And my guess is he came to that conclusion after his Russian defeat in 1812. He went in an amateur, came out a professional, and was very much disabused of the idea that he could move troops and horses through that region with success. But it goes back to Russia looking at this piece of land. This isn’t about nostalgia. This is about strategic self-interest. They appreciate its role as a historic buffer zone, then hopefully now. Again, from their perspective.

Kevin: I just wonder, too. You had talked about personal interests. And strangely, there is a tie between the Biden family and Ukraine, and that’s starting to show up in White House news as we speak.

David: A press secretary said this week that Russia now has more troops on the border than any time since 2014. So for us, managing money and being in the precious metals business for 50-odd years, we keep those two geopolitical wildcards in view, Russia and Ukraine as number one, Taiwan and China, number two, with escalating military exercises in both places. And, as I mentioned, South China Sea, US naval presence, at least there to make a statement. And fascinating to us, as usual, markets remain oblivious to the importance of geopolitics.

Kevin: The markets are just drunk with free money right now, but I think it’s going to have to come up at some point, isn’t it, Dave? Ukraine and the Biden family, the combination and the ties?

David: It’s the uncomfortable part of the conversation. If you’re going to talk about Ukraine, the Biden family dealings there are important mainly because you’ve got the potential for pressure points from Putin that he can push on when he wants to. And this is not meant to be partisan, frankly. I feel it deep inside me with a son who’s soon to be of age to fight in the military if such a conflict ever required it. It compels me to understand the backstories and understand some of the details, whether it’s places like Myanmar, Ukraine, Taiwan. Just as a side note, one of the conversations I had with my parents last night, they’re invested deeply in a home in Myanmar and 18 children had to be taken out of the major city because life is at risk in Myanmar and you actually have a forced recruitment, if you will, of young boys into the military. And they’re seeing it in real-time, I haven’t seen it in a single place in the news yet, this notion of child soldier in Myanmar, but the leader of this home took the deliberate action to get them out of the city and into the countryside so that they would not be forced into that awkward position.

Kevin: Well, and obviously for the listener who doesn’t know, Don and Molly McAlvany help at a number of orphans’ homes around the world. And we talk about geopolitics and geostrategy. I’ve noticed through the years that there’s no better way to actually feel the impact of geopolitics than to watch what happens to orphans. But I want to go back to 2014, Dave, because you talked about the Russian buildup on the border of Ukraine has not been this much since 2014. Well, of course 2014 was when they came back into Ukraine. And strangely enough, that was when Hunter Biden was given a board position at Burisma. Was it not?

David: It was very opportunistic by the company, hiring Hunter for a board position at Burisma that does date to 2014. It preceded the Russian move into Crimea. And I mean, when you’re dealing with a large energy conglomerate and they’re hiring someone to be on the board, having a board position’s a fairly significant thing. They expect a contribution. He had zero energy industry experience, which suggests that he was hired for other purposes. 

Fascinating enough, one of the Burisma’s primary assets at that time was in Crimea. And I say that again, was in Crimea. The asset was at risk. The company sought to protect its many Ukrainian, and of course at that time, Crimean assets. I don’t mean to be cynical here. I don’t think it’s necessary to go to the other extreme and try to sanitize what power is and how money plays. It’s really nothing unusual here. Political protection is bought and sold every day in every country of the world. And to some degree, that’s what you had with the Hunter appointment to Burisma. The existing Burisma oil and gas fields are Ukrainian. Kiev benefits from those supplies flowing to Europe. And so does Burisma, of course, but I think there’s a bigger story here. If you set aside all of the 2014 issues, the pipeline trend tells a very important story. You have to go back a number of years, when we talked at length about a couple of these pipelines coming into play, but it may be the story. You get contracted flows from Russia to Europe through Ukraine, and it has nothing to do with Burisma. However, you look at those transit fees and they’re into the billions of dollars. That flows to Kiev for the supplies that simply go through the country to Europe.

Kevin: One of the things we’ve talked about, Dave, is the flow of either energy or the flow of currency. One of the ways that we’ve maintained empire as a nation, the United States here, over the last 50 or 60 years, has been to have the dollar as the reserve currency of the world. And of course we can control the flow through the SWIFT processing system and various means, and that can control a lot of empire. But the other thing is the pipeline, the movement of energy. So if the dollar and the movement of money and SWIFT is the pipeline or the plumbing for currency transactions, the actual movement of energy pipelines worldwide, especially in Europe and Russia, Ukraine, what have you, they really, as orphans may tell the story of the pain of geopolitical change, the pipelines tell the story of the geopolitical future.

David: And clearly, I mean, we are a reluctant empire in America, and as we referenced the sterling devaluation, 1931, and the British end of empire, they were not a reluctant empire. They were not afraid of demonstrating control and power over three quarters of the world’s landmass. Our version, our expression of empire has been one of influence and less one of control. Nord Stream 1 launched in 2011 and it cut the flows through Ukraine from about 80% to between 50 and 60%. So still, Europe is getting a very significant portion of their energy through those Ukrainian pipelines. 

TurkStream launched a few years ago, aims to deliver energy primarily to Turkey and then on to Southern Europe. So linking Russia more directly to Southern Europe. That’s a Black Sea project that Erdogan has been a partner to. 

The Nord Stream 2 project through the Baltic Sea, it ends up, just like Nord Stream 1, diminishing the importance of Ukraine. It strips out even more flows through Ukraine than the Nord Stream 1 pipeline did. Not only does it shift cash flows to new interested parties at the expense of the Ukrainians, and yes, ultimately at the expense of Burisma’s Ukrainian assets, but it also recalibrates relationships. And that recalibration of relationships is what our international relations folks are very keen on. It’s making all of Europe more beholden to Russia through energy dependency. 

So US foreign policy impotency is an implication of the Nord Stream 2 project completion. And Ukraine will remain the flashpoint of US interest as sort of a proxy and a protest over Nord Stream 2. And that’s a project that’s not going to be stopped. But this issue of impotency, again, it’s not like we’re fighting for control. We’re trying to maintain the last vestiges of influence in the European sphere. And yes, the dollar is at risk here. So coincidentally, the dollar’s facing all kinds of challenges, not the least of which we mentioned last year with the official launch of the Chinese digital currency.

Kevin: So sometimes when you see military action or the threat of military action, it actually may be to bolster and support a currency. There could be other reasons. You have to look underneath the surface to see what the actual motivation is.

David: Yeah. It’s erosion at the edges. And I think Hunter’s history is a complicating aspect of US relations with Ukraine. I think, unfortunately, again, maybe this is me being a paranoid father. I think it raises the risk of military conflict, including US troops. And whatever past financial controversy may be there is buried in the ashes of war. You’ve got the Democrats in the White House that have been particularly vocal on Russia, and that noise dates back prior to 2014 and the Crimea incursion. And frankly, I’m not sure why. But, as advertised by the Democrats, the stage has been set for a “justified” response, a very strong, justified response to the aggressions of the Russian state. And I think it’s worth keeping in mind, as you consider weakness in the US dollar, it should come as no surprise that we find ourselves more involved, shall we say, from a military standpoint that serves as both a distraction and an excuse for spending even more money.

Kevin: One of the things that I’ve learned listening to Dr. George Friedman and reading his books is just sort of the personality—Dave, you’ve talked in the past, too—the personality of these various countries. If you think of them as people and that they have personalities, Russia is very, very insecure in their security. Okay? We talked about the Ukrainian buffer, that 500-mile buffer. That’s because they’ve been invaded a number of times. I mean, Hitler, you can go back to Napoleon, but you can look that that buffer actually is seen as the way that they have been able to stabilize and save themselves. I’m thinking now, too, about the currency again, Dave, because one of the ways that we control nations that are misbehaving is by changing the flow of their ability to use and buy and sell with dollars.

David: And this brings up this fascinating twist where the Chinese digital currency has already contracted with SWIFT, and they may choose to use the SWIFT program of digital transfers of assets. And they may continue sort of a parallel universe where, again, they work around the SWIFT system. 

But you’re right. The nature of warfare has changed. I mean, the geographic importance of Ukraine to Russia, that remains, I think an elevated thing. And the US administration of course prefers Ukrainian energy supply lines to the Nord Stream 2 alternative. Whether that’s strictly for geopolitical advantages or advantages of another sort is no longer clear. But our involvement in Ukraine militarily, I think it can be viewed through multiple lenses: the lens of financial self-interest, the geographic-historical significance, through energy politics. And if I were to guess, our objection to Nord Stream 2 is directly tied to Ukrainian energy deals, maybe only indirectly to the Biden family. But Burisma was not a conspiracy theory. You’re talking about a company that wanted its strategic interests prior to Crimea protected, and still does. TurkStream, Nord Stream from 2011. Now Nord Stream 2. They are reshaping energy dependency and they are changing relationships. That’s pure and simple. With that in mind, Russia is on the rise.

Kevin: Well, and I wonder then with the announcement of the Chinese currency, especially during this period of time of geopolitical tension, is it a coincidence, the timing of the announcement of the currency, Dave?

David: I don’t think so. I think there’s not many coincidences in life. Certainly when we see coincidences, you can look and see who shares self-interest. And there are some self-interesting aspects of the Chinese and the Russians which align. So as things are heating up in Ukraine, China offers the world its first central bank digital currency. This is the time when the power of the US Treasury is waning and the ability to enforce sanctions is becoming more difficult. And, as the Bloomberg article points out, Chinese digital currency is not, I repeat, not intended to circumvent sanctions. In other words, yes, that’s precisely one of the things it puts on offer to all of China’s trade partners. So in a world where no one cares about US carrots and the US cannot meaningfully use its sticks as sort of an enforcement mechanism, yeah, I wonder. I wonder where we think the US dollar is going here. I think it is, to some degree, delusional to think that the status quo can be maintained—I mean, we’re talking about the US dollar status quo—where we are in a massive social restructuring on a domestic basis with a currency that has been a pillar of strength primarily reflecting weakness everywhere else. So by default, we win because there is no better alternative. And yet here is one.

Kevin: Yes. But we have to ask ourselves, have we been responsible with the exorbitant privilege that we’ve been granted through the reserve currency status? Dave, I’m wondering. Periods of time, sometimes they feel like they’re repeating. The 1930s, of course, FDR, huge, huge social change at that time. And then, of course, LBJ, Lyndon Johnson, the Great Society. There were huge social changes at the same time that we were seeing changes in status of reserve currency as far as value goes and backing goes.

David: I think today’s policymakers view what is responsible as capitalizing on the last vestiges of a Covid crisis. Now, again, massive social restructuring, which I mentioned a minute ago. You’ve got sweeping changes politically and socially afoot today. You go back in time. FDR set the bar for that in the 1930s, increasing the scope and scale of government involvement, taking advantage of crisis dynamics to reset the cultural tone on who’s responsible for what, from the standpoint of private and public spheres. So you’ve got this great ratchet, as Robert Higgs describes in his book Crisis and Leviathan, which comes on the heels of crisis. By the way, that’s required reading. At a minimum, go back to the archives and listen to our interview with Higgs. But I would really encourage you to order a copy of Crisis and Leviathan. The next great leap. Following FDR’s forays, the next great leap into social idealism and expanded government footprint came through Lyndon Johnson’s, LBJ’s, Great Society programs in 1960s. And Nixon kept it going, but we recall it as the period of “guns and butter.” Assertive foreign policy, that’s the guns part. And sort of a leftist social agenda aimed at leveraging change off of grassroots discontentment. The butter policy, again, social programs, which— how do you say no to them?

Kevin: He’s an interesting read when he talks about the Leviathan continuing to grow, but it never really shrinks, does it?

David: No. The ratchet moves you one direction. It’s only forward progress. If you thought it was sort of Hegelian in that sense of two steps forward one step back, no, it doesn’t happen that way. It’s worth recollecting that the two major devaluations of the US dollar in the past 90 years were directly connected with these periods of social and political expansionism. How else were we going to pay for so many political promises and future obligations? 

So you’ve got the devaluation of the 1930s following the suspension of gold from the domestic monetary system in the throes of the depression. And then that other one, the second major devaluation in the United States, the inflation of the 1970s. And that was already being anticipated in 1964. That was the last year that silver was in our coinage. And then it got pulled from that point forward. The old dimes, quarters, 50 cent pieces were 90% silver up until 1964. Afterwards, you had the literal debasement of coinage. 

So in both of these periods, it’d be fair to recall sort of the layers of an onion. There’s complexity here layered in, one on top of the other. There are political issues. There are geopolitical issues. There are monetary and economic issues and they can’t really be separated out. Onion layers of complexity. And of course, you’ve got the investment market issues as well.

Kevin: Dave, one of the questions that we have is, “Granted, I’ve got my gold, I’ve got my silver. Where else do I go if there’s a devaluation?” Sometimes the stocks actually benefit if a currency falters in the beginning stages.

David: Yeah. I mean, a little perspective on crisis and devaluation in Britain. As I mentioned earlier, you had financial markets which were tightening. That was already in motion. That was already in motion prior to the sterling decline. The sterling declined in 1931. They had a series of other declines, ’49 and ’67 and a few others. But in the US it was 1930, 1931. You had equities that were getting slaughtered, in 89% decline. And then the devaluation followed. Then came the US evaluation. And the market response, I mean, one, you had sort of a bounce off of that 89% decline, but it was also fueled by easier money policies. And so at first, equities liked the inflation, and then there was just too much of it. By the time you got to 1937, the stock market started being more concerned with inflation. Again, front edge, a happy thing to have more liquidity. And just a few years later, by ’37, it was too much. 45% decline, 1937, that emerged once inflation hit harder and was more than just liquidity in the system for the bankers’ interests. But it was liquidity that was having a real and negative impact for families. There wasn’t a real resurgence in US equities until after World War II.

Kevin: Yeah. And remember, there was a freeze. In a way, the government sort of took over the economy during the war, didn’t they?

David: Command and control dynamics, 100%. and you saw capital go very quiet until government decided to get out of the way. And so the receding of government price-setting and wartime interventionism—that goes, again, sort of 1949—that opened up the financial markets again. The bull market pushed to the upside. Started in 1949. And again, it was derailed by inflation like the recovery of the late ’30s—’37 and the derailment there and inflation catching up and being too, in cumulative form, too great. We get there by the mid-’60s, ’64 to ’66, stocks move up. Final push, 45% to the top. And that top that was put in in 1966, tried again, came close to taking it out in ’68. Didn’t happen. That top was not beaten for 17 years. That was 17 years of a grind, where prices in the Dow Jones Industrial Average, they moved sideways to down, and it got more painful as time wore on due to the negative compound rates compliments of the US dollar in decline. So inflation became a fixture. It became a national frustration. Whip Inflation Now. You probably remember those pens if you lived in the era.

Kevin: Oh, yeah. 1976.

David: It was a factor in how investors allocated capital as much as it was sort of a family consideration, thinking about food, fuel, housing, things of that nature.

Kevin: I really remember those years, Dave, because I was in high school and then I got married young. So when we got our house in 1983, we were paying, I think it was 15% interest on the loan. It’s amazing but politicians, one of the things— All through the years, Dave, as you talked through these different market moves and currency value changes, and I’ve never seen social programs back up. It seems like politicians just continue to promise more and more. That’s that Leviathan effect.

David: Yeah. I referenced two critical articles last week from the Financial Times, and the other from the Wall Street Journal. I’ve got one more that I think is must reading this week. And again, just think about it in this context. You’ve got today’s mega-push on social programs. They’re a reminder that politicians are going to line up the commitments regardless of their ability to pay for them. Notice that they didn’t figure out the financing and the taxing and the revenue generation prior to figuring out what they wanted to spend the money on. No, no, no. Promise to the people, then back in how are we going to cover it. And I think it’s going to create some hardships and maybe inadvertently in the form of inflation. 

So again, two critical articles. Last week was Financial Times and Wall Street Journal. This one is Financial Times. It’s an interview between Martin Wolf and Larry Summers. Your week’s must reading. In case you missed the article, I’m going to provide you with a few quotes. And just to remind you, bear in mind, Summers is a center-left Democrat that has come and gone through the Clinton and Obama administrations, served at the World Bank, served as president of Harvard University. When he starts talking about public policy issues, there are a host of people that do listen. Summers describes the current fiscal interventions and commitments made today on future resources as, in his words, “The least responsible in 40 years.” So here’s just a couple of quotes to think about if you don’t get a chance to read the article. He says, “This latest package is not temporary Covid relief, but a major transformation in social policy, which suggests that at least some of it will be continued indefinitely.”

Kevin: And again, you talked about the ratcheting. There’s the Leviathan. You can use Covid as the excuse, but it looks like a lot of this is going to be a change for forever.

David: So what is the issue? In his mind, if this is an economic concern, then run the numbers, figure out what the gap is, and fill it as best you can. He would say that we did not adequately fill the gap in 2008, 2009. We could have done more. He would warn against doing too much and would say today we’re being over-reactive. Second quote I wanted to share is he says, “I see substantial risk that the amount of water being poured in vastly exceeds the size of the bathtub.” And what he’s talking about is about a 250 to $300 billion gap in wages. And the replacement for that, the programs that have been proposed both from Trump and from Biden are programs that are six times as large, to which he says, “I look at the response, and I look at the scale of the problem, and I can’t see how it adds up.”

Kevin: And you know, Dave, lest you sound like you’re picking a side, I remember back in the early ’80s, the Reagan administration had a cabinet meeting. They basically sat down and said, “Okay, how do we get reelected?” And we had, at that point, from George Washington to Jimmy Carter, we had built up $1 trillion in debt. And they decided to triple that debt. Literally within just a couple of years, we went from 1 to 3 trillion. Now that did create a temporary boom.

David: This is one of those quirky things that you’d only know if you knew our family very well. Generally my dad’s considered a conservative guy. He couldn’t stand Ronald Reagan, which is hard for conservatives to understand because here’s the arch-conservative that everyone tends to— I mean, if you have a shrine in your home to some— it’s to Reagan, right? But this is where my dad, being a fiscal conservative, a fiscal conservative would say, on principle, how can you do this? George Washington to Jimmy Carter, 1 trillion. And we’re going to jump from one to three, not bat an eye, and pretend like he’s a hero. What is this about? 

So holding his feet to the fiscal fire was a part of what my dad was interested in at the time. But this is what Summers had to say. And this is again, back to the article from the Financial Times, the interview with Martin Wolf. He looks at two possible scenarios, both of which he considers to be destabilizing. One, he equates to the Reagan era where massive deficit spending gave us the boom, it gave us a strong dollar, but the implications of a boom and strong dollar were that it was crushing to foreign countries. And actually, if you look at a lot of the debt restructuring that happened in the emerging markets and in Latin America, it happened in this period of time where we got to abuse the exorbitant privilege, and it had its impact all over the world. 

So creating a global debt crisis is one possible scenario Summers sees, and not particularly keen on it, but he thinks there’s another potentiality, and that’s like the Carter era. So first, the Reagan era, that’s one possibility, one scenario. The other is the Carter era scenario where you get indiscriminate money-printing. You’ve got huge debt accumulation. And then you end up with a reputational repudiation. You’re talking about the US debt markets and the US currency. No one wants our debt. No one wants our currency. Leads you ultimately to a currency collapse. And it’s kind of funny that Summers is so sour on the Democratic plan to deliver social restructuring, because again, he’s a center-left guy. He does not mind the expansion of government. He does think that the size of government needs to expand. But to me, Kevin, the end of the story feels very similar. It feels like we’ve been here before to some degree. And yeah, he puts it in fancy terms. He calls it iatrogenic volatility. That’s not—

Kevin: I’ll have to go look that up, Dave. Iatrogenic volatility.

David: Yeah. He says iatrogenic illness is when you go into a hospital and you catch an infection there. Iatrogenic volatility is when policymakers whose role is to stabilize markets destabilize them with their actions.

Kevin: And you said that he is left of center, and that’s definitely true, but I also know that these guys want to say, “See? I told you so.” And when you have a 24% surge in M2 money supply, when does that not turn to inflation?

David: And again, the reason why this seems so familiar, you can go back to the 1500s and Copernicus as he was writing not only on the universe but also on the difficulties, the challenges, and the temptations of mismanaging money, he actually wrote a treatise on the minting of money.

Kevin: Really? Copernicus did? I didn’t know that. I know Newton was Master of the Mint, but Copernicus before him, huh?

David: And he said, “Although there are countless maladies that are forever causing the decline of kingdoms, princedoms, and republics, the following four in my judgment are the most serious: civil discord, a high death rate, sterility of the soil, and the debasement of coinage.” He concludes with this, “The first three are so obvious that everybody recognizes the damage they cause. But the fourth one, which has to do with money, is noticed by only a very few thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments and in a hidden, insidious way.”

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us mcalvany.com, M-C-A-L-V-A-N-Y dotcom. And you can call us at (800) 525-9556.

This has been the McAlvany weekly commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary

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