WBD476 Audio Transcription
The End of the Dollar Hegemony with Nic Carter
Interview date: Wednesday 16th March
Note: the following is a transcription of my interview with Nic Carter. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Nic Carter is a Partner at Castle Island Ventures and co-founder and Chairman of Coin Metrics. In this interview, we discuss the seizure of Russian Central Bank assets by the G7, the demise of US hegemony, and a multipolar multi-reserve world.
“Right now the integrity of the dollar is in question, people don’t trust US power, US is withdrawing from the international sphere, the international institutions we set up in 1944 are fraying; nobody really trusts them anymore.”
— Nic Carter
Interview Transcription
Peter McCormack: Nic Carter, second highest appearing guest on What Bitcoin Did.
Nic Carter: We were just tallying it up. So, I'm behind Jack Mallers?
Peter McCormack: Yeah, you're behind Jack; Jack's done 12.
Nic Carter: Second most popular guest on What Bitcoin Did outside of normal contributors.
Peter McCormack: I don't know about popular? Second most appearances.
Nic Carter: Appearance.
Peter McCormack: Popular would be down to the -- you're my most popular. You're joint with all 360 other guests.
Nic Carter: So, I'm ahead of Jameson Lopp, importantly.
Peter McCormack: You're ahead of him, yeah, and Saifedean Ammous.
Nic Carter: Is he not getting invited back on?
Peter McCormack: He can come on whenever he wants. I don't think he wants to, because he thinks I'm an attention-whoring snake.
Nic Carter: We can do a little climate debate.
Peter McCormack: Yeah. I wouldn't debate him, I'd rather someone like Katharine Hayhoe, who's an actual scientist.
Nic Carter: There's nothing like bitcoiners spouting off on the climate. I mean, technically we did do that for two hours this morning.
Peter McCormack: We did, but we did it a different way.
Nic Carter: It was a little more restrained.
Peter McCormack: Yeah, and now we're going to talk Ukraine and Bitcoin and Russia, because we're experts on that now.
Nic Carter: People are always telling me to stay in my line. I don't have a lane, to be clear, as in I don't have a specialty. So, I think that ought to free us to cover any topic whatsoever.
Peter McCormack: Well, I think we're going to stick with this though, this is what we've prepared for! Do you know what, it's weird times, man. Me and Danny went out last night and got Mac and Cheese with brisket and nachos, and we were talking about the show, and we realised that it seems like every single big event now, news event, has a Bitcoin angle.
Nic Carter: Yeah.
Peter McCormack: Truly, it's not that Bitcoin fixes it, but like, "Here's a Bitcoin solution". We listed them: there's the Belarus protests, when they wanted to protest against the state, people were sending them Bitcoin; same in Nigeria; El Salvador essentially wanted to de-risk being a dollarised state, made Bitcoin legal tender; we had the Canadian truckers.
Nic Carter: Yeah, there's always a Bitcoin angle.
Peter McCormack: There is always some Bitcoin, and it's usually just like, "Well, shit, just use Bitcoin".
Nic Carter: The thing is, it's just because Bitcoin is money, and so all of these protests, all this turmoil, it involves crowd-funding and sending money around, and Bitcoin's the one reliable way.
Peter McCormack: And, yeah, money and financial rails are intrinsically linked to all of this.
Nic Carter: And, because political repression, political action focuses on the financial access so much now, which we'll talk about today.
Peter McCormack: Where do we start?
Nic Carter: Well, there's a war going on!
Peter McCormack: I know, but we're not going to discuss the war. For anyone listening, we just did two hours nearly with Scott Horton, breaking down the history of the war, and we're probably -- we're not sure whether we'll release it before or after this, but if you're listening to this and you want to find out the details of the war from Scott Horton, from antiwar.com, that will be worth listening to, either before or after when we release this.
Nic Carter: I wonder what his stance is, given that he's antiwar.com?
Peter McCormack: His stance, the summary, because I think it will come after this, I think the summary would be, and Danny will correct me if I'm wrong, but his summary is, he's not defending Putin, certainly not defending his invasion of Ukraine; but at the same time, we have to look at the foreign policy mistakes of the United States which have led up to this, the expansion of NATO east of Germany, and the potential of missiles being placed within minutes of Moscow, and that Putin didn't want this. That's a very quick summary.
Danny Knowles: Yeah, as much as Putin does wrong, he basically criticised America a lot for their actions leading up to this war.
Nic Carter: Understandable.
Danny Knowles: And to be honest, I think that show will probably go out before this one, so hopefully people will listen.
Peter McCormack: Yeah. So, as part of this, we're seeing the great cancelling of Russia, everything from Formula 1 racing drivers losing their contracts to film festivals removing Russian films to the financial rails, just every single thing, and it's that typical -- do you know it reminded me of? I think we were talking about this the other day. Do you remember during the BLM protests, about a week later, every single company's mailing list you were on would send you their BLM email? It feels like every single company is doing their, "We won't trade in Russia, we'll close our --", they've got their anti-Russia, pro-Ukraine --
Nic Carter: It's incredible. I had a dinner in a restaurant here last night. It's a place formerly known as The Russian House. They scrubbed off from the sign the word "Russian".
Peter McCormack: So, it's just The House now?
Nic Carter: It's just House!
Peter McCormack: Just House!
Nic Carter: It's incredible that they felt compelled to do that. I guess they didn't want to get a brick thrown through their window or something. But yeah, it's every access conceivable, it's all internet applications, internet services, are deplatforming Russia. It's like the deplatforming playbook that we saw rehearsed a little bit here in the US against certain politically-exposed figures, just generalised to an entire nation state. It's breath-taking.
It's financial, I'm even seeing venture funds saying, "We are going to buy out any of our limited partners, our investors, that are Russians. We are not going to invest in Russian companies". Starbucks and McDonald's announced today they're withdrawing from Russia. It's like, do we hold every individual Russian and Russian company responsible for what the Russian state is doing? It's not like Russia's a totalitarian state where the whole government apparatus is the rest of the country. There are citizens, there are individuals; they're obviously not accountable for what Putin is doing.
I'm kind of uneasy with the fact that we're in this economic total war situation against Russia, as if kicking individual Russians off of Spotify is going to make Putin reconsider anything.
Peter McCormack: Hearts and minds.
Nic Carter: If anything, I think it would steel my resolve if I were Russian and I got kicked off of Spotify and Apple Music and all of my internet services, and my bank account was frozen, and the rouble depreciated by half, and I couldn't use any payment processors. I would probably be like, "Maybe all that stuff Putin is saying about the evil West, maybe there's a grain of truth to that?" I don't think it would make me become pro-West if I was deplatformed from every luxury or internet service that I used.
Peter McCormack: Did you see the Babylon Bee article?
Nic Carter: Which one?
Peter McCormack: Do you want to find it? It was that Russia has been removed from Google Maps! There's like a picture of the world.
Nic Carter: It's funny how that's the first reaction when an entity or an individual does something egregious, it's like, "Let's deplatform them from everything that they ever used on the internet. That will fix it".
Peter McCormack: Yeah, I'm with you, I'm uneasy about it.
Nic Carter: We have Russian employees, a number. Actually, Russian and Ukrainian at Coin Metrics, we have quite a few. We're helping them leave, in both cases, because the Russians are pretty miserable too, because their country is under economic siege, they can't do anything. So, they want to get out of there too.
Peter McCormack: Well, that's a brain drain from Russia then?
Nic Carter: Of course it is, yeah, it's sad. But as an ordinary Russian, you don't have any control over what's happening at the state level, but now you're experiencing a kind of financial warfare, and you want to get out of there now as a consequence.
Peter McCormack: You can't protest, because you'll be arrested.
Nic Carter: Exactly, you can't voice your dissent.
Peter McCormack: So, you just have to sit and suffer. Look, I'm with you, I feel uneasy about it as well. I feel uneasy about the damage it's doing to Russians, I feel uneasy about the escalation of war that can come from this, because whilst bombs are a weapon, so is financial censorship. I'm uneasy about the almost xenophobic undertones that are coming through.
Nic Carter: Incredibly xenophobic, yeah, and it's like there's an open season on Russians in the US with no restraint, and it's like they're an acceptable nationality to spout off against, for some reason, when generally speaking, xenophobia and other forms of super-hostile, aggressive chauvinism and nationalism would be not popular. For some reason, when it concerns eastern Europeans, it seems to be more acceptable and more normalised in this country. It's very perturbing.
Peter McCormack: So, what have you been really digging into with this?
Nic Carter: The number one thing has to be the seizure of the Russian central bank assets by the G7. I think the reverberations for that are absolutely immense. I've seen a few strategists say the same thing, Luke Gromen most notably and most stridently; Zoltan Pozsar, who's the Chief Interest Rate Strategist at Credit Suisse, who's one of the best among macro and Fed watchers, he's probably considered one of the most elite strategists. All these guys are saying, "This is the end of Bretton Woods, this is the end of Bretton Woods II".
The US and its European allies went to the step of immobilising and seizing Russia's reserves in foreign currencies held at foreign banks, foreign central banks. That is a move that's completely unprecedented, and it calls into question the credibility of the US dollar system, and of US Treasuries, of US sovereign debt as a savings device for the rest of the world, which it has been. That's been the number one primary savings device since 1971, for 50 years, over the course of Bretton Woods II.
Seizing the Russian foreign exchange assets, $630 billion, that is the most aggressive move to weaponise that dollar system, the US-dominated financial system, that hegemonic model, that we've ever seen. And it's worked, of course. To a certain extent, it plunged Russia into a deep financial crisis. It wasn't something they expected, they didn't expect that. So, it shocked them, and we'll see what happens, we'll see if it arrests Putin's ambitions in Ukraine.
But it also risks undermining the entire nature of the dollar system, and it will, I think, likely cause other major foreign powers to consider divesting their US Treasuries, of which there are trillions and trillions and trillions. I think China has something like over $1 trillion, and they have $3 trillion in foreign exchange in Treasuries and other currencies. That, to me, is the number one most important storyline here, beyond just the geopolitical day-to-day and the war; that's the most important thing that I've been focused on.
Peter McCormack: So, these foreign reserves, just so people understand, I understand they tend to be -- why are they stored in foreign banks; why are they not stored in Russian banks; how does this whole system work?
Nic Carter: Well basically, these are securities that consist of debt issued by the US and other nations. And in the system as it's set up today, US short-term debt is considered to be the most risk-free asset, the safest possible asset you can hold. So, dollar-denominated debt issued by the US Government, it's a liability with the US Government.
It's not a great asset, frankly, because it's yielding at a much lower rate than inflation, so it has a negative real yield. So, you are mathematically guaranteed to lose money if you hold it to maturity, but it's very safe. It's considered to be as good as gold. It is the base savings asset in the international system.
So, since 1971 when we left the gold standard, initially gold was that asset and the dollar was linked to gold. Now, since then, we got basically the petrodollar system, where the dollar was the main currency that was used to price and trade commodities. Commodities, especially oil, would trade against the dollar. And then the commodity-exporting nations would take the dollars that they were earning and re-deploy them back into US Treasuries.
US Treasuries became the dominant savings device for foreign central banks. And the reason they hold these is to shore up their own currency, so that they can defend their own currency if their currency starts to slide. So, this was the default savings device; the number one store of value in the world was US Treasuries, US Treasury securities, not dollars but Treasuries, so the debt that the US was issuing.
It was fraying a little bit since about 2014; foreigners have been buying less and less of this. China has been buying much less, they've actually been divesting. They've been selling them, instead they've been buying other hard assets. But now, this move immediately throws the whole system into question.
Peter McCormack: What is the risk of this system collapsing?
Nic Carter: So, the US is able to really cheaply issue debt, because there's always been foreign demand for our debt. Because there's just been this perennial bid for our debt issuance, we've been able to issue debt with a low interest rate, which means we can spend aggressively and not pay a lot for that privilege. The risk would be that instead of foreigners buying it, which has been declining, the foreign ownership of Treasuries and the US debt has declined from around 35% to the mid-20%s over the course of a decade, the entity that's making up the difference there is the US Federal Reserve.
So, Lyn Alden says it's like a chef eating his own cooking, it's very circular. And the US Federal Reserve, that's not organic demand for our debt. They're buying the debt with dollars that are printed out of thin air, so that's not really a particularly sustainable system. So, as foreigners buy less of our debt, the Fed is buying more of our debt, and they're doing it with dollars that are just printed out of the void. That system works as long as people have faith in the dollar and as long as inflation is not elevated. Obviously, inflation is pretty high right now, so that system can't really work in perpetuity.
It means that eventually, interest rates are going to rise and the US is going to default, or the corporate sector's going to default. And just general levels of indebtedness in the US are very high, the US Government itself has a very high debt-to-GDP ratio of 120%, which is historically very high. So, if foreigners stop trusting our debt and they stop buying our debt, we're not really going to be able to finance our spending, which is extraordinarily high right now, with deficits at something like 12% of GDP. We're kind of in the wartime levels of expenditure, even though the US is not in a war. So, that's the risk really.
Peter McCormack: So, the risk is much higher inflation then, because what else can they do but continue to buy more of this debt with more printed dollars; or cut spending, but that's unlikely?
Nic Carter: Inflation or austerity. And what do governments go for? They go for inflation.
Peter McCormack: They go for inflation, because austerity is unpopular.
Nic Carter: Austerity sucks, everyone hates austerity. Inflation is the more palatable way to reset the system, to have a soft default. And no country like the US would do a hard default, where they refuse to pay back entities that hold their debt. That's only something that an Argentina or a Greece would do. So, the US would do a soft default by having very high levels of inflation for a long time, and trying to keep interest rates low, so that the difference between inflation and interest rates allows them to bring down their general level of indebtedness, which is the 1940s playbook; that's what the US did back then.
Peter McCormack: So, they pay the nominal cost, but the purchasing power of those being paid back has been vastly reduced?
Nic Carter: So, if you hold US debt, you lose in real terms, and that's the 1940s playbook.
Peter McCormack: And what's the implications for other currencies around the world, because this feels like -- the 1940s, it was a less globalised economy. But now we have a fully-integrated global economy, this feels like 2008 on crack?
Nic Carter: Yeah, it really depends. So, if interest rates rise and the dollar rallies, the dollar has actually been rallying interestingly, when compared with other currencies, the dollar index, the DXY, has been rallying. That's a sign that actually, capital has been flowing into Treasuries paradoxically, which is funny because it's, okay, the US makes Treasuries an unappetising thing to hold, and everybody's panicked, and then capital flows into Treasuries, because that's what you buy when you're in a panic. And the dollar's been rallying.
That's very bad for emerging market economies, and solvency for emerging markets, so you can expect a sovereign debt crisis probably; unless the Fed is very proactive and creates just enormous amounts of liquidity and weakens the dollar dramatically, in which case then maybe the odds of an emerging market sovereign debt crisis are less. But either way, the inflation and commodities rally that we're having right now, are going to plunge the world into chaos regardless.
Peter McCormack: Okay, talk to me about that, because I've seen nickel up 250% in a few days, wheat is up, oil is up, everything, everything is up, gold is up.
Nic Carter: Yeah, so that's the thing that is deeply concerning. Commodity price charts, they're not just numbers on a screen. They're a measure of human flourishing, basically. So, if the price of a commodity gets cheaper, humans are flourishing more. And if it gets higher, humans are in misery, basically. So, it's an inverse flourishing index.
So, as metals and oil and gas get more expensive, life gets worse for human beings on Planet Earth. And the fact that commodities are in this enormous, monstrous rally, no matter where you look, whether it's food commodities or metals or energy, that's a bad sign for humanity, especially food. I mean, agricultural commodities like wheat going limit up day after day. I mean, Russia and Ukraine produce something like 30% of the world's exported wheat. I might be overstating that slightly, but it's a very, very significant amount. If they're walled off and siloed off from global markets, countries that rely on a lot of wheat for import to support their populations, those governments will collapse. There'll be riots and possibly government collapse.
We've already seen governments collapse over commodity rallies. Kazakhstan would be one good example. That was partly due to oil prices, right. You'll see nations like Egypt will probably have unrest, because they import a huge percentage of their overall agricultural commodities, if this dislocation continues. So, commodity rallies will cause just total chaos. And if the US continues to withdraw from being the global guardian and the guarantor of energy security and the guarantor of global trade, if they continue to structurally withdraw, which the US is doing actively, you can expect significant food insecurity across the globe. That's going to hit places like Africa probably the hardest, because those are the countries that import a significant portion of their calories.
Peter McCormack: It's pretty dark, man.
Nic Carter: Yeah, it's a pretty wild time that we're living through.
Peter McCormack: So, with US Treasuries as the world's largest store of value, as such --
Nic Carter: Correct.
Peter McCormack: -- and faith probably being lost in that, what are the alternatives that people will look to? And, I know some of them are obvious, but from your perspective, what are you considering?
Nic Carter: Well, I would say Bitcoin, but here's the thing. What's Bitcoin worth in the aggregate right now? Probably less than $1 trillion, and that's if you count all the Bitcoins, not even including discounting for the lost ones. There's European bonds; European nations issue bonds. But they're slightly less liquid, they're not as significant in scope as Treasuries. It really comes down to US securities. The US has by far the largest securities market in the world, and that includes bonds and then our equities as well.
US equities and property are a very popular store of value. That's really where China has actually been deploying their surplus, has been into hard assets like equities and property. They realised a while back that Treasuries were a bad thing to own, it's probably the right bet; and instead, it's going into other securities markets. But it could just be the case that there's no successor to the dollar regime, that we have a multi-polar world and multi-currency world.
Peter McCormack: That's what Jerome Powell said, we could have multiple reserve assets.
Nic Carter: Yeah, so he wasn't really talking about Bitcoin there.
Peter McCormack: Yeah, I know.
Nic Carter: He might have been talking about, you have the dollar, then you have the renminbi and then you have the euro, and they're all co-existing, which is kind of like what we had between the 1920s and the 1940s. The British pound was still a very important reserve asset, even though the British Empire had effectively ended with World War I. But these things are very sticky.
Of course, the dollar's not going away any time soon. But the problem is, if I'm China or I'm India and I voted abstain on the UN Resolution to condemn Russia's invasion into the Ukraine, I'm probably looking at my US-denominated reserves a little bit warily and thinking, "Are they just going to immobilise them at the flip of a switch, like they did with Russia, because I funded the US?" in the same way that Afghanistan got their reserves frozen, and Iran before them.
So, the US is going for successfully larger and larger targets in terms of financial warfare. And if I'm China, I'm thinking to myself, "I really want to invade Taiwan, but I'm sitting on $1 trillion of US debt and a couple of trillion dollars of other sovereign debt that's held in overseas instruments. I probably want to sell that before I do my Taiwan invasion, and move into hard assets like gold, or ports in Africa, things like that".
Peter McCormack: Which, as you said, they have been doing.
Nic Carter: They've been actively preparing for this. They realised in 2008 what was up. They saw that the US was going to defend its own interests in an inflationary way at the expense of creditors, people holding US debt. And then, since 2014, it's been really the big shift, when foreign governments stopped buying our debt as much. So, the Bretton Woods regime has been in decline, and not a lot of people noticed it. The US has been buying more of their own debt in this circular way, and a lot of people are saying the mobilisation and the seizure of the Russian reserves was actually a date, we could say, where Bretton Woods II ended.
Bretton Woods I ended on 15 August 1971, when Nixon ended the convertibility of the dollar into gold. Bretton Woods III, it could be argued, ended last week, when the US seized Russia's reserves effectively, because that was when the US said, "We can go after the 12th largest nation in the world, and one of the largest energy and commodities importers in the world, and we can use our stewardship over the international financial system against them in a way that undermines the credibility of our Treasuries".
In my view, that's a form of default. They basically defaulted on a promise to have Treasuries be a risk-free asset, and they introduced the notion of genuine liability and the risk that Treasuries could be immobilised. And so, that's what a few people are starting to say now, is the Bretton Woods system has actually ended and we're in a new system, which is a commodities-based system, and there's less trust in the international sphere. And it's going to be based on gold, other fiscal commodities, and maybe eventually Bitcoin.
Peter McCormack: Which, going back to your point, is dangerous, because when commodities are expensive, that has a material impact on everybody.
Nic Carter: Yeah, you don't want commodities to be stores of value, because we need them. It's like why it's bad for property to be a store of value, because you need to live in it, and so it makes it more expensive. So that's why Russians using Vancouver property as a store of value, or Russians using London property as a store of value, Chinese people using San Francisco property or New York as a store of value, that's bad for the people that actually live there that need to consume the property.
That's why we don't want wheat to be considered a store of value. That's why we need pure monetary assets, that have no real industrial use or any consumable use whatsoever, which is why gold, it's actually great that -- people say gold has all these industrial uses, and that's what gives it its value; totally not the case. Gold is primarily monetary premium, has a small sliver of industrial value, and that's why Bitcoin is great there also, because there's no industrial use for Bitcoin whatsoever, so you're not crowding out any consumable use case. So, that's why Bitcoin, as a pure monetary premium asset, is a suitable store of value.
Peter McCormack: But while commodities have been rallying, Bitcoin hasn't really rallied. There was a small amount, but really that feels more like speculation, because of what was happening with people sending money to the Ukrainian army, or whatever, but it hasn't rallied in the same ways, which means it hasn't achieved what it's set to sell itself as.
Nic Carter: It's a long game. I don't think there's any invalidation moment for the Bitcoin hypothesis. I think it has to just continue what it does well.
Peter McCormack: I don't mean an invalidation, but I do mean it hasn't validated.
Nic Carter: Well, yeah, because it's too illiquid and too small to be useful at sovereign scale right now, that's just the truth of it. We have a lot more monetisation due before a nation state can meaningfully start to use it. It's not something that's owned by nation states for the most part, there's probably a couple of exceptions here and there, obviously with El Salvador and others.
Gold is owned by a ton of central banks globally. It's easier to remonetise gold. That's probably what Russia's going to do, maybe what China's going to do. It's easier to say, "We're explicitly backing our currency with gold once again. We're going to increase our foreign exchange ownership of gold, and back our currency", because they already own it. That's the thing that bitcoiners miss about gold. I think I came on your show and I was sort of pro-gold last time, which shocked people a little bit. But the thing is that gold is already in the hands of governments, so it's easier. It's less of a leap for them to say, "Okay, we're going to explicitly increase our holdings and back our currency with gold".
Peter McCormack: Yeah. Was it you who was saying to me, "Gold isn't the enemy"?
Nic Carter: Not at all, yeah. I think eventually, you're going to see portfolios of gold and other commodities and Bitcoin backing foreign exchange reserves, but Bitcoin has a lot of development to do. But the thing is that gold also has many problems. It's hard to send, it's not very transmissible, it's hard to take physical delivery. So, Russia's kind of lucky in a sense. Their gold is in Russian vaults in Moscow, I believe. They've got like $130 billion of gold. That was the only thing the US couldn't seize. The US is actually trying to figure out a system to stop anyone trading with them for the gold, but they still have the gold, for what it's worth.
Most other central banks, their gold is held in New York or in London physically, because that's where the gold markets are, and they want the gold to be pretty liquid and market-available. So, if they really offended the US, or the international community, then even their gold would vanish in a second, because it would be held with a custodian that's in the UK or America. So, because gold is expensive to move and physically settle, it ends up getting concentrated in these handful of warehouses.
Bitcoin obviously is much more favourable, in that it's cheaper to do physical delivery, it's easier to prove ownership to a third party, and so it's easier to verify that you have a certain quantity of it, cheap and effectively free. So, the more this starts to occur and trust breaks down, the more we're also going to interrogate the qualities of gold. Now everybody's thinking to themselves, "Okay, Treasuries, wow. There's a lot of stuff we didn't consider there". But also gold, we're going to be thinking to ourselves, "Wow, there's a lot of dynamics with gold that are a little inferior, and a digital version, a digital commodity, bearer asset stock commodity, improves on it really materially".
That's why we always talk about the cost of verification bitcoiners do. Because gold is constantly de-verified, you want to have it basically in a single location with a single trusted custodian intermediary. Bitcoin obviously fixes this.
Peter McCormack: Do you see this as a massive miscalculation, incompetence, not thinking through the consequences; or, is there any part of this that could be by design, people understanding the consequences, because they want something to change? I don't know.
Nic Carter: A miscalculation on the part of who?
Peter McCormack: On the part of, I'd say, the US, because they're leading policy on this, leading the coalition of sanctions.
Nic Carter: Yeah, that's the interesting thing. Russia is still able to sell its energy exports for the most part; we'll see what happens there.
Peter McCormack: To the country sanctioning them!
Nic Carter: Right. And the US has been very clear about carving out exceptions and loopholes, things like that. The Germans import something like 50% of their natural gas from Russia still. They need that, they don't have an alternative. There just literally isn't an alternative in Europe. So, Russia is still able to accumulate something like $20 billion a month, in terms of just liquidating its energy assets, which obviously now energy is super-super-expensive, so they're able to sell it at a higher premium too, assuming they can.
I think the US is just making a lot of decisions without considering long-term consequences. Obama warned about this in 2015 actually, to his credit. When the US was considering unilateral sanctions against Iran, really aggressive unilateral sanctions, Obama said something to the extent of, "We actually need to be really careful what we do here, in terms of weaponising SWIFT, the banking system, and seizing Iranian reserves, because we don't want to undermine the international confidence in the US dollar as the reserve". That's why the US actually stepped back from the brink a little bit, in 2015, as it pertains to Iran.
But then, fast-forward a little bit, the Taliban takes over Afghanistan, the US seizes Afghanistan's central bank reserves, about $7 billion worth. That's kind of small peanuts' worth when it comes to central banks.
Peter McCormack: Not for the people of Afghanistan.
Nic Carter: That's the crazy thing. They were just regular savings for regular Afghans that had nothing to do with the Taliban in that. And then, what the US did, they didn't earmark it and put it in a trust and say, "Well, when Afghanistan has a democratically elected government, they can come back and get their essential bank reserves back", the US liquidated half of it and apportioned it to the plaintiffs in a lawsuit against, I guess, the Taliban. I don't know if they've distributed it yet, but they intend to. It was a group of relatives of 9/11 victims that were suing the Afghanistan Government over 9/11, which happened 21 years ago.
So, you have a transfer, and that was about half of the $7 billion. So, you have a transfer of wealth, kind of like a reparation-style transfer of wealth from maybe literally the poorest nation in the world.
Peter McCormack: To the richest.
Nic Carter: To the richest nation in the world, because of a lawsuit which -- I mean, 9/11 was very tragic, but how long was the statue of limitations on that?
Peter McCormack: The Iraqis, can they sue the US Government for reparations for the Gulf War?
Nic Carter: Yeah, exactly. It's like, I mean, really it's not about the legal basis at all, it's just about who has power. But that was particularly arbitrary, I thought; also the fact that regular Afghans just had their savings totally seized.
Then, fast-forward again, Russia invades Ukraine, the US does something that Russia does not expect. The US and the G7, they seize Russian reserves, $630 billion. You're getting increasing escalation in terms of taking the dollar network, think about the network and all the nodes, overlay it against the globe, and you're poking massive holes in it, and you're saying, "This node is now off limits, this node is off limits". You're taking what was a global network, and you're throwing the whole thing into chaos and throwing the whole thing into question, because you're making the network less of a network.
Anybody that would join the network is now thinking twice and saying, "I don't know if I want to be a part of this, because I'm giving up so much power". Because previously, it was kind of a gentlemen's agreement that you would never seize the foreign exchange reserves, the central bank reserves of another nation. You had sovereign immunity, kind of thing. The US basically reacted very aggressively to the invasion and were like, "Okay, this is too far, we're going to seize the reserves".
Is that going to stop Putin? Probably not. Is he still going to conquer the Ukraine? Almost certainly. And so, what will they have achieved by doing that?
Peter McCormack: And, I guess China's rubbing their hands thinking, "Opportunity".
Nic Carter: They're in the best position to deal with this, because what did China really want? They wanted to free the world from the grip of the US dollar dominance, so they've been trying these little experiments here and there. They tried their Belt and Road Initiative, which was a way to project power and make investments abroad. They had been decreasing the use of dollar in international trade, like Russia/China trade was less and less dollarised with time.
Peter McCormack: What were they trading with? Had they moved to the euro?
Nic Carter: I think it was the renminbi. But it was dollarised, and now it's much less so. China now has an opportunity, because China is a commodity-rich nation, they certainly buy a lot of commodities and produce them as well. They have an opportunity to internationalise the renminbi, should they want to. They haven't really acted in such a way as to demonstrate that they intend to do that, because they still exercise a lot of control over it. It's very much a managed currency, they don't have an open capital account the way the US does.
But they definitely have an opportunity here to promote an alternative to the dollar if they want, and to promote themselves as a safe haven relative to the dollar, which would be kind of amusing, because it's not like China has the respect for property rights that exceeds that of the US. But relative to the capriciousness of the US, they might have a case.
Peter McCormack: Doesn't China has its own alternative version of SWIFT that they've been developing?
Nic Carter: Both China and Russia do. People think SWIFT is a payments network. It's just a messaging network. It's just a way for banks to send messages to each other, so it's really like a standard. So, China has a standard, Russia has a standard, it's actually pretty plug and play, so it's really not that difficult. People say, "If you're off SWIFT, you're out of luck". It's actively technologically very trivial to move to a different one, they all interoperate with each other almost.
The problem is getting the banks to subscribe to your alternative payments and settlements network, and no banks really want to, if the US is doing very aggressive sanctions.
Peter McCormack: But could there be an alternative network that's built between, or used by China, Russia, Iran, North Korea, these or more considered pariah states?
Nic Carter: Well, yeah, those are the ones that subscribe to -- they would be the prime candidates. Russia's alternative SWIFT already operates, I think. Certainly eastern European nations use it, it's certainly used within Russia. Iran, when they were sanctioned by America, Europe tried to create a special purpose vehicle, I think called INSTEX, so that they could trade with Iran directly.
So, the trend here is obvious. Ever since the US has been threatening broad-based sanctions, they threatened Russia in 2014, they were sanctioning Iran, they sanctioned Venezuela of course; ever since the US was threatening more aggressive and more aggressive sanctions, everybody else has been watching that very carefully and thinking to themselves, "How do we diversify away from this system?"
Something like seizing the foreign exchange reserves, that's only something you get to do once, basically. They're not really going to get the opportunity to do that again. They'll probably find that if some country does something that they think is going to offend the US, they'll make sure that they divest all their exposure first. I think it spells a death knell for Treasuries as a totally unquestionable store of value asset that the world uses.
Peter McCormack: It completely fragments the global financial rails, which is not useful, but leaves an open door for, I'm not saying this as an opportunist for Bitcoin, but there is a story here for a permissionless open network that anyone can plug into, that they can't be removed from, they can't have their assets stolen from, unless they're keeping them on exchange, but I don't see a nation keeping hundreds of millions, maybe billions of Bitcoin on Coinbase.
Nic Carter: Right, and I'd love to say that Bitcoin can slot in seamlessly here and fill the gap left by the dollar as the primary settlement network. The truth is that we have a long way to go, and maybe it would have been better if this transition had happened a decade from now, as opposed to today; maybe Bitcoin would have been more ready then.
But all that said, Bitcoin has been designed expressly with this eventuality in mind. As the trust frays within the international system, as IOUs become less useful as a medium of exchange and a store of value as well, you're going to want to move back to liability-free money. That's what we had in antiquity, that's what we had in the days of the privateers. That's why you would have ships doing their trade routes across the Atlantic with gold as the settlement medium, because nothing else was trustworthy.
Then, for a time, we went to this standard where everyone trusted the US, and everyone behaved as if the US debt was totally unimpeachable. And now, we're moving back to a system where once again, we only trust specie and hard money that is no one's liability. Part of that is going to be gold, but part of that will obviously be digital alternatives, digital commodities, and Bitcoin is the most mature and in the best position to fill that gap.
Peter McCormack: But there's this parallel situation that's happening between citizens and nation states. We're talking about Russia that's a nation state, but what happened with truckers in Canada. Whether you agree or disagree, we don't need to get into that, because I know a lot of people actually disagree; and when I made the Canadian Truckers show, I got a lot of comments on YouTube and email, some people weren't happy with that situation. But whether you agree or disagree, we saw openly that the state weaponised the financial system against their citizens. They blocked access to funds being raised on GoFundMe, they threatened, or arrested, or froze access to the banking system for people who even financial supported these people, not as many as was claimed, but it still happened.
So, there's an incentive model for a group of people in that country to go, "I need an alternative". There is, within El Salvador, people there considering an alternative. All around the world, there are people considering an alternative. I've adopted, you've adopted, everyone in this room has at least partially adopted an alternative, because we recognise those risks. Add to that, you do have one country that has adopted this alternative, a smaller nation. And perhaps what we have is a growing parallel group of citizens around the world, for different reasons, who are adopting the system.
Perhaps there might be other countries, smaller ones thinking, "I see what the US did there, we could be under threat at some point. We need to divest into this open, permissionless system", and perhaps it's just a bottom-up approach, Nic.
Nic Carter: Yeah, absolutely, and I love the Balaji Srinivasan puts it, which is maybe a little crass, but he divides it into three categories: woke capital, as represented by the US, whether or not woke is the right word to use, but capital that requires obeisance to the America neo-institutional set of mandates, the principles of American hegemony, whether that's local, whether that's something like the Canadian truckers basically saying, "Don't protest against the powers that be" and the dominant narratives espoused by the government, or whether that's international like, "Don't offend the US Government, don't go against their interests". So, that's one tranche.
Then you have, communist capital, CCP capital, that's going to be the Chinese power projection through the Belt and Road, through the regional power projection, which is going to be, "Well, you have to adhere to the effectively Maoist Marxist beliefs". Then there's the non-aligned crypto capital, of which El Salvador is maybe arguably the first member of that subscriber group. When you had, back in the Cold War, the expression Third World, that referred to countries that were not part of the Soviet block or the US block. That's why we called them the Third World, so they just weren't aligned with either.
In theory, or at least the way Balaji puts it is, that group could well be using crypto, maybe Bitcoin primarily, as their primary financial settlement medium in a way to free themselves from the hegemony of either pole, the US pole or the China pole. And I kind of buy that. Now, we need to see another nation join El Salvador, we need to see how sincere El Salvador's desire is to be genuinely non-aligned, and whether they are actually going to adopt a Bitcoin standard, or just use that as a ploy to engage in expropriation, or something.
But I think that could be the way this goes, is you have a US-aligned financial system, which comes with all of its political dictates; a CCP-aligned financial system, which comes with all of the CCP dictates; and then the third way, which is predicated on an apolitical financial system and neutrality. And I think a lot of political leaders are going to be looking at themselves nervously and seeing what's happening right now and thinking, "Well, I don't necessarily trust the dollar system, I don't necessarily trust the quality of America's security guarantees, or their ability to maintain an orderly worldwide trade system, maintain energy security, I don't necessarily trust China, is there a third way?"
Peter McCormack: A system you don't have to trust.
Nic Carter: Yeah, or you trust the cryptography.
Peter McCormack: Yeah. There's this super-fascinating game theory of it all as well. I was walking through it last night with Danny, in that you have somebody like Elizabeth Warren. She comes up on this show sometimes, she's such a dick. But she was talking about potentially --
Nic Carter: I left Massachusetts to get away from her!
Peter McCormack: Jesus Christ, man, that woman, discussing potentially Russia using Bitcoin to evade sanctions. And I've seen different commentary on this, I've seen David Zell did a thread talking about why they wouldn't, and then I think Marty Bent talked about, "You're an idiot if you don't think they could", but whether this is used as a ploy to attack Bitcoin.
Thinking it through, it's like if you push people to Bitcoin, you also probably really want to hold it yourself. Nobody wants to be left out of a growing alternative currency. And is it that Bitcoin becomes the new Treasury Bill, because it's the last thing you can trust; you can't be removed from it. I mean, it might not have this interest rate that you get guaranteed with Treasury Bills, but it becomes the one last thing you can fully trust. And even if it starts with these potentially third-world nations, if it continues to grow and grow and grow, there's a threat to not being part of it.
Nic Carter: Yeah, and look where it's getting adopted. If you look, Chainalysis, for all their flaws, there's actually some pretty good data on this. They always do every year, they do a survey showing where -- well, it's crypto, but I think a large part of that is Bitcoin, where it's adopted on a per-capita basis. And I think Ukraine was number 4 last year. And all the top ten, it's places like Vietnam, India, I think Russia's up there, Columbia, Venezuela, Nigeria.
These places, it's like Latin America, west Africa, southeast Asia, eastern Europe, they're places that don't necessarily have the strongest respect for property rights, they might have a history of inflation, they might have a history of a banking system that doesn't work or is used to plunder the savings of individuals. So, it's all places where you have a reason to want to own your assets directly, outside of the control of either the state or the banking system.
It's not a coincidence that Ukraine was up there. Now, Ukrainians are going to be -- were, are, relatively well-positioned in terms of becoming refugees and asylum-seekers, leaving their homes. Obviously, it's tragic that they have to do that, but leaving their homes with at least a portion of their savings intact, because they can hold it on a hardware wallet, or memorise 12 words. That's not really possible with gold.
So, that is a new thing, and people are going to be shocked in the coming months with the amounts of stories that come out from Ukrainians saying, "Yeah, the only reason I was able to secure anything, any of my financial security, any of my assets, anything like that, was because I had a digital bearer asset".
Peter McCormack: Well, those stories are already coming out, I've seen them.
Nic Carter: Yeah, exactly. And I mean, we have employees that are actively doing this, I can attest, on a first-hand basis. Having a digital bearer asset, something that you can truly own, that's outside the banking system, because it's not working in Russia or Ukraine right now, the ATMs aren't working, the currencies themselves are failing, the banks don't work, you don't have time to get your affairs in order, or anything like that, cryptocurrency, Bitcoin is working, it continues to work.
Not everyone was onboarded onto it, obviously, only a small percentage of the population was, but for those that were, it's a lifesaver, it's a godsend. So, it is this bottom-up movement that is demonstrating real value in relatively developed countries. This isn't the total Third World, or anything like that. So, I don't know how you ignore that case study. We see a lot of Americans dismissing cryptocurrency and Bitcoin, saying it has no use. But how can you possibly look at what's happening in eastern Europe and think to yourself this thing is useless now, because it's the last line of defence, financially, for a lot of these people that would have had no alternative otherwise.
Peter McCormack: It puts the US in this really interesting position as well, with regards to Bitcoin, because my assumption is that as a percentage, the US citizens have the most Bitcoin. It's just an assumption, but I'm going to go with that.
Nic Carter: Yeah, I think that's very fair.
Peter McCormack: It also has probably the largest percentage of Bitcoin owned by companies, or Bitcoin companies.
Nic Carter: Yeah, no question.
Peter McCormack: So, really it's in the dominant position for a Bitcoin world, and as the US dollar declines, as there's growth in this digital renminbi, there is a reason for the US to fully back Bitcoin and get behind it, not just at a state level like we've seen in Texas, but as a nation there's an incentive to do it. And it kind of aligns with traditionally what America stands for, which is freedom and would you argue that the Republic is essentially decentralisation of some sort?
Nic Carter: Of course.
Peter McCormack: So, to match up what the US traditionally stood for, which is freedom and decentralisation, there is a currency that supports that. So there are also massive incentives to do it. And should it do it, it may make the US stronger and push it away from these terrible foreign policy mistakes. It feels like a lot of potential wins there, it's whether it can happen.
Nic Carter: Well, here's the thing. In the 1970s, when we broke the tether to gold, we had a period of very high inflation. So, all the inflation prints we're seeing now, they're the highest since the 1970s. And then what we did was we scrambled for a few years until we found a system that restored the security of the dollar and the credibility of the dollar, which was the petrodollar system, where we went to all the oil-producing nations and we said, "Will you agree to trade oil exclusively for dollars and then buy Treasuries with the proceeds, and we will militarily guarantee your security?" That was the deal, and that was what secured the dollar.
We need something like that now. Right now, the integrity of the dollar is in question, people don't trust US power, the US is withdrawing from the international sphere, the international institutions we set up in 1944 are fraying, nobody really trusts them anymore. Our allies are openly questioning our importance and authority in the reserve. The Federal Reserve doesn't have a ton of credibility, they've been wrong on inflation. Inflation's probably going to hit double digits in the next couple of months, double digits. The energy security and the food security that the US-based order has been premised on is failing.
So, we need to find something that will shore up the integrity and the credibility of the dollar. The US is the largest holder of gold in the world, officially speaking, in Fort Knox. We don't think of the dollar as backed by gold, but we do have the most amount of gold that any central bank has.
Peter McCormack: Do we know if it's there; do we know if it exists?
Nic Carter: Yeah, we need to audit Fort Knox! So, the question is, what are we going to contrive in order to restore confidence. And Bitcoin is maybe not sufficient, but Bitcoin is, not exclusively, but it's a very American phenomenon. A lot of the Bitcoin companies are here, as you say, a lot of the Bitcoin holders are here. That could be one part of the toolkit to restore the credibility of the dollar, and we're having a credibility crisis right now, there's no question about that.
Danny Knowles: Is it fair to say that it's now even worse than in the 1970s, because at least then they had high interest rates?
Nic Carter: Well, they had the ability to hike interest rates, you're right. They don't have that ability today.
Danny Knowles: So, this happens quicker?
Nic Carter: The crisis, we don't have as many tools to deal with it. In the 1970s, debt-to-GDP was something like 30% when Paul Volcker hiked interest rates all the way up to 20%. So, if we hiked interest rates to 5%, the US would be bankrupt. We can't afford interest rates to go to 3%. We have so much debt right now, the corporate sector would go bankrupt, the US Government wouldn't be able to service its debt. So, we don't have the ability to do the Volcker and hike rates in order to restore faith in the dollar, so we need to figure something out.
Peter McCormack: Print a bunch of dollars, buy a bunch of Bitcoin and move to a Bitcoin standard, watch it accelerate in price?
Nic Carter: The only way out is to have a soft default, but the question is, how does the world regain its trust in the dollar and the dollar system?
Peter McCormack: Backed by a basket of Bitcoin and gold?
Nic Carter: That's what I'd recommend. That's my recommended cure.
Peter McCormack: It's funny, Nic, I've made a lot of shows, and sometimes we make a show and I'm like, "Shit, I need some more Bitcoin, I just do", and I end up going a little bit longer on Bitcoin. This is the first time I've done a show and I've thought, "I need to be a little bit more diversified".
Nic Carter: I mean, the crazy thing is that Bitcoin is so custom built to obviously improve on the flaws of a liability-impregnated store of value like sovereign debt, but it's also built to improve on the flaws of gold. And, gold is going to become very important here shortly. Every foreign central bank is going to think to themselves, "Wow, I need some more gold". But they're also going to think to themselves, "What is my exposure like? Buying this gold, is it truly sovereign, do I really own it if I'm custodying it abroad?"
So, gold also has all these flaws that are going to become very apparent; the cost of verification. When you take delivery of a physical bar of gold, you can't really know for sure that those are gold atoms in the bar. It's extremely difficult to perform a genuine physical verification. You really, to truly trust that, you actually have to fully melt it down and do an assay. So, that's a very cumbersome process. That's why gold ended up centralised in these hubs.
So, Bitcoin also markedly improves on gold's flaws in that respect. And then obviously, there's stuff like multisig, which is much more complexity and programmability in terms of your custodial arrangement, and things like that. So, it feels like this is very obvious, but it's also hidden knowledge that for some reason, the world doesn't possess just yet, which is like, "There is a solution here, and it's just a matter of time".
Peter McCormack: I'm kind of worried as well. I can't help but be worried, because whilst there's been wars during my lifetime, I've seen two gulf wars, I've seen a Balkan War, there's been war; but this is the first one where it's a concerning war because of the potential escalation. I've lived through market crashes, 2008, March of 2020, but I feel like there's a potential much bigger crash coming. I feel like there's a lot more to worry about right now than I've ever experienced in my life. I'm not saying this to be alarmist, but it's just a bit shit!
Nic Carter: Yeah, I mean frankly from an American perspective, what's happening now is not good, to be clear. What happens now is the US hegemony, as the unquestioned single global dominant power, is ending. So, we were at the zenith of our power in 1990 when the Soviet Union collapsed. We went from a multi-polar world to a unipolar world. We had 20 good years of unquestioned superiority, absolutely unquestioned, from 1990 to 2010 or so. And now, we're going back to a world where the US is not the sole, dominant power. So, as an American, it's not a good thing.
But we also have to be realistic about what's happening and keep our eyes wide open. China is going to be dramatically empowered by this crisis, there is no question about that. Russia will probably be empowered, we will see what happens. But they appear to be in a relatively strong position, believe it or not. But no question that China will be empowered by this, and no question that the dollar system, which we believed gave us the unilateral right to cut off any entity from that network, sanction them, use the dollar dominance as a weapon of war, we've fired off all the rounds in our revolver, we're running out of bullets there; because, every time we fire one, everybody else reacts and they equip themselves better to deal with the next one. This was by far the most significant round in the chamber, and now that this has occurred, the world's going to consider a move towards a multi-currency system.
So, it's probably not necessarily a good thing from a broad American perspective, but at the same time, the dollar system wasn't that good for regular Americans. This is something Lyn Alden talks about all the time, Luke Gromen talks about, the fact that we had these structural trade deficits, and that the dollar was this enormously dominant tool for international trade that meant we had to produce a huge quantity of dollars. It meant that the financial system ended up really engorged and structurally too large in the US, which was good for people in the financial system, like me, but it was really bad for regular people who had manufacturing jobs. That all got completely outsourced. The working class was totally decimated in this country and everything was outsourced abroad, and we lost all of our manufacturing capacity.
So, maybe ending the dollar as the global reserve and moving towards a more multi-currency model, like a Bancorp maybe, or a commodity-based model, will actually be better, because maybe this will be a catalyst to re-onshore our manufacturing capacity. So, it's possible that this is bad for American strength at large as an empire, but is good for maybe your median American.
Peter McCormack: Well, I think there's been little benefit to the world of having such an empire. Some people argue that the world needs a world police, and it's not a popular job and the US has had to do this. But it also appears like it's geopolitical mistake after mistake, and perhaps a weakening of the US may be net good around the world.
Nic Carter: I don't know, I think it's going to be really bad for energy security and food security. And the question is, who can step in and run that blue-water navy and ensure that the trade routes are protected and ensure that Saudi oil makes it way round all the four corners of the globe safely, and that the fully globalised system of trade works and functions, and things like that. It's not clear that there's anyone that can step in and do that.
The US is very energy secure, it's very food secure, it's obviously militarily secure within its own borders. The US would be fine if it structurally withdraws from the rest of the world, as it has done; it's always a cycle, looking inward, looking outward. Now we're on the cycle of returning looking inward, the question is, how does the rest of the world do? And a lot of our allies I don't think are adequately prepared to deal with an increasingly isolationist USA, with Europe being a great example right now.
Peter McCormack: Okay, well I'm glad I'm drinking a whiskey right now.
Nic Carter: Cheers.
Peter McCormack: Cheers. Is there anything we've not covered that you would like to have covered in this?
Nic Carter: I think we're on, what, hour four of recording today!
Peter McCormack: Yeah!
Nic Carter: I think I've probably said plenty.
Peter McCormack: Yeah, okay. Nic, thank you. If people want to learn -- do you know what, I think what some people listening might be thinking is, how the fuck do I prepare for this? Apologies for the language for everyone who writes to me and says, "Stop swearing", but how do people prepare for this? I'm kind of asking you for financial advice! I mean, I feel relatively prepared anyway, but some people aren't going to be, and be very nervous about what they're hearing today.
Nic Carter: Yeah, I mean I can't offer any good guidance on that basis, aside from learn how to farm and stitch your own clothing and things like that. But I would recommend a few thinkers that helped me, helped steward me through my thinking on this. So, two Peters: Peter Turchin and Peter Zeihan; Peter Turchin in terms of the domestic shifts that are likely to occur here, and Peter Zeihan in terms of the geopolitical shifts. And then Luke Gromen, who has been my number one most important thinker, and he's the reason I feel equipped to understand what's going on right now. He's been totally on the mark in terms of the transition away from the US-based order to a novel commodity-based order. He's the thinker I recommend.
Peter McCormack: Do you remember what I said to you yesterday in the car about my garden?
Danny Knowles: That you want to start farming!
Peter McCormack: Didn't I bring this up yesterday?
Danny Knowles: Yeah.
Peter McCormack: I said to Danny, I've bought a new house, and not that I'm thinking that we go to this crazy world where I can't afford food, but it would be good just to be able to be prepared for certain scenarios.
Nic Carter: Yeah, like a victory garden. We had those in World War II. Yeah, so learn to grow your own squashes and leeks and things like that.
Peter McCormack: Tomatoes with potatoes. Okay, Nic, look I always appreciate you coming in, you know I love talking to you. And, yeah, going to have to have a deep think about this one. I don't want people to think this is alarmist, but there are certainly signals out there that aren't great, and yeah, I'm going to have to think about this one. But thank you, appreciate you coming on. God, I sound fucking miserable, but I do appreciate you coming on.
Nic Carter: Yeah, of course, man, always good to chat. And, it's not about being too pessimistic about the future, but it's just about seeing it with your eyes wide open and seeing what's likely to happen, and seeing what's happening right now with really realistic eyes.
Peter McCormack: Scenario planning.
Nic Carter: Exactly.
Peter McCormack: Yeah. All right, man, appreciate you.
Nic Carter: Thank you.
