Podcast Summary
Energy and Money Interconnection: The relationship between energy and money is crucial, and high energy costs could lead to significant changes in the monetary system. Productivity enhancements from AI and humanoid robotics may cause deflation and incompatibility with the global debt-backed monetary system, potentially leading to defaults, bond buying by central banks, and the demise of traditional investment strategies.
The relationship between energy and money is more interconnected than most people realize. Luke Gromen, the guest on this episode of Bankless, argues that energy is the base layer of money and that high energy costs could lead to a massive monetary system change. Most people are still assuming that the dollar equals oil, but according to Gromen, they're different. He uses the example of the S&P 500 total return since January 1, 2020, which is up 75% in dollars, up 15% in gold, and down 81% in Bitcoin, to illustrate that the denominators are wildly different. Gromen suggests that as productivity enhancements from AI and humanoid robotics become more prevalent, they will be exponentially deflationary and incompatible with the global sovereign debt-backed monetary system. Central banks will have to fully reserve consumer and sovereign debt with printed money, leading to potential defaults and the selling of treasury bonds. This could result in the Fed buying all the bonds, creating more dollar liquidity. Understanding this relationship between energy and money is essential for anyone on the bankless journey, and Gromen provides some actionable ideas on how to prepare for this potential monetary system change. The 6040 portfolio, which is a common investment strategy, is dead, according to Gromen.
Energy and sovereign debt: High debt levels make it challenging to pay back debts during economic instability, especially when resources like oil and copper are needed to support growing economies. Countries with the ability to print currency for resources are game-changers.
Energy and sovereign debt are interconnected in significant ways that have far-reaching implications for the global economy. When debt levels are high, as they are now, it becomes challenging to pay back debts during periods of deflation or inflation, especially when it comes to finding the necessary resources, like oil and copper, to support growing economies. The ability to print currency for oil, as the US has done for decades, is a game-changer for countries like China and India, which are rapidly increasing their ability to do the same. This dynamic, with its conflicting deflationary and inflationary pressures, highlights the unsustainability of the current sovereign debt-backed system that has been in place for over 50 years. Energy is the base layer of money because it's tied to human labor and the promises we make to pay back debts. Central banks, governments, and policymakers may not fully understand this connection, but it's essential to recognize that energy is the foundation upon which our financial systems and empires are built.
Energy and Empires: Empires have historically sought out cheap energy sources and secured them to avoid collapse, but underestimating the importance of securing a reliable and affordable energy supply can lead to collapse
Energy is a fundamental requirement for the existence and functioning of empires and individuals alike. Empires have historically sought out cheap sources of energy and secured them to avoid collapse. The concept of entropy, which is the energy required to maintain systems, highlights the energy needs of empires as they grow and expand. The mispricing or acquisition of energy on the cheap has been achieved through various means, including slaves, productivity enhancers, and military force. Energy is essential for all living things and for the functioning of economies, and its availability and affordability significantly impact the value of currencies. The US dollar's status as the global reserve currency is linked to its ability to provide energy security, but this arrangement is changing as global central banks shift their reserves towards gold. The petrodollar system, which linked the US dollar to oil, is no longer holding, and the dollar's value is being challenged as energy alternatives gain prominence. Ultimately, the fundamental error for empires and individuals is underestimating the importance of securing a reliable and affordable energy supply.
Oil as a dominant energy source: Investors should consider energy as their denominator when measuring returns, as oil remains the largest marginal source of energy and primary transport fuel in a globalized economy, and historical relationships between the dollar and oil are changing, potentially leading to inflation and investment opportunities in gold, commodities, and inflation-protected industries.
Oil remains a critical and dominant form of energy, despite the diversification of the energy mix. Oil is still the largest marginal source of energy and the primary transport fuel in a globalized economy. The speaker suggests that investors should consider energy as their denominator when measuring returns, as it is a unit of value and energy sources like oil, gold, and Bitcoin are all proxies for this denominator. The speaker also discusses the historical relationship between the dollar and oil, and how this relationship is changing, with the dollar no longer being as good as gold or oil. The speaker predicts that as this relationship continues to break down, investments in gold, commodities, and industries that benefit from inflation may perform well. The speaker also suggests that technological advancements can decrease the price of energy in the short term, but over time, supply and demand imbalances can lead to increasing energy prices.
Dollar disconnection from gold and oil: The disconnection of the dollar from gold in the 1970s enabled the US to afford uneconomical oil reserves, print dollars for oil, and maintain its status as the global reserve currency, ultimately weakening the Soviet Union
The disconnection of the dollar from gold in the 1970s was a strategically brilliant move that allowed the US to win the Cold War and increase domestic oil production. This decision led to a significant increase in the price of oil, making uneconomical oil reserves in friendly areas like the Gulf of Mexico, Alaska, and the UK North Sea affordable. The US could print dollars for oil while the Russians couldn't, ultimately bankrupting them and weakening their power. This geopolitical move also allowed the US to maintain its status as the global reserve currency. However, it's important to note that the relationship between energy and currency is complex, and the goals of a country can influence the price of energy and the role of different currencies. The discussion also touched on the potential for energy miracles, but the second derivative impacts should be considered before getting too optimistic.
Celo's transition to Ethereum layer 2: Celo, a fast-growing blockchain, is transitioning to Ethereum layer 2 using Optimism's OP stack, bringing lower gas fees and more users to Ethereum, and potentially increasing demand for gold as a potential oil currency.
Celo, a fast-growing blockchain platform with over 375 million transactions and 1 million monthly active users, is poised to become a layer 2 solution on Ethereum using Optimism's OP stack. This transition, which includes the use of ERC-20 tokens for gas payments and the ability to send crypto to phone numbers, will help keep gas fees low and bring more users to the Ethereum ecosystem. Additionally, the price of oil could force a monetary change as countries like China shift away from the petrodollar and begin paying for oil in their own currencies, leading to a potential repricing of the dollar and increased demand for hard assets like gold. This trend, driven by geopolitical necessity, could result in gold becoming an oil currency and reduce the need for countries to hold US treasuries as reserves.
US dollar's supremacy under threat: China's increasing demand for gold, record-trade settlements, and competition to SWIFT could challenge the US dollar's dominance, leading to higher interest rates, inflation, or debt default, and potential political instability, benefiting assets like stocks, real estate, and gold.
China's increasing demand for gold, record-breaking use of its currency for trade settlements, and competition to the SWIFT system are signs of a shifting monetary system that could weaken the US dollar's supremacy. This could lead to the US having to choose between defending the currency or bailing out the bond market. The choices between these two options could result in either higher interest rates and a stronger dollar or inflation and debt default. The US, which has a large debt and relies on foreign demand for treasuries, is predicted to continue supporting the bond market at the expense of the currency. This could lead to inflation, nominal GDP growth, and increasing political instability, benefiting assets like stocks, real estate, and gold. The US may face challenges similar to Japan's debt issue but with the added pressure of negative real rates and a lack of a significant net international investment position.
Central Bank Balance Sheets: The expansion of central bank balance sheets could lead to economic instability and potential negative consequences for bondholders due to inflation and potential capital controls
The continued growth of central bank balance sheets, which currently represent a significant percentage of their respective countries' GDPs, could lead to economic conditions akin to Argentina's experience. This is due to the potential for a significant increase in the Fed's balance sheet size over the next five years, which could result in inflation and potentially even capital controls. Bondholders, who currently hold a significant amount of long-term debt, could be negatively impacted if demand for these assets decreases. The speaker also mentioned the possibility of extreme measures, such as revaluing the gold on the US government's balance sheet, which could lead to significant inflation. The book "The Great Taking" discusses how financial assets have quietly been converted from legal ownership to a general claim on ownership, potentially leaving individuals with little to no net assets in the event of a financial crisis. The speaker expressed concern about the US's weak economic position, with a large debt-to-GDP ratio and other countries, like China, outpacing the US in various areas.
US economic optimism: Despite economic challenges, the US is believed to have a strong legal system and property rights, making it a promising investment destination for the next 20 years. Investors should consider investing in industries that will benefit from rebuilding and reindustrialization, keep a portion of bonds in T-bills, and be cautious with consumer debt.
Despite the current economic headwinds and historic levels of debt interest exceeding military spending in the US, the speaker remains bullish on the country's future over the next 20 years. This optimism is based on the belief that the US has the best legal system and property rights, and that certain areas of the country are poised for growth. The speaker also references Winston Churchill's quote about the Americans doing the right thing after exhausting all alternatives. The speaker acknowledges the potential for high inflation, industrial policy, and wage growth, but also warns of potential challenges and areas of the country where they are not bullish. The speaker suggests individuals prepare for this economic environment by keeping a portion of their bonds in T-bills, investing in gold and Bitcoin, and being cautious with consumer debt. They also suggest investing in industries that will benefit from the rebuilding and reindustrialization of the US. The speaker believes the bubble is in long-term government debt, not equities, and that volatility will be high, but for the average investor, it's irrelevant unless they are levered.
Volatile markets investment approach: Investing in volatile markets requires a low-leverage approach for the average investor due to ongoing global financial instability and potential shifts in the monetary system, which could take months to decades to resolve. Prepare for potential exponential growth of debt and its impacts, and stay informed through Luke's weekly report and Twitter account.
Investing in volatile markets requires a low-leverage approach for the average investor. The current global financial situation, including geopolitical instability and a potential shift in the monetary system, is expected to continue causing high volatility. This process could take anywhere from months to decades. As interest doesn't sleep and compounding interest moves fast, it's essential to be prepared for the potential exponential growth of debt and its impacts. Luke's weekly report and Twitter account are excellent resources for staying informed on these topics. Remember, investing in finance and crypto carries risks, but it may be a better alternative to holding bonds. Stay with us on the Bankless journey as we navigate this frontier together.
