WBD275 Audio Transcription
The Money Revolution with Raoul Pal
Interview date: Tuesday 3rd November
Note: the following is a transcription of my interview with Raoul Pal. 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.
In this interview, I am joined by Raoul Pal, macroeconomist and co-founder & CEO of Real Vision. We discuss the IMF considering a new Bretton Woods type system, central banks issuing digital currencies and what this means for Bitcoin.
“If what they’re telling you is they want to do a Bretton Woods, where we can all agree to stabilise our currencies and do massive printing… christ, if you’re after a better case for Bitcoin, I’ve never heard of one.”
— Raoul Pal
Interview Transcription
Peter McCormack: Good to see you, man. Are you all right, brother?
Raoul Pal: Yeah, I'm very good.
Peter McCormack: Yeah? How are things in Cayman?
Raoul Pal: It's good. I mean, we've got no COVID here, so we can move round the islands, all that stuff. I'm still in Little Cayman; I'm doing some work on my house in Grand Cayman so I can't go there, it's unliveable. But other than that, it's all good.
Peter McCormack: So, not a single case on the island?
Raoul Pal: No.
Peter McCormack: How do you decide whether to let people on?
Raoul Pal: We don't. Well, you can if you've got a work permit or family, or they've got this new one-year work permit that, you know, if you wanted to go and work from Cayman, you can. You have to quarantine for two weeks, wear a tracking device, so there are not a lot of tourists, put it that way.
Peter McCormack: I quite fancy that; a year in Cayman.
Raoul Pal: Yeah, well, why not?
Peter McCormack: Well, they're about to lock us down again here, I think. They've denied it, but the rest of Europe's doing it, so …
Raoul Pal: I know; it's coming.
Peter McCormack: Anyway man, listen, your epic thread on central bank digital currencies, which I haven't spent too much time looking at yet, but I have now obviously in preparation for this, and I'm a little bit scared by them.
Raoul Pal: Yeah, you should be, but also excited.
Peter McCormack: Yeah, I should be. Well, I'm more excited for what it means for Bitcoin, because it's just obviously a vote for Bitcoin. But, we should go through it, because there were some things I didn't understand or I wouldn't understand; there are some things other people wouldn't understand. But, the background to this was, you put in early on in the thread, was the IMF, I read the article, relating to a new Bretton Woods moment.
What was your take on that, because I don't believe they're going to be moving to fiscally responsible policies that they had under the original Bretton Woods agreement?
Raoul Pal: No. What it's to do with, and this has come from various sources, from the BIS, from the Bank of England, all sorts of people. What they want to move away from is the dollar standard because, you know, everybody's heard this; the dollar is too strong; the $13 trillion of debts; the system's unsustainable. What is that all about? It's really simple. The dollar accounts for -- the US accounts for 25% of the global economy and it's about 79% of all transactions; so there simply aren't enough dollars.
So, in a system like that, because it's the world's reserve currency, everybody's beholden to it. So, that means the US owns the SWIFT payment system, which is the way we transfer money around the world and if you don't delight the Americans, they can just turn it off. We've heard from Russia and others who've had that treatment; so people don't like that, because it's a power that they have over others, and that was impossible to solve until central bank digital currencies came along.
And so, they're also looking at -- imagine that you're South African or Brazilian; you're whole economy goes up and down with the dollar, which is not in your hands. Yes, you may not run responsible fiscal and monetary policy, but you've got this added thing of the dollar is everything. So, if the dollar goes up, you're screwed; if the dollar goes down, you do well.
Really, it's because trade is all in dollars in commodities and what you need is probably maybe a commodity currency, which has a basket of currencies; something that dampens that volatility. And I think China and the Asian regional block would probably prefer their own currency, because most of their trade is inter-country and inter-region. So, there's a block, but it doesn't have to be pegged. Who knows how it works? Maybe it's just a basket with some sort of percentage weighting based on whatever; GDP or trade flows, or it could be anything really.
So, that's what it's all about at top level is, we need to move away from the dollar. Now obviously, if you read all of the whitepapers from all of these guys, they all mention Bitcoin, because they saw it, they understood what it meant and understood, okay, the world's changed so we need to adapt and this is a better way of doing things.
Now, these are not cryptocurrencies; these are very different things. These are a digital version of their own currency issued directly from the central bank so it doesn't have to go through the banking system.
Peter McCormack: Okay, there's quite a bit to unpack there. So, for somebody like me who doesn't understand this, you've talked here about Brazil where, as an example, if the dollar goes up in value, that's bad for their economy. Did you say it's bad or it's good?
Raoul Pal: If it goes up, it's bad.
Peter McCormack: Just explain why that is?
Raoul Pal: Because their commodities are priced in dollars denominated. So, when the dollar goes up, the price of commodities goes down; they're inversely correlated. So then, they get less Brazilian Real for every bushel of wheat they sell, or whatever it may be. And it's that. The problem is, they have dollar debts, a lot of these, and then they get dollars back in; but, it goes up and down depending on what's happening to the commodity price. And, that's all related to the dollar.
So often you find, for example, as we're speaking, oil's down another 5% today; so, oil's fallen very sharply, 20% in a few days. What it means is now people who produce oil have US dollar debts and they're making less dollars from selling their oil, so your cash flow's impaired.
Peter McCormack: Yeah, I understand now.
Raoul Pal: I've been talking about the insolvency issues. These are some of the things that cause it because not only have you got a global slowdown, but the price has gone lower as well; so, you're selling less at a lower price. That's really bad if you're a debtor.
Peter McCormack: Right, okay. So, you imagine a basket of currencies; Libra came up a couple of times as an inspiration for some of this potentially. But even so, with a basket of currencies, does that still -- are we talking about dampening the risks, but the risks still exist?
Raoul Pal: There's no change in the risk of debasement of currencies, we're not changing the structure of fiat money; we're changing how we transfer it around. So, it doesn't change any of the issues that we have with fiat currency. In fact, arguably, when you saw the IMF paper, what they said is, "Fine, if we all start thinking of a basket of global currency, why don't we all undertake fiscal stimulus at the same time and monetary stimulus", because they realise it's a big mess out there right now, and it's only going to get worse.
So, they're kind of talking about, that's the agreement with Bretton Woods, that we all kind of debase our currency at the same time; that's the code word for what this is all about.
Peter McCormack: But, why would they do that, because if you were the central bank in the country that the currency was performing well, the country was performing well, the economy was doing well; if everyone else debased their currency, wouldn't you be incentivised not to; wouldn't you be incentivised to avoid that stimulus?
Raoul Pal: No, everybody wants a weaker currency. When you've got low global demand, you want lower price for your own goods.
So, you've heard this expression about currency wars for a long time, and that's because one by one, they kind of all rotate in quantitative easing and monetary debasement. But this is, they say, "Well, why don't we just all do it together, because therefore nobody has the beggar-thy-neighbour approach?"
So, if the IMF agrees it with, let's say, the top ten currency blocks in the world, they all say, "Fine, we're all going to expand our monetary base for fiscal stimulus purposes by 25%"; who loses? Nobody. Well, we all lose, but the reality is what they think is nobody's getting a competitive advantage; everyone's getting the advantage at the same time. I get it; it kind of does make sense. If you're a large debtor and you can issue more to try and pay for some of the issues, and yes we do need fiscal stimulus, I understand.
And again, that always goes into the argument of why this is so powerful for Bitcoin. Somebody's creating digital rails that you can buy and sell things instantaneously; you actually don't need stablecoins in this environment; and so, you can move digital assets around the world supremely efficiently and it gives you also the bull case for Bitcoin; because if what they're telling you is you want to do a Bretton Woods, where we can all agree to stabilise our currencies and do massive printing, Christ! If you're after a better case for Bitcoin, I've never heard of one.
Peter McCormack: All right, well we'll come to the Bitcoin bit. I still want to spend a bit of time just kind of understanding this. Okay, so every country would be able to enact a stimulus programme at the same time; it avoids currency wars; that still doesn't affect us as potential, say, savers; it would still debase our currency as an individual?
Raoul Pal: Correct but, you know, it all depends on what you think of as inflation, right; because, if all currency blocks are debasing their currency at the same time, imports and exports don't go up and down in price. So, you don't feel worse off. It's kind of weird because only hard assets have really gone up in value then, so you'll find that everything from fine wine to arts to gold will go up in value; maybe real estate too. So, it depends whether it generates inflation and how people perceive that.
Peter McCormack: So if anything, therefore, it will create a bigger wealth divide though between those who have assets and those who don't?
Raoul Pal: Well, the idea is not to, right? The idea is they want to directly give money to people who don't have the assets. That's the part of the problem; the current system is really broken, as you cannot stimulate where it's needed. So, you stimulate by printing money that goes into the banking system that does or does not get distributed. Then, only the people with the best credit get the money. That's the credit cycle; that's how it always works.
That's okay, but in a situation like this, which is an external event, where small businesses have been destroyed, how do you help them? I mean, it's not their fault. It's not like they've got massive debts. They're not General Electric or AT&T with these hundreds of billions of debts; they're just normal businesses whose cash flow now doesn't meet the rent.
Peter McCormack: So, is this just a big plan for potentially restructuring these debts across the world over the next five to ten years, because I spoke with Lyn Alden and she talked about the 130% debt to GDP event horizon; 51 of 52 countries have hit that point of having to devalue their currency. I think there's only Japan who hasn't. And, I think I was reading in that IMF paper that, yeah, so we expect 2021 debt levels to go up significantly to around 125% of GDP in advance economies; so, we're heading towards that event horizon.
Is this just a plan to essentially wipe these debts in a certain way?
Raoul Pal: Look, that's always been my thought is obviously, they're thinking about the end game, and the end game of debt is either pay it back, default on it, or inflate your way out; that is the only way. And no way of paying it back. The central banks have tried to get off the quantitative easing system. They can't, because debt itself is so deflationary, plus the demographics, plus technology, plus globalisation; it's almost impossible. So, they've got to do something.
You know, everybody hates central banks, I get it. Put yourself in the hands of a central banker given this; what do you do? You're 120% of GDP in debt, what are you going to do; just not stimulate; say I'm going to be fiscally responsible? You're not going to do it. So, they have to do something, and some sort of debt jubilee, in whatever format that is, is as old as human literature is.
There's always been debt jubilees where people over-extend, over-borrow; eventually there's no way out without wiping it out. And, who pays the cost in that? That's the issue.
Peter McCormack: Well, this is again what Lyn was talking about, because she said a default is unlikely due to credit ratings. She said the most likely way is they'll inflate their way out of it, and we'll see high inflation over the next ten years, so the debtors will be nominally paid off, but their purchasing power may be half what it was. She thinks that's the most likely outcome.
Raoul Pal: Yes, and that's again slightly tricky; how to generate inflation. I mean, the central banks have not been able to. Inflation is different to different people. Your inflation rate's different to mine; currency debasement inflation is different to commodity inflation. What we don't have is demand-led, wage-growth inflation.
And, I'm going to write a big piece for this for Global Macro Investor in a couple of weekends' time. Wage deflation, I think, is actually what's been going on; not inflation of goods prices. Because, if you look at the price of most goods in gold terms, they're roughly where they were, right, so why are we not benefitting; why is it not stable for us; why does everybody feel screwed?
Well, if you look at real wages in the US, they haven't risen since 1974. Real wage growth has not gone up, but goods have gone up and people think that's inflation. But, if you look at all the goods, they all kind of match gold and everything else, so it feels that -- if you think it through, what is wage deflation; why? And it's a very different way of looking at things and I'm just starting to get my head around this after a conversation with Jeff Booth.
If you think about it, in the early 1980s, a record number of people walked into the labour force, which is the baby boomers, not just every cohort in world history. So, they all compete for a job. Guess what? Wages stop going up, obviously, that's basic economics. Too much supply; not enough demand. So, the next part of the equation is, so wages stop going up, but goods continue to go up in price over time, so what do people do? Borrow money to make up for it. Obvious. There goes the debt bubble.
So, now you've got the debt bubble and you've got wages that won't go up. Then, the next thing, you hit 1996 and the World Trade Organisation is formed and the treaty is ratified. Then suddenly, somebody making steel in Sheffield is now competing with somebody in China; game over. What happened there was the corporations got rich, because their margins exploded, and the average guy got poor. So, you made them have lower wages, you got them to increase their debts, and now you've taken their jobs away; or, lowered the cost again of wages, because you're competing with China.
And then layer on top of that, technology. In ten years' time, there'll be no taxi drivers, there'll be no bus drivers, there'll be no truck drivers, there'll be no train drivers. I mean, just simple things like that. Marc Andreessen was dead right; software is eating the world. Technology is proving to be a more productive way of running businesses than humans, okay? That's just fact. It's not going away; it's been happening since the industrial revolution and the agricultural revolution. It's all the same thing, it's just the relentless drive of technology, which is why procreation rates around the world have collapsed because there's no point having children, because the opportunity's less.
So actually, population growth will adjust over time to this. We've seen in Japan. So, that then leads into the things like universal basic income. You've screwed all these people; they've got no way out; they're now heavily indebted; they're trying to retire; they don't have enough on their pensions; there are no jobs for them; and, technology is keeping a lid on wages. You can't generate inflation from the 1970s; that just can't happen. It will be a different type of inflation when it comes. So, that's not there; how do you help these people?
So, the idea was to print money and the banks will give it away; I get that. It didn't work, because only the people who didn't need the money got access to it. So, Jeff Bezos could probably go out and borrow $100 billion on a phone call. Good luck, my friend, if you want to. That's the issue here. What you're doing is creating a system that incentivises the rich. So, the idea then is universal basic income, which is okay, fine. Let's just shift up the standard of living of everybody and that's going to help. At least people can afford to have …
If the structural situation means that companies can't pay them more wages and lay them off over time because of technology, let's make sure people have access to food, rent, clothing, healthcare.
Peter McCormack: Well, what do you think of UBI yourself?
Raoul Pal: I actually like it.
Peter McCormack: Okay. It's controversial?
Raoul Pal: Yes. And I get it; people don't like it; are you paying people not to work, etc? Look, the facts are these people have been left behind and it's no fault of their own. Okay, you can layer in the education system's failed them as well. But, how do you help people in this situation? It's not going to get better.
And this is why it's come out of Silicon Valley because they're like, "Listen, guys, we're destroying the world here. You need to find an answer because it's not going away". And everyone's still so back in the 1970s, because that was the big thing, that they saw inflation. But, they're fighting the wrong war. And, Silicon Valley's telling them that, and I think they're right. And again, I don't think it should be thought of as a socialist thing versus a capitalist thing; it's basically a humanist thing at this point
Peter McCormack: It's a welfare programme.
Raoul Pal: It is a welfare programme but, you know, all of Europe's surviving with welfare programmes just fine.
Peter McCormack: Yeah.
Raoul Pal: And, the quality of life in Europe's extremely high.
Peter McCormack: It's a very tough concept to discuss in Bitcoin circles, because it's socialism and if you believe in it, you believe in the socialism and it's one step from communism?
Raoul Pal: Well you see, what's attractive about Bitcoin really at its core is it offers the little guy an opportunity, right, which most other things don't. So, it's a complete inversion, and that's great. But still, not enough people will benefit; there will be a group who will, because it's not owned by enough.
Peter McCormack: Yeah, I haven't actually looked, because there have been a couple of studies, a couple of test programmes with UBI and I haven't actually seen what the success rate is. And, in some ways we're operating a -- the furlough scheme is almost a micro-test of UBI.
Raoul Pal: Yeah, and people say it's going to be inflationary. So, think how it works, right. Inflation is a rate of change. So, you can have one year where all the inflation numbers are going to go up, because there's a new increased demand for goods; people who couldn't get access to whatever, now have access to it. But, the following year it goes out, because it's not like there's inflation in UBI. What you're trying to do is just make sure -- you can either lower the cost of these goods and services, like healthcare or whatever, or you can increase wages. And if companies can't do it …?
Now, I think there are interesting ways of doing UBI. I think tokenisation allows us online to be able to sell our eyeballs, not literally; figuratively! Because, why should the lion's share of all of our attention spans go to Google? That's not right. They're making super-normal profits and they're going to get regulated. But, people like Brave Browser and stuff are doing interesting things where you could earn whatever digital currency; Bitcoin. You spend time online, you get paid for part of the advertising share. Well, that could pay for part of UBI? There's just a whole new world out there that is going to become accessible.
The other things about these central bank digital currencies is it stops monetary policy and fiscal policy being a blunt tool, because I can give you a different amount than I give the guy next door to you, because I want to incentivise you because you've got a business; and the guy next door, he works for a large corporation and I don't think I need to incentivise him as much.
I can give you a higher rate of interest because I want to encourage you to be a saver, and I can give me a lower rate of interest, or negative interest, because I've got more savings. I mean, wow; these are behavioural economics; it throws out the rule book of everything, and we can change monetary policy and fiscal policy forever, and I think that's super exciting.
Peter McCormack: Yeah.
Raoul Pal: And, you know, they will screw it up, obviously. It's the law of unintended consequences not going away. I really like it, because it's better than what we've got, and I haven't heard anybody else come up with a better system.
Peter McCormack: Yeah, so one of the things I think about with UBI is the forecast of doom with all these jobs being lost in transport and --
Raoul Pal: Manufacturing?
Peter McCormack: Yeah, manufacturing and even, I saw once with regard to some roles within medicine, the ability to review x-rays and such. There are so many different areas of jobs that could be lost. But, what we haven't accounted for is the ingenuity of humans to find new jobs, or will that lead to people finding jobs in other areas, other service-related jobs, arts jobs; I guess we don't know.
But, I guess one of the other arguments against UBI is that, if you don't have productivity behind the generation of money, that does tend to --
Raoul Pal: Why are you assuming that people will just stay at home and do nothing? Humans, out of instinct, want to work; they want a purpose.
Peter McCormack: I think some will, some won't.
Raoul Pal: Sorry?
Peter McCormack: I think some will and some won't; I think it will be a mixed bag. Not all humans want to work.
Raoul Pal: But then, fine. So, the people who do work; they have more opportunity. I just think entrepreneurialism is the output here. The SaaS business model is so empowering for anybody; you can make 70% margins in pretty much anything you do now. That's why technology is eating the world, because the margin of technology is so high. So, anybody can start a business. I mean, look, you've started a media business with no actual cost.
Peter McCormack: Want to bet?!
Raoul Pal: But, you know, limited cost.
Peter McCormack: Yeah, I know what you mean.
Raoul Pal: Take a restaurant, right, which is bloody capital-intensive and has shitty margins. But now, it's a whole different world out there. So, I think the micro-business and the ability that everybody is now a media person, everybody has an expertise that somebody wants something of, all of this is here; it's all there and it's powerful. But, some people just don't have that ability; some people don't have the education; some people don't have the knowledge; some people are too old; some people are too young.
So, I don't mind it. I understand why people don't like it, but I think the system's so screwed now and if somebody wants to come with a much better idea on fixing this, I'd love to hear it, because I don't hear a lot of ideas; I hear a lot of criticism. And at least it's something, and I love change because in change, there's opportunity.
Peter McCormack: Well, let's talk about the bit of the CBDC that I really, really don't like, which is also the argument for Bitcoin. So, when I started reading through the thread and then reading through the links you put in, which by the way, thank you for putting those all in, was this idea that, well, the money being issued by the central bank, but this realisation that you no longer own your money really. It's not like with Bitcoin where you'll own your private keys.
You won't really own your money. It's the ability to auto-tax you. And, I'm going to imagine there'll be the ability to auto-fine you from your money. And you never have that ability just to -- for example, you can take cash out now, and we're moving away from cash rapidly through COVID; but, I have a bit of cash that I always store, which is my backup. We could end up just not having that.
So, you don't really ever control or own your money. You have access to it potentially, but that could be switched off, it could be debased, it could be taken; or, and as you said, behavioural control. It feels really dystopian and scary.
Raoul Pal: Is it any worse than what we've got?
Peter McCormack: I think so, yeah. I think it is worse.
Raoul Pal: I don't think so.
Peter McCormack: I think it's marginally worse.
Raoul Pal: Okay, I'll buy that. The state control; it's inevitable, right. We can complain all day about it, but behavioural economics and big data combined have changed the world. People just don't understand this yet, but this is all Facebook it; this is all Google is, is understanding human incentives. The power of behavioural economics in manipulating societies for the good or the bad is out of the bottle now. That genie cannot be put back; it's not going away, which is why I call it the Bitcoin life raft, because it is one of the few ways you can get out of it.
Peter McCormack: Yeah, well that's why I said it's a good argument for Bitcoin. But, that idea that you can't just exit at all?
Raoul Pal: So, let's say you weren't a nefarious person and now you've been given the ability to incentivise, put a tax rate just immediately on goods and services whenever money changes hands so there's no tax filing system. Imagine that you can give handouts to the right people. Imagine if there are no bad debts, because you can claim them. There are some really good things in this.
Peter McCormack: Oh, I don't deny that.
Raoul Pal: But, the problem is is governments are governments and humans are humans and we're just not good.
Peter McCormack: Well, it's kind of utopian. I agree with you there are some really great benefits. You know, companies screw you over and you win a court judgement; the money can be automatically issued to you, rather than having to wait for it. The money can't be hidden. I mean, I don't know how central banks will work with each other and cross-jurisdiction, but I understand that.
In a healthy, good society, where everyone has good intentions, I can see the benefits. I just know what humans are like and it just feels a little bit like it's another freedom we've given away.
Raoul Pal: Yeah, okay, and I get that. But, let's say you're a bus driver in the UK. Let's say, I don't know how many bus drivers there are in the UK; let's call it 50,000, 100,000, right; 100,000 bus drivers. We know, in the next five years, they're all going to be out of a job, or ten years. So now me, as government, I can look after bus drivers and I can give them direct payments and I can re-educate. That's a huge benefit, because I can't do that really easily in the current system. But, to get that, I'm going to have to give up any form of anonymity.
You know, this trade-off, it's the same trade-off we do when we use bloody Twitter or Google or Facebook; it's a trade-off. When you trade off with a government, everybody gets up upset; yet you, who really believes in this stuff, uses Google all day, and they have more data on more people than any single entity on earth, and they don't use it necessarily for good means.
Peter McCormack: Well, yeah, we're learning about that now though. I don't know if you've seen, The Social Dilemma, but there are lots of these kinds of documentaries or concerns about the use of big data. For me personally, it's kind of pushing me away from these companies, so I don't use Google now on my desktop; I've just stopped using it.
Raoul Pal: I don't. Well, I still use Google search, but I don't use Google browser. I only had to look for this, but I don't use it because Apple's less nefarious, because Apple's a walled garden and Google's not. I don't use Facebook any longer. I'll go on and check on once a month, but I don't have any app or anything else.
But I do use Twitter. Now, Twitter's just particularly incompetent at capturing data. But, if they get their shit sorted out, then the amount of conversations we all have all day on Twitter, I mean, that's there; our locations; what we do; everything.
Peter McCormack: Have you looked into technically how they're going to implement this, because that was one of the things I couldn't find. Like, is it, distribute a ledger, or something?
Raoul Pal: So, I started, who was it? Joe Weisenthal, who I've blocked on Twitter --
Peter McCormack: What? Why?! For his Bitcoin trolling?
Raoul Pal: He was just being a dick. He was unnecessary, just unnecessary, so I didn't have time for him. But anyway, he did a good podcast with Tracy Alloway and Benoît Cœuré, who was the guy at the ECB who was fronting the digital currency project, now is at the BIS. It was a great interview, because it was really open and honest.
He said, "Well, some countries are going to use it for smart contracts where they can use it for direct payments; others will just have it like a stablecoin; others will have incentives built in". He goes, "Nobody really knows what they're going to do". He said, "I prefer the incentive-based ability to do a bunch of stuff; others won't. The US hasn't really decided where it's going to go; others are further down the track; some of them will change".
With Bitcoin, it was very clear that it was not anti-Bitcoin, which everyone was like, "See, they're going to ban Bitcoin". It sounds so far away from that. They're moving towards it. They understand that it's there and it's not going to go away and it probably plays a good role. So, that was a really good thing to hear. But basically, it's telling you they don't know. There is no masterplan; they're trying to figure it out, because there's new technological and, do we use behavioural economics or not? Some voters won't like that.
So, that was a political decision and he said, "All of this is actually a political decision, not a monetary decision". So, it depends.
Peter McCormack: Right. Do you think this is why some of these banks are given these new licences, you know, Kraken and Avanti; it's almost in preparation for the CBDC to come?
Raoul Pal: Oh, he made it clear that really, you don't actually need a banking system, because you can have fintech and central bank digital currencies and then, anything else in the crypto space or the digital asset space. You actually don't need a bank. So he was like, "We're very actively encouraging all of the fintech, because it's helping us". He said, "We're governments; we can't create this stuff, but the private sector can and we should be using it and encouraging it".
So, the banks themselves, it's like being an oil company right now. You either try and stick to what you do and milk the last dollar out, or you change.
Peter McCormack: I mean, we'll still need financial services for borrowing and lending; or, do you think the borrowing and lending will come from the central bank?
Raoul Pal: Why not? I mean, they just do it through a middleman right now. It's like, you can buy your produce from the farm next door, or you can go to the supermarket that stocks the produce from the farm next door and pay the supermarket money; why?
Peter McCormack: Well, you want competition, right, for servers?
Raoul Pal: But, that's what fintech does. You can choose what digital wallet, what interest rate programme you want to use; you can choose any of this stuff; what custody systems; anything. So, what do you need the bank for? Now that asks the question of, who's better at allocating capital; central bank or banks themselves? Well, both seem pretty shit to me, so I don't really know the answer to that.
Peter McCormack: Well, perhaps there are companies like BlockFi then, who are essentially a crypto fintech company?
Raoul Pal: Absolutely. The system is moving to them; they're not moving towards the system.
Peter McCormack: Yeah, that's interesting. It does really, like I said earlier, and we wanted to come back to this, it does really reinforce my conviction on Bitcoin, which is being reinforced almost on a daily basis at the moment.
Raoul Pal: Yeah, I mean yesterday, the Central Bank of Thailand talked about their digital currency. I mean, all of this is coming. I mean, you couldn't ask for more flags being planted on a daily basis. I mean, I log on to Twitter every morning and there's another big story of somebody else who's entered the space, or acknowledged the space, or moving forwards in the space. You're like, "Okay".
I keep talking about this, and never before has the little guy had the ability to front-run the financial institutions and the financial system; that's what we're being given here. It's always been the other way round. We all get screwed because they sell into us. They get us to buy into their products and they make all the money. This is the inverse; it's fantastic. It's an inverse pyramid here where we get the power and we're the ones who sell them the Bitcoin at the high price. Thank you!
Peter McCormack: Yeah, thank you! Is there an incentive with the central banks, with these new CBDCs, themselves to also be owning Bitcoin?
Raoul Pal: Well, I think game theory would suggest yes, because my guess is, if it does well and people understand a bit as a reserve asset, it starts to go into some reserves. That won't be quick, but my guess is within the next year, somebody will do it; let's say a small country like Jamaica or the Bahamas or whoever. And everyone will go, "Huh", because what they want is stability. The Bahamas is pegged currency, but choose a place that has problems historically with its currency; you get a harder currency. It's like, "Huh, okay, that's interesting".
So then, if that helps them with their capital flows, much like we've seen with Michael Saylor's share price, it's the same thing. So if you've got that backed by a bit of Bitcoin and then it gives them more returns, that works, because Bitcoin's still not at the money stage; it's still at the appreciation stage where its price discovery is still underway. So, there's a lot of price discovery still to come out of this.
Peter McCormack: Yeah, one thing that's quite interesting, it does seem to be, like, the correlation with the S&P seems to be breaking a little bit. I've been very impressed with the price this last two weeks. It's kind of interesting. Well, look at us now, we're back to nearly $13,500; we dipped just below $13,000. It keeps bouncing back. There are so many interesting things that have been happening.
Have you had Saylor on Real Vision; you must have, course you have?
Raoul Pal: Yeah, we were the second people to have him. We had him for two hours.
Peter McCormack: Did you? I did a double one with him. What did you, when the MicroStrategy thing happened, how did you react; what was your -- because it wasn't like some company had come out and said, "Yes, we've put $10 million into Bitcoin", which itself would have been amazing; I think everyone would have leapt up. It was $450 million!
Raoul Pal: Well, forget the amount of money it is; it was a large part of their cash reserves. Now, most companies won't do that, but Michael's a true believer. And, I don't think Michael is going to drive corporate adoption in the space, because he's really speaking the language of Bitcoin and not the language of corporate treasurers, and that has to happen. We're very bad in this space of speaking the language of the others that we actually want to encourage into the system in the end.
So, and I've mentioned this numerous times, you're not going to get the pension system and the asset allocations until you start talking in terms of Barra asset allocation models. None of us know what those are, because nobody uses them, except that industry.
Peter McCormack: Do you know what it is?
Raoul Pal: Not really, but it's basically asset allocation models that the entire pension fund industry uses and the consultant use and the actuaries use and all of this stuff. Well, unless we start talking in those terms, we might as well be shouting in Swahili at them, because it makes no sense; and the same with the Corporate Treasury.
To talk about 100-year value of model to the treasurer of Microsoft, who might be in his job for ten years before he moves on somewhere else, is irrelevant; it doesn't matter. Show him the portfolio diversification effects versus cash that he holds across credit, commercial, paper, treasuries, different currencies and say, "Well, if you put this in, this is what it does to your portfolio", then he's going to go, "Yeah, I get it. I'm going to do some of that". We're just still not talking the same language. We're so busy shilling the damn thing that we don't actually help people.
Peter McCormack: Yeah, it's funny. We shill it because we want it to go up and then when it goes up, we have this panic, "Oh, I don't have enough". Michael Saylor today, after admitting he has 17,500 personal Bitcoins thinking, "I get anxiety at night because I don't have enough". That's like, "Well, I'm fucked".
Raoul Pal: I saw that and I'm just like, I feel so underweight now, I just feel so brassic.
Peter McCormack: Yeah. In terms of this though, because like I say, it's been a really interesting year. It feels like, and like you say, every day you wake up and there's something new. There's always something new that seems to be happening. But, it really feels like this year will be a year we look back, for a number of reasons. I mean, 2020's just been insane for a number of reasons; what's going on in the US; the election; pandemic; Black Lives Matter; what's going on with Bitcoin.
But, do you feel like, as an industry, because I consider you somebody who kind of came outside and then came into Bitcoin, you already had a traditional financial background; do you feel like the industry is really maturing now?
Raoul Pal: Yeah. This was the accelerator. I've said for a long time, I've been involved in the Bitcoin space since about 2011 and I always knew where they were going, which was that Bitcoin and macro were going to meet; and, this was the year it happened. I mean, there's no surprise hear at Real Vision that we're starting Real Vision Crypto, which is a whole crypto channel, because macro and crypto; all the crypto people are now having to get up to speed with macro and you've been doing that. You've been educating.
Peter McCormack: I've tried.
Raoul Pal: So, there's actually that, and then all the macro guys have to understand crypto. So, we're all having to learn at record pace to figure it out, because these are not separate worlds now; they're now the same thing. When we're talking about central bank digital currencies, behavioural economics, we're talking about incentive systems, monetary policy, fiscal policy, how does it affect Bitcoin, right? We're all in the same world now, and this was the year it happened. Amazing time.
Peter McCormack: It's like, I'm not sure how to class it, and I guess these times are classed retrospectively; I don't think you consider the industrial revolution as it was just starting, right. You look back and think, well, that was the industrial revolution. What is this; is this the money revolution; is it the economic revolution; because, it's certainly something?
Raoul Pal: If software is eating the world, this is software eating money, and it's just that; I mean, the whole financial system. What's been clever here is at the beginning of all of this was basically just a bunch of engineers saying, "We think we can build a better system of money". What a ridiculously arrogant thing to set out to do, but they did. I mean, staggering, and we haven't even started this journey.
I mean, we can postulate all day what's coming; we have no real idea. And, that's what's so fascinating about it. We have no idea where this is all going to go. And, I know it's not really your focus, but stuff like tokens are going to change everything.
Peter McCormack: Yeah, I mean I covered the IMX one. I'm not really in a lot of cryptocurrencies or coins. I did cover the IMX one because I was like, you know, and I might get shouted at by maximalists for thinking this, but the idea that I have a wallet, say my ledger, and the idea that on my ledger I can have my Bitcoin and also I could have my digital pounds and also, next to that, I could maybe have my shares.
And then, I could be having this conversation with, Raoul, and Raoul, you're like, "Sure, Pete, I want to buy 10% of What Bitcoin Did for Real Vision", and it's, whatever, 50 Bitcoin; and I say yes, and we can just do that transfer. The idea of owning those assets and that would legally be enforceable, I think is great. I don't know how it works, but if that is legally enforceable and it works, I actually like that idea.
Raoul Pal: Yeah, it's super empowering. So, somebody came to me here in the Cayman Islands, because Cayman's looking very seriously at this whole digital space, because all the legal infrastructure globally came out of here really, because all the lawyers are here, because it's mainly offshore.
And somebody came to me and said, "I want to tokenise the real estate; start tokenising real estate", and he's a real estate guy. But he also actually is involved in the gold storage business and the crypto industry and all sorts of stuff. And it's well, people, Caymanians, we've got the same problem; rich and poor divide. It's a relatively wealthy island, but there's still a rich/poor divide.
The idea is, they can't afford real estate on Seven Mile Beach, prime real estate. Hell, I can't afford real estate on Seven Mile Beach. But, if you tokenise it, then all of the Caymanians can participate in all of the property market and it can go in the pension system. Okay, so then, it's not like, "Well, you can't buy the bottle of Château Lafite that's $10,000 at auction"; you can, because you tokenise it. So, everybody -- it's so democratising that it's incredibly powerful.
And, we talk about a world where everybody becomes a media person, where everybody has these small businesses. Well, to tokenise your cash flows, to tokenise you, we're going to see it with sports stars, we'll see it with, you know, everybody's talking about this already; music is clearly -- I mean, there are no middlemen; they're all going to get taken out. Why Taylor Swift, with this enormous army of followers, should ever need a middleman? She shouldn't, not when you can tokenise everything.
Peter McCormack: Yeah. Well, there are these other implications for things as well; things I've noticed happening at the same time. I started work on this series about Donald Trump about three months ago and it's completely changed on its head. It was originally going to be a story about how he's a potential dictator. I spent months researching it, all his nefarious actions and lies.
And what I ended up realising, it's not actually a story about Donald Trump; this is a story about the massive change in society right now, because on so many levels this happening. It might just be money, but we've all become much closer to politics than we were 20 years ago, because we have apps, we have 24-hour news, we have social media. Politics is in our face, so we all feel closer to it.
But, politics hasn't grown up, hasn't matured in a way to cope with everyone having a political opinion. And, one of the negative effects of that is we now have read distrust in the news. So, you talk about people being their own media companies? We also have this situation where people are, like you say, they're becoming their own media company on Twitter; but I'm becoming really distrustful on that.
So, we've got this kind of revolution in money, revolution in news, revolution in media, but I'm not sure if it's all going in the right direction for me, Raoul?
Raoul Pal: No, but I think everybody acknowledges that; that's a good start. So, for example, at Real Vision, we've built our own community. It's called The Exchange and you can go in there and interact with Real Vision's subscribers. So, what you're doing there essentially is curating who you want to interact with, right. Twitter is everybody, but once you're on a platform that has the details of who you are really, and you can use a fake name on Real Vision, but we bill your credit card, so we know who the hell you are.
So, what it does is create a different kind of behavioural interaction and I think communities themselves begin to self-police. If you set it up as, "Listen, if somebody's posting something that is fictitious, nefarious, or something else …", then again, just using a token system, a credit system, you can have people leave the community or get promoted within the community for the right actions. That's not driven by us as a centralised, but actually driven by the community.
Peter McCormack: I think what it was, I was heading towards saying though, is everything's moving a lot more towards smaller units, individuals, smaller companies; but yes, you're still going to need huge companies. Like, if the airlines ever start flying again, I don't think I'm going to trust, no offence, but Raoul Pal Airways; I'm still going to want to use British Airways.
But, in terms of media, I think the structure doesn't work for massive media companies. So I think structurally, we're moving towards this kind of self-sovereign, individual, smaller units of everything. I'm just not ready for it myself.
Raoul Pal: Well, it's hard, and people get more isolated from everybody. It's not easy and I think it does go towards smaller units and it goes towards communities. It used to be a broadcast world and it's now becoming a community world where, not only do you create content, but the community creates content and everybody's in charge of the whole thing.
I love that, but it's very fragmented, because everyone's had enough of the big platforms, so we're now going to do the opposite, because we're humans, we always do this, "Oh my God, we don't want that, we'll go to that", and then, "Oh my God, we don't want that, we'll go the other way". But, that's where we're going and we're moving away, so we'll go to communities where we don't have to hear from everybody else.
Peter McCormack: Well, "fragmented", is the word I should have used, because everything is fragmenting. But, the thing that's been in my head with the story I've been writing, or script writing, is that I think politics now needs to fragment. This idea of this focus on centralised government is actually really ineffective.
Raoul Pal: Well, look, here's a question for you: what's wrong, and I don't know the answer to this, I don't really have a view, but the two-party system has failed the UK, it's failed the US. The Europeans generally have proportional representation. Is that better? Probably.
Peter McCormack: Probably, yeah. I think it's more wanting to take a bigger interest in localised politics anyway. But, that's where I've been heading. If the digital revolution empowers everyone, if this monetary revolution makes us all self-sovereign, outside of this CBDC issue, why do we need to rely on these big governments?
Raoul Pal: But, the question is, do you even need to interact with them; because, I'm not sure that what we understand as society, country stuff, is going to be defined by anything apart from the services that the state provides, be it defence, be it healthcare; whatever it is, right; having your rubbish collected.
But, we actually live online in a different community, so my online community is Twitter; that's where I hang out. That is where the social pressure, if you create the wrong behaviour, the social reward system lies there; it doesn't lie within the state. So, living online, we just go and hang out in the tribes and the places in the community that we want to. We live in different societies.
And then, you end up with a weird world where, if you think it's okay to be a paedophile, you can hang out in paedophile online groups and all the societal norms of that. But, you know, God forbid if you beat dogs, because then you're one of the awful people and the dog-beating society, you know, they think that's great. And then -- it's weird. So, you're going to fracture societal norms, because what's norm in some place is not norm in the other.
Peter McCormack: Yeah. I think where I was going is I was thinking, are we railroading ourselves into anarchism without even realising it? We're becoming self-sovereign in terms of money, especially with something like Bitcoin; we're becoming, like, we can operate and create businesses at a whim online; we can, in some ways, Raoul, we can do business with each other outside of the government, outside of the government knowing what we're doing. Are we actually pushing ourselves to a point where we don't need government?
Raoul Pal: Well, the ultra-fragmentation, where everybody has a different set of rules, as I said, the paedophile online groups have a different set of rules than our Twitter group, or the Bitcoin maximalist group, or whoever it may be, right; the Chihuahua lovers group. Therefore, there are no rules, there is no cohesion to society, because you're living in micro-societies; so, it's like going back to the dark ages where everybody fights.
Peter McCormack: Oh, no, I don't want that.
Raoul Pal: You don't have societal cohesion. Well, something has to change to create cohesion because, actually, all the incentives are for fragmentation because, you know, you're doing it, I'm doing it. So, we've fragmented media into financial media and then Bitcoin media, right; fragment, fragment, fragment. It used to be, when I first grew up, I was listening to the BBC, okay; centralised down to fragmentation.
And, I think you're right. It feels really empowering in the beginning and then you realise, there is no society, or your society is so narrow that you seek large society again. We probably do this endlessly. Countries are going smaller as well, right? Ever since World War II, really -- no, since the end of the British Empire, country blocks have been shrinking. So, it was the British Empire; then it was the Russians that went; Europe was the anomaly.
Peter McCormack: Well, we still had it in, like, Yugoslavia?
Raoul Pal: Yeah, but, fragmentation? The Scots are going to leave England at some point; the Catalonians are going to end up leaving Spain; the Basques will end up leaving Spain and France; the southern Germans, the northern Italians. That's the natural, from what you're describing, the natural path.
Now, that's not terrible; it's just very different. But, we all know that when you have lots of micro-states, you tend to have less peace and I think we can see it online. Like, the Bitcoin maximalists just will not stop trolling everybody, and that's great because they support Bitcoin; it creates a vibrant society; it's good. But, their societal norms are different to mine.
Peter McCormack: Yeah, I agree with them on a lot of Bitcoin stuff, but then there's some of the things I don't agree with them on. But, we've really gone down a rabbit hole I wasn't prepared for, and now you've given me a whole bunch of things to think about.
Well, listen, I know you're busy, so I'm going to let you off the line now, but it's good to see you. I might look into my Cayman one-year stay thing; see if my kids want to go out for a year!
Raoul Pal: I think you should, Peter.
Peter McCormack: I don't; I can't see it happening. But, tell people how to find out more about Real Vision, Raoul?
Raoul Pal: Yeah, look, the easiest thing, because people listen to podcasts, watching video, go to our YouTube channel first, Real Vision, or go to the podcast. Just check those out, the usual places. You'll see what we do and as I said, we're about to make the biggest media launch in the crypto business, so we've been testing internally our Real Vision Crypto. It will become and you'll be on it, without question, and it will become the meeting place for all of us. We'll have a community we're building for that and we want to bring as many people together as possible.
That will be free, which is a big change for us, and that's going to be brought by dealing with a partner consortium to bring that free. So, Real Vision Crypto I think launches around 18 November.
Peter McCormack: Wow, it's very soon.
Raoul Pal: Yeah.
Peter McCormack: Let the election get out of the way.
Raoul Pal: Yeah, always, right. I just want to give birth to the damn thing and get going.
Peter McCormack: Well, listen -- oh, by the way, thanks for that bottle of cognac; was it cognac?
Raoul Pal: No, it was rum, you cheeky sod.
Peter McCormack: Oh, no, rum, a bottle of rum, sorry, yeah. I stopped drinking half way through, but do you know why that bottle's so good? It's one of the few spirits I can have without a mixer.
Raoul Pal: Yes, that's right.
Peter McCormack: It just tastes so good. I got through about half of it and then I gave up drinking.
Raoul Pal: Why have you given up drinking?
Peter McCormack: I just stopped for a week, and then it's become nearly three months. I'll go back at some point probably.
Raoul Pal: Yeah. I stopped for three weeks. I was going to do a month, but I didn't.
Peter McCormack: Well, I was going to go until my birthday and my birthday is Saturday, on Halloween. So I might, and this will disappoint some people, I might have a glass of Champagne on Saturday. But, thank you for that, by the way; that rum is amazing.
Raoul Pal: Yeah, it's really incredible, really incredible rum.
Peter McCormack: I'm not a rum drinker traditionally, but I had some in Barbados once.
Raoul Pal: We all grew up with Bacardi and crap like the Captain Morgans and all that rubbish; Wood's Navy Reserve.
Peter McCormack: Yeah!
Raoul Pal: Good rum is like, oh my God, this is delicious.
Peter McCormack: Well, I got through that first half in days!
Raoul Pal: Good on you!
Peter McCormack: Well listen, Raoul, good to see you, man. Good luck with the launch of the new channel and take care. I'm sure we'll stay in touch. I'll be pestering you in few months to come on again.
Raoul Pal: Yeah, absolutely. Yeah, take care, my friend; good to see you.
