WBD353 Audio Transcription

From the Petrodollar to a Bitcoin Standard with Alex Gladstein & Nic Carter

Interview date: Wednesday 26th May

Note: the following is a transcription of my interview with Alex Gladstein & 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.

In this interview, I talk to Alex Gladstein, the Chief Strategy Officer at The Human Rights Foundation and Nic Carter, a Partner at Castle Island Ventures. We discuss the petrodollar system, moving to a bitcoin standard and the benefits that it would have on society.

“It’s reasonable to think that in the next 10-15 years, we’ll start seeing a real shift. Whether it’s to a bi-polar world or a multi-polar world or potentially a world where we no longer have the petrodollar as the reserve currency… but rather, maybe the Bitcoin standard.”

— Alex Gladstein

Interview Transcription

Peter McCormack: Alex, good to see you, mate, how are you doing?

Alex Gladstein: Doing well.  Thanks for having us, Peter.

Peter McCormack: Always a pleasure.  Nic, you're 150th appearance on What Bitcoin Did, how are you?

Nic Carter: I'm doing great.  I think this is number eight, man.

Peter McCormack: I think it might be nine?

Nic Carter: I hope I'm still on top.  Am I on top?  Is Lopp ahead of me again?

Peter McCormack: No, Lopp's behind, Breedlove is on eight now.  The problem is, I've got regular guests.

Nic Carter: That's messed up.

Alex Gladstein: That's unfair; you can't compare us to them.

Peter McCormack: Yeah, they don't count.  I think this puts you back on top.

Alex Gladstein: More importantly, the first podcast that I've ever appeared on with Nic.

Peter McCormack: Really?

Alex Gladstein: Yes.

Nic Carter: Yeah, it's our first.

Peter McCormack: Well, I feel honoured to have you both together, because you're two of my favourite people to talk to.  Okay, so Alex, you know I'm a huge fan of your work.  You produce, I think, some of the best content out there.  I think the only person who rivals you for that spot is the man who's joining us, Nic Carter, but your recent article on the petrodollar I think is my favourite thing I've read by you, because you educated me on something that I'd heard about, but I didn't really properly understand the mechanics; and certainly didn't understand the geopolitical mechanics.

So firstly, a big thanks.  Anyone listening, it will be linked in the show notes.  You should probably read it before you listen to this interview but, Alex, what was the background to this; why did you decide to attack this topic?

Alex Gladstein: Yeah, so I can credit Nic and a few others actually for persistently reminding the world that when we talk about Bitcoin's energy use, we're not talking about a comparison to like a Visa, which is what the media likes to focus on.  In reality, when you look at Visa, of course, Visa is a Fintech kind of sitting on top of the banking system, which is sitting on top of the dollar system.  So, transactions actually use a lot more energy than it seems on the surface.

My whole goal here was to dive down past the surface to the bottom of the monetary system; and to fairly compare Bitcoin per transaction, or whatever, to the existing financial system, you have to compare the full stack.  So, Bitcoin is this open stack, you can see it all and we can more easily figure out the externalities.  The dollars that we spend on a daily basis today, usually through commercial banking and Fintech, the full stack is hidden.  So, my goal here was to dive all the way down and take a look at what is backing the financial system today and then that way, we can have a fair comparison in terms of the negative externalities of the Bitcoin system versus the dollar system.

The whole premise of this conversation that I want to have with you guys is this idea that the world reserve currency, or essentially what nations save in at a geopolitical level, has evolved over the last century-plus from basically a gold standard to a Bretton Woods standard, which we can get into, which was essentially governments now using dollars pegged to gold; then evolving to what we could call maybe the Treasury Bill standard, which is after 1971/72/73.  Since then, nations have basically saved in US debt essentially as the "hardest money".

Then, for the context of our show here obviously, my thesis is I think we're going to go to a Bitcoin standard as the next kind of monetary revolution, in terms of what do central banks and governments and sovereigns actually hold as the hardest money.  So again, we've gone from gold to dollars backed by gold to dollar/treasuries backed by "nothing" to, I think we're going to head to Bitcoin.  So, that's the chronology here of what I want to talk about.

Peter McCormack: Fantastic.  Well, you asked Nic to join us today, because Nic is one of the world's leading experts on the history of the gold standard!

Nic Carter: I'm not an expert, but I might be able to chime in here.  But, I learned a lot from Alex's piece, so this is the Alex show.

Peter McCormack: Yeah, it's an incredibly detailed and well-researched article and I will circulate it amongst everyone I know again.  But I do think, and an important starting point, even though I've covered this on the show before, other people won't have listened to all my previous shows; my producer, Ben, was one of the contributors to the website, WTF Happened In 1971; but pre-1971, it's probably good to just give an overview of the history and, Nic, if you want to attack this from what happened after World War II, leading up to essentially the Vietnam War and how world powers decided to work together on a common monetary base.

Nic Carter: Sure thing.  Yeah, so of course, there's a very long monetary history which we can't fully cover here, but the long and short of it is, in 1944, when it was pretty clear that the US and the Allies would win the war, effectively the Allies got together at this hotel, the Mount Washington Resort in Bretton Woods, New Hampshire, which is a lovely hotel by the way; I was actually just there.  It's very charming, it's two hours north of Boston in the shadow of Mount Washington, which is a pretty tall mountain, and they discussed a new international system.

They set up a bunch of international organisations and of course, the key thing that came out of that was the agreement that the world would unify on this monetary standard, administered by the US, with the US as the main arbiter and administrator of that system.  And effectively, what had happened during the war was a lot of these European countries, they had actually given, or entrusted the US, with their gold reserves for safekeeping.  There's a whole story about European nations fleeing with their gold, getting it to the US, because that was considered to be the safe place.

Effectively the US, in 1944, took this bargain to the world and to their allies saying, "We will administer the monetary standard.  It will be based on gold.  We will, for the most part, hold everyone's gold and all of your sovereign currencies will just be different weights of the dollar, which will be backed by gold and redeemable for gold".  Keep in mind, at this point in US history, gold convertibility for individual citizens was still suspended, if I'm not mistaken.  It had been suspended in the 1930s in the Great Depression, so it was a tiered system.  There was gold convertibility for sovereigns, but not for regular folks.

So effectively, it was a gold-based standard, through the interface of dollars, with other currencies just being different weights of gold, or different weights of the dollar.  That persisted for a couple of decades.  That was known as the Bretton Woods system.  People talk about the IMF and the World Bank as the Bretton Woods institutions as well, so Bretton Woods is sort of an autonomy for that entire system that the US used as it became the sole superpower, the sole nation that had really survived World War II intact with no destruction.  And the US embarked on the Marshall Plan to help rebuild the world.  They issued a huge amount of credit and distributed capital globally to help rebuild Europe effectively. 

Because they were the unmitigated victor there, they were able to effectively seize control.  And there was discussion at that time around a bancor-style system.  Keynes had advocated for bancor, which would have been a global reserve currency, which would have been a mixture of different sovereign currencies to avoid the Triffin dilemma, but that idea was actually shot down at the time; and instead, we got this dollar-based standard, which ended up persisting for the next 30 years or so.

Peter McCormack: Nic, can you just explain the Triffin dilemma.

Nic Carter: Maybe Alex can chime in here; I want to make sure I get this right.  As far as I understand it, it's this tension between domestic goals and international needs, as far as an issuer of the world reserve currency is concerned.  If the world has a need for, let's say dollars, and you're issuing dollars as the global reserve, that's a constant pressure on dollars in that foreigners need dollars to conduct commerce in.  That conflicts with domestic goals, because it makes exports uncompetitive in the country that is issuing the global reserve.  So, it causes this negative balance of trade effectively.

So, Triffin, who's an economist, I suppose, predicted this issue and people knew that it would eventually be an issue, which is the two goals are kind of in tension; issuing the global reserve, a currency that everyone can use; and then being able to have a stable monetary framework domestically.  I don't know if that's a full explanation.

Alex Gladstein: Yeah, I guess I would point out that Triffin, he came out with this theory in the 1960s, and that's when the world generally speaking started to question the US's ability to hold the gold peg at $35 an ounce.  Number one, the French, led by de Gaulle, and other countries really questioned, especially after the assassination of JFK, the direction that the US went in, number one with just huge war spending for Vietnam, but also the Great Society.  So, this was known as Guns and Butter. 

It was unclear to the world whether or not the US would be able to keep its promise to redeem their gold.  And in fact, later in the 1960s, French statesmen came up with this phrase, "The dollar is an exorbitant privilege".  And they started to realise that in the Triffin dilemma, it almost required the US to have this huge balance of payments deficit.  And essentially what the other countries would end up doing would be financing US debt.

So, when you got up to the late 1960s, Britain actually defaulted, let's say, and ended up having to devalue the pound in the late 1960s as a result of a lot of poor fiscal policy and its colonial collapse.  A lot of the other powers started to really worry the same thing could happen to the US.  So, in the summer of 1971, actually the French sent a battleship to New York City in August of 1971 to redeem their gold and the British asked for like £3 billion of gold to be moved from Fort Knox to New York in preparation for withdrawal.

So, countries around the world were basically calling the US's bluff, based on what they saw out of Vietnam and social spending, and they just didn't think the US could sustain the system, so they were ready to take their gold back.  So, Nixon, in a famous speech actually went on TV and he declared -- this was a few days after the French sent the battleship, so literally this was a reaction to this world demand for their gold back; and he said, "No, we're not going to give it back.  We're ending the gold window; other nations can no longer redeem their dollars for gold".  He also announced some wage freezes and some more import tariffs, and this was pitched as a kind of bid to save the economy, as the US was entering into a very inflationary decade.

So, the system that Nic described came under heavy stress at the end of the 1960s, and the early 1970s really set the stage for this transition to a new kind of world economy.  Now, just a couple of big events I wanted to hit for the audience.  As I mentioned, Nixon ended the convertibility of gold in the late summer of 1971.  This immediately devalued the dollar by 10%, so the fears of the world were founded.  The US was, at the end of the day, not to be trusted to guard the world's reserve currency and its war in Vietnam and social programmes made it impossible to guarantee the promises it once extended.

Now, the world kind of went into a very inflationary decade in the coming years.  The next big event I would hit is in 1973; we have this dynamic in oil really shifting.  So, first of all you have this change between colonial powers controlling oil to sovereign dictatorships controlling oil.  So, in the 1950s and 1960s, you had this thing called the Seven Sisters.  So, these were a handful of western oil conglomerates that could really determine the price of oil through colonialist practices.  So, these folks were essentially thrown out, they lost their power to nations like Saudi Arabia and Qatar, Kuwait, etc, in the 1960s and by the early 1970s, this OPEC, this association of oil-producing countries, really had a lot of leverage and power, whereas they didn't before.

When countries tried to do this previously, like get power over the West, like when Mexico tried to do this and when Iran tried to do this, they got rekt.  So, this was a historic shift where these oil countries could now actually hold a lot of leverage and power.  So, in 1973, when the US supported Israel in the Yom Kippur war, and we had put a lot of pressure on basically the whole developing world through our agricultural policies, as a response the Arab nations decided to both jack up the price of oil by 4X and announce an embargo on the United States.

So, you had oil going from like $2 a barrel, where it was for a long time, to $10, $11, $12 a barrel.  This created an enormous flow of cash for the Saudis and the OPEC nations.  This was a historic moment, because it was so much money, essentially OPEC ran a surplus and the rest of the world ran a net deficit.  I mean, I can't stress just how much money came into the coffers of these Arab regimes.

So basically, Kissinger and Nixon and the US and the new Treasury Secretary, Simon, they were like, "What do we do; how do we save this?  How do we prolong dollar hegemony; how do we get people to continue to demand and buy and use the dollar?"  This was their dilemma and the petrodollar was the solution.  The petrodollar was the mechanism for how they would solve this issue.

So, by the end of that year, 1973, the dollar had actually lost 20% of its value against other top currencies and people called this, "a peacetime redistribution of global wealth on a scale that had never been seen in living memory"; so again, all the spoils shifting from other countries to OPEC.  To give another data point, in 1974, the oil exporters had an account surplus of $70 billion up from $7 billion the year before.  And the thing is, this wealth that they were getting, it was so much wealth they couldn't spend it all.

So, there was this mutual dilemma where the Saudis and the oil states didn't know what to do with the money and the US had a need for people to buy its debt.  So, through a bunch of meetings in 1974 and 1975, Kissinger and Nixon and William Simon, the Treasury Secretary, basically figured out a deal; maybe we would call it a pact with the devil, given the Saudis' proclivity for Human Rights violations, tyranny, later in history destroying other nations and things like that. 

But essentially, Simon and Kissinger said, and this is a quote from Simon, "If the OPEC nations put a larger amount of their accumulated funds into investment in this country", this was a way of saving the day.  Because the other way to save the day would be if the American public spent less and saved more, and that was not going to happen with Nixon facing impeachment.  So the ideas were, "We need to get other nations to finance our debt, because we're not going to do it through raising taxes; there's no way".

So, essentially the deal was, in the petrodollar system, that these dollars that these OPEC nations were earning, they would not only force the sale of oil to be in dollars, so all oil sales were now denominated in dollars, but they would take the earnings and they would actually buy US debt with the profits, and this is what we call "petrodollar recycling".  This mechanism really saved the dollar hegemony, I think would be my thesis, and it wasn't necessarily a market decision. 

Maybe the other thing I would just like to hammer home, this was all ironed out through secret deals.  The Saudis could just have pursued a broader portfolio of investment.  They didn't have to go so heavy on US debt; they didn't have to price oil in dollars; these were decisions they made in exchange for protection, okay; in exchange for massive amounts of weapons, massive amounts of protection.

So, essentially the Saudis became non-market investors in US debt and the US became a non-market seller of weapons to the Saudis.  So, Nixon, Kissinger, Simon, they ended up saving the day for the US in a lot of ways, at least for US elites, by figuring out a way to keep dollar hegemony alive; and indeed, it was even more strong in the late 1970s and 1980s than it was in the 1960s in terms of the amount of total global trade denominated in dollars and amount of global reserves held in dollars. 

This really helped us, of course, in the struggle with the Soviets, because through this system, we could print money to buy oil.  The Soviets had to literally dig it out of the ground, or somehow get dollars in another way, and this gave us a huge, huge advantage.  So, that kind of brings us into the 1980s.

There were a lot of other interesting things.  I'll just mention one other item here.  The eurodollar market is very related.  The eurodollar market was essentially something that happened in the beginning of the Cold War, where Eastern Bloc nations needed dollar accounts and they established ways to do that in Europe, outside of the purview of the Fed.  It was kind of, I wouldn't say niche, but it wasn't a huge, huge market until the petrodollar.  So, the petrodollar system really relied on these eurodollar banks so the Saudis would plough all their money into them.  And then from there, either get treasuries, or the money would be lent out to what they called LDCs, or developing world countries. 

That was another sad legacy of the petrodollar system, was that essentially a lot of poorer nations were forced to import -- they all had to import oil, most of them at least; and now, it was super hard for them to do that.  They had to structure their economy in a way to get dollars and they had to ignore domestic investment and spending.  This led to a huge number of debt crises in the Third World in the 1980s and 1990s.  So, you had a system where the US and a lot of rich countries really benefitted, but a lot of the world really suffered; and that's like the first era of the petrodollar.

Peter McCormack: That's amazing.  Thank you for that explanation.  Nic, I also noticed on Twitter a few times when one of the Bitcoin critics step up, you have occasionally stepped into the argument and raised the petrodollar before.  You're a strong critic of it as well?

Nic Carter: Yeah.  Well, we've moved on, I would say, from the first template for the petrodollar a little bit today, but it's just worth elucidating these things, because part of the case for Bitcoin people often consider in isolation without considering what the alternatives are.  The alternative is this dollar system and, as Alex says, the dollar uses this tool of US hegemony to use to pursue political objectives, and obviously we see that with sanctions; but it has these externalities. 

Bitcoin's externalities are pretty transparent.  Anybody can quantify its energy, impact, emissions and so on.  The dollar's externalities are much more diffused, they're much more opaque.  I would argue they're deliberately opaque.  The dollar's externalities have much more to do with this military adventurism that we see worldwide that we'll probably get into later in the episode; they have to do with driving an equality within the US; and so, these things are genuine and they're real, but they're just much less perceptible, which is why we have to do this analysis of the petrodollar system.

But I guess the broader point is, this is a very imperfect system and it pits the US against its allies in many cases, and also pits various social strata within the US against each other.  So, the dollar is not homogenously good for all Americans; in fact, you could argue that this system, as constructed, is actually pretty bad for the working classes, for anybody that depended on manufacturing jobs, for the sector of society that makes physical things.  And it's very good for a smaller set of globalised elites.

We can definitely get into that and expand on that, but that's the point; we know Bitcoin's not perfect, it has costs, etc.  The dollar system is also pretty exclusionary and causes these rifts in society that are worth pointing out.

Peter McCormack: Yeah, well we should definitely get into that, because there are a number of points that Alex brings up in his article, the negative externalities that come from the dollar system.  But let's start, Nic, with that point; let's start with the impact on manufacturing in the US.  I know Alex, in his article, alluded to what happened in the Rust Belt, the cost of exports for the US and the rise of populism; do you want to touch on that?

Nic Carter: Sure, yeah.  So, this is sort of what we were talking about with the Triffin dilemma.  This is another phenomenon called Dutch disease, which is the idea that when you export a lot of a commodity, it sort of cannibalises other sectors of the economy.  In this case, the commodity the US exported was the dollar.  So, what happens when you issue the global reserve currency is foreigners need to acquire lots of it in order to engage in commerce, and this causes it to trade at a premium to where it would normally be settling.  What this means is your exports are more expensive than your competitor nation exports.

So, everybody looks at the charts that show things going badly wrong in the 1970s, right, what happened in 1971, etc.  One of the things that started to go wrong was our manufacturing sector just started to structurally decline as US exports became less and less competitive and we started to run this huge trade deficit.  And again, this wasn't actually unexpected.  This was something Keynes pointed out in 1944 that would be a consequence of the dollar system.  This is why the SDR or the bancor was proposed.

But we got the petrodollar, we got the dollar as the global reserve and so, the US was effectively forced into running this huge trade deficit, which meant that we would engage in consumerism and import things from abroad, export dollars and export relatively little of our own, which meant that blue-collar manufacturing would be structurally suppressed.

So effectively, the US working class was sacrificed at the altar of the dollar and that's had really negative effects on society.  That's why it's no coincidence that the US is the most financialised of the developed nations and it has some of the highest inequality of any sort of OECD of developed nation.  It's a direct consequence of this system and now we see the political ramifications of that.  That's why you see the growth of populism, this political enthusiasm for trade wars, things like that; it's because the dollar system does not work for everyone and we're reaching a tipping point here where people are starting to rebel a little bit against the status quo.

Peter McCormack: Thank you for that.  One of the other areas I definitely want to dig into with you as well, Alex, is the destabilisation of the Middle East through the petrodollar.  There are two specific areas we can talk about.  We can obviously talk about the support for the House of Saud, their regime, the war against Yemen; but I also want to talk to you about some of the suggestions around the Iraq war, which was completely new to me. 

I said to you before we started recording, I watched the BBC four-part documentary, which I will also put in the show notes, because it's excellent.  But as you correctly asked me, "Did it touch on the finances [or] global finances?" and it didn't.  So, can we start by breaking down how the petrodollar has destabilised the Middle East?

Alex Gladstein: Yeah.  And just to recap so far where we are, the US dollar as the world reserve currency was propped up after Nixon went off the gold standard by the petrodollar system.  And again, at the heart of this was this idea of what some people call "a double loan".  So, because the US, through its military force, was able to pressure the Saudis to only sell oil and dollars, dollars became the medium of exchange for oil.  That meant the US Government could literally just print dollars to pay for oil and the American economy didn't have to produce goods or services in exchange for the oil.  That's the first part of the double loan.

The second part is that all the other countries had to pay dollars for the oil, but they couldn't print dollars; so, they had to trade their goods and services for dollars in order to go pay OPEC.  So, all the US really had to do was export treasuries, meaning bonds; and Simon, who was the Treasury Secretary who set this whole thing up, he was a bond salesman so he was really good at this.  We basically got to sell bonds to finance all of our activities.  So, that's kind of the trick here and that's what sustained the ability of the US to continue running these crazy deficits that have gotten even more intense over time.  In terms of debt-to-GDP ratio, I think at the time in the 1970s, it was about 30%; today it's 130%.  So, a lot of this has been sustained by the petrodollar system. 

Now, when it comes to risks to the petrodollar system, I guess my thesis would be that the US has aggressively defended the petrodollar system.  And, some people say -- I think David Graeber, who wrote Debt, said what I thought was quite sharp, he said that essentially, he wasn't sure exactly to the extent today how important the petrodollar system still was.  But, as he noted, at least through the 1990s and 2000s, American policymakers certainly thought it was very important, and that's what we need to focus on here.

So, the first threat to the petrodollar was actually back in the 1970s.  Apparently, OPEC nations were thinking about shifting away from the dollar as the unit of account/MOE for oil, to something called the SDR, which was like a Keynes' bancor-inspired unit of account that the IMF would run and that would be collectively managed by all nations; so, that would get rid of our exorbitant privilege.  So, in order to defuse that first threat, the US actually did a deal with the Saudis, another deal, where we got them into the IMF on the premise that they would never allow the SDR to become the world reserve currency; so, that's how we diffused the first threat to the petrodollar system. 

The second threat came in the late 1990s with the euro.  So, you had this uniting of a huge economic structure.  After the fall of the Soviets, we did not do another Bretton Woods.  The world did not come together to create a new financial system, we remained on dollar hegemony; but the euro really threatened that.  I mean, here you have a larger population than the US, at the time 500 million people-ish, coming together, very powerful economies; so, US policymakers were concerned about this. 

If you read media from the time, there was a lot of talk about the euro unseating the dollar.  If you read any financial newspaper from 1999, 2000, 2001, this was a big, big deal; people really thought the euro would put a dent in the dollar; maybe we would go back to a bipolar financial system, like we had in the 1920s, or whatever, where we had the pound and the dollar.  Well now, maybe we were going to have the euro and the dollar.

One of the biggest threats was this idea of the petroeuro, right.  The importance of oil, I think, needs to be unpacked a little bit.  The first reason it's so important is because it's not just the oil itself and the currency that it's denominated in, but it's all the derivatives on top of it.  So, I can't remember the exact number, but the number of derivatives traded on each barrel of oil is astronomical.  So, the actual volume of oil-based derivatives is so enormous, so the fact that the US is able to get all these things priced in dollars is hugely, hugely helpful; not just for the volume of oil itself, but all of the derivatives on top.

Then, what ends up happening is all these other countries that want to participate in either the oil or the oil markets, the energy markets more broadly, they're sort of forced to do business in dollars.  So, their currency pair with the dollar starts getting really strong.  So, the second-order effects of this are key.  So again, at this point, it's clear to US policymakers that protecting the petrodollar standard is very important for keeping dollar primacy, essentially, and continuing to convince other nations to buy our debt. 

We started with OPEC in the 1970s.  After 1982, when oil prices fell off, they started dwindling in terms of purchasers of our debt, but Japan and Germany took its place all throughout the 1990s.  And then in the 2000s, you started to have the Chinese starting to buy our debt.  But again, to sustain and prop up the system, where our debt was so desirable, at the base, I guess is my case, you needed to have that link to oil and that denomination of oil and then therefore, broader energy markets and derivatives in dollars.

So, something very interesting happens in October 2000.  Saddam Hussein, who's obviously very stuck in the oil for food programme, you know, bad guy, I don't want to defend him at all, he's a horrible dictator; but he did come out and say, "Hey, I'm going to sell my oil in euros".  And, by 2002, he was selling all of his 5% of the world's oil in euros to France and Germany through UN-brokered accounts.  So, the petroeuro was starting to be born, and this kind of screws up the US plan if this continues.  If the petrodollar becomes 10%, 20% of the global oil market, it really puts a dent in our plans to have this nice little system.

It's worth noting that six months later, in March 2003, the US Government invades Iraq and by June 2003, that new Iraqi Government is now pricing oil in dollars again.  And outside of a couple of rogue nations, you didn't have a threat to the petrodollar system for another 12 to 15 years, and we can touch on that in the conclusion, because the system is now finally starting to come apart.  But I guess my case is that I feel like American foreign policymakers believed that the petrodollar system was important, even if it was less so on an economic front; they thought it was so important that they wanted to defend it, and this is what I think Graeber does a good job of pointing out.

The US invasion of Iraq; what other explanation do we have that makes sense?  We know that it wasn't Operation Iraqi Freedom, it wasn't for human rights; we know that.  We know that there was no connection to Al-Qaeda and we know that there were no WMDs.  And we also know that the idea that it was to counter Iran doesn't make much sense, because in the 1980s we were funding Saddam to counter Iran.  So, none of the big explanations make a lot of sense.  So today, there's no consensus among mainstream thinkers, politicians, historians; no one really knows why we went to war in Iraq.  They call it "a war in search of a reason".

I think this is a very compelling explanation.  It wasn't just to get oil.  I mean, the US wasn't importing that much oil from the Middle East at the time.  We get most of our oil from ourselves, from Canada, from Mexico, from Venezuela; so, it wasn't about the loot itself.  It was about the continued system and making sure that all the nations in the world price oil in dollars.  And, I would say that American foreign policy has protected that to the extent it can.

Now today, this is starting to dwindle and deteriorate.  In late 2013/14, China stopped buying new treasuries and I think, as Luke Gromen has pointed out, the world has been negative treasury since then, so they're just hoarding.  And the US Government is now the majority purchaser of these treasuries.  And the Biden Administration, they talk about dollar primacy; it's still important, but there's just not much geopolitically we can do.  Let's put it this way; if the US was in its current state of affairs, I don't think we would have invaded Iraq back in 2003.  We were at an apex of hyperpower at that point. 

We no longer have the same geopolitical power and in the last few years indeed, Russia and China and all these other countries have started to do more business in their own currencies and we're watching the decline of the dollar.  Yes, it's still at 60% of reserve holdings, but that's down from 80%-plus.  So, we're on the downside; we're on the back nine of the petrodollar here.  Now, I'm not going to say it's going to end tomorrow, because everyone who's ever tried to predict the end of this system always has egg on their face, because it lasts a lot longer than people think, because there's a lot of inertia here. 

But I think it's reasonable to think and interesting to see what Nic believes, but it's reasonable to think that in the next 10, 15 years, you'll start seeing a real shift, whether it's to a bipolar world, or a multipolar world, or potentially a world where we no longer have the petrodollar as the reserve currency propping US debt, but rather maybe the Bitcoin standard.

Nic Carter: I want to add two more case studies to this military connection, to the US adventurism connection.  So, Lyn Alden has this great quote, "There's no shortage of odious dictators in the world, but we choose to go after a few very specifically" and it's not a coincidence the ones the US has gone after.  So obviously, Saddam, completely contrived war, no clear justification for it; Gaddafi, of course he didn't try and sell oil for euros, he tried to sell oil for gold.  And a few years later, Gaddafi was dead, thanks to the US air strike and a local militia.  There's another dictator that tried to sell for not dollars, which was Chávez.  He threatened to do it and we unsuccessfully tried to launch a coup.

So, there are three case studies of dictators saying, "We want to sell our oil commodity for something other than dollars" and in each case, the US successfully or unsuccessfully deposed that dictator.  And there are dozens and dozens of odious dictators the world over, but we choose very specifically the ones we've gone after; and this dollar, petrodollar connection, seems to be a big part of the reason in many of those cases.

Alex Gladstein: Just one more thing; you could also add Iran.  Obviously, Iran has tried to sell, has sold, energy goods in different currencies and the US has put them under a lot of pressure obviously, especially their efforts to sell to India.  So, generally speaking, the facts are pretty strong here in terms of American foreign policy trying to defend dollar primacy; and to bring it to today, obviously we have this Nord Stream deal happening, which has got a lot of media attention lately.  And it looks again, whereas maybe 10 years ago, 20 years ago, we would have fought it really hard, we're just in a different position now and Biden has indeed says he's not going to pursue sanctions on the guy who's in charge of Nord Stream.

So, it looks like the Biden Administration is now sending some signals that maybe they're not going to be defending the petrodollar as much as they used to.

Peter McCormack: Have either of you considered or looked into what the implication is of an unwinding of the petrodollar; it doesn't sound particularly good for the US?

Nic Carter: Well, I think theorists disagree generally and I think you have to consider the class issue here.  So, the dollar and just more generally, US capital markets, it's like the centre of the globe and the assets that foreigners use to store value in, whether it's treasuries or US bonds or equities, that has massively benefitted the wealthy US globalised elites that own financial assets, that work in finance.  As we know, finance has become engorged, share of GDP has grown dramatically since the 1970s.

So, that globalised set of elites has been an enormous beneficiary of this system, so they have a strong incentive to keep it going.  The US has this enormous ability to pursue sanctions via that highly integrated dollar system, because they are the central nexus of all international trade.  So, it benefits a relatively small share of society.  Of course, the American middle and working class has been hollowed out and a median male income today is just not enough to support a household, frankly, in the US.  And we have an opioid epidemic in the heartland of America and we don't have any manufacture anymore.

So, I think if we left that standard and strategically devalued the dollar and re-onshored manufacturing in this country, that would shift the balance of power back towards labour, as opposed to capital in this country, and that would be generally very good for a large share of the US population.  It would also mean that the US would lose its ability to pursue these non-military policy objectives via sanctions, so it would slightly disempower the elites that benefit from their proximity to Washington, to the dollar system.  So, it's kind of heterogenous what the impact on society would be, but some would argue that it's a necessary move that should occur.

Alex Gladstein: And just to piggyback on that, yeah obviously if you look at these charts from what the fuck has happened since 1971, I mean elites have been enriched enormously.  Anyone in finance, defence, services, technology; I mean, just the financial sector alone in the US has grown from 10% of GDP to over 20% over the last few decades.  So, coastal elites have done really well, including people like me. 

So, this is a system I've been a beneficiary of for sure, but a US that's beyond the petrodollar would potentially be a lot less than equal, would have a lot less financial privilege for the elite.  We would lose this need to prop up these dictators.  I mean again, the fact that we've propped up the House of Saud for so many decades, it's had so many negative externalities.  I mean, both Gulf Wars, we came in to defend them in different ways.  15 of the 19 9/11 hijackers were Saudi.  Bin Laden was Saudi and yet we never went after Saudi.  And in fact, every time the Congress tried to go after Saudi, it was snuffed out.  We've never been able to investigate them properly for connections to 9/11 and there's a bunch of other dictators as well who are propped up through this system.

Then you have the fossil fuel industry obviously, which has been heavily subsidised in this way, in addition to fighting off nuclear energy across the world in the 1970s/80s/90s.  A lot of these nations saw what happened in 1973; they saw oil quadruple in price and they were like, "We don't want to import oil and be at the mercy of these handful of countries.  We want to be energy-independent".  Well, guess what?  The US and the World Bank and the IMF did not like that!  So, we did not let countries become energy independent.

So, there's been a whole bunch of things that are the negative externality of the petrodollar and don't forget this fossil fuel piece.  In the US, the military is the single largest consumer of oil and you have to really think carefully about what backs the dollar here.  So, we have a system now where, I guess to sum up, the dollar is backed by a political pact that has really determined the way that capital flows in the international economy.  It has not been a market decision here.  There have been political pacts and deals made; we've used our power; and the system is supported by our deals with dictators, our wars abroad; as Nic has describe very eloquently, our increasing inequality domestically; and this reliance on the fossil fuel industry.  So, I think a petrodollar America moving forward could be a lot stronger on all those fronts.

Peter McCormack: And, Nic, how do you think this might affect other nations who rely on the dollar?  I was recently in El Salvador, it's a dollarised country.  Something Jack Mallers said to me, which was a real standout quote when I first got there, he said, "The US is increasing the M2 money supply, but there are no stimulus cheques reaching the people in El Salvador".  So, do you think this might lead to these dollarised countries maybe moving off the dollar themselves, or do you think it will just create a more stable dollar for them domestically?

Nic Carter: Well, what's interesting is there's this odd tension, because on the one hand, I'm very critical of Federal Reserve policy; but on the other hand, dollarisation, as a solution to monetary failure in emerging markets, is often a great solution and one that I completely advocate for.  So, the Federal Reserve, as unstable in its mandate as it may be, still achieves monetary stability that far outstrips what we're seeing in much of the developing world; and I would say that dollarisation happens too infrequently, I would actually advocate for it to happen much more.

That said, the Federal Reserve has these tiers, it's got this kind of hierarchy with the central banks that it has swap line agreements with, and so they do exercise political discretion in terms of who has access to US-based money, who has privileged access to that system and who doesn't.  It's going to be interesting to see if we have another devaluation, 1970s-style inflation and devaluation in the dollar, whether these dollarised countries choose to stay on the dollar standard. 

Oddly enough, I believe that the cryptocurrency industry, which makes capital incredibly liquid and accessible globally, in particular stablecoins and dollars, has been a tool which projects the dollar out to many of these emerging markets with net good effects.  I mean, you give someone the choice between a rapidly depreciating currency and the dollar, they're going to opt for the dollar a significant percentage of the time.

Peter McCormack: Nic, let me tell you about something interesting; sorry to interject.  So, I've been fortunate enough to travel a lot of the world doing this podcast and I've been to non-dollarised countries where they still want the dollar.  So, I was out in Cambodia and they wanted the dollar; they didn't want the local currency.  Also, another thing I've noticed, people won't take any notes which are crumpled or got tears in, but that's a side point. 

But interestingly, when I was in El Salvador and I was in El Zonte, when I tried to pay with the dollar, people were actually asking for Bitcoin.

Nic Carter: Yeah, so you see the hierarchy of hardness, right?

Peter McCormack: Yeah, it's fascinating.

Nic Carter: Cambodia became semi-dollarised with the UN mission in the 1990s, I believe, so that brought in a huge influx of dollars.  So, you have these semi, partially-dollarised societies, like Cambodia; but El Salvador, they sort of ratified the dollarisation, right.

Alex Gladstein: Yeah, and what we could be very well moving to is kind of a system where, as you're watching starting to happen, Peter, Bitcoin may become the ultimate monetary good at the very top of the money hierarchy and it may be held by a lot of governments.  But the difference here, and it's worth dwelling on, gold was captured, as Nic pointed out.  By the 1930s/40s, gold had been captured domestically in the US.  It had been stolen and excavated from developing countries by colonial powers and it had ultimately been centralised in the hands of largely the US Government by the 1940s, 1950s and 1960s.

Bitcoin is not as easily confiscatable.  I mean, there's a reason why Satoshi choose 5 April as his or her birthday, or whatever.  I mean, this person who designed the system was thinking about 6102 and was thinking about the centralisation and capture of gold.  And they designed a system whereby the asset was invisible, it could teleport, the signing device could be broken apart and diversified.  So, I think we have another shot here to create a new system where the ultimate monetary good is less centralised and less confiscatable. 

I guess what it could look like is kind of a Bretton Woods system, where you may actually have the dollar and a handful of fiat currencies still be really powerful, but they're pegged to Bitcoin at some rate.  I mean, that's one possibility, I suppose.  And that gives developing countries a huge bonus now.  If they can realise this before others, they can start mining Bitcoin, they can start attracting Bitcoin companies and they can get a leg up in the new world economy. 

So, I think it's really important for people to think about what could happen over the next few decades.  And even if you assign a chance of the Bitcoin standard like 5%, you should be thinking about that 5% chance as policymakers, someone running a country, etc.  So, as we sit here, no one knows what's going to happen post-petrodollar.  I personally think it will be good for the United States. 

Yes, our warfare state and some of our really extravagant welfare that we pay out at a very inefficient rate will have to decrease, but some of our exports will go up.  If the dollar becomes weaker, we'll be able to sell more to the rest of the world; I think you're already seen that with supply chains coming back to our country.  Hopefully, we won't have to rely on communist countries to create medicines that we need and things like that.

So, I think there's a good case to be made here that moving to this standard where the US dollar doesn't have this exorbitant privilege, but is just one of many currencies, maybe a more desirable one, but underpinned by Bitcoin, is a really nice thing to look forward to.

Peter McCormack: Well, a number of us are moving to our own personal Bitcoin standards anyway.  I'm essentially on one; I assume you both are.  It becomes a lot easier once you've been in Bitcoin for four years, because you've had the hurdle of one halving, so you've gone through a market cycle.  I would love to see nations move to a Bitcoin standard.  I still think there is volatility risk.  We can't ignore what happened in the last week.  Yes, we can talk about diamond hands, etc, but that still has to make people consider, they still have to consider volatility. 

Do you worry about that at all, Nic, or do you think we will, if we got to the stage where maybe more nations had moved to a Bitcoin standard, we would have higher trading volumes, higher liquidity and therefore the volatility wouldn't be such an issue?

Nic Carter: I think volatility is the market's expression of uncertainty, so we clearly are in a very uncertain time.  It's not clear how -- right now, the volatility is partially state-driven.  People don't know how major powers like China are going to react to Bitcoin, or even the US for that matter.  As we begin to understand that better, I expect that the market's expectations and hence the volatility will become more stable over time.  So, if we do see central banks adopting Bitcoin in their foreign exchange reserves, I think that abates a lot of the uncertainty, right?  Then we're on a path towards stability. 

The other thing to note is that, in the 1970s, gold was extremely volatile.  It was undergoing this financialisation process, so I'd say we're in a kind of similar situation right now.  We have this commodity which is potentially very useful from a monetary perspective.  It's interplaying with this very uncertain monetary backdrop.  So, fixed supply commodities tend to be volatile; that's sort of intrinsic to them; that's the price you pay for the nice qualities that you get from that commodity.

Alex Gladstein: We're also, Peter, in this price discovery phase, where it took thousands of years for humans to figure out the value of gold.  I mean at first, not everybody realised it was so valuable, but over time and independently across the world, different communities of people realised that this rock was something that they could use and it was hard to make.  They tried alchemy and it didn't work and it's held its purchasing power for a long time.  But that was a process that stretched out over thousands of years and that's being shrunk into decades here with Bitcoin.

So, we have this price discovery happening now.  We're now entering the second decade.  Now you're starting to see corporations start to realise that it might be a good thing to have; like Ray Dalio coming out today I would say, or recently, is probably an interesting indicator, probably pretty significant.  And, there's going to be short-term volatility all the way up as we go from 2% of the world is using this thing to 10%, 20%, 30%.  But at the end of the day, I don't really view this -- I view this as a very difficult phenomenon to stop, as people realise that it's going to be the ultimate monetary good.

But I do think that it will be a positive, and I think that the petrodollar system has again not looked closely enough at what are the negative externalities of this thing.  And, speaking as an American again, I think we could be better off not having this exorbitant privilege; I think we could be a more dynamic country and I think we're pretty ready for the Bitcoin standard.  I mean, America has more and more infrastructure, mining, users, developers, holdings.  I know none of these things control Bitcoin, but I would say we are in prime position here.

Peter McCormack: Yeah, I agree and every attack seems to be batted back which is good.  Despite China FUD and energy FUD and Elon Musk Dogecoin bullshit, we've defended $30,000 pretty well, which is good.  But I guess one of the things, Alex, that you're looking out for is the first oil trade that's settled in Bitcoin; that would be super interesting to you and do you think we potentially get to a petrobitcoin standard?

Alex Gladstein: Well I guess part of what my hope is is that oil becomes less important.  I mean, some have pointed out that a lot of oil's value comes from the fact that it has this double use, where it almost has this store of value property as well, in addition to its industrial value.  And of course, most of gold's value is from its store of value monetary property as opposed to its actual industrial ornamental value. 

So, I hope that oil becomes less important to the human race over time.  I don't think it's good to be based on fossil fuels, that's my opinion; and I think Bitcoin can pull us into a world where we're much more reliant on other kinds of either renewable or kind of nuclear energy.  It's very dynamic and it fits into that world, whereas obviously oil doesn't. 

So, yeah, I think you will eventually see Bitcoin settling all of these major international trades.  I mean, look, the petrodollar took over gold as the way that nations settled balance of payment issues; and I guess my thesis here is that eventually, Bitcoin's going to do that as that settlement layer.  The cool part is though that, even as citizens, again they were stripped of their ability to use gold in many ways.  That isn't going to be so easy for governments to do with Bitcoin.  We've got the Lightning Network and we've got ways to do final private settlement of Bitcoin in ways that are really easy and can be done on a smartphone.  So, I'm very bullish about this future.

Peter McCormack: And, Nic, while I have you here, as we're coming to a close, I do just want to take advantage of your recent press conference and just talk a little bit about how Bitcoin does promote investment in renewables and the energy FUD that we've experienced recently since Elon Musk decided to learn in public.  So, do you want to just add some closing notes on that, because I think people would love to hear you talk about that?

Nic Carter: Yeah.  So, you know, the great commonality here is that we're talking about monetary standards, which are backed by or based on energy, except one of them is hydrocarbons and the other one is any energy source that is suitable.  And of course, Bitcoin has this great property, which is totally distinct from other ways that we consume energy, which is it doesn't care about when that energy is generated; you don't have to match it to the grid peak times, like the way we actually have to match our normal energy generation; and it doesn't care about where that energy is produced.

It's an interesting quirk of the CCP's overbuild of energy resources in their country in the last couple of decades that so much Bitcoin hash rate ended up in China.  And, like Alex says about political mechanisms as opposed to market mechanisms, this was a political mechanism.  China had this centrally planned grid where they just built a massive overcapacity of resources.  It caused all this stranded energy to emerge.  We're talking non-curtailed 40 terawatt hours of hydropower in the year 2017 alone.  That's like one-third of the Bitcoin Network's worth.  I mean, it's just a preposterous amount.  That's more than most countries produce in hydropower total.

So, because China had this pretty rough approach to energy resources, Bitcoin hash rate ended up localised there.  It wasn't that Bitcoin miners have some sort of affinity for China.  And so now, we're seeing this potential massive distribution event, where the CCP looks to be discouraging mining in China, and miners are aggressively looking to move outside of China.  And this is, of course, going to reduce any dependence we might have had on Chinese Government, so that's great; and the other thing is it's probably going to massively reduce the ecological impact of Bitcoin production and Bitcoin consensus, because China has a very carbon-intense grid.

So, we're going to see this amazing migration, which is so exciting, and there's a lot of uncertainty as to where the hash power's going to go, but it looks like Central Asia, Russia, Pakistan, potentially even Nigeria, certainly the US.  We're going to see this distribution of the Bitcoin Network, the nexuses of production, away from one centralised nation to a much more globally diversified patchwork.  And of course, now miners have this strong incentive to seek out renewable, stranded, otherwise wasted sources of power and I believe that the overall Bitcoin Network will get much greater as a consequence of this.

A lot of people think it's a bad thing, because maybe hash rate will drop in the short term; but quite the contrary, I see this as an amazing step in progressing towards this genuinely globally generated commodity, which no single country has that much influence over.  And it couldn't contrast better with, for instance, the Bretton Woods situation, where the US had the vast, vast majority of the world's stock of gold and they had this tremendous influence to shape that system. 

By contrast, Bitcoin is, as Satoshi says, produced by the majority.  It will now increasingly be produced globally at stranded and hopefully green energy assets on a global basis.  So, really a fascinating time and I'm incredibly optimistic about the next 12, 24 months here.

Peter McCormack: Amazing.  Well listen, look --

Alex Gladstein: One more thing, Peter.  I just want to finish because remember, folks, I'm a human rights activist and I wouldn't be doing this or saying this or spending all this time with you if I didn't think that the petrodollar was negative for human rights and that we could improve upon it.  And I think again, when we started with gold, gold was very easily manipulated by colonial powers and by tyrants.  I mean, it was very centralised, confiscatable.  The petrodollar system, as I've tried to outline here, was also bad in many ways for human rights; it really empowered a lot of tyrants around the world and allowed, I think, the US to pursue policies which it may not have done otherwise, which were really bad for human rights. 

But now, we have the possibility to move to this other system, where at its base it's going to be very bad for tyrants.  And you're watching that happen live partially with the Chinese Government basically having an allergic reaction to this thing.  That's going to deepen over the next few years as autocratic governments realise what they're playing with here.  So, I'm again positive about the future.

Peter McCormack: Well, I appreciate you both; I've learnt so much from both of you.  I can't wait to get to Miami and have a beer; it's been a long wait with this COVID stuff.  So, we're all going to get to hang out and talk Bitcoin and maybe some other stuff.  I will share everything from both of you in the show notes, but I appreciate you and see you soon.

Nic Carter: Thanks, Peter.

Alex Gladstein: Thanks, guys.