WBD602 Audio Transcription

China & America’s Economic War with Matthew Pines

Release date: Saturday 7th January

Note: the following is a transcription of my interview with Matthew Pines. 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.

Matthew Pines is a Managing Consultant at the Krebs Stamos Group and a Fellow at the Bitcoin Policy Institute specializing in national security. In this interview, we discuss the rapidly changing geopolitical order as China competes with the US for dominance, and how Bitcoin may become one of a number of alternative global reserve assets to US debt.

“It’s not being looked at properly as a realistic scenario that, say, by 2030 you could have several countries that have meaningful holdings of bitcoin as part of this geo-economic arrangement, and this is a way for them to hedge.”

— Matthew Pines

Interview Transcription

Peter McCormack: Matthew, good to see you again.

Matthew Pines: Thanks for having me.

Peter McCormack: Any time.  Okay, we're going to get in some deep topics here today. I know you've been on the show before but if people are listening now and they haven't listened, definitely go back and listen to the other show, but can you just give people an intro to who you are the work you do?

Matthew Pines: Certainly, so I have a sort of non-traditional background.  My undergrad was in physics and philosophy, I did a master's in philosophy and public policy, found my way to DC, worked for the National Science Foundation for two years, and then stumbled into consulting for the government on a sort of range of projects for the past ten years.  Generally, the through line is helping the government sort of think through and prepare for bad scenarios, and then assess how they're prepared for those bad scenarios, and then also along the way do various assessments of emerging technology and sort of jump around from project to project.

I recently shifted last year away from government-focused security consulting to private sector security consulting, so I joined a firm called the Krebs Stamos Group, which is a startup focusing on the intersection of geopolitical and cyber security risk, and really advising multinationals on their senior business strategy.  So I recently took over as the Director for Security Intelligence there.  

I'm also affiliate with the Bitcoin Policy Institute as a national security fellow, about a year ago connected with those guys, and really trying to help put out some rigorous long-form and insightful analysis, at least I think, on the intersection of Bitcoin and US national security.  So yeah, I jump around and try to keep myself busy.

Peter McCormack: And what are some of those bad scenarios that we should be worried about right now?

Matthew Pines: Well right now, that's a Pandora's Box.  So geopolitically, we're entering an environment of increasing tension, I think that's pretty obvious, and there's things that are going to be the major flash points everyone focuses on, like Ukraine, like Taiwan, like US/China, continued frictions across lots of different policy domains.  But there's lots of things that when you have an environment that we're in, where folks are trying to challenge the status quo order, you can have volatility erupt in places maybe you didn't expect, and lots of interdependencies can sort of cascade.

So there's lots of risks; there's risks from types of security, risks from novel pandemics that these things aren't going to go back in the bottle, risks just from how modern societies confront the rising risks themselves and the reflexivity that our political systems are maybe not necessarily postured for.  So yeah, there's a lot there we can go on, on any one of those risks.

But yeah, one of the things I did over a number of years was help the government think through those things systematically.  One of the things government tries to do is try to be prepared for lots of bad things, even if they're low-probability, high-consequence events, you want to have a plan for them.  And so, you don't necessarily expect there to be a low-yield nuclear device going off in a city, but if it does that would be a catastrophic event, so you have to prepare and plan for that type of scenario.  So yeah, did those sorts of things for a number of years.

Peter McCormack: And you've obviously been down the Bitcoin rabbit hole, you've come out of it as somebody who's pro-Bitcoin.  Why so; why are you pro-Bitcoin; and why do you think it's important for America to adopt and allow for Bitcoin to flourish?

Matthew Pines: Well, that gets to I think one of the larger theses I have about the coming decade, which is the major sources that underpinned American hegemonic power are going to be increasingly challenged by both adversaries aggressively attempting to undermine those sources of national power, but also just what you would imagine is just inevitable decay of institutional systems, when you've reached a peak power and the systems that were designed or optimised for a certain global environment maybe aren't so well suited to a change in global and technological and cultural environment.  And I think our overall institutional framework, including our monetary arrangement, are struggling to keep pace with both the endogenous decay of those institutional structures, as well as the aggressive exogenous attack that our adversaries are attempting to place to reset the global order on their terms.  

So I see Bitcoin as one element of how to think through navigating this turbulent geopolitical period, as like a backup plan, at least in the medium term, because we're placing a lot of chips on the existing structures, in particular the US Treasury market, which in my view is going to be an increasing source of vulnerability and a source of fragility in the global monetary system, which underpins US global hegemonic power ultimately.  And the function of the US Treasury security, in particular as the global reserve asset, underpinning global monetary system and the global trade and finance system that everyone's become used to for the past 50 years, when that system starts to reach points of vulnerability, that puts the US position in jeopardy.

I think we need to explore even non-traditional backup plans just to kind of put a bumper sticker on it.  There are serious attempts that adversaries are going to try to take to use the vulnerabilities that exist in the global financial system against us; our plan A is to double down the US Treasury security market and do what we can to enforce financial repression and keep that market as stable as possible, but maybe that works, maybe it doesn't.  What if it fails?  And our adversaries are attempting to recreate a Eurasian commodity block, where they can try to de-dollarise as much as they can to insulate themselves from sanctions, and to carve out a sphere of influence where they can be protected from US interference, and we don't have a really good strategy other than to reinforce what we've already been doing for the past 20, 30 years.

So I think Bitcoin is a novel phenomenon that's emerging to this very complicated and contested geopolitical environment that's not really being explored.  So the first thesis I have is, it just needs to be looked at seriously; that's the first objective.  And then, think through in a more serious way what would be the conditions under which we could seek to take advantage, relative to our adversaries, if Bitcoin were to succeed this decade; and what would be the second-order consequences that could be down to our relative advantage against our adversaries, if they're trying to move towards more of an analogue, 19th century, cold-style system, and to pair that with a view of global state relations that also harkens back to that period, the concept of Europe, great powers, carve up the world kind of idea.

Well, that's not a very attractive proposition and if they're moving towards analogue gold, can we pivot to digital gold as a backup plan?  That's an interesting thesis; I think there are other consequences need to be analysed for that.  I wouldn't say we just need to go all-in on Bitcoin tomorrow, right, these are big, world historical structural factors that are going to become major questions and live issues this decade.  So I think just first order of business is treating Bitcoin with intellectual seriousness, and seriousness from a geopolitical and national security perspective, and start putting it on the table and thinking through how we can take advantage of it.

Peter McCormack: When you talk about our adversaries, do you apply any moral framework to how these adversarial relationships work; and in doing so, are there fair criticisms that you can make back at the United States to see why these countries aren't working into a maybe more cooperative way?

Matthew Pines: My first step is to try to just treat things purely analytically, and sometimes that means you have to be apolitical first just to understand, what is the structure of power; what are the historical dynamics; what are the national interests at stake?  That's in the school of international relations realism; it's just to understand and make sure that you're not clouding your view of what is by what you think should be, because sometimes folks will want to impose a view that is maybe what they desire, what they think is morally good, from what they should accurately assess is the current state of the situation, or what is a likely evolution of the global environment.

But I think you have to be committed to certain principles, if you like.  But I think I separate those two in different buckets.  First is trying to understand, as rigorously as possible, the current balance of power arrangements, what are the systems, both financial systems, economic systems, political systems, military systems, intelligence systems, cultural systems, systems of elite power production?  All these are the systems that dominate our global environment, that set the rules and set the patterns of constraint and motivation that drive our global order.  Just trying to understand what those things are is first condition, it's very hard, almost impossible.

Then saying, okay, what is a desirable state of affairs; what is a better situation?  I think for me, there are clear differences in world views between what you might call the rules-based little order, dominated by the West, and the rising authoritarian challenges, you might you'll call it "axis of authoritarians" emerging out of Eurasia, and they have very different world views that are also historically explainable.  They have a very different cultural background, very different political environment, very different historical experience.  But I think as someone who lives in the West that has a commitment to liberal values and freedom of expression and rule of law and human rights, these are things that I would like to succeed relative to the political projects of say the Chinese Communist Party.

So when it comes down to it, my personal views are that, yeah, I would much rather have there be a world that is much more open, much more aligned with individual autonomy and freedom of expression, than a world that involves state coercion and oppression and oligarchic extraction; these are things that I would not want to see succeed in the world.  But I think it's important to separate that moral view from just a realistic assessment of how the world could evolve.  The world doesn't necessarily align to your normative prescriptions.

Peter McCormack: And so, when considering this balance of power, the US has been the dominant, arguably only superpower, for the last couple of decades, I'm sure some Russians listening would argue back, but we have seen the rise of China.  Is there a distinct possibility that this balance of power will shift and that maybe China could become the dominant global power?

Matthew Pines: So, there's quite a live debate over the structure of the global power arrangement, in particular different scenarios that have been put under the umbrella of unipolarity, bipolarity and multipolarity.  There's a fringe view that thinks that China would just take over and become the new unipolar hegemon; I think that's still a fringe view, but that still opens the door for quite a wide range of scenarios that involve a relative diminution of US unipolar, hegemonic power, and potential distribution of more decentralised arrangements you might call a multipolar system, or an arrangement where it's basically just a new Cold War, where we divide up the world as a bifurcation between a Sinocentric system and a US-led system, and those two systems essentially have to figure out how to not blow each other up over the over the coming decade.

So that's the live debate.  I hear convincing arguments.  For me, it all comes down to timescales, what kind of question are you trying to ask?  If you say, "Is the US going to lose its global hegemonic position next year?"  Very unlikely.  2030 is an open question, and I think that's really where for me I set the time horizon for any analysis; five, ten years is probably the most important period to really assess.  I think that's where a lot of these latent dynamics and friction points in the global system are going to come to a head and if you're going to see a disruption to the global order, you're going to see it probably the next five or ten years.

Now, how it shakes out is an open question, and for me the concerning part is usually, if you look through history, these environments where you have a status quo of power that is in charge of global security, that its currency is the global reserve currency, it sets the rules basically of the global arrangement and other powers essentially defer to it; when that system starts getting challenged by rising, strengthening military powers, economic powers and powers especially that have an ideological view that runs counter to the system of rules that the status quo power wants to impose, usually those don't end up going so peacefully.  

Usually, those end up with a great power confrontation where ultimately the tit-for-tat escalation of economic war, of trade war, of proxy war of influence campaigns, of destabilisation, of covert operations and other sorts of things that always happen in the shadows, usually those don't tip the balance.  Usually those are the prelude to a confrontation, a decisive conflict that sets the terms for what comes after.  So the winner gets to write new rules, if they're the resurgent challenger; or they fail, and the status quo power basically gets a new lease on life.

That, I think, is the environment we're going to be facing the next few years, is really China is going to attempt to try to rise and carve out a larger sphere of influence, and the US is going to challenge it and try to contain it, and that can spill over into lots of bad scenarios.

Peter McCormack: And with your work, are you only looking at how it shakes out, or do you also consider defensive moves to stop this?

Matthew Pines: So, my day-to-day job is as a Director of Security Intelligence for Krebs Stamos Group, we help advise multinationals on really how these geopolitical trends are going to intersect with the business environment and cyber security risks, in particular.  So there's a tactical translation of this strategic question down to how multinationals posture themselves for a world that's going to be very different than the world that they built their businesses, for the past 20, 30 years.  

Globalisation, especially premised on China's opening, where western capital poured into China and there was massive technology transfer, there was an entire rewriting of the global trade and supply chain system, production system, to China, and that is a system that's very hard to just reverse; but the clear national priorities from the West, and now it's translating a lot into boardrooms, is to reverse that, but it's very hard.  These are very complex networks and investments and structures that were built up over 20, 30 years, so they don't just flip on a dime.

That is a lot of what my day-to-day is, helping navigate this terrain for companies that have to balance very different interests.  Some have exposure to onshore manufacturing facilities, some have exposure to supply chain risks, some have exposure from a digital threat environment, insider threat, so this larger geopolitical story starts to have the second-order consequences down to how businesses think about their risk environment and how they think about the competitive landscape in the next several years.  

There's only so much you can try to predict, and a lot of these companies also have to hedge their bets, and that itself can be a self-perpetuating feedback loop, where if you think that there's a material chance of say a Taiwan event that might disrupt supply chains, you have to hedge against that risk now, even if you think it's a low-probability event; but it becomes a material scenario that you, as a fiduciary to your shareholders, have to plan for.  And then all your competitors have to do the same thing.  

That can create a momentum to de-risk your China operations that involves moving and relocating and building up redundancies, and changing the way your network architectures are structured.  These things are expensive, they're often very complicated, and that's really the situation we're in right now, is the globalised multinational structure that was premised for 20, 30 years on basically China seamlessly integrating into the global system is really breaking, or it's in the process of posturing for a potential break, which involves basically a pretty substantial reordering of those sorts of structures.

Peter McCormack: And so, in terms of it breaking, what is the key evidence, what are the things that you're seeing, the highlights that it's breaking?

Matthew Pines: Well, breaking for me, so I studied physics and so I think about these as complex non-linear systems, where you can hit them like glass, you can tap on glass and you get some vibration, you're perturbing it in some way but it's not materially changing its structure.  Then, you know there's some threshold point, you're not quite sure exactly what it is, that if you increase the force of that perturbation, it breaks; it's sort of a phase transition.  You boil water to 99°, you start seeing some bubbles, and then you go to 100° and now it starts showing very different dynamics.

I think we're in that tap, tap, tap with increasing force, or turning up the heat closer to 99°, where you don't know how far away you are from that critical threshold point, where you might enter into a new regime, where you go from a regime of stable feedback loops that start to -- you hit something and then it starts to come back to its original state to, "Oh, it's tipped past a point where those stabilisers can really be effective", and then different sets of feedback loops, vicious spirals, start to kick into place where everyone has to get out, everyone has to sell, everyone has to be the first one to get out of Dodge basically.

I think there's a lot of this looking around like, "Are we there yet?" and I think some folks, it's a spectrum and I think we're not quite yet to the critical mass; we're not quite there yet.  But the fact that you have senior C-suite starting to seriously assess the probability of say a Taiwan event, two, three years ago would have been laughed out; that would not have been a serious senior-level business strategy scenario to put on the table, and now it is.  That doesn't mean that they're preparing for World War III by any means, but it means that now they have to take that scenario seriously, which itself is a marked qualitative shift.  That, in aggregate, means a lot of companies have to make a lot of different decisions.  It also means countries are making these pretty substantial decisions.

In Asia, that's really the locus of this.  So Ukraine gets a lot of the attention, it's a very important conflict, but really the locus of great power confrontation, in terms of where there might be a major disruption to the global system, is going to come in Asia, it's really going to come in the South China Sea, in Taiwan, if it comes in the near future.  So that's where I'd really be focused.

Peter McCormack: It's obviously a very high risk move for China in trying to shift the global power; there's clear risks to their own economy?

Matthew Pines: Very, very, yeah, it is a high-wire act.  And this is where, in the analytic community, there's quite a lot of debate between the arguments that China's economic exposures, their weaknesses, their dependencies on the dollar system, their dependencies on deficit countries to absorb their surpluses, their dependencies still on energy and food imports, make them vulnerable to counterattack if they try to challenge that system.  There are arguments there that they would not risk it basically.  So, it's a question of, how do we think the politburo, in particular President Xi, is going to make that risk calculation, over what time horizon.

I look at different analysis and different folks who are experts in this area, and it's a spectrum.  Some folks who I trust have a credible view that there's no real likelihood that they would try to make a move, for example on Taiwan, until the end of the decade at least, for a combination of both domestic political reasons, they're just not prepared yet domestically to get their population ready for war; also their military capacity is almost there but not quite, and they need time to improve their modernisation, develop some of these advanced capabilities to really increase their confidence and ability to prevail in a conflict against the US and Japan and some of our allies over Taiwan.

But there's others who think that actually there's a window that they might assess of their relative peaking power, and that they are not going to go when they think they're most ready, they're going to go when they think they have the maximum possible relative advantage; and in particular, relative advantage to US's ability to create a counter-China coalition that is reliable and that is effective at both military and economic deterrence against China, as well as US hard power military capabilities, reinforcing our credible military deterrent in the Pacific and building up Taiwan's endogenous defence capabilities.  Those things are happening, starting now, but they're going to have a major lag towards the end of the decade.

So you have these different lines basically of China's assessment of their growing relative strength, and trying to patch up some of these weaknesses that they know they have, as well as assessment of the external environment, and that is also increasing in terms of its ability to counter and deter China.  And they have to make this judgment of, it's a risk calculation.  At what point in time are those lines going to become too close together, and where the delta is going to be the most in their favour?  The risk is that sometime in the middle of this decade, if you look at the relative economic lines and the development of their military capabilities relative to ours, that's the danger zone, as one book calls it.

It doesn't mean it's a certainty, but that is I think why there's so much angst about China and Taiwan in particular, is because there's a recognition that this is a very unique scenario, is a very unique environment.  The US has never had a peer challenger with China's capabilities.  It doesn't mean that they're ready to take the mantle of global hegemony, I don't subscribe to that view, but it doesn't mean that they aren't able to effectively challenge US-led security architecture and economic order, especially in the western Pacific, which is a big deal.  And so, there's a reason why that should be paid close attention to, especially because of the prospects for that spiralling into a larger, great power war, which would be exceptionally dangerous.

So, even if you think that China is weak and it would have no chance against the United States I think you still have to take that scenario seriously, because it doesn't matter what you think, it matters what President Xi thinks.  And then history is replete with autocrats and dictators who maybe have an inflated sense of their own capabilities.  We have a good example of this with President Putin.  A lot of people looked at his build-up in the wintertime and said, "This is a bluff, this is a coercive pressure campaign, this is him trying to extract concessions, etc.  There's no way he would try to conduct this foolish invasion, his military's way incapable of completing that large scale of an invasion, he's risking domestic stability, the siloviki will just take him out back and kill him".  

These were the things that were said, and then he did it anyways.  And it's clearly not been a very successful military operation thus far.  So, I take that as not necessarily all that encouraging that the Taiwan scenario is off the table.

Peter McCormack: What's the siloviki?

Matthew Pines: The siloviki is the term for the intelligence elite that run Russia.  So, out of the ashes of the collapse of the Soviet Union, basically the elite KGB officers took over the remnants of the state and dominated most of the privatisations, and Putin was a member of that cadre of intelligence officers who took over the state.  It's this quasi-Mafia, quasi-state, quasi-intelligence group that, yeah, goes by the term, siloviki.

Peter McCormack: So, a hot war between the US and China is kind of unthinkable, right?  I mean I know in your job you have to think about it, but…

Matthew Pines: I mean, I don't think it's unthinkable, I think it is what the National Defence Strategy that we recently published basically is focused on.  It's focused on integrated returns to meet "the pacing threat", which they define as China, and that's a market term from the last National Defence Strategy.  And they're explicitly focusing on very aggressively trying to reorient US Military strategy and defence capabilities to deter China, which basically means fight and be able to fight and win a war against China over time, when there's a lot of attention being placed on that scenario, a lot of tactical level planning, intelligence collection that's explicitly geared towards that scenario.

So if you ask folks in the intelligence community, in the military, in the political apparatus in both countries, they don't think they're preparing for an imminent conflict by any means, but there's a recognition on both sides that they're heading in the wrong direction, as in terms of the bilateral relationship; the tensions between these two great powers is not great.

Now, there might be I think a slight softening in the coming year.  There's lots of reasons why that might happen in 2023, but it might just be a slight upcycle in this deteriorating trend between the two countries, and this is the most important bilateral relationship in the world.  These are the two powers that dominate the global system; they're also intimately linked in terms of their economic dependencies. 

So unlike in history, where you think about the century-long competition/conflict between France and Britain in the 19th century, that's one model that you can imagine some folks think that that's the scenario we're likely going to be heading into, this long grind of relative positioning and trying to rearrange relative power on the periphery without getting into major war; or, it's a pre-World War I scenario, where miscalculation, economic sanctions ratchet up into what people thought would be a quick war, and turned out to be anything but.

So, this is the challenge.  You have an environment where there's increasing tensions economically, politically; a sense of insecurity on both sides.  I think the United States is also -- we have the most powerful military, but the thing is that we've never had a challenger with the relative delta that China has closed, and so that generates insecurity.  China also has a sense of insecurity, not because they don't have confidence in their recent military or economic gains, but because I think they see that this window is pretty close to Japan and Orcus, and a lot of these other countries are not necessarily all on board with China dominating East Asia, and so they realise that there's a matter of time before potentially there's a counter China coalition that can block them.

And they have a geographic constraint; they're pretty much hemmed in the first island chain.  They don't have the geographic advantage the United States has, with two peaceful neighbours and open oceans on both sides where we don't have to worry about invasion.  So China has 20 different borders, they have 130,000 troops on both sides of the India/China border, they've fought clashes there.  They right now have a good relationship with Russia but they have a massive, long border with Russia; historically, Russia's been one of their major threats.  So yeah, they have a sense of insecurity too, and usually that's an environment where bad things happen is when folks are feeling insecure and there aren't necessarily stable patterns of bilateral relations, that can help contain a conflict, like we have with the Soviet Union.

We had hotlines with the Soviets, we had many years after the initial Cold War period to figure out how to manage this Cold War dynamic, where we would not fight each other overtly; we would fight in these proxy wars and it was okay if we were shooting down Mig pilots in Korea, that was okay.  But we recognised that would not spill out into a great power war with Russia, because everyone knew it would be catastrophic.

We have not established I think as stable of a deterrence and deconfliction process with China, which makes accidents much more dangerous, like a fighter jet colliding with a US biplane in the South China Sea could precipitate a major crisis, may not actually lead to a conflict, but these things are on the table.  Or things like the Speaker of the House visit back in August, the Chinese reaction to that was to essentially bracket Taiwan with ballistic missiles that they launched over the island, they put their forces all around the island essentially to show how they conduct essentially quarantine/blockade of those trade routes if they wanted to, and forced the United States to basically fight our way in if we wanted to relieve Taiwan from that quarantine.

So, these are the scenarios that are being discussed over the next several years, if the relationship doesn't take a dramatically positive turn; our issues.

Peter McCormack: Okay, so this has led us all the way up to your article, The Future Geopolitical Order And Bitcoin: an Initial Assessment.  So I mean, it's such a huge topic to approach; what was the background to it all?

Matthew Pines: So, really it was precipitated by the post-Ukraine geopolitical shake-up, because I think that had a number of dimensions to it which brought a lot of these latent frictions to the fore, answered a lot of interesting questions that I think were hypothetical that became more real, and that forced serious people to start thinking about the way the global order is currently structured, is now being placed under a huge amount of stress.  And when you stress a system that's been built for many years, you start to think about how stable is the current system; and how could it evolve; how could it break; and you want to be prepared for that.  So, maybe it's this intellectual anxiety that I had about, "Okay, well what does this mean; how is this potentially going to play out?"  That's why I called it An Initial Assessment of the Future Geopolitical Order.

One of the things that I tried to do in the paper was just bracket, first off geopolitics; it's a filler term for everything, "What do you mean by geopolitics?  It literally means all of human society", "No, there are certain academic definitions of geopolitics that focus on geography and the intersection between geography and political systems, and military capabilities, and state relations".  But in the present context, it really just means the international order, which is the balance of power between states, which are the main actors in the system; and the rules that those states subject themselves to, in particular the Westphalian concept of state sovereignty and the Concert of Europe Agreement, that you don't violate the territorial integrity of another great power.

That really is the main concept that Russia is accused of violating essentially, that their view of state sovereignty is the old one, which is that only great powers really matter and other states are essentially subject to spheres of influence, and you're either with me or with someone else, and then you have to use force to compel folks to act the way you want.  And so I saw that as a critical flashpoint that revealed not just the geopolitical order, but really the how the monetary system is going to become critical to this.  Because unlike in the past, where we had pretty much a…

You think about these previous periods of major historical confrontation, the most recent one, World War I, World War II, the global monetary system was not that well integrated.  I mean, you could argue that there was a first globalisation leading up to World War I that broke in World War I, and that was a gold standard, there was there was lots of global trade, there was lots of integrated specialisation, and people thought that -- in fact there was debates in the British House of Commons that economic interdependence would make war foolhardy, there's no way that we would go to war with Germany, we're so connected, we are so intimately dependent on each other that to fight would just be insanity.  They made the same arguments that you hear now, that the degree of global economic and trade interconnection would make war impossible to countenance.  Then others were looking and basically they said, "Well, the aspirations of rising states eventually decide to go and then economics starts to take a back seat".  

This is why I think it's important to look at why I focused a lot of the monetary system in the paper because sometimes you have this technocratic view that just it's just money, it's just the ledger account in your bank; but really, money and geopolitics are intimately connected.  In a sense, the enduring or the existing monetary system is usually downstream of the global geopolitical arrangement.  Whoever has the most hard power usually is the one who sets the rules, and part of those rules is what counts as money; and who has the power to enforce what counts as money and cut people out of that system and delete access to that money system is an expression and demonstration of power.  So, if you're trying to understand the future monetary arrangement you have to understand what you think the future of geopolitical arrangement is going to be.

Bitcoiners are obsessed about thinking about the future monetary arrangement, but I feel you're missing a huge and probably an essential component of that analysis, if you don't have a view of what you think the future geopolitical order is going to be.  That's why you have to have that be at the centre of your focus and then try to assess the relevance of Bitcoin in some of these future scenarios.

Peter McCormack: Did you come into this paper with a hypothesis then that you would try to prove, disprove?

Matthew Pines: I've divided it really into two main sections.  The first section is really just trying to provide a schema to think about the global order in different domains, and it gets really complicated.  My first objective was just to try to put some of these more technical and somewhat jargony pieces into one semi-coherent framework, so you can understand what you mean when you say the global monetary system; what does that mean; and when you say there's frictions or potential vulnerabilities, where?  And I try to locate, in the structure of the Treasury market, in the structure of the technical plumbing of the monetary system, the micro scale, how does that actually work?

There's a lot of focus on fintwit, on all the all the charts about, "Well what is the Bank of Japan's yield curve control going to mean for the US ten-year Treasury note?"  "What are the flows between different global money centres and the offshore eurodollar system?"  All these things get very technocratic and very complicated and you have to zoom in a bit.  But ultimately, that's where these endogenous instabilities could erupt.  We've seen this in history; we've seen from the obscure plumbing of the monetary system, things break, and then all of a sudden the Fed has to do trillions of dollars of QE and that has a geostrategic implication.  So, you have to have an eye to the microscopic details and then try to zoom out and say, "Well, what would this mean for geopolitical power relations?"

Japan is a good example for this, in the sense that Japan is a critical part of the offshore eurodollar system for lots of historical reasons.  They've taken over a lot of eurodollar offshore lending from Europe, as Europe became much more highly regulated and post-Brexit City of London took a backseat to some of this stuff.  And really, because of Japan's closeness to China as trying to integrate into a global dollar system, Japan became a main conduit of trillions of dollars of dollar lending into China.

Japan is usually not thought of as being this major global player, but they are critical to this.  But they're also geopolitically critical, because they're essentially one of the closest US allies.  They're at the centre of any military deterrent scenario against China, their critical trade partner, so we have a very close bilateral relationship with them across lots of different domains.  So seeing the intersection between these monetary dynamics, the geopolitical dynamics, the military dynamics, and then the rising challenge of China, especially in that East Asian system of power, these are the things you need to be focused on and there's no one story that you can just easily tell that's nice and clean; these are very complicated systems that all link together.

I don't think I did a very good job of covering it all, but I try to touch on all the key elements of it just to get the micro and the meso and the macro scales about why the plumbing matters, why the geopolitical power arrangements matter, and in the sweep of history why we see this this typical pattern of tension between rising powers and incumbent powers between Eurasian land-based powers and maritime oceanic powers, and the different cultural political systems they have.  Eurasian autocratic tends to be the match, and then oceanic, maritime, commercial rule of law is the historical inheritance we have from Britain and France.  These all come together.  If you want to be hubristic enough to try to look into the future and predict how the whole global arrangement is going to evolve in the next five or ten years, you literally have to try to capture everything.

Then I tried to lay out a scenario with different excursions, how this could evolve in different ways.  It's weird because in this topic in social media and other contexts, people have a lot invested in one particular scenario.  It's almost there's tribes associated with, "There is going to be a new gold bricks commodity, Eurasian power block, that's going to supplant the dollar tomorrow", and people get really emotionally invested this.  And sometimes, to your earlier point, there's often this latent moral view that, "US bad, Russia good; China good, US bad" or vice versa, that people have as their background say normative political views, that they weight what they think analytically is likely to happen.  And so I tried to not do that.  What you think you want to happen is not necessarily the way it could happen.

Also, one of the critical risks in all of this is that these changes to the global monetary system and the global amounts of power typically don't happen in a smooth, linear line that you can just say, "Here's the steps, here's A to B to C to D and we are now 30% of the way there, and you can easily see that because the value of the dollar or the percent of global trade being used by the dollar is X, Y or Z".  People often default to these crude metrics as indicators of this change that may or may not be happening in this immensely complex global system.  I think that's just a category error.  You're not going to get much meaningful information from those simple measures; you have to understand how the global system is currently arranged and look for ways that could just break, and ways that maybe could shift the regime to a very different system.

Peter McCormack: So, when considering this and then looking at what happened with the sanctions against Russia, and essentially the freezing of -- it was their US Treasuries were essentially frozen, right?

Matthew Pines: Actually, Russia sold off all their US Treasury securities in 2018.  What they held were dollar deposits in the Bundesbank essentially associated with ECB and the Bank of Japan.  So yeah, we froze in a coordinated G7 action on 25 February, I believe, it was that Sunday just after the invasion, maybe the 26th, about $300 billion of those dollar deposits, which was by two orders of magnitude the largest sanction on those types of dollar deposits that we've ever done.  The closest equivalent was actually the Afghan National Bank, was about $7 billion or so that we seized when the Taliban took over.

Peter McCormack: So $7 billion to $300 billion?

Matthew Pines: Yeah.

Peter McCormack: I thought it was $60 billion, I don't know why I thought that.

Matthew Pines: Yeah, it was $300 billion, a lot, yeah.

Peter McCormack: And, okay, the sell-off of the US Treasuries, do we know why that was; do you think that's in preparation?

Matthew Pines: Yes.  I mean they were making no secret of the fact that they were trying to create fortress Russia, where they are trying to insulate themselves from western economic coercion that really started after their first military engagement into Ukraine in the Donbas and Crimea in 2014, where we sanctioned them; nothing as significant as the most recent sanctions, but that was a pivot in their relationship to the US and a strategic shift that they were posturing for potential additional sanctions.  And so they sold them off in 2018, and they did other things to try to insulate themselves from western economic coercion.

Peter McCormack: Bought gold.

Matthew Pines: Yeah, they were buying a lot of gold.  Now they didn't quite insulate themselves entirely.  I think they were a little bit surprised by the degree to which for example the ECB went along with those sanctions, and actually Japan did too about two days later.

Danny Knowles: I think the interesting thing that you mentioned in the article as well is that people were really willing to self-sanction them.

Matthew Pines: Yeah, and actually this is something that the Chinese have taken close notes on, as they start to think about what sort of a backlash would they expect in a Taiwan scenario.  When that invasion first occurred there was a whole series of official actions that happened, the most high profile of which was the blocking sanctions against the Russian Central Bank, the ability to access those dollar deposits; that was certainly among the more strategically significant.  But there was also a wave of just spontaneous corporate exit from Russia; this fire-selling of their Russian assets to local partners, just getting out of the country and doing voluntary boycotts of selling goods to Russian customers.

That wave became almost a moral panic in a sense.  You were a bad company if you were still doing business in Russia.  And so there wasn't an official US sanction; it wasn't the Treasury Department was telling you, "Don't sell those widgets to Russia", it was just, "We can't be seen to be selling these things to Russia, so we're not".  I think China looked at that and started to calculate and has continued to calculate whether something similar would happen in a Taiwan scenario with western multinationals, whether aside from the official sanction that say the US Government would want to impose, there might be waves of social media essentially boycotts, that have to be reckoned with.

Peter McCormack: It would put Apple in a tricky position.

Matthew Pines: Oh, yeah, I mean a lot of multinationals, especially folks that have extensive first- and second-order dependencies on Chinese production are aggressively trying to posture for backups.  Apple's trying to move production out of China; it's a very tall order for them, because they were one of the biggest proponents of Chinese integration to the global manufacturing system for their components.  So they're trying to spread some of it to Vietnam and India, but the scale of what they've built in China and the integrated supply chains and third-party providers, it's just hard to replicate, it's going to be many years and very expensive in the process.

But yeah, that is a key different dynamic.  Particularly when we sanctioned Russia, there's things that we didn't sanction importantly.  So, we did not sanction their energy, we did not sanction the majority of their commodities, we had some exemptions for pharmaceuticals, COVID stuff; we didn't want to be seen causing a humanitarian crisis.  But it was pretty obvious that we actually created a helpful schema for the banks to say, "You can keep buying and facilitating the financing of Russian oil trade.  Please don't self-sanction out of that".  They very explicitly did not want to sanction Russian oil, because they were especially conscious of the potential impact on global energy markets and inflation.  So they were very clear to banks around the world, and US banks particularly that, "We want you to keep facilitating these payments".

So it's then been a very complicated, very messy almost year now of gradually trying to tighten the screws in different ways, as the G7 tries to do this in ways to minimise the blowback.  This is tough because Russia's the third largest I think oil producer, the largest overall commodity producer in the world; it's very hard to just cut them out of the global system.  And that's how I see the global arrangement now from a simple schematic.  There's three major power centres you can think of in any economy: you have money; you have raw commodities, inputs; and you have production manufacturing.  That's a very simple schema, you can think of a triangle.  And the G7 has the dominant point of that triangle when it comes to money.  

G7 money credit and really also the matrix of money and military and legal institutions, we dominate that, and that's by far the most powerful single element of the global system.  But that's just money and military and law; it's institutions, it's not stuff and it's not production.  So the stuff is mainly coming from OPEC-plus, so OPEC plus Russia; plus is the Russia piece, and that's energy and raw commodities.  That's how you have an economy at all, you need to extract resources and then turn them into final goods.  And that final goods production comes from mainly China, and so China is the third leg.  So you have essentially the G7; OPEC-plus, essentially Saudi Arabia, Russia; and China.

When those three elements of the global system were in frenemy mode, when they agreed to cooperate as part of globalisation and specialise in those different areas and we didn't weaponise the dollar system, they didn't weaponise supply chains, and they didn't weaponise raw commodities, you had a nice global order.  What we've seen really in the post-Ukraine environment is different parts of that triangle starting to break down.  You could imagine the sanctions on Russia Central Bank reserves is a big weed-whacker to the link between the G7 military money system, legal system, and Russian commodities; and you can see what is now creeping up on the other leg is sanctions on or restrictions on Chinese technology, so the various export controls we've started to place on the Chinese semiconductor industry, which have really ratcheted up essentially the scale of our economic containment campaign against Chinese.

Peter McCormack: Is that just economic, or is that also fear over what's in these technologies; or is that a smokescreen?

Matthew Pines: Well, so it's complicated; both, to a certain extent.  The big strategic action that was taken recently to up the ante was really taking what had been really narrowly-drawn restrictions on Huawei in particular, and really applied them across the board to a lot of Chinese technology firms in semiconductors, so really trying to stop their technological progress, to really hold them back from the technological frontier, in particular with advanced semiconductor chips, so that they can't design the next generation of AI capabilities that the West is going to be taking a lead on.

Peter McCormack: Was this the restrictions that are human resources essentially?

Matthew Pines: It was across the board.  I mean, these are very complicated export controls that are  implemented by the Bureau of Industrial Standards, BIS, of the commerce department.  And their job is basically export control, so basically saying that, "Any product that uses American technology, in particular these chip designs, it's very technocratic how it's implemented, basically you can't sell it to these Chinese firms.  And if you sell it to these Chinese firms, we'll put crippling penalties on you".  

Now, this is a unilateral sanction, it has about a 12-month period to try to get some of our critical allies in this industry, in particular the Dutch, the Japanese, the South Koreans on board; that's going to be a tall order but that's going to be a real test of how much geoeconomic coercive and diplomatic influence the United States can exert in building a true counter-China coalition.  This is what is talked about on PowerPoints and thinktank pieces in DC.  But the rubber that meets the road is going to be, can we get the South Koreans to agree to do this, even though Samsung is a national champion and they have 25% of their sales in China and major manufacturing capabilities that they would have to potentially take a hit at.

So this is going to be a real test of, can we incentivise, can we coerce our East Asian allies to pick our side in this attempt to hold back Chinese technological advancement.

Peter McCormack: What is the potential response from China on this, or what responses have there been; and what is the hope with this?  What reaction do they really want from China; some kind of come to the table and negotiate and agree certain things?

Matthew Pines: These things are very complicated.  There hasn't been yet a very overt reaction from China and people speculate on why.  I think my best assessment is that, one, they don't think they've yet been really effective in the implementation yet.  There was some initial panic of when they were first released, there was a lot of uncertainty over how they could be implemented and especially on Americans working for these companies; they had to basically quit their jobs, and there was some initial disruption.  

But China I think also has some degree of confidence from the Huawei experience, where Huawei was directly targeted by the full force of US sanctions and it hurt them, it really cut them out of some of the smartphone market, and their equity took a hit and they were struggling for a bit.  But they've pivoted, they've adapted in really the two years that it took, and they've shifted to servers and cloud and peripheral devices, and found ways to work around it.  And in 2020, aside from I think it was Google and Apple were the only two other companies in the world that spent more on R&D than Huawei.

So Huawei is major in telecommunications 5G, selling that around the world.  So we're trying to stop that, we're doing everything we can to gum up the works of Chinese domestic technological events, but also their ability to spread their surveillances and service capabilities to their geosphere of influence through the Belt and Road initiative, where they have this package of, "We'll help finance you with dollars that we that we have from our export surplus, and we'll do these vanity projects, maybe some gold bars will find your way into your suitcase.  And we'll also help build up your infrastructure, we'll bring 5G towers from Huawei.  We'll also build in a whole surveillance system for you with Hikvision cameras and ZTE.  We have all these really advanced facial recognition algorithms", and basically a lot of these aspiring autocrats or weak states can see this as just a subscription model, "I must subscribe to the Chinese techno governance stack".

Peter McCormack: Surveillance as a service?

Matthew Pines: Yeah, and that is a major strategic threat from the United States' perspective.   So we're trying to do everything we can to stop that or at least to gum up the works.  All these things are instruments of what you could imagine is this increasing attempt by the United States, and really our geoeconomic allies, to try to forestall China's technological progress as a rising military and economic competitor, and that's where we are now.

Peter McCormack: Just going back to Russia, amongst the analysts, the people who you follow, you talk to, has this been largely seen as a strategic error, or has Russia generally been largely unaffected?

Matthew Pines: Well, it depends what you mean by Russia.  There's certainly been major pain felt by the Russian people.  Their economy is facing contraction and they can't get the luxury goods, finding a car with airbags and satellite radio is very difficult.  But in any economy, your black markets flourish and Russian elites vacation in Turkey and basically tell their interlocutors that, we can basically get anything we want for 20% more surcharge going through Kazakhstan, etc, to get the goods they want.  Italian handbags are apparently the most in-demand, high-margin thing for those criminal gangs to smuggle.  So like anything, the poor and the marginal tend to suffer, and then the elite find a way to get what they want regardless.

Peter McCormack: But we have the same in the UK right now as a result of the war.  We have the poor suffering, who cannot heat their homes and they suffer from high inflation, can't afford to feed their children.  Yet anyone who's certainly upper class is not feeling those effects.

Matthew Pines: Yeah, and that's the sad story with really any major conflict, is usually the rich and well-connected can find a way to avoid the most pain and then it falls on everyone else in society.

Peter McCormack: The decision-makers.

Matthew Pines: Yeah.  And the thing about Russia is this is not an unusual scenario; you can go back through Russian history, this has happened quite a bit.  Russia as a state, people have different claims about, will the state collapse; is Putin personally vulnerable from assassination?  There's been lots of speculation about his personal health; there's ripe fodder for speculation about that.  I think in general though, it was a miscalculation, it was not a well-informed strategic decision; he clearly had poor intelligence.  He clearly expected the FSB sleeper cells, that they had claimed that they had recruited in all of these local townships, across especially Eastern Ukraine, would rise up and spontaneously greet them as liberators, and that they could take large swaths of the country, that the GRU Spetsnaz units could do this crazy insertion to Kiev and take out the leadership, and it would be this blitzkrieg, Desert Storm demonstration of Russia's superior military and intelligence capabilities.

Clearly that was wrong, clearly they did not have these capabilities and it was a major embarrassment for his intelligence and military institutions.  And so China has also recalibrated their views.  I think they thought that they could do this and so they had to take a second assessment of the capabilities of this now junior partner in the relationship.  But longer term, this is just going to be a grind.  I mean people have different assessments of the military situation the ground.  I'm not a military expert, but I think my baseline assumption is that there'll be counteroffensives to take certain territory back and forth, there'll be still very destructive attacks on both sides that will be just a terrible grinding conflict for a while before there's any attempt at some ceasefire.

The problem is the Ukrainians have maximal war aims, which is to get all of their territory back.  The United States, our war aims are just to basically defang Russia as a military power, but we don't necessarily need to take all of Ukraine's territory back in order to do that.  And the Europeans have even less of an ambitious war aim, which is just stop the pain from energy disruptions and migrant flows from Ukrainian refugees.  So each of those actors is going to try to compel the parties to take a different position in any settlement negotiation, but it's going to be a grind and I don't know exactly how it's going to play out.  But yeah, that's a mess.

Peter McCormack: The US Government has been very supportive to the Ukrainians.  I think the last number was another $40 billion being sent.  I'm not sure if that's money or weapons; it's kind of irrelevant to my point I'm making, is that there's been a lot of criticism of this, mainly in conservative right-wing circles, and that's just an observation.  Do you think if it was currently a Republican Government, they would have been supporting Ukraine the same; these kinds of decisions, do they tend to be the same whoever is controlling government, whether it's Republican or Democrat?  Yeah, I've got more questions, but we'll deal with that first.

Matthew Pines: So again, putting just my pure analyst, realist hat on, if you're looking at a pure ROI, we've spent probably 5% of our military budget to destroy about 50% of Russia's military capacity.

Peter McCormack: That's a good return.

Matthew Pines: So, if that is your pure measure of "success", that's not a moral judgment just, "Did you get an effective bang for your buck, given that the conflict already occurred?" that's one data point you'd have to assess.  I think a lot of that judgment though goes back to a different political view of just the antecedents for the conflict itself, and these are interminable debates between, was it NATO enlargement or was it Putin's revanchist ambitions that are the true blame?  I'm not an expert in the deep history of that area, so usually you need to have a fact-based argument to say, what was the causal root of any particular action and what was the sequence of actions that took place that you can assign moral blame to the root cause, and then everyone else was making a reaction to that initial, morally vulnerable claim.

I don't have the deep historical knowledge to say, "Okay, this is going back to the break of the Soviet Union.  Here's the tit-for-tat and this is where someone made the morally blameworthy decision".  But I think the bottom line now is Ukraine was invaded; that's the basic near-term fact.  When you're in that state of affairs, you have the very simple options: do you support or do you not support; and what is the threshold by which you decide to push for coercive reproachment; where do you think you can squeak out a gain?  I think just from real politics, as long as you're winning, there's no incentive for you to go to the negotiating table.

I think that's where a lot of the political debates fall in terms of, these are great powers going at it and your moral judgments, you can have that debate, but they're just going to fight until they feel like their interests are no longer being served; and great powers will continue to push until they think that they've reached the marginal benefit, and I think that's what the United States is just going to do.  So just as a realist, I think we're just going to keep supporting Ukraine up at the point where we don't want to risk an asymmetric tail-risk scenario, like Russian tactical nuclear weapons or chemical biological weapons, or force him to retaliate against western critical infrastructure, or do something immensely more disruptive outside the Ukrainian theatre.  Those are things that would not be advantageous to us, so we don't want to push so far that it triggers those sorts of things.  

But as long as we can grind out and just basically defang the Russian Military with, from the larger scheme of things, a fraction of our military expenditure, I could see them easily winning that argument inside Congress like, "Yes, this is a good bang for the buck".

Peter McCormack: And it is 50% of the Russian Military has been destroyed?

Matthew Pines: That's basically the assessment of their overall armaments that they've wasted, they've lost probably 100,000 troops.

Peter McCormack: 100,000 troops?

Matthew Pines: Probably, yeah.

Peter McCormack: Wow.

Matthew Pines: Close to that.

Peter McCormack: Do we know how many people Ukraine have lost?

Matthew Pines: Very closely held.  I mean people speculate but I think I've heard folks estimate 30,000 to 40,000 roughly.  These are all back of the envelope; no one really knows.

Peter McCormack: So, there must be a limitation to how far Russia can push this if they've lost 100,000 troops?

Matthew Pines: Well again, you're talking to someone who listens to other experts, so I'm not the military expert.  They've drawn up 300,000 reserves; about maybe 80,000 to 100,000 of those have actually been put into theatre in various parts; they've tried to use Belarus as a staging ground for training these new reserves; they've taken some prison conscripts to do some backfill on the logistics; they've been able to reinforce their lines in the East; they're going to be hard for a Ukrainian counteroffensive to really dislodge; and they're fighting over what are more marginal territorial gains at this point.  

I suppose in the early innings of the conflict, there were wild swings back and forth, and now it's selling into not people making I think a poor analogy to a traditional warfare, like World War I; it's not quite like that, because it's not as ingrained, it's still a very fluid situation, and also the capabilities are still changing.  Every time a new capability gets introduced, it changes some of the strategic positioning.  For example, when we gave the Ukrainians these HIMARS systems, it allowed them to target much deeper behind Russian lines and killed a lot of their senior generals and interrupted their supply and formations, and then Russians adapted to that and those started becoming less effective.  

Then the Russians started to bring in Iranian drones, the Shaheds, and started to do these saturation strikes on urban centres and hitting critical infrastructure and wiping out Ukrainian power in the depths of a winter.  So this is not a very settled situation.  But Russia has a million-man army that they're trying to build and they have a lot of surplus prisoners they can throw in the meat grinder and they're getting ammunition from North Korea, they've got a million artillery rounds they just bought.  So I think people that think that the Russian army is going to collapse are not correct, but they probably don't have the capability to mount a major new offensive to seriously threaten Kiev, even though I think the Ukrainian Defence Minister just gave an interview where he said Russia was building a secret army to try to reinforce and maybe do a new counteroffensive.  That may be just to try to get more resources.

But yeah, there's nothing I see now that's going to strategically tip the balance and this is just going to be a grind.

Peter McCormack: What has this conflict told us about money, in terms of money as an expression of power?

Matthew Pines: I think that was one of the framing devices I used in the paper, which is money, in our current context and really for most of human history, is an expression of a sovereign's sphere of influence, where you decide who is going to be allowed to access your institutions, mainly your banks, under what terms, what rules of law; and you can limit access to those institutions.  You can provide an open capital account, you can have a closed capital account, so money is always an expression of the sovereign's sphere of influence.

The United States has set a global environment post-war, where we could create essentially a monetary commons; and the premise of a monetary commons is that it has really no gates, like an open park, anyone can walk in and anyone can go out.  The dollar was a monetary commons, anyone could use it.  That was why it became the global reserve currency, is because it was so easy to use and it also correlated with US power.  We were the global security guarantee to global trade post World War II, and so people just endogenously started trading in dollars and denominating their offshore loans in dollars; that was the genesis of the of the eurodollar system.

What we've seen really in the past 20 years, and really it hit a new phase after the Global Financial Crisis, was the global monetary commons basically broke.  And then we've increasingly gated it, with the sanctions on Iran, and then in the last year or two we're starting to see more and more conditions, conditional access policies be placed on this what was normally an open, global monetary commons.  I think that is changing the risk premium that all global actors, in particular the most strategically important, like sovereign wealth funds, FX reserve managers, have to now place a new political and geopolitical risk premium on what was formally thought to be their risk-free access to global monetary commons.

Peter McCormack: But that's almost similar to the work you've been doing with advising companies, in terms of what might happen with China, what access they might have, or they might have to de-risk their semiconductor supply chains; this is exactly the same scenario?

Matthew Pines: Yeah, you think about money is a technology, these are all institutional arrangements that go through real infrastructure.  So, SWIFT is a technical network; Fedwire is a technical network.  The competing systems that China is trying to build, like the cross-border interbank settlement system, CIPS, and their digital currency system, DCEP, is their sort of proto-competitor to these global infrastructures.  And so you're seeing this bifurcation and the institutional competition play out across all these different domains, and monetary domain is probably one of the more geostrategically important domains where this is going to be contested.

Usually China and United States have the most power to try to take actions, but there's a lot of other actors in the system that have to respond or can push back in different ways.  And so one of the interesting things I think we're going to see in the coming years is, you might call it a multipolar arrangement, but these powers that can play both sides.  That can leverage either their access to critical resources, like the GCC or OPEC, Saudi Arabia in particular; or folks that have a critical geographic advantage, like Turkey; or folks that have major commodity other resources, like Brazil.  These are countries that are going to have a new ability to play both sides.

That means that when you have one monopoly competitor, like Blockbuster, everyone has to go there to get their movies, Netflix comes out with a better technology and destroys Blockbuster; people make that type of analogy between the digital yuan and the dollar.  I don't think that's the right analogy, but I think you're seeing essentially more like Apple/Android where it's, okay, here are two competing entire technical governance, political stacks and we have a legacy stack, it's very strong, it's a dominant stack, everyone likes Apple, you're kind of stuck in Apple.  But if Apple starts to make you pay up to get your pictures, or starts to impose excessive fees on every transaction you make, and then Android says, "Actually, maybe you don't like us, maybe you hate Google, but we're going to make our system just cheaper for you to use, especially for you, because maybe you're someone that Apple doesn't like".

For example, the Saudi Arabians, this is a critical litmus test.  They were the key to the re-architecture of the global geoeconomic arrangement post 1971, when Secretary Simon went to Jeddah, and basically created the petrodollar system, which really involved recycling oil dollar surpluses that they agreed to accumulate by only selling their oil for dollars, and then they would recycle those surpluses into western debt, US Treasury securities.  That put this critical link between the essential commodity of the economy oil and the dollar, to replace the dollar gold peg that broke in 1971, flipped it to this dollar oil arrangement.  So Saudi Arabia was a critical geostrategic partner for us for many decades.

So them essentially, they're not flipping to the Chinese, but they are recalibrating their arrangement to really play the middle power role, where they want to be able to do with their surpluses what they want.  That may involve selling some of their oil for yuan, and it may be involving setting up these arrangements for direct bilateral digital currency settlement and helping bring the rest of the GCC along the way with that with China.  It also doesn't hurt that their ballistic missiles come from China and they've got Huawei as their main telecommunications service provider.  

Throughout the Middle East, China has taken this tack of, "Okay, we're not going to move in with the PLA Navy first, like what the West did in the early part of the 20th century, where first it was the British, then it was the Americans who took over as the major security force" mainly to get the oil and control the oil and denominate the oil, first in pounds and then in dollars, and that was the critical geostrategic relevance of that region.  And it was military first, it wasn't a whole lot of technology; it was just, get the oil out of the ground and ship it out.

Now China's coming in and saying, "Okay, we're going to start with economics, we're going to start with trade, we're going to start with digital transformation of these countries, and we're going to use that to pull them into our geoeconomic orbit gradually", and that is the point of tension now.  And these countries are also not all that liberal.  MBS is not exactly all that on good terms with the White House, so it doesn't take a whole lot to make him seem like he's on a better team if he aligns marginally with the Putins the Erdoğans and the Xis of the world, relative to the G7, and that is a challenge for the United States.

This is a different environment and we're trying to keep a lid on all these things, we're trying to reinforce our hegemonic power.  But every intervention takes costs and those costs are straining our fiscal budget, our capacity, and we have a lot of embedded obligations that are going to stretch our capabilities in the coming decades.  We basically committed to try to build up a military to reinforce our deterrent capabilities against China, it's going to be very expensive; we've committed to helping friend-shore and re-shore a lot of these supply chains away from China, that's going to be expensive; we're trying to prosecute this strategic competition with China, so industrial subsidies, industrial policies, the CHIPS Act and other things like that are going to be coming on the line, that's going to be very expensive; we're going to try to rebuild our domestic energy infrastructure to meet our net zero climate objectives, that's going to be very expensive, rewiring our grid and doing all this shift towards electrification; and we have the boomers retiring that are going to be making large claims on social security Medicare.

These are all very expensive structural forces that'll require a lot more debt issuance from the US Treasury, at the same time that there's less people that may have a reason to hold US Treasury securities.  So those are trading lines that aren't going in the right direction for the United States, in particular putting a lot of strain on the US Treasury security market.

Peter McCormack: Would you say then sanctioning Russia's US bank holders, would you say that was a miscalculation?

Matthew Pines: I think history will see that as a major pivot, and maybe it was inevitable.  History is contingent, so it can play out in a lot of ways, but I don't think they thought through all the second- and third-order consequences.  I think that sanction was done because we wanted to do something extremely significant, but below the threshold of casus belli with Russia.  We wanted to punish them as severely as we could, but we knew weren't going to do a no-fly zone, we weren't going to put Seal teams behind enemy lines and blow stuff up, we weren't going to do anything kinetic against Russia.

Biden was like, "Give me the most substantial non-kinetic punishment that we can lay on Russia", and I think the guys in the National Security Council talked to some folks at the Fed or folks at the US Treasury department and were like, "What's the biggest hammer we can swing that isn't going to cause a war?" and they were like, "Well, we could sanction all their dollars", and, "Okay, we'll do that", and I think it was decided over a weekend basically.  I don't think anyone modelled out what folks in say the PIF or the SAMA, which is the sovereign wealth funds of Saudi Arabia, would think about that or what the Indians would think about that, what some of these other powers in the world that are critical to the stability of the dollar system that are potentially going to be gaining more relative power.

Now they see that as a signal that if, "Okay, maybe the Ukrainian situation is morally justified to bring the sanction on them, what's to stop a future US Political Administration to now wield this as a tool of geoeconomic coercion against me for something that I think is in my legitimate national interest?  Now I have this vulnerability that I didn't really think was all that severe, and now I have to increase the risk premium I attach to it".  I think that was not well modelled out.  I think that is something that's hard to model, but also those are the things you typically, when you think about strategic mistakes, those are the things that you look back on you think, "Oh well, this precipitated a whole set of decisions and hedging behaviour that maybe individually doesn't change everything, but in aggregate can cause a strategic effect".

Peter McCormack: When that money is sanctioned, what actually happens to it; is it frozen or is it confiscated?

Matthew Pines: So again, in the fiat system, these are just ledger entries on a balance sheet and they just have accounts, and this is the Russian Central Bank's account and it says, "You have [say] $300 billion", there's a little dollar sign next to the number, and they put a blocking sanction, like it's a legal manoeuvre.  When I said this is the matrix of money/military/legal, this is how US hegemonic power is really enforced, it's, "You can no longer withdraw from that account".  No other institutions in the dollar system will accept that.  The Bundesbank, as an institution, is prevented by law and under the threat of sanction to let you do anything with that money.

So it's there, in the sense that it's a credit in that system that could be re-opened, like they didn't delete it, and so if it could be used as, for example, the Iranian sanctions; we did something similar with them.  We blocked them out of SWIFT and then we sanctioned a bunch of their dollar deposits and we essentially held them as a point of leverage, "If you do what you want in these nuclear negotiations, maybe we'll unlock some of those frozen funds".  So they could get it back potentially, probably not any time soon, but you can imagine some future Russian liberal state that says, "Yeah, we performed, we'll apologise", maybe half of it goes to Ukraine as reparations and then they get some of it back.

Peter McCormack: You see, if there is a risk of the US losing its position as a global reserve currency, and when you talk about less interest in US debt, but we don't want a shift in the power because people will take on say the digital yuan, it's almost like if somebody invented a decentralised alternative currency, that might be useful right now?!

Matthew Pines: Yeah, so when I think about this environment, where you have general degradation of interstate trust; trust is an abstract concept but in a geopolitical context it really is critical, it means that your allies but also folks that are maybe in the second or third tier of the global hierarchy, that they think that the system they're bought into is going to be safe for them.  So they trust that the provider of this hegemonic arrangement isn't going to weaponise that monetary commons against them.  When that happens, then they have to hedge their bets and they're going to look for alternatives. 

It doesn't mean there's going to be this overnight flee from the dollar; there's a lot of structural reasons why the dollar is still very strong, as a unit of account.  For me, the US Treasury security is more vulnerable as the global reserve asset, as opposed to the dollar's role as the global reserve currency.  The global reserve asset is the function of the US Treasury security as collateral in the global dollar funding system; it's what you have to pledge and hold if you want to engage in dollar funding transactions.  A lot of sovereign wealth funds and foreign exchange reserve managers hold Treasury securities as the most safe and liquid asset, and there's two key parts of that value proposition: safety and liquidity.

Safety refers mostly to, it's not going to dramatically lose its value over time, it's relatively stable, "Well, it's lost 25% in the last year".  So, the "risk parity idea", where bonds are the ballast in your portfolio, is destroyed, so that pure financial dimension of safety.  But also just safety from geopolitical risk.  If you are a nation that may feel vulnerable to a future political administration using your reserve holdings as a point of coercion, you may want to draw down on the extent to which you're exposed to that.

Liquidity is also taking a hit.  There's been major issues with the liquidity in the Treasury market recently.  Even Treasury Secretary Yellen came out in September and noted this and people speculated about why there was such a dramatic turn in the dollar strength around that time, that coincided with a whole bunch of international meetings where a lot of our allies were saying, "We're in trouble".  There was the blow-up in the gilts market in Britain; Bank of Japan is still facing a lot of issues with their sovereign debt markets; so a lot of sovereign debt is taking it on the chin.  US Treasury security is, as we see, the gilts are going to take it first, the JGBs are going to take it second; it's not going to be the Treasury security that's going to be the canary in the coal mine, it's going to be these other G7 fiat sovereign debt securities that are going to be showing this type of stress.  But it's showing that the system is becoming more unstable.

Yeah, so if you're a sovereign that's looking to hedge out of that inside money system, where are you going to go?  There's only so many alternatives in the traditional landscape of, do you just buy more land?  That's what a lot of countries are doing, they're buying up a lot of farmland, they're buying up desirable properties investing in western real estate markets.

Peter McCormack: What, sorry, the governments are?

Matthew Pines: Yeah, for example of the Saudis.  The PIF, which essentially is the piggy bank for MBS --

Peter McCormack: That's who owns Newcastle, right?

Danny Knowles: I don't know.

Peter McCormack: Yeah, I think so.

Matthew Pines: Yeah.

Peter McCormack: They're doing a lot of investment in sports as well.

Matthew Pines: Yeah, I mean they've got so much money.  I mean the Saudis and the Chinese and maybe if you add in one other country, it's like $1 trillion of annual surpluses.

Peter McCormack: I'm sure I heard that their revenue from oils generates $240 billion profit a quarter, the Saudis alone.  Can you double check that?

Matthew Pines: I don't know the exact number off the top of my head, but I know Saudi Aramco has among the highest revenue, it's like $1 trillion in annual revenue.

Peter McCormack: Maybe it's revenue; I thought it was profits?

Matthew Pines:  I mean, they print money.  I don't know off the top of my head, but they print money; they're making a ton of money.  I think the breakeven for a Saudi's bearable is like $60, but it's probably a lot lower than that, that's probably the public number.  But yeah, so the basic system is that there's a lot of these Eurasian, authoritarian-inclined states that are usually either in control of hard natural resources or dominant global production, which means they accumulate massive amounts of surpluses.  Those surpluses are mainly dollars and then the balance of payments of the global system have to be balanced by net deficits.  So as they accumulate ever larger surpluses, the West has to accumulate ever larger deficits.

So, the UK and India and a lot of Europe, especially Southern Europe, and the US have to run massive deficits; that's why we're running historically large deficits, these are the balance of payments.  The system as it worked is that those surpluses have to get recycled into our assets, so we sell off basically our equities, our sports teams, our real estate; anything that's desirable that these foreign reserve managers want to buy, they buy it.  

So, it has really distorted our economy, because it means that a large portion of our economy for the past 50 years, really in the past 20-some years after China came into the WTO and it accelerated or turbocharged this recycling system, is that the sectors of our economy that benefited from that were the fire sectors, so finance, insurance, real estate, the parts of our of our economy that were basically designed to take these global capital flows from China, from Saudi Arabia, from Russia and funnel them into their economies, funnel them into fancy Knightsbridge real estate in London; funnel them into wealth management products from JP Morgan or Goldman Sachs; funnel them into our tech firms.  It's why Saudi was a major equity holder and still has I think a position in the capital stack in Twitter.

There's a reason why the GCC in China and Russia have oligarchs and a lot of equity investment and control over western firms, and this has actually created a lot of national security concerns inside the intelligence community because these are very often used as mechanisms for influence campaigns that the Chinese are really good at, in terms of co-opting western elites to defang what would otherwise be elite resistance to the rise of a competitor power.  If you're getting rich off of them, maybe you're okay with that; case in point: Ray Dalio, Bridgewater, who his firm manages Chinese state assets.  Okay, this is what you would expect.  They're not going to be people that are going to be for breaking the system.

Peter McCormack: And, "Here's my new book".

Matthew Pines: Yeah, exactly.  So this is the challenge we're in though, and this doesn't mean they have everyone checkmated, because China domestically has its own major economic issues.  They have massive overinvestment in their industrial capacity that they've tried to export demand to BRI, so they take dollars from their surpluses, and they basically do dollar lending to --

Peter McCormack: BRI; Brazil, Russia, India?

Matthew Pines: The Belt and Road Initiative.  This is the major geoeconomic --

Peter McCormack: Oh, sorry, yeah, of course.

Matthew Pines: Yeah.  So, they have lent or mostly lent about $1 trillion to African countries, South American countries, even across Eurasia, even to Montenegro.  They have a bridge that they still owe -- the debt payments on that bridge is something like 12% of their GDP; it's this insane thing!

Peter McCormack: For a fucking bridge, really?!

Matthew Pines: Yeah, it was a big scandal.  Or Sri Lanka, there's a road that costs like $40 million a kilometre, big scandals here.  But yeah, so they've used the dollar system that they accumulate these dollar surpluses, and they weaponise it by embarking on this program of strategic influence, and they had a really clever arrangement where not just ports, but often resource projects like offshore drilling or mines or whatever, they collateralised the loan with the revenues. 

So they take the revenues from those projects and they park them into two funds that they manage offshore; one is to repay the loan, it's the stream of interest payments essentially; and the other is essentially the profit from that project goes into an offshore fund that the Chinese control, the Chinese state enterprise usually controls.  It's like the collateral that if you default on the loan, you know, weak frontier market, we'll just take all this what would otherwise be your profit from this whole project; we'll just take it instead.  

That's how they've collateralised a lot of these BRI loans, and it's usually people say the BRI loans have blown back in SOE's faces, and that is for some of these projects they have blown up, but not all of those flows are accounted for.  A lot of this is in offshore money centres; they're going back to the Chinese in other ways.  This has become one of the major critiques I have of the current -- like, the net-net, is the global dollar system good for the United States?  It's like, well, it's generated a whole bunch of these political pathologies where we've de-industrialised the Midwest, created a lot of political frictions as a result, to the relative advantage of economic sectors that maybe aren't all that net productive or innovative, like the finance, insurance, real estate sectors; and has become a major mechanism by which our adversaries, especially these Eurasian autocrats, can buy up our most valuable assets and also spread strategic influence throughout the Eurasian periphery in their attempt to get those countries on their side.

There's a statistic that for every 10% more that a typical, or an average African country votes in alignment with China at the UN General Assembly, they could expect to see 86% more Chinese BRI funding.  So there's a clear geoeconomic link between BRI and strategic influence in these parts of the world where we are trying to compete.  Africa is one of those places where all the raw materials for the future of the energy transition are going to be coming out of these countries, and China, one of their top priorities is to dominate the renewable energy industry, just like Saudi Arabia dominates oil.  So they are trying to lock up a lot of these critical inputs to solar power manufacture, battery production, and they want to locate the futures markets for those commodities in China, unlike where right now, the futures markets for most commodities are in the United States.

Peter McCormack: Yeah, I listened to the Rogan show with a guy who talks about the cobalt mining in the Democratic Republic of the Congo; did you hear it?

Matthew Pines: I saw the clips and, yeah, I followed the story.

Peter McCormack: I mean, it's well worth a listen to, but he talks about a large majority of those mines are owned by Chinese companies.

Matthew Pines: Yeah, in fact I think there was an American company that used to own it and there was such a moral and public backlash, or dissuasion against being involved in that, that they divested and the Chinese said, "Okay, we'll take it".

Peter McCormack: Yeah, "We don't give a fuck"!

Matthew Pines: Yeah, they don't care.  The SOEs have been given free reign by the Chinese Government to just go out there and make a buck.  They don't have as much moral compulsion, environmental compulsion, as western firms do.

Peter McCormack: Human rights compulsion.

Matthew Pines: No, by no means.  And actually, one of the interesting challenges recently has been, one of the critiques about, okay, China's got all this BRI funding but they don't have military capability to back it up.  So okay, they have these loans, but they don't have the Fifth Fleet, they don't have aircraft carriers that can have a blue-water, cross-continental, power projection capability.  And actually, what China is really innovating on in a lot of these countries is, you don't need those types of military abilities to really enforce these natural resource claims.  What you need are proxy allies that you can get on your board, as well as private military companies, so PMCs is what they're called.  

So China has really invested a lot in their equivalent to the Wagner group, although they're not as bloodthirsty psychopaths like the Wagner group is from Russia, but they're professional mercenaries.  They're not official Chinese Military officers, they're like Blackwater basically.  In fact, Blackwater contracted with the Chinese Government when it wasn't Blackwater, but it was Erik Prince's other company, Frontier Resources Group in Africa, to do some of this stuff.  So they're actually able to effectively project military power where it's needed in an asymmetric way.

The US Government has a lot of special operations capability in Africa to try to do something similar, where we have host government agreements to do counterterrorism missions that happen to be near strategic resources.  But this is I think some of the canards that are played around, to be sceptical of China's ability to enforce these geoeconomic patterns of influence, because they don't have 11 aircraft carriers.  And it's true they don't have, those but I think they don't need those necessarily.  And, they're building them quickly.

Peter McCormack: They're building them, yeah.  Didn't they just launch one recently?

Matthew Pines: They have the Liaoning, which is their major flagship aircraft carrier.  I think they're building another one, and they've got one more on the way after that.  Yeah, their shipbuilding capacity is enormous.  They have by far the largest shipbuilding capacity in the world, mostly for commercial shipping, but that infrastructure is used for naval build up.  And they've embarked on the largest military modernisation in history.

The US Government typically isn't histrionic when it comes to doing these sorts of assessments, but if you read statements of different deputies and secretaries for Strategy and Force Planning from the Pentagon, they'll come out with pretty strong statements assessing how quickly China's capabilities have improved and how concerned they are about the deterrence capabilities of the United States, relative to what China is able to do, across lots of different domains.

A lot of my day job is also related to cyber security, and so cyber is a major domain that stretches not just the commercial environment, but obviously the strategic environment, and space.  Space is becoming a critical domain of a competition, and China is a major space player, very big in space.  So yeah, I'm not a China bull, but I don't think they have a lot of demographic issues, their political system isn't all that innovative, they've got a straw man leader who doesn't necessarily listen to his advisors on things.  They have a lot of problems; they've got these massive debt loads.

But I think people that underestimate rising aspirant revengeous powers, history tells you that you should keep an eye out.

Peter McCormack: You mapped out a scenario or scenarios in your article; can you talk me through that?

Matthew Pines: Certainly.  So there's been some a lot of hot topic in the geoeconomic monetary discussion, a lot of it's precipitated by a certain analyst named Zoltan Pozsar, from Credit Suisse, who's written a number of these notes articulating what he calls Bretton Woods III thesis, which he updated and refined and just in the past a few weeks, he's released different versions of it.  It's quite complicated, I don't want to go through all of it, but the basic premise is what we were talking about before which is, can China create an economic arrangement that gives them some of the similar benefits that the US has?  

That's their overall objective, if you think longer term, is they want to have their own sphere of influence that eliminates all their dependence and removes any potential coercive power the United States has over them.  So that's the high level objective, so that the CCP can endure indefinitely and they can have the great rejuvenation of the Chinese people, achieve the great Chinese dream and resolve the Taiwan question in our generation; these are the major commitments that they've made to the public.  So these are the high-level, strategic objectives.  Those translate to having a regional balance of power arrangement that's in their favour, that includes also bilateral trade arrangements, trade agreements and an economic and monetary arrangement that is not subject to US influence or control.  That's the high-level, strategic objective.

Now, how they get there is the key question; and can they get there; and what's the pathway that they'll try to get to that point?  I think for me, they have an approach that's quite complicated.  But in my simple fish brain, it's first starting with building up some of the alternative infrastructure as the "in case".  So right now, they mostly use SWIFT, just like everyone else does; right now, they engage heavily in the global dollar clearing system with western banks; they're intimately connected into the global dollar system; they have over $1 trillion in US Treasury securities.  So they haven't decided to do that break yet, they haven't gone really that far down that road yet.

What they have done is built up some of these alternative infrastructures, so that they have the systems in place in proto form, to maybe gradually grow and mature over time, or as a backup plan in case they get locked out.  The two big ones really are DCEP, the Digital Currency Electronic Payment.  That's basically the technology package for digital yuan that they're trying to export along BRI, but they're testing it in different countries and setting it up more in these prototype stages, including domestically.  They really launched it officially at the Winter Olympics, so it's still very early in its development.  Then there's CIPS, the Cross-Border Interbank Settlement Systems.  They're really trying to build their own alternatives to basically Fedwire and SWIFT; that's first one.

So their strategy is really just block, then build, and then expand.  So across lots of domains, that's been their strategy; in the South China Sea, it's been the same strategy.  First, invest in denial weapons so that they can block US Military from doing too much in their immediate proximity; then they want to build they, want to build the islands physically, they actually built islands in the South China Sea; and then they want to expand, they want to eventually push us out, they want to reset the balance of power in the South China states.

They want to do that I think similarly in the economic domain, but it takes a lot of time.  So they want to block first and just protect themselves; they want to build these infrastructures; and then they want to expand them.  How they get to that expansion stage is where there's a lot of debate right now, and for me it's a little more speculative.  But you can see things happening with these arrangements with the GCC, with Saudi Arabia, with Russia.  For example, over 50% of the bilateral trade between Russia and China is in yuan when it was, I don't know, 10% before the war, so dramatically shifted to the point where that's basically completely de-dollarised.

So, all these arrangements, any individual piece you can be sceptical of, like how much oil trade is going to be settled in yuan, in the rupee, in the rouble, and it's probably not going to make much of a difference in the near term.  But I think they're trying to put in place the infrastructure, the bilateral political agreements first; and then, once the political agreements are in place, they can then coerce or influence major institutional players to make those shifts, because they're not going to happen organically in a market, no one's going to market-demand the yuan.  But if most sovereign wealth funds and major institutional players are basically coerced, because access to the Chinese market, access to critical commodities is geopolitically contingent, that's going to be the major pivot point, is when people don't voluntarily really adopt the yuan; but, "If you want to keep selling to us, you want to keep trading with us, you have to use the DCEP, you have to basically agree to settle with this".  That could be the thing that shifts the balance.

We're not there yet and they haven't pulled that card, because they know that card will be likely the point at which they're going to be challenged by the United States across a lot of other domains, like these aren't going to happen in a vacuum.  The United States is not just going to take this lying down.  We're not just going to let this happen, we're going to do lots of things just to contest this.  That's going to be a very messy dynamic, and that's really what we're going to see take place in the next three to five years, I think.

Peter McCormack: It all feels a little bit like, "How much can I push you?  Just test a bit more".

Matthew Pines: Yeah, I mean China has been very sophisticated in how they think about -- it's literally the famous slogan from Deng Xiaoping was, "Hide your strength, bide your time", which is like a clue!  It's like, "What are you biding your time for; why are you hiding your strength?"  The idea was, they were a weak power when they first shed Mao, and they had to embark on this program of global integration.  But they knew that that created lots of risks, especially after a post-Soviet collapse to their system of government and their personal safety and their livelihoods, and so they had to think strategically.

There's a book called The Long Game, by Rush Doshi, who's actually currently the Director for China Policy on their Security Council, and his PhD thesis turned into this book.  It's like a systematic analysis of Chinese Government documents, to try to unpack and make a case that they actually have a grand strategy.  Most countries don't have a grand strategy, and his closest analogy would be Bismarck's Germany.  And a grand strategy is where a country, all the instruments of national power and bureaucratic plans and agency resources are pretty effectively aligned over a long period of time to achieve a high-level, national, strategic objective.  

Usually most countries don't have that.  Most countries are just like, "What's our next year's budget?  These are our planning documents, we want to have new investments in X, Y or Z", but he makes it like China has this pretty clear grand strategy to grow into a global power, and this translates into a lot of different activities across multiple domains.  But one of those critical domains was in strategic influence.  This has been very underplayed, and still is underplayed.  The degree to which China's been really effective at conducting subthreshold grey-zone activities, as well as influence operations in the West.  That's mainly been conducted in the West by the Ministry of State Security, which is their equivalent to the CIA.

They started really in the 1980s, and there's a book called Spies and Lies, by a researcher from Australia named Alex Joske, and he really unpacked how China was really sophisticated using these front organisations for cultural exchange, trade exchange, and a lot of westerners that want to do business in China would go through these middlemen like, "We can get you the meetings with the local provincial official, etc, but come through me and we'll help you basically get that business", and they were all intelligence officers basically.  So, they're not doing the traditional work of spying which is, "I recruit you as an asset inside the government and you give me the secret documents in the fake rock", kind of thing; it was just developing friendships, developing relationships, nurturing upstart political aspirants in local councils, before they become major political officials.  They had a very sophisticated long-term view of how to develop these relationships over time and really strategically influence our political conversation, our economic conversation. 

One of the critical priorities for the MSS, starting in the 1990s was, "Convince the West that China getting rich is good.  Convince the West that us climbing the ladder of technology and getting richer and getting more powerful is good".  This was believed; we actually thought that we could convert them to the liberal order.  And this was an influence operation, this was a psychological operation to convince us that this would happen, that they would democratise as they got wealthy, and they would liberalise their political system, they would do these experiments in local elections, etc, and it was all basically confection.  We were willing to believe that, because we just want to make a lot of money.  And now we're waking up belatedly to the fact that they have no intention of liberalising as a ruling state.  

So, yeah, that's the major recognition that has occurred gradually, and then now has definitely solidified in the major political and policy circles in the West, especially the United States, and now it's translating to these actions, like total economic war, essentially just try to halt China's technological advancement, massive pressure campaigns, really trying to take on China as a major pacing threat to the United States.

Peter McCormack: All right, so look, we've covered a lot of geopolitical stuff here.  Going back to the original title of the article, the Future Geopolitical Order and Bitcoin: an Initial Assessment, so what is the role of Bitcoin in all of this; what is the potential; what is your thesis here?

Matthew Pines: So I could see it play out in different ways; one in particular.  So Bitcoin, just as a monetary network and as a neutral reserve asset, has very valuable properties that could make it play a role in a system that is lacking this type of trust in the legacy fiat issuers, and also lack of trust in the rising challenge.  I don't think people are necessarily going to trust the Chinese yuan or Chinese Government bonds any more than they trust dollars or US Treasury securities; even if they have to hedge in this bipolar system, it doesn't mean they're going to shift to the yuan as the new top dog.

Peter McCormack: And possibly trust it less, but have to use it.

Matthew Pines: Yeah, again you could see a rebalancing, but it doesn't mean the dollar is going to lose its overall dominance.  But it does mean that there's a role for something like Bitcoin to take a different position in the asset allocation portfolio for sovereign wealth managers.  So, if you're taking the perspective of someone in say Qatar, or another GCC country, that's looking across their sovereign wealth funds and saying, "Okay, I've got X amount of western equities, X amount of western and other real estate, I've got these mines, I've got these just basic dollar balances and deposits and US Treasury security holdings", it's not an insane proposition for me to put forward that them allocating some small percentage to Bitcoin in the next several years is a possibility.

You can imagine them taking a flyer on it to start, but there is this dynamic where, okay, they're going to experiment with it, they're going to test it out, but if a few do it in a small scale it could become successful; I think their alternatives are not that great.  But there's a great paper by a Harvard econ graduate, named Matthew Ferranti, and it's a very technical mathematical paper.  It's a model, and like all models it has assumptions that you could argue with, but it's a good first rigorous attempt to try to put some maths behind this question of, as the geopolitical risk premium goes up from say sanctions risk to countries that are marginally geopolitically disaligned with the United States, how would you expect that to change their portfolio allocation away from say fiat reserves to both gold and Bitcoin?

He has this model and he plugs in different assumptions, and you can do the parameter space and see, "Okay, if it's a high risk, or the different assumptions about Bitcoin versus gold, you get a different distribution".  But the bottom line of the model is, even in a more conservative scenario, you get to where a single-digit percentage allocation makes sense from a risk-weighted perspective to some of those countries.  And so that's an interesting thesis to have.

Peter McCormack: We need to talk to this guy.

Matthew Pines: Yeah, you should, and he can certainly explain his model better than I can.  But that puts something on the board that I think wasn't on the board before, and it changes the dynamic.  Because a lot of these countries can't custody their own gold, so I think people just go to gold as an alternative; but gold actually has a lot of disadvantages.  The reason why gold failed as a global monetary reserve asset is because it's difficult to transport, to secure, to verify.  It means it usually ends up being centralised in the global hegemon's vaults anyways.  Most gold in the world is held in 66 Liberty Street underneath the New York Fed.

Peter McCormack: Do we believe that?

Matthew Pines: Well, I don't know.  Die Hard, the robbery --

Peter McCormack: Die Hard with a Vengeance!

Matthew Pines: Yeah.  But literally, if you're worried about the Treasury securities that you hold being seized, well then the gold in a vault in the New York Fed doesn't help you at all!  So, unless you're prepared to actually self-custody your gold, which Saudi Arabia could do that, some of these big Gulf powers could do that; but the average emerging market, it's going to be expensive and sometimes it may not make a whole lot of sense just to transact in this.  So, it starts to add a whole lot of frictional cost, even if it was a necessity.  It would just quickly become unworkable I think for a lot of those countries, and they would have to resort to the same sort of thing, which is paper claims on the gold that are held by some other power on your behalf, and you're just choosing a different sovereign to derogate your monetary sovereignty to.

So, Bitcoin is an interesting alternative, because you don't have to take all those settlement frictional costs, because it's just a digitally native asset you can just transfer over this censorship-resistant network, and it's super-easy to and cheap to self-custody with high-level security equivalent to gold security, to a certain extent, if you have good custody practices.  So, this is a different type of asset whose monetary properties, scarcity and its bearer nature, make it like gold to a certain extent, but as a settlement system it's got the efficiencies of the traditional fiat system.  So, it's kind of mixing a SWIFT and a Fedwire with the Treasury security into one standalone package.

Now, it's very speculative, so that's got to be priced in.  This is what Matt does in the model.  Okay, clearly Bitcoin is much more volatile than any other current sovereign reserve asset, so it would be foolhardy to allocate a large portion of your holdings to it; but yeah, a small few percentage points to start, especially for folks that have a high sanctions risk and that otherwise can't self-custody gold, the model says it makes sense to do that.  And that's I think how you could see it start.  

That's like anything else, start small and then as the market grows because of that initial capital injection, in my basic assumptions about Bitcoin's volatilities, it will generally correspond to adoption and size.  It just takes more inflows and outflows to cause the same level of price movement.  So as it gets larger, volatility has to come down, to a certain extent.  So, as volatility comes down, the risk premium associated with the volatility also comes down, which means your portfolio allocation goes up, and so that's how you can see this play out.  I wouldn't ascribe 100% probability to that, but I think it's not being looked at properly as a realistic scenario.  Say by 2030, you could have several countries that have meaningful holdings of Bitcoin as part of this re-gig or geoeconomic arrangement, and this is a way for them to hedge.

Peter McCormack: Do you think the US Government should be encouraging this though?

Matthew Pines: Well, so this is the key thing.  I think this is an ace in the whole for US geostrategic interests, to a certain extent, that we can leverage Bitcoin's monetisation with stablecoin growth.  This is a whole separate conversation, but you can imagine the competition between Bitcoin isn't really with the US dollar, it's with the US Treasury security, and competitors for the Treasury Security, namely gold.  But you don't have to give up the dollar's pre-eminence in the process; you can leverage what is a very strong, endogenous demand for dollars around the world via crypto dollars, so stablecoins, and a synergistic relationship can emerge between demand in a lot of these countries for dollars that are really hard to get.  

They would rather transact in crypto dollars, like Tether and other versions of that that could come down the line, than just the digital yuan.  That spreads demand for dollars and if you have a proper regulatory framework for stablecoins that reserves them, so you don't get these stablecoin blow-ups or frauds, then you could see dollarisation take place in a much more stable way around the world than actually it happens today.  Right now, dollarisation is a very unstable process offshore.  It is eurodollar balances that are hot money flows, and they rely on Treasury security collateral.  So, when you have runs in the offshore dollar system, it's the Treasury securities that get fire sold.  That's what causes the Fed to come out with these swap lines and liquidity facilities and repo facilities to re-liquify the offshore dollar system to prevent a total collapse of the monetary arrangement.

So, we've created this gun to our own head by making the Treasury security critical collateral for the offshore dollar system; that dollar system has to keep expanding; that puts a lot more fragility on the Treasury security that is a source of geoeconomic vulnerability to us.  So, having stablecoins monetise alongside Bitcoin, it also doesn't hurt the fact that Americans hold a lot more Bitcoin than a lot of other countries in the world.  So Bitcoin monetises relative to other countries; it's essentially a form of seigniorage, because their capital inflows to buy Bitcoin make our Bitcoin worth more, and so we accrue value from their capital inflows into the overall network.

Peter McCormack: And also, control a lot of the infrastructure in terms of a lot of the major companies have been established in the US, are being established in the US, so it gives a lot more control there as well, a bit like with the internet.

Matthew Pines: Yeah, I mean control is an interesting dynamic.

Peter McCormack: It's not control over the network or the code as such, but do you know what I mean?

Matthew Pines: Yeah.  Well I think when it comes to, what kind of value system does Bitcoin represent; it represents a system of individual autonomy, the ability to transact peer-to-peer, the idea that you have property rights, you can custody what you want, reinforces the ability to express yourself.  These are natural liberal values that are antithetical to the system that China's trying to set up.  So, you can imagine this is in alignment with US political interests.

But you also have a challenge with the fact that China is trying to impose their political views in a subtle way by exporting their technology stack, and Bitcoin represents a very diametrically opposed vision of a technology stack for a new internet.  The internet has become more centralised with surveillance built into it, and I think people see the trend lines of tech balkanisation being a major issue, where data localisation is going to be a major thing.  Tech companies are going to have to locate data say on Indian users in India, their algorithms are going to be subject to state review and approval.  I think this open era of the internet that people still maybe think exists is going to die.

I think Bitcoin represents the last hope that maybe you can have something still like a global, open internet, and it may not represent -- this is I think what some of the work with Web5 is about, not the Web3 nonsense, but actually building in decentralised identity applications and building in other applications on top of the basic network that can create a different type of internet than what we've evolved into, that is maybe not fully aligned with our moral or our political interests.  Yeah, and it helps the fact that Bitcoin companies are here, Bitcoin innovators are here.  

I think Bitcoin's kind of a trigger word.  People start to think about it as associated with people they don't like or political ideologies they don't like.  I look at it as just a technology stack that is going to potentially offer us a novel geopolitical solution/backup plan, in case our adversaries succeed in destabilising the current geoeconomic arrangement.  I think we need to be seeking how we can use it to our advantage and not just our advantage, but the advantage of everyone around the world.  If you think about what the function of a global reserve asset is, it's something that you hold your savings in and what you think is the safest thing.  The dollar, via Treasury securities, was that for institutions.  

But the average person in emerging markets, even the average American doesn't hold a US Treasury security.  Only a subset of people that actually hold money market funds are sophisticated enough or even have enough free capital to invest, can hold bonds.  But the best players in the world can't hold a Treasury security.  So that I think implicitly weights the power dynamic towards large institutions, especially in countries where institutions are not all that liberal.  So, it puts a lot of the power in these countries into the hands of those elite structures, like the sovereign wealth funds, the central banks, the government elites; and the people don't have access to those resources, they just get managed by the political system, oftentimes not on their behalf.

Bitcoin offers a premise of, "Here's a global reserve asset that's global reserve asset for the people.  An individual can hold a tiny amount of Bitcoin on their phone, can also enhance it with dollar-based stablecoins, and can engage in a global marketplace, maybe with these other applications, and do an Enron around their oppressive government".  That's pretty encouraging.  

Also, more speculative but really encouraging is a company called Bridger Solutions that is just starting up mining operations in Africa, and they're going to scout these power facilities that have been funded by Chinese loans, major hydro and wind farms that were built because of some vanity or political reason, and now they have no interconnection to any load centre.  So there's 50 MW, 100 MW wind farms, hydropower plants, just stranded assets basically, and a perfect place for Bitcoin miners to go, help the local communities as you monetise these assets.  I think there's a company called Gridless in Kenya doing these things.

Peter McCormack: We tried to speak to, what's his name?

Danny Knowles: Erik.

Peter McCormack: Yeah, we tried to speak to him and we agreed to do the show remotely, obviously, because he's in, I think he was in Kenya or something at the time, and I think he did it with an iPhone on top of a hill, and we could see this --

Danny Knowles: It was at the actual facility!

Peter McCormack: Yeah, it was at the facility, but the connection was shit, so we've had to defer it.  But we're going to get the guy on the show.

Danny Knowles: It should be next week.

Peter McCormack: Next week, yeah, we're going to get him on the fucking show.

Matthew Pines: Yeah, so these Bridger guys, they actually come from US Military and State department.  So they actually worked in Africa for many years, they know the political terrain, and they know how Africa has become this site of geoeconomic great power competition between US, Russia and China, operating in these countries, control over natural resources, trying to influence the host government.  They're also bitcoiners, but they're like, "Hey, we can essentially take the Chinese funded asset, mine Bitcoin with it, and it's an American company doing it".

Peter McCormack: Love it!

Matthew Pines: "And we're basically teleporting the Bitcoin out from the middle of the jungle", so you don't have the traditional problems of getting a traditional -- if you want to monetise that sort of resource in those countries, it's challenging.  You've got to get the inputs out; you're got to get them in and then get them out, across borders, etc.  Bitcoin is a novel commodity in the sense you can monetise these assets in these countries and then teleport them out.  And I think they're looking at setting up some pilots to do this.  

But that's I think an interesting alignment between monetising Chinese-funded renewable energy projects that are not actually helping the local communities, with Bitcoin mining, in a way that reinforces American values and American economic interests, in these countries that are the site of intense geopolitical influence.  This is speculative, it's not game-changing, it's not going to tip the balance of scales between US and China by any means, but that's an underplayed --

Peter McCormack: It's funny!

Matthew Pines: Yeah!  That's crazy that you'd think that was that was possible.  But yeah, that's I think an interesting thing to keep an eye on.

Peter McCormack: Okay, so how do people find more?  I mean we'll put it in the show notes, but how do they go and read this?

Matthew Pines: So, this was published in the Censorship Resistant issue of Bitcoin Magazine six months ago; it's on their website.  I think it's Bitcoin, The Future Geopolitical Order: an Initial Assessment.  Yeah, so you can go on the Bitcoin Magazine website.  I'm also on twitter @matthew_pines.  Separately, I'll be releasing just a random novel I wrote, so that'll be fun.

Peter McCormack: What; a random novel?!

Matthew Pines: Yeah, I had some free time before I started this new job last year and I just wrote this thing.

Peter McCormack: What's it about; can you tell anything?

Matthew Pines: Yeah, it basically mixes spies, technology all together.  So basically it's got Russian spies, corporate thugs, and some tech cult billionaires, all chasing a physicist with breakthrough technology in his head.  So it's about AI, quantum computing, spies, all that sort of stuff.

Peter McCormack: All right, man.  Maybe I'll check that out on my next holiday!

Matthew Pines: Yeah.

Peter McCormack: All right, wicked.  Matthew, always good to see you.  I appreciate you coming on and talking through this.  it's a lot to think about with this, but very interesting and, yeah, good luck with everything you do.  I'm sure we'll see you here again soon.

Matthew Pines: Yeah, thanks for having me.

Matthew Pines: All right, man.