WBD650 Audio Transcription
Recession is Coming with James Lavish
Release date: Thursday 27th April
Note: the following is a transcription of my interview with James Lavish. 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.
James Lavish is a Bitcoin advocate and writer of the Informationist newsletter. In this interview, we discuss central banks' manipulation of the monetary system, the eye-melting bailouts to come, an inevitable credit event the Fed will be unable to rectify, why BRICS pressure doesn’t currently threaten the dollar, and how the US rejecting Bitcoin may lead to hyperbitcoinisation.
“There’s just too much leverage in the US system, they can’t let the market drawdown too deeply, we can’t go into too deep of a recession; and everybody knows this, they’ve been conditioned to it and this is the QE moment where the Fed pivots and they step in and they print, a face-melting print.”
— James Lavish
Interview Transcription
Peter McCormack: All right, James. Good morning.
James Lavish: Good morning.
Peter McCormack: How have you enjoyed your trip to Bedford?
James Lavish: I have enjoyed it immensely.
Peter McCormack: Yeah?
James Lavish: Great little town here, I love it.
Peter McCormack: Did you enjoy the football?
James Lavish: There's nothing better than a good football game on Saturday.
Peter McCormack: I drunk a lot of beer yesterday.
James Lavish: Yes you did!
Peter McCormack: You did! You were bringing me beers, man.
James Lavish: I will not admit to that!
Peter McCormack: Thank you for coming over.
James Lavish: I've loved it. Thank you for having me, it's been an awesome experience, great people here.
Peter McCormack: We're going to make it an annual trip and we'll have an invite for you as soon as we know the dates for next season.
James Lavish: Awesome.
Peter McCormack: This is the final interview of the sprint, so a few things we're going to want to get into with you.
James Lavish: Yeah.
Peter McCormack: Firstly, there's been a lot of talk of recession. In the UK, we just missed out on recession; we had no growth but no negative growth. So, it came out on the radio the other day, they said we've just avoided recession, but you believe we're going into recession; it's inevitable, right?
James Lavish: Well, in the US it is.
Peter McCormack: Yeah.
James Lavish: I would say, in the UK, it is as well; everybody's kind of on the back side of the US. So, yeah, if you look at all the indicators and all the things that I look at, which are the yield curves, and they've been inverted for a while now, and it's a pretty solid indicator, it's pretty much 100% indicator if you're looking at the three-month and the two-year Treasury and what those things are doing.
For your listeners, and trying to understand exactly how that works is, so if you look at the yield curve and you plot out all the yields of the Treasuries, anything from Fed Funds, the overnight, 1-month, the 6-month, 1-year, 2-year, 5-year, 10-year, 15-year, 20- or 30-year, so if you plot those out, in a normal yield curve you'd see the rates at the front end of the curve lower than the rates at the far end of the curve; longer duration assets should be at a higher interest rate.
Peter McCormack: Because it's more risky?
James Lavish: It's more risk, you're risking for a longer period of time. So, in a normal environment, in a solid, healthy economy, your yield curve should move up from the shortest duration to the longest duration.
Peter McCormack: Yeah.
James Lavish: But in our yield curve currently, our Fed Funds is up around 5% and you've got the yields, they're decreasing as you go further on in the yield curve, and so what does that tell you? That tells you that people believe that yields are going to be lower in the future, that interest rates are going to be lower in the future, and the reason they're telling you that is because they think that the economy's going to contract. When that happens, you have your yields that you're looking at, so you look at the three-month, the two-year and the ten-year are typically the three yields you're looking at, and you plot the three-month or the two-year against the ten-year; ten-year's kind of like your bogey treasury, it's your benchmark.
So, when you look at the 3-month and you plot it against the 2-year, it's deeply negative, and it's been like that since last July I believe; and if you look at the 2-year and you plot it against the 10-month, it's about 60 basis points negative versus the 3-month, which is about 1.5% negative, and so it's pretty deep, and that's about as deeply negative as it's been since 2008, and so it's a strong indicator. Now, it doesn't mean that you're going into recession right then, it typically goes negative, it flips negative somewhere between 6 and 18 months, maybe 2 years, before we actually hit a recession, so it kind of signals that that's the direction we're going in.
But it not only shows that we're going into recession, it kind of causes it, and I wrote a whole piece about this, and, Danny, I think you read it, about yield curves, in my newsletter months ago. The economy's not only affected, it's effected by the yield curves being negative, because if you know how banks work, they usually lend at the longer end and borrow at the shorter end. So, if those are inverted, then they're not able to make as much money and the credit kind of contracts.
Peter McCormack: Okay.
James Lavish: So, as credit contracts and liquidity dries up, they're not lending as much; that's when you see it's more difficult to have access to capital. If corporations have, and companies have, less access to capital, then it's more expensive for them, their margins compress, their profits decrease and they have to wind up either stopping certain businesses or laying off people, and it just heads us right into recession. It's a very reliable indicator when you look at yield curves.
Peter McCormack: Right, okay, so should we be referring to it as a banana?! Danny told me this; tell the story of Alfred Kahn because this is brilliant, this blew my mind.
James Lavish: Yeah, so back in the 1970s there was an economist who was at Cornell and when he taught his class, and I think Greg Foss actually had him as a professor because he reached out to me after I wrote this; he was like, "Yeah, I had him as a professor". But Alfred Kahn, he liked to speak very simply so he could communicate to his students well, but he was hired by the Carter Administration to be what they termed "The Inflation Tsar", and I forget what his title was but it was, God, what was it? I'll look it up here so we have it. He was the Chairman on the Council of Wage and Price Stability, so he was in charge of tackling inflation, and this was in the 1970s when inflation was raging out of control.
He kept telling Carter and his Cabinet and speaking to the press, he was talking about how we're in a recession, we're nearing a depression, and he kept getting in trouble for that and getting called out onto the carpet, and so he finally just got fed up and he said, "Fine, well I won't call it a recession, I'll call it a banana". And so he was quoted in the Washington Post and he said that, "We've had the deepest banana we've have in 35 years and inflation hasn't really come in yet", and so it pissed them off royally.
Peter McCormack: What tends to happen to inflation during a recession?
James Lavish: Well, inflation ceases; you can actually have deflation depending on how bad the recession is.
Peter McCormack: Is that the potential deflationary moment that we discussed the other night?
James Lavish: No, that's a little different. So, what Jeff Booth talks about is how technology, and this is a really strong concept, it's a really important concept, technology creates deflation, it's deflationary, because if you think about in the examples he gives, it's like you used to go and buy a camera, well most people don't even buy cameras anymore; the iPhone, these cameras are incredible. So, how are you paying for that? Well, you're not seeing that anymore; it's embedded a little bit in the price of the iPhone.
But then talk about calculators, so you used to physically -- I had calculators, an HP-12C that I used every single day at work. Now the regular calculator's just embedded in this phone and you're not paying for that, it's just gone, you're not creating the components, you're not assembling the components. Think of all the supply chain, all the distribution chain that's just completely eliminated from nobody creating, manufacturing, buying and selling calculators anymore; so that's deflationary, it's nowhere in GDP anymore, it's just in your phone, so that's deflationary. So, technology creates deflationary pressures.
The problem is, that's bad for our Treasuries because we operate at such a deficit, and we've talked about this before, our deficit is so high that we have to keep borrowing to pay that hole that we're creating every single year, we have to close that gap, and we close it by selling more Treasuries and then using that capital to pay off those maturing Treasuries.
So, the problem is that deficit is growing and our debt is growing, and so we need inflation in order to tame that, keep it from getting out of control; why? Because the higher inflation you have, it's more GDP in nominal dollars without inflation, and so when you have higher GDP, then your tax base is bigger and you get to tax those dollars and pay down that debt that you've created, that you have put on your balance sheet. So, they need to keep creating higher and higher GDP, it's manipulating more and more GDP in nominal dollars by creating inflation, manipulating interest rates to create inflation, and so that's what we're doing.
The problem is though technology is naturally deflationary, so they have to just print more and more money and manipulate the whole monetary system more in order to manufacture this inflation; it's bad for you and me, it's good for the Treasury.
Peter McCormack: So, really, I think I'm starting to come to an understanding that Treasuries and the balancing of inflation is really a way of just stealing from us constantly.
James Lavish: Yes, it's a form of silent tax.
Peter McCormack: Yeah.
James Lavish: And it hits certain people worse than it hits others.
Peter McCormack: But they get to control the entire market, the interest rates; I know central banks are meant to be independent.
James Lavish: Yeah, it's QE, it's all of it, it's all rolled into this manipulation of money.
Peter McCormack: But if you got rid of central banks and bonds, would we even care about GDP?
James Lavish: I mean, you want your economy thriving, it just shows that you've got a healthy economy, you've got a healthy community, so whether it's an island or a country and you want expansion, people are naturally productive. If you sit around all day on the sofa for a week or two, you're going to feel terrible, you're going to feel terrible physically, you're going to feel terrible mentally. People like to be productive, they like to be interactive and produce things, but the problem is, when you force people to be so productive that they have no free time, they have no down time, they have nothing that they have just for themselves.
I'm not talking about sitting and watching Netflix because if you're out and working for 12, 14, 15 hours a day, you don't have energy to go and do something physically rewarding for yourself, to go climbing or go running, you just don't have that energy, and you probably don't have the time if you want to spend some time with your kids or you want to sleep. So, the problem is we've gotten into this situation where people have two, three jobs, households have three, four, five jobs, it's out of control and they're just trying to keep up with this inflation.
Peter McCormack: Yeah, this was what Dominic Frisby spoke about on this last film I made on inflation; he referred to it, I think, "It's the biggest crime of our times [or] the biggest scam of our times". He said, "We used to have households that would live on one income".
James Lavish: Yeah, back in the 1950s and 1960s.
Peter McCormack: Yeah.
James Lavish: And when I was a kid, my mum had to start working because we just wouldn't keep up, which is a crime because my dad was a nuclear engineer, but he just wasn't make enough money to support all three kids and get us in schools and pay for college, it just wasn't possible.
Peter McCormack: We've now got households with two incomes, or maybe three incomes, who can't keep up.
James Lavish: And they can't keep up. So, I just read something the other day, and you have to take some of this stuff with a grain of salt, but there was a study and some sort of survey that said people have started skipping meals in order to make mortgage payments or make rent payments.
Peter McCormack: Yeah.
James Lavish: That's a problem, that's an indicator of what we're talking about.
Peter McCormack: They've pushed this scam too far.
James Lavish: Yeah.
Peter McCormack: Man! Your dad was a nuclear power engineer?
James Lavish: Yeah, so he designed steam turbines for nuclear reactors and they were in submarines, so he worked for GE, Navy Nuclear Division, and so their client, their only client was the Navy.
Peter McCormack: So, what would he make of all these plants being decommissioned in Germany?
James Lavish: He would be disgusted.
Peter McCormack: It's fucking mental!
James Lavish: He would be disgusted; this is just insane, it's literal insanity.
Peter McCormack: Yeah.
James Lavish: They're perfectly productive and they're closing them down and people don't understand. We don't have to get into a nuclear discussion but they're going to look back at that as being one of the largest mistakes they've ever made on energy policy in the history of Europe.
Peter McCormack: Yeah. Right, back to recessions, are recessions healthy themselves though; should an economy have recessions; if we're going to have expansion of the economy, do we not need to have recessions? Is it not good to have a period where we can wipe out some businesses, wipe out some jobs, the ones that aren't really -- because I always think the strong businesses will survive?
James Lavish: Well, think about it, so why are weak businesses surviving? Well, they survive and they thrive, even though they're weak businesses, because we've had zero interest rate policy for so long and it's just this free capital, and access to free capital allows bad actors and poor management, poor risk management, to actually live or keep going, and that's the problem. So, in a normal economy, sure, you're going to have the ebbs and flows, it's organic in a normal community, but when you manipulate this much, those ebbs and flows turn into peaks and valleys and they just get larger and larger.
Peter McCormack: And so you think we might be heading for quite a deep recession?
James Lavish: Well, it's hard to say.
Peter McCormack: But potentially?
James Lavish: The problem is we haven't seen the effects of all these rate rises; why? Because we've raised the rates so quickly, so rapidly. I don't know if you can pull it up, but I've got one chart that I showed Danny earlier today that is just the rate of the rate rises that the Fed has done.
Peter McCormack: What's the timescale on that? 2004…
James Lavish: It's just the middle of last year, we just started raising rates; look at how quickly we've raised those. And so the problem is we haven't had time, look at back even in 2016, look at how we started raising rates, and it's just a stairstep and that's kind of normal.
Peter McCormack: Right, okay.
James Lavish: So, you start seeing some of the effects of -- so if you look at that, in 2016, you could start seeing the effects of those raises in 2018, 2019, 2020, but look at how long it took for those to come into effect where we started decreasing rates, this is before the pandemic, and you start seeing those; look at how long it took. We are just raising these things, it's like a rocket ship; it's not healthy.
Peter McCormack: So, when you look at 2004, that's what really triggered the Global Financial Crisis because the rates went up, people couldn't afford their mortgages, people who'd had 100%, 120% mortgages I was reading about, multiple homes, they were trying to flip them.
James Lavish: Yeah, some of that was just poor policy around the mortgage market, so most of that.
Peter McCormack: But could this have a housing crisis wrapped in it again?
James Lavish: I don't think it'll be like that because it's not centred around housing.
Peter McCormack: Right, okay.
James Lavish: The problem with this is all that leverage is embedded in what we're seeing in the banks and what we're seeing in -- I mean, the commercial real estate market, now it's different than housing, that's embedded in these small banks, the small banks own all this paper, and so that could be a problem, that could be a major problem. But what we're not seeing is the effects of all those rate rises on all these companies; they're having to refinance notes, they're going to have to try to borrow capital, they're trying to get lines of credit, and the lines of credit are way more expensive. Now you're seeing individual balance sheets, individual credit card holdings and the balances are just skyrocketing and the rates are up over 20% average. Those birds are going to come home to roost, and that's the problem, and we haven't seen that yet.
So my fear, and look, I don't know, I really don't know, Peter, but I feel there's a high probability, and I think of everything in probabilities and likelihood, and I think there's a high likelihood that we hit a pretty healthy recession here, and for the reasons that we've talked about, all the leverage, the low interest rates skyrocketing higher, and then the inflation, people getting squeezed; it could be a powerful drawdown. So, we could just see a watershed moment, and that could come in the form of a credit event, and I'm talking about one that isn't saved by the Fed and the Treasury, one that we don't have this new little BTFP programme that comes in and saves and shores up the banks and then we're okay and we can move along. That's just a plug in the hole of this big wall that could break, that dam could break, and I don't know what that could be and what that will be, but there's a high chance of that, there's a much higher than non-zero chance of there being a credit event.
Peter McCormack: And when you say a credit event, do you mean it could be some large bank failures and they'll just let them fail?
James Lavish: It could be like Deutsche Bank or -- well, they can't let Deutsche Bank fail.
Peter McCormack: Okay.
James Lavish: So, you've got certain banks that are protected, they're protected in the G20 and they're on a list and they're too big to fail.
Peter McCormack: Okay.
James Lavish: If they fail, they'll take down the whole financial system; why? Because of contagion. There's counterparty risk between the banks; if one fails, this one might fail, it might take down the other one, and that counterparty risk is too large and the ripple effect from that will reach just about every single corner of the financial industry and it'll just collapse.
Peter McCormack: Right.
James Lavish: That's their thesis, so they can't let any of those collapse. Jamie Dimon is safe, so is his job, so is his money!
Peter McCormack: Okay, but outside of those banks, it could be some other banks that are allowed to fail will fail, they will allow them and that could have some contagious spread --
James Lavish: There could be a non-financial institution that fails, it could be a very large company that has counterparty risk that we're not thinking of that fails, we just don't know. There are some dark spots in there that we're not aware of. Private equity and venture capital, and Jeff and I were talking about this this weekend, there are books that are just not marked properly yet. These companies, these venture capital firms, they've got these portfolio companies that are struggling to raise capital, and especially in this environment, and if you can't raise capital at the valuation you did last time, you have what's called the down round, and if you have a down round, then the venture capital firms have to mark those books down; that's just one spot where we aren't seeing that.
The same thing with the private equity firms. As interest rates go up, cost of borrowing goes up, cost of capital goes up, so the margins compress, the firms, these companies are not making quite as much money and so they shouldn't be valued where they were last year perhaps, and those marks, the mark to market, which is done by hand by these private equity firms, that has to be fixed. And when you go in and you mark to market these companies, then the profits are a lot lower, and that's just yet another spot; we just don't know.
Peter McCormack: And that could trigger a lot of people taking interest in these other companies and expecting everyone to re-price?
James Lavish: Sure, yeah. If you can't get capital for one of these portfolio companies, you just don't know where that's going to ripple out, it's difficult to say.
Peter McCormack: It could be Twitter.
James Lavish: It could be, I mean not funny, but yeah, it could be Twitter; that's a lot of debt.
Peter McCormack: $44 billion.
James Lavish: Yeah, and the problem with that, so talk about that, actually I think I wrote about this too, but the problem with that is that these banks are saddled with that debt; it's called they're hung with this debt. So what happens when you do a leverage buyout, banks will basically lend you their balance sheet to do this buyout and they'll say, "You can park that debt here, that you're going to go take over this company, you're going to make some changes, you're going to make it profitable or more profitable by these changes, and then you'll be able to pay off this debt. And what we're going to do is we're going to syndicate it, we're going underwrite it", which means that these banks will take that debt onto their books and then sell it to their customers. So, they'll sell it to the private equity firms, they'll sell it to high-net-worth individuals or family offices or endowments and they'll sell it to them.
But in Twitter's case, they took down that debt and they're hung with it, they're hung with billions and billions of dollars' worth of this debt and it's sitting on these banks' books. So, Twitter goes under, I'm not saying this is going to be the event, this is just one of those things that if Twitter goes under, well, these banks, and maybe one of the smaller banks, it hits them harder than we realise and it's a problem. So, you just don't know, and that's just yet another spot of leverage in the system.
Peter McCormack: And so, in your mind, are you partially preparing for a recession; how do you prepare for a recession?
James Lavish: Yeah, well you want to have your money in safe assets and so I have a large percentage of my net worth in gold and silver and in hard monies, and I also have capital in Bitcoin, obviously. Now, that said, look, if we hit a recession, we have a credit event, what happens is, we have a saying on Wall Street that is, "All correlations go to one", which means that everything sells off. Because what happens is you literally step into the trading floor, and it doesn't matter if you're a hedge fund, if you're a large investment firm, whatever it is, and you step in and you see the market drawing down, you just say, "Take 20% of everything off the books", you don't even have time, you just take it all off the books. "I don't care if it's an Apple stock; I don't care if it's Philip Morris; I don't care if it's a bond; I don't care if it's gold, just take it off the books".
So, you have this drawdown and it's steep, but we were just talking about all the leverage in the system, the Treasuries and there's just too much leverage in the US system they can't let the market draw down too deeply, we can't go into too deep of a recession. And everybody knows this, they've been conditioned to it, and this is the QE moment where the Fed pivots and they step in and they print and everybody's expecting --
Peter McCormack: Face-melting print.
James Lavish: A face-melting print, and you saw it in 2020 and I feel, if we have a credit event, it'll be more like that where you just have a straight down, everything goes correlated to one, we have a significant drawdown. It could be 15%, it could be 30%, I don't know, if you have a major credit event, but the Fed will come in, the Treasury will come in, they're print and they'll shore up the market, "No, no, we've got this, don't panic", and they'll print so much money that your eyeballs will melt, so it'll be the face-melting print.
If you just have a strong drawdown because of a recession, well they will still step in, well we know they'll step in, they've done it before repeatedly, and the Fed's been saying it, Powell's said it a number of times in his press conferences, he's said, "Look, what we can't have is inflation get out of control. If we have inflation get out of control, that damages the credibility of the US Treasury and the US dollar and it could lead to hyperinflation". So, super-inflation, serious inflation leads to super-inflation which leads to hyperinflation.
Peter McCormack: Hold on, so what is super-inflation?
James Lavish: I'm just…
Peter McCormack: Oh, you're making it up?
James Lavish: Yeah. So, high inflation is what we're seeing in our economics, in the UK, over 10%, in the US, we got up to 9% and change, but when you get to like super-inflation, it's really steepening. I feel like super-inflation is inflation that is severely damaging to citizens, yet it's not hyperinflation yet because it's not 50% month over month, which is a ludicrous measure by any standard. But anyway, what you can't have is you can't be accelerating into that, and they know this, so they've got to calm down inflation.
They're in a really tough position; we've got so much debt on our books. Every single time they raise rates, we're reissuing more debt at a higher cost to pay down the last debt, which means that our deficit grows which makes it more difficult for the Treasury to dig out of this hole; we know it's unsustainable. They printed a chart, and I wish I had given this to you, there's a chart on one of my newsletters, and --
Peter McCormack: He can find it.
Danny Knowles: Yeah, I can find it; which one?
Peter McCormack: Do you know the newsletter?
James Lavish: In my pinned newsletter.
Danny Knowles: Okay.
James Lavish: It's the chart that shows the Treasury admitting how bad debt-to-GDP is going to get. And so what they did here is they did this report, Peter, and this is the Treasury, the US Treasury, they did a report, like a 2021 report card, like, "How are we doing?" and they go through and they're saying, "This is how much we're spending, this is how much we're making".
Peter McCormack: Holy shit!
James Lavish: This is a report that the US Treasury put out and hat tip to Lyn Alden, she found this before any of us did, and she alerted me to it, but they're showing here just how much the -- I mean, it's not funny, this is ludicrous.
Peter McCormack: But it is stupid funny.
James Lavish: And this report, the subtitle of the report is An Unsustainable Fiscal Path; they literally put that as a subtitle of the report for the whole world to see.
Peter McCormack: The historical high was 160% post World War II, understandable.
James Lavish: Yeah, and here we are.
Peter McCormack: And this is the expectation.
Danny Knowles: And for anyone listening, it's projected to nearly 700% by --
James Lavish: Yeah, here's the thing though, and what's also crazy about this is that this is actually pretty optimistic. So, if you look at the US Treasury, there's so much we can talk about, but the CBO puts out a report every year, actually it's periodically, so the last report they put out was last March or last May, they just put one out a couple of months ago, and it talks about the deficits, it's the CBO, the Congressional Budget Office report. It talks about the balance sheet of the Treasury, of course it's all deficits, and so what they're expecting this year is to have a deficit of about $1.4 trillion. We can walk through the maths, I think we walked through it with Greg, so --
Peter McCormack: Hold on, that chart, they're already at $1.4 trillion for the year, you know the US Debt Clock?
James Lavish: Yeah, so their fiscal year's in October, so for the last six months, we've actually been running a deficit over $1 trillion in just 6 months. So, this fiscal year, we're running a deficit that's $2 trillion. So, that's what they're projecting, so that's the very optimistic view, but they've been putting out numbers, their deficit numbers, and if you add them up from October to now, it's $1.1 trillion, they're on a run rate of over $2 trillion for this fiscal year, yet on that chart, what they're assuming is $1.4 trillion. Now remember, everything is exponential.
Peter McCormack: Well, that was my problem with that chart, it was kind of like a straight line.
James Lavish: Yeah, it's going to decrease.
Peter McCormack: Yeah.
James Lavish: So, that's the problem.
Peter McCormack: But they'll never allow it to go that far. Lyn Alden always says that the event horizon for debt-to-GDP is 135%; once you go beyond that, you can't get out of it.
James Lavish: You can't get out it, that's it, it's over, we're in a debt spiral. Now, okay, before your listeners --
Peter McCormack: Panic?!
James Lavish: -- panic, this can go on for a very long time, this can go on for a very, very long time. First of all, look at Japan, Japan's debt-to-GDP is over 250%. They own more of their own bonds than anybody else in the world, they own over 50% of their own debt, the Bank of Japan, and they're still going and nobody's even really talking about.
So, this can happen and the US dollar and the US Treasury, we have the benefit in the US of being the global reserve currency and the global reserve asset, the dollar and the Treasury, so we can do this for a very long time, but what we can't do is get out of it, and eventually it will collapse. I don't when, I don't know if it's in 2020 or 2100, that number's not going to be 700%, that number's going to be so much bigger than it but I don't think we get to 2100, I don't we get to 2100. I don't think this can last until 2050, that's like 30 years, but it's not going to happen tomorrow; this could go on for decades.
Peter McCormack: Do you think the Fed's going to drop rates?
James Lavish: This next meeting?
Peter McCormack: Yeah, they're going to go sideways, you think they'll --
James Lavish: No, I don't. I think they're still full steam ahead, another 25 basis-point raise.
Peter McCormack: Okay.
James Lavish: But I also think that's the last one, I think then they can back off and say -- see, here's the thing, I'm waiting to hear the Fed say that we're above a neutral rate, meaning it's constrictive. So, if you're below a neutral rate, it's expansionary, but if you're above the neutral rate, the Fed Funds rate, that means that the cost of capital is causing constriction in the economy, but we haven't even been able to see it.
So, the problem is when they turn and they realise that the economy is really starting to not just cool down, it's wiping out, then it's going to be too late, and that's the issue. So, that's why you're watching Wall Street News, seeing the Fed Funds' futures and they're predicting that we start lowering rates this year, because the economists and the investors and Wall Street are thinking we're going to hit a spot here where the Fed not just pauses but has to really quickly pivot, because it's going to be apparent that the economy's not just going into the tank, it's going to be flushed and we're nosediving, so I think that's a pretty high likelihood.
Peter McCormack: What's the time spell for that, timespan potential?
James Lavish: It's impossible to tell.
Peter McCormack: But could be it multiple years away or are we talking probably next year?
James Lavish: No, I think it's in the next 6 to 12 months.
Peter McCormack: Right, okay.
James Lavish: But going back to your original question, I want to make this point, that's why I personally hold a lot of cash right now. Now everybody talks about cash is trash, and we're talking about the fact that if you hold on to cash for a long time, well you're losing purchasing power because of this high inflation, that's a problem. However, in these periods of uncertainty, you want to hold some cash because you want to have some dry powder ready for when we do have a drawdown because that's when fortunes are made.
Peter McCormack: Yeah, but it's funny because I ask it thinking, "How I do kind of protect myself and where are the opportunities?" But I also fear scenarios where, just as a person, you get wiped out.
James Lavish: Yeah.
Peter McCormack: There's a personal contagion. Did I tell you where that gradually, then suddenly came from?
Danny Knowles: I think you did but I can't remember.
James Lavish: What's that?
Peter McCormack: You know gradually, then suddenly, a lot of bitcoiners remember that?
James Lavish: Yeah.
Danny Knowles: That was Hemingway.
Peter McCormack: Hemingway, yeah, it's about going bankrupt, it's gradually, then suddenly, and I just fear a scenario like suddenly there's no -- like, the marketing budget's dried up this year; that could have been bad for the podcast and then I can't pay my mortgage and then Bitcoin has a massive drawdown --
James Lavish: It snowballs.
Peter McCormack: Yeah, your entire life changes.
James Lavish: Yeah, and then Bitcoin and everything sells off and you have some sort of margin call, whether it's literal or something because you're not making as much money for the podcast because the marketing has dried up and the marketing budgets have dried up, well that could cause other things.
Peter McCormack: Or there's massive inflation and the cash you have is destroyed.
James Lavish: Yeah, well, I don't see us getting to a spot in the West here with hyperinflation in the next year or two, I don't see that. Is it possible?
Peter McCormack: Still a year or two!
James Lavish: It's a non-zero chance. Well, if you look at that Treasury chart, it's obviously going to happen at some point.
Peter McCormack: But you think about the craziness of that, it's like, "I don't think we will enter hyperinflation into the next year or two", it's not like we're never going to have hyperinflation.
James Lavish: No.
Danny Knowles: But even it can possibly be part of the conversation is crazy.
James Lavish: Yeah, and again, the dollar, the US dollar will be the last one to hyperinflate, in my opinion, or one of the last, maybe the Swiss franc or something, but it'll be one of the last.
Peter McCormack: Yeah. So, I've been talking to Danny a lot about buying gold, I've really been thinking about it; I talked to Larry about it this week. I was thinking of doing it with cash I hold, just having it in gold; to me, it's still cash.
James Lavish: Yeah, some of it, but again, you're going to have the moment where gold could get hit too, but I believe that gold, it's a strong store of value over a long period of time; it's been like that forever. So, it's safe over a long period of time, for sure. But again, for me personally, it's smart to have some cash too; I wouldn't have it all in gold.
Peter McCormack: So, a bit of cash, a bit of gold ETF, some physical coins.
James Lavish: Physical-backed ETF, that's important.
Peter McCormack: Yeah. What was the one he recommended?
Danny Knowles: I can't remember.
James Lavish: PHYS.
Peter McCormack: Yes, that was it.
James Lavish: Yeah, that's the one he likes.
Danny Knowles: Have you always been a gold bug?
James Lavish: No, these last couple of years, sound money, it has become absolutely abundantly important to me, and so that's why I love Bitcoin. It's not ready for primetime on the stage with the entire investment community, I mean it is ready --
Peter McCormack: They're not ready.
James Lavish: Bitcoin's ready, but they have no idea, they're clueless still, and that's the problem. But once they clue in, it's a different story. And so for long term, I mean long, long term, you just buy Bitcoin and just put it away.
Peter McCormack: Yeah, of course.
James Lavish: Just put it away.
Peter McCormack: It's a real balancing act of where to put your money.
James Lavish: Yeah, because you have short-term needs.
Peter McCormack: Yeah.
James Lavish: You have a mortgage; you have to pay employees.
Peter McCormack: Think of the kids, I have to think of them.
James Lavish: Kids, yeah.
Peter McCormack: There's a lot to think about.
James Lavish: Yeah.
Peter McCormack: But I still think the fact that we're discussing a potential future hyperinflation event here in the UK or in the US, it's a lot.
James Lavish: It's mind-bending.
Peter McCormack: Yeah, because when you see it happen in Venezuela or Zimbabwe, you look at Chavez or Mugabi and you're like --
James Lavish: It's because of a dictator.
Peter McCormack: Yeah.
James Lavish: It's because of poor economies; yeah, it's manipulation.
Peter McCormack: Oh man! I wanted to talk you about the BRICS nations as well, but can we just talk about employment as well, because this is another thing that me and Danny where trying to rattle through this morning is that there's high employment, there are lots of companies who cannot employ people. I was chatting to a lady last night who runs a recruitment firm, she said, "I cannot get temporary staff", yet we're heading to recession, so in your head you're like, "How can there be such high employment?"
James Lavish: Yeah, it's head-scratching.
Peter McCormack: Companies are going well and we're heading to recession.
James Lavish: Well, and that's the thing is that people talk about that, the Fed talks about it, they say, "Look, employment's still high", and they talk about how we've got to bring employment down basically.
Peter McCormack: It's mad that.
James Lavish: It is mad, we want people unemployed, yeah; it's sickening is what it is. But the thing is, when you look at the employment rate and you plot it against recessions, and you can do this through the Fed, when you do that, you hit this lightning-bolt moment when you realise employment's supposed to tick up but it doesn't really spike until you're actually in the recession. It takes the moment for you to get in the recession for people to lose their jobs. So, looking at unemployment is actually a lagging indicator, and that's problematic.
People keep talking about, "Yeah, but unemployment's so low", look at right before each recession; it ticks up a little bit and then it explodes, ticks up a little bit, explodes, one after another, after another.
Peter McCormack: 2020's a hard one to judge because it was such a weird scenario.
James Lavish: You take that out, it's an anomaly, that's a tail event, but if you look at 2010, but that there, that's interesting because we had so much lead time going into the Housing Crisis, but look at each of them, they're --
Peter McCormack: Every single time.
James Lavish: Every single time; it's mindboggling. So, when you hear people talk about, "Yeah, but everybody's employed", yeah, look, everybody was employed in every single one of these recessions right up before, and then everybody lost their jobs.
Peter McCormack: But what is the correlation there between high employment and pre-recession; is it because the inflation has driven this?
James Lavish: Yeah, well inflation drives all of the expansion or easy money, cheap money in the last number of recessions that we've had. But then, if you just walk through the mechanics of it, borrowing becomes more expensive so everything's more expensive for the company, the company's profit margins decrease, they decrease to a point where they have to start laying off people, but their profit margins are decreasing leading into this, and then all of a sudden they're like, "Oh, we've got layoff a bunch of --" but it happens cross the board.
So if Microsoft's or Apple's profit margins are decreasing, it doesn't just effect Microsoft or Apple, think of all the suppliers that go in that create all the components that go into all those products, and then think of all the distribution, all the manufacturing; it touches everything. So, when Apple goes into a recessionary mode and they end up selling 50% fewer laptops than they did last year, that's a problem.
Peter McCormack: And we've seen massive layoffs in the tech sector.
James Lavish: We are starting to see it, and so that'll start rippling through.
Peter McCormack: How many people have Meta -- have they rebranded back to Facebook now?
Danny Knowles: Have they?
Peter McCormack: I think they might have, I'm sure I read that, or maybe I dreamed it.
Danny Knowles: They laid off loads of people.
Peter McCormack: Yeah, tens of thousands.
Danny Knowles: 10,000 employees, another 10,000.
Peter McCormack: Another 10,000? And Microsoft laid off a bunch of people? I don't know if I heard about any layoffs at Apple, but even Google. Google's such an interesting one, they're clearly under massive threat from AI; we're not going to get into this now because it's a whole other subject, but there's a real -- do you remember pre-Google?
James Lavish: And there you have, there's something interesting, so you have AI coming in. Man, AI could not have come at a worse moment, right?
Peter McCormack: Yeah.
James Lavish: Well, we're not at true AI yet.
Peter McCormack: Do you remember pre-Google?
Danny Knowles: Yeah, I remember like Ask Jeeves, but no, not pre-Google, there were just competitors.
Peter McCormack: Pre-Google, do you remember AltaVista?
James Lavish: Yeah.
Danny Knowles: I don't remember that.
Peter McCormack: That was the one everybody used, it was brilliant, it was a brilliant search engine and then Google came along and the first time you used Google, "Oh, the results are better", and you just stuck with Google, the results were just better.
James Lavish: That's it, yeah.
Peter McCormack: But there's never been a reason to go away from Google apart from now, with AI, you can get better answers to specific questions. Danny's regularly using it; he factchecks during the show sometimes using ChatGPT because the answers are better. It's a massive threat.
James Lavish: Yeah, it's a massive threat; it's not fully there yet, also because the inputs are controlled.
Danny Knowles: Yeah.
James Lavish: But I have to go and factcheck some of the stuff I get from ChatGPT.
Danny Knowles: Definitely, but what you can do, you can ask it much broader questions and then ask for citations on the results it's given you, and so it's sometimes quite useful, like you can ask it a much more generic question. Like we asked for it to summarise a chapter of a book in an episode and it gives you a perfect -- well, I've not read the book so I'm assuming it's a perfect summation. So, it's useful when you need a much broader set of inputs.
James Lavish: Yeah, interesting.
Peter McCormack: All right, let's talk about the BRICS nations. Seen a lot of growth and a lot of growth in coverage of the BRICS nations.
James Lavish: Yeah.
Peter McCormack: We've seen other countries wanting to join them.
James Lavish: There's a lot of chatter about it.
Peter McCormack: Yeah. So, part of me thinks it would be healthy to go into a multipolar world, it's probably good for Bitcoin.
James Lavish: Well, healthy yeah; it could be painful for the Treasury. First of all, let's walk through what it is.
Peter McCormack: Well, can I just say why I think it's healthy?
James Lavish: Yeah.
Peter McCormack: I think the US has too much control over other countries, like other countries suffer under the US --
James Lavish: Yeah, smaller countries really do suffer, yeah.
Peter McCormack: Yeah, small countries and it's I think the chance to break away from that. We made the show with Alex Gladstein about economic imperialism, it's not good, and for other countries to have an opportunity to break away from that I think could be a good thing, bad for the US, good for the rest of the world.
James Lavish: Yeah.
Peter McCormack: But I don't know if ultimately, bad for the US is long-term good for the rest of the world because of the nations that are part of BRICS.
James Lavish: That's a problem, it's how quickly, how badly.
Peter McCormack: Yeah.
James Lavish: Yeah, so BRICS, for your listeners, it's a cooperative of countries that have agreed to band together to kind of create their own trading economy, so they're talking about creating their own currency; they haven't yet because you need to have somebody's currency in there that you can trust you or you create one collectively.
So, the nations are Brazil, Russia, India, China and South Africa, so you put all those together, you get BRICS. And that's what they're trying to do, and you're hearing a lot of chatter about, "Hey, we've got to pull away from the dollar hegemony, it's just too powerful". Well, look what happened last year when Russia, they stepped over the line, attack Ukraine, well the answer from the United States was, "Well, we're going to seize their Treasuries and we're going to cut them off SWIFT".
Peter McCormack: And maybe blow up a pipeline!
James Lavish: Maybe!
Peter McCormack: Maybe it was them, maybe.
James Lavish: There are only a few operatives around the world who could have pulled that off.
Peter McCormack: It wasn't me! Was it Danny?
James Lavish: Danny, where were you…?
Danny Knowles: I was in that little stretch of sea between --
James Lavish: Ask ChatGPT who blew up the pipeline.
Peter McCormack: Yeah, do it.
Danny Knowles: Well, no because this data's too old.
James Lavish: So, it happened too recently. So, that's what you're hearing, but now you're hearing of other countries talking about it, and Iran has just applied, now Saudi Arabia's talking about it. So, what they're looking for is they're really looking for a way to settle trades in non-US dollar denominations.
Peter McCormack: Do you think this is mainly a political move, mainly an economic move or it's just both?
James Lavish: Both, definitely.
Peter McCormack: All right.
James Lavish: For instance, China just settled a very large LNG trade, natural gas trade, with United Emirates, and it was in yuan, Chinese yuan, so it's real, they're doing things, it's happening. If you put together the BRICS nations, their GDP is actually now cresting the G7 nations.
Peter McCormack: Wow!
James Lavish: So, I'd seen a chart on that very recently about it's actually just crested it.
Peter McCormack: But when they settle the trade in the yuan, does that mean that country holds that yuan or do you think they're still selling it back into dollars?
James Lavish: Well, no, look, they're probably selling it right back into their own currency.
Peter McCormack: Hold on, so the GDP of the G7 is falling?
James Lavish: Yeah.
Peter McCormack: That doesn't make sense.
James Lavish: As a total share.
Peter McCormack: Oh, as a total share; this is a percentage?
James Lavish: Yeah.
Peter McCormack: Okay, I was going to say that didn't make any sense. So, it's about crossed, it's crossed already.
James Lavish: It's crossed already, so it's pretty interesting; so it's real. So the real question is, what everybody wants to know and what everybody's trying to figure out is, could BRICS cause the US Treasury to no longer be the global reserve asset? What happens is, you want to hold Treasuries so you have an easy way to get dollars, because if you hold your own currency and you need to constantly move that in and out of dollars, then you're at risk, but if you hold Treasuries, you're not at risk. If you know you're going to need dollars, you're naturally hedged by owning Treasuries; does that make sense?
Peter McCormack: Yeah.
James Lavish: All right. So, that's why the US Treasuries are the global reserve asset because all these countries, they need access to dollars quickly without the currency risk, the FX risk, so they're holding Treasuries. So, if they can break away from holding Treasuries and use their own currency, then they don't need to worry about propping up the United States and propping up the US Treasuries; they can sell their Treasuries and use their own currency.
Peter McCormack: What would UAE be holding?
James Lavish: That's a good question.
Peter McCormack: Would they be holding Chinese Treasuries?
James Lavish: I don't know, I don't know what their balance sheet looks like, to be honest.
Peter McCormack: Yeah.
James Lavish: But interestingly, that's the question, is could this eventually cause the collapse of the US Treasury from being the world's reserve asset; what would be the global reserve asset? Well, the obvious thing would be gold, right?
Peter McCormack: Yeah.
James Lavish: Why? Because it's been around for centuries, it's trusted as a store of value and so it's not surprising that you're seeing huge amounts of gold being bought by all these countries recently.
Peter McCormack: Do you think that's why they're buying ahead of this? Both Russia and China have bought a lot of gold.
James Lavish: They bought a lot of gold; it all started happening, it really started to flip. Gold was on net being sold by sovereigns and central banks all the way up until the Great Financial Crisis, and then after the Great Financial Crisis, all these central banks started buying gold and so it kind of flipped and now it's gone positive, and yeah, there's the chart. So, Russia, China, India, Turkey all accounted for the bulk of those purchases that we're seeing, and that's the interesting part.
Peter McCormack: So, why do you not think we've seen such a massive rise in the price of gold, because this is a high indicator?
James Lavish: Because gold is manipulated with paper and derivatives.
Peter McCormack: But that's what we've been told, but how? I never really fully understand how it's being manipulated.
James Lavish: You could sell paper, create paper around it that you don't really have attached to any reserves that are in vaults. I don't know how Goldman is marking their paper, but they're short massive, massive amounts of gold. And so, it's just a way for them to hold the price down; it's like the Bitcoin future where you just short the future, short the future.
Danny Knowles: Why is it in Goldman's interest to keep the price down?
James Lavish: It's a good question, that's probably a much deeper conversation than this, than what we're pointing to here, but you don't want gold to usurp the US Treasury, you don't want that, you want the US Treasury to be what everybody holds. So, if you're a US-centric business, if you're a US person, if you're the US Treasury, that's what you want, and that's what this is kind of threatening; is it threatening it really yet? No. I mean, the dollar, it's a massive share of a means of exchange across the world. So it's been falling, it was in the 70s, 72% of all transactions were done in dollars just, what, ten years ago, and it's fallen, it's under 60% now, it's like 59%. But still, there's nothing near it, there's nothing close to it; I think the euro's at like 20% or 21%, so it's not even close.
So, the dollar still has a chokehold on the entire world, let's make that clear, and it has to do with a lot of different things, it has to do with the fact that Treasuries are the reserve asset, it has to do with the petrodollar transaction-based energy transactions are by and large done in US dollars around the world. It also has to do with the fact that countries who cannot lend in their own currency, that have hyperinflated before, that don't have the ability to issue their own debt in the own currency, they have to issue debt in the US currencies, they have to issue debt that's based in US dollars, so the eurodollar market is massive around the world; it's so deeply engrained into the system. This is why we say the US dollar will be the last one to hyperinflate, it's in everything.
Danny Knowles: But you were talking earlier about like a massive credit event. Presumably, if massive institutions like Goldman are short gold, a gold price running up, that could be one of the triggers if they have to mark their books correctly.
James Lavish: I'm not going to predict that, but yeah, if gold doubled or tripled, that would not be good for them.
Danny Knowles: Interesting.
James Lavish: So, that would be a very bad moment for them. So, yeah, it's in their interests to keep issuing paper and keeping the price down. Let me back up, I haven't studied Goldman's balance sheet, I don't know exactly what they hold, I don't know that, but I've just heard recently that they hold a massive negative derivative position in gold.
Peter McCormack: So, if the BRICS nations form their own currency, do you think it would be like a basket currency?
James Lavish: So that's the problem, so none of these countries have really been trustworthy to anyone or each other, not that the US is, but again, US has the chokehold. Are you going to trust China? Let's say that you want to have a gold-backed yuan, are you going to trust that they have the gold in the vaults that they say they do; are you going to send in teams to audit them; are they going to allow that? I don't know. And how much gold would they really have to buy? That's a lot of gold to back the yuan.
Another thing is, look, the Chinese economy, it's not a tremendous economy. They have their own debt-to-GDP problems; their debt-to-GDP is in the hundreds as well, 350%, that we know of, we don't know exactly what it is. And their whole economy, people in China, their savings are in their real estate.
Peter McCormack: Yeah.
James Lavish: So, their homes. When we talk about, "Well, what should I buy, gold or stocks?" they don't own that stuff, they own their homes, that's their net worth. And so all their net worth is tied up in this real estate market, and the real estate market is not good out there, it has massive problems, we started seeing last year.
So, where are you going to denominate it? There are problems with it. So, as much attention and excitement as there's been around BRICS, there are deep structural problems with those countries already, so it's not like something they're just going band together, the dollar's no longer going to number one, we're going to have a few currencies. They'll start doing trades in yuan or their own currencies, like we're seeing happen; but again, this is a longtail event.
Peter McCormack: Yeah. You need a single currency for it to be competitive to the dollar, so that's why I ask.
James Lavish: Great question. It can't be gold, gold is not a means of exchange, it's not good for trading, for barter because I can't say, "Hey, Peter, I really like this house, I'm going to rent it from you for the summer, I'll give you a couple of gold coins"; what?!
Peter McCormack: Yeah.
James Lavish: It just doesn't work that way.
Danny Knowles: Although you wouldn't buy your house to get gold!
Peter McCormack: You can have it for the summer!
James Lavish: A cup of coffee, what are going to do, scrape off some, I don't know, like -- however --
Peter McCormack: However, I've heard about this invention.
James Lavish: However, there is a new invention.
Peter McCormack: Before that, before they get to that, before we get to the Bitcoin, is there a way they can create, I don't know, like a central bank of BRICS where they have their own currency for it? What I'm thinking is, what are the reasons to do it?
James Lavish: Like if it's the European Union? It would be like that.
Peter McCormack: Yeah.
James Lavish: Who are they going to borrow from, China; who are going to borrow from?
Peter McCormack: Yeah.
James Lavish: Russia? The European Union borrows from Germany, so who's going to be that centrepiece?
Peter McCormack: So, do you think it could be something like Bitcoin?
James Lavish: Yeah, of course it could be. It's not conspiracy, it's just why is the Bitcoin hashrate up over 350 now; what is it at? I heard yesterday it's at 355.
Danny Knowles: Yeah, it was above 350.
Peter McCormack: Can you put it up on the…?
James Lavish: Okay, so what percentage of that is over -- look at that rise in hashrate; who is plugging in miners? Now, I've heard a number of theories on this, part of it is that the S9s are being retired and the 140s are being plugged in; they're just much more efficient, they drive that much more hash, okay, that's one thing. Another thing is, you're getting people who are plugging in miners ahead of this move in Bitcoin. See, just think of the function of it; when Bitcoin's price runs, it's very difficult to get mining set up. All right, let's back up. If Bitcoin's price falls, just turn off the switch, unplug that miner. If Bitcoin price rises and you've already got all your miners plugged in, well, you have to source energy, you have to source huts, you have to pull energy to the huts.
Peter McCormack: If they're larger --
James Lavish: It's much more difficult to chase, so maybe what's happening is that some of these 140s are getting plugged in and they're trying to front run the halving and get as much hash up there as possible now, especially before Bitcoin's price runs. Maybe there's a massive amount of miners being plugged in in China and Siberia; that's a possibility. I don't know, but it would seem to make sense that there's some sort of state player involved, and if it's not, well it's just a whole lot of miners being plugged in. But it could be, it could be Russia's trying to load up on it, and you've heard them rumble about accepting cryptocurrency as payment for their energy, so their oil.
Peter McCormack: And how do you think they would deal with the volatility, or does that not matter because they would just settle their end? I think the difficulty is how much liquidity is required. You could only do small trade.
James Lavish: How has Bitcoin done against the ruble?
Peter McCormack: Interesting, yeah, let's have a look.
James Lavish: Yeah. So, that's what they're thinking of, they're not thinking of what's Bitcoin done on the price of the dollar; what's it done against the price of the ruble?
Peter McCormack: But I'm thinking what's a trade in, I don't know, are these tens of billions, these deals when they do an oil deal, like an oil trade?
James Lavish: Yeah, they're billions of dollars roughly.
Peter McCormack: Yeah, but if you'd settled a trade for $5 billion and it was in Bitcoin, first you've got to accumulate the Bitcoin to be able to settle the trade.
James Lavish: So, you're talking about something that's way out there.
Peter McCormack: Yeah.
James Lavish: This is not something that's going to happen this year.
Peter McCormack: But they could start testing small trades.
James Lavish: Sure, you could start testing small trades and see how it does. Look, the likelihood of all this is, it's still low, in my opinion; I wrote about it because there is some game theory around it, there are scenarios that we need to probably start thinking through, and that's the thing that, do I think that BRICS alone would topple the US Treasury today? No, however this could accumulate. I call it the BRIICSS Plus, and what I mean is you have Iran and Saudi Arabia join, so BRIICSS, and then "Plus" meaning other countries start to join. So, we don't know who those would be, but when you get enough together, banded together, and you've got enough of an economy, what they need is they need enough trade with economies that are both net exporters and net importers.
So, you need countries that have raw materials that could export to countries that have manufacturing, to countries who are net importers and buying those goods and services, so it's got to work; where the US has the benefit of, yeah, we can buy and sell in dollars to all the economies. So, the economy, it's got to get to some sort of critical mass. Let's say it did and let's say that Bitcoin does get to a critical mass where it is possible to transact, have these massive transactions daily in energy or in goods and raw materials. Well, now you're getting into a spot where it may be too late, but now the US has to make a decision; do they buy Bitcoin? And so this is the game theory.
Peter McCormack: This is the game theory.
James Lavish: Do they buy Bitcoin and start backing the US dollar by Bitcoin, or do they not; and does the BRICS denominate in Bitcoin or do they not; do they back their currency? And that's the game theory, again, far out there, this is far out-there thinking, but why not walk through it because it's on everybody's mind, let's talk through it.
So, if BRICS does, if they buy Bitcoin and they back their currency by it and the United States also does, well the Treasury probably remains as the global reserve because it's backed by Bitcoin, it's backed by something that's decentralised, it's not inflationary, it's easily transferrable, so all those things. But if the US does it and the BRICS doesn't do it, well, the US Treasury is still going to remain the global reserve asset because it's backed -- sorry, I'm conflating those -- the US dollar remains a global reserve currency backed by Bitcoin, if they do; if the BRICS doesn't, then the dollar remains the global monetary system.
But if the US doesn't do it and BRICS does it, well, that's where the US could get in trouble, because if Bitcoin becomes a means of exchange that's widely accepted and everybody's using it and it becomes this natural reserve asset that people are looking for that's anti-inflationary, while the Treasury is doing what we're watching is happening, people will start turning to Bitcoin, and I think they will start turning. That's the event where you're talking about, well that's when the dollar hyperinflates because it's over, and it's not even the BRICS nations, it's just that's it, that's hyperbitcoinisation, the whole world, forget about BRICS, that's the whole world; but that's a long way off.
Peter McCormack: Yeah, it's wild though.
James Lavish: This is wild, way out-there stuff, and you can bring up that chart if you want of the game theory.
Peter McCormack: You say that, but these things can happen quickly. If BRICS made an announcement in the next year or so…
Danny Knowles: So, this one?
James Lavish: Yeah. So, cooperate and defect; cooperate is use Bitcoin and start accumulating it, and defect is you don't, you ignore it. So, the thing is, if the US cooperates, if they cooperate, either way, it remains the reserve currency, because they're going to back the US dollar by Bitcoin. If they don't, if they defect and BRICS does it, and let's call it BRIICSS Plus and the rest of the world is using this currency and they're actually really using it, well, that is where hyperbitcoinisation is a possibility. It's only when the US refuses; does that make sense? That's my take on it, now I think this is my theory, but you know, I mean…
Peter McCormack: The other thing I don't understand is, with the ability to print trillions of dollars, why wouldn't they be just accumulating a silent large position in Bitcoin; why wouldn't any nation be doing that right now?
James Lavish: Because they're not psychopaths!
Peter McCormack: But I think they are psychopaths.
James Lavish: No, in a good way I meant. We live in a little bit of an echo chamber, right?
Peter McCormack: Yeah, I know.
James Lavish: We live in a Bitcoin bubble; we talk to a lot of people who understand it. Go out and talk to anybody around here in London, and as I get home, I talk to them in Las Vegas, they're not thinking about this.
Peter McCormack: I know.
James Lavish: They're not even thinking about inflation, they're barely thinking of it, like, "Yeah, my grocery bill is way more than it was last year"; that's about as far as they're getting.
Peter McCormack: I had Jeff Booth talking to Tom about it last night, and watching the conversation was fascinating.
Danny Knowles: What did Tom think?
Peter McCormack: I said, "Look, just explain to Tom the scenario where we could hit high double-digit inflation", and Tom was saying back to Jeff, he was like, "Yeah, I understand we have inflation but that's never going to happen", and Jeff was like, "No, here are the steps", and I still think Tom was like, "No, you sound crazy, mate. You're just one of Pete's crazy Bitcoin friends. You want it to happen because you want your Bitcoin to go up".
James Lavish: Yeah, and let's make it clear, I don't want hyperbitcoinisation to happen overnight; that would be very painful for everybody.
Peter McCormack: Yeah, awful.
James Lavish: That would be devastating economically for the entire world, that would not be good. So, no, this is a very slow process and it's a long, long, long --
Peter McCormack: Gradually, then suddenly.
James Lavish: -- and then suddenly.
Peter McCormack: Yeah, and there are a couple of interesting case studies we're going to get over the next year, I think. Saylor's back in the green, which is fantastic.
James Lavish: That's awesome.
Peter McCormack: Because there are a lot of dicks out there who I think were laughing.
James Lavish: They were rooting for him to fail.
Peter McCormack: Yeah.
James Lavish: They're rooting for that company to go under, they're shorting it.
Peter McCormack: Yeah, and he was down $1 billion or so, wasn't he?
Danny Knowles: A lot, I think more even.
James Lavish: Yeah.
Peter McCormack: And now he's in the green; I think his average purchase price is $28,000.
Danny Knowles: Yeah, I think it's $29,000 maybe.
Peter McCormack: And what are we at, $30,500?
Danny Knowles: Yeah.
James Lavish: Yeah.
Peter McCormack: The amount of Bitcoin he has, you're talking about 140,000 Bitcoin, what's that, times -- God, I can't even do the maths on that, we're up $2,000, is that $280 million he's up or $2.8 billion! I think it's $280 million or so, but anyway he's up, but he could be massively up soon, and he's going to be like, "I told you so, I invited you to my conference, I talked to you about --" are you going to his conference next week?
James Lavish: I'm not, no.
Peter McCormack: And then I think there's a higher average purchase price, but Bukele's going to hit the green at some point, and all the people rooting for him to fail, he's going to be, "We were right, we've solved our economy".
James Lavish: I think if you just ride the peaks and valleys, and that's the thing, people get scared because Bitcoin has these massive runs and drawdowns, but if you're not selling, you wait it out, the volatility is not a negative when the price is increasing over time; that volatility is actually a positive, that's the crazy part.
Peter McCormack: So, are we going to see you in Miami?
James Lavish: Absolutely, yeah; I'm supposed to be speaking, I don't know who with or what about, but I'll be there.
Peter McCormack: Okay, so we'll see you in Miami, we'll see you maybe November?
Danny Knowles: Yeah.
Peter McCormack: For the F1.
Danny Knowles: Fingers crossed.
James Lavish: That would be fun.
Peter McCormack: Didn't we agree the other night if Bitcoin was over $100,000 you and I would split a box?
James Lavish: We'll see what those boxes cost!
Peter McCormack: They would be scary money. And we'll see you back here next year for another promotion celebration.
Danny Knowles: Let's do it.
Peter McCormack: Fingers crossed.
James Lavish: Absolutely.
Peter McCormack: James, thanks for coming over, man. I appreciate you, appreciate you coming over and it's been a good few days.
James Lavish: Yeah, it's been awesome. Congratulations on the win; you're graduating up, you're getting promoted, that's awesome.
Peter McCormack: Yeah, man.
James Lavish: One step at a time.
Peter McCormack: Back to work tomorrow.
James Lavish: It's awesome. It was great fun, thank you for having me and I'm looking forward to the next time.
Peter McCormack: Thank you for coming.
