Show Notes for Erik Townsend Podcast July 2019
Sam: As a long-time listener I really see on a week to week basis the amount of work that goes into the production of podcasts like that, even finding the guests, putting together the agenda, to bring them on and producing it, it is a lot of work. I can tell you, doing it myself. You have to put credit where it is due. The reason I wanted to get you here today is because of your book called ‘Beyond Blockchain: The Death of the Dollar and the Rise of the Digital Currency’.
As someone who has been following cryptocurrencies, trading them and been part of the space for eight years now, since 2011, I have always looked upon cryptocurrencies with a lot of scepticism, and I have always wondered what’s the end goal for them. In your book Beyond Blockchain it really puts everything together, your book delves into the existing cryptocurrency system, what their strengths and weaknesses are, and you put forward an idea of what is going to be the outcome of all this. It’s really generated a lot of controversies online, in your most recent video where you updated a lot of what you talk about in the book, and this was a reaction to Facebook’s Libra coin which was just released by them a couple of weeks back. Some people were, like me, saying you got it completely right and other people were not too happy with what you have been saying.
What do you think is the cause of this kind of two-sided reaction? Why is there so much dissonance between those that are supporting you and those who just outright aren’t interested in what you are saying?
Erik: Well I think it is entirely because we are talking cross-purposes and a lot of people in the crypto community perceive that I don’t get it, that I seem to be missing the whole point. It is really not the case that I am missing the whole point; I got the whole point; I understand the whole crypto agenda. Unfortunately, I do not think it is realistic, or I don’t think it is going to play out the way the Crypto guys think it will. And so, what I have tried to describe in the book: here’s the history of what the cyberpunk community was trying to create when they invented Bitcoin, what their objectives were and the reasons why I don’t think they can be successful.
And to some extent, there are different levels of objectives. They have already been very successful in creating what is effectively a digital money system that can work anywhere internationally. It’s cool. It has a bunch of interesting features. A lot of the aspirations that a lot of people have that Bitcoin, or another cryptocurrency is going to become a significant part of the international monetary system and maybe replace the US dollar as the Kingpin of the global financial system. I think that’s crazy and I think the people who are expecting that outcome haven’t really done their homework. What the book was about was trying to explain that. But I think that what you are seeing in the social media reaction to the book, the video or whatever, is there are people who are convinced that… I call it a religion, the religion of cryptocurrency and of Bitcoin, which is the mission here is that you got to recognise that the central bankers, the governments are evil, they are doing something with the way they are debasing fiat money which is a crime and we the people owe it to ourselves to fight back by designing our own money system which is impervious to government oversight.
By the way, from an engineering perspective, they have done a brilliant job of creating something which is resistant to government oversight. If that is your goal, I think they are being very unrealistic about understanding how much power government ultimately has. And the other thing that I think they have failed to recognise… you know think of what Bitcoin actually is: it is essentially a technology that was invented to create an alternative to government-issued money, hoping that the people of the world would like it better, and say the hell with government money we are better off with Bitcoin because it does not allow the government to monitor and/or oversee our financial transactions, they can’t freeze our bank accounts the way they can in the mainstream financial system. This is better. We like it.
Imagine it is a weapon, what you have essentially done is you’ve gone and shot your enemy with your first few warning shots and left the blueprints for your weapon system behind for them. So, the cat’s out of the bag, the invention of distributed ledger technology and double spend-proof digital cash was an absolutely genius, brilliant invention on the part of whoever, the probably several people who went under this pseudonym of Satoshi Nakamoto.
But the thing is the cat’s out of the bag now, the how to do this is clear. You can use the power of distributed ledger technology to create Bitcoin, to create something whose purpose is to be an assault against what you don’t like in central banking, or if you are the central bankers you could use the same invention to create a government-issued cryptocurrency which is Satoshi’s worst nightmare on steroids. The entire system is designed from start to finish to collect all possible information about who's using it, keep track of all of your personal details and give the government the ability to oversee every aspect of your financial life. You could use these same inventions to achieve something which has the opposite design goals of Bitcoin.
And what I have predicted ever since I first learned about cryptocurrency, probably around 2010 or so is these inventions will eventually be used to create something that does the exact opposite of what Satoshi wanted, and I think that is where we are ultimately headed. But I don’t think we are going to get there overnight and I don’t think it is going to be a clear path to get there. The people who are saying this Townsend guy totally doesn’t get it. They are sort of right. What I don’t get is I don’t buy the religion of cryptocurrency and the people who believe it realistically has the potential to replace the dollar at centre of the global financial system. Central bankers are still in charge of that stuff whether you like it or not, and they would never allow Bitcoin to do that. What Central bankers have been incredibly slow to wake up on, but are finally getting the memo on, is hey wait a minute we could use this technology to build central bank digital currencies… the first central bank digital currency conference was just held in Stockholm by the way… we could use this to build central bank-issued digital currencies which not only don’t attack us in the way Bitcoin was designed to attack us, but which give us the power to do all sorts of things the inventors of Bitcoin would just hate. I’ve predicted that would be the ultimate outcome of these inventions. I think it is clear now that is what is happening.
What I didn’t really predict in the book, but I should have because it is pretty obvious. What I thought was going to happen, you have the cyber punks trying to create this thing that is designed to attack government currencies. Governments are going to want a digital currency system with all the opposite objectives. Where the idea is to give governments more power as opposed to less power to regulate and control its citizens financial transactions. So if ultimately where it’s headed is governments are going to want this power, my prediction was that tech interests, silicon valley tech companies, would recognise… wait a minute, if we design a digital currency system which was intended to allow central bankers to be the ones who coin the money, but it’s way better than the existing conventional money system, we could sell it to the central banking establishment. We could be the ones, if we are google or whoever, to engineer and build the technology that we can sell for a fortune because it is going to become the new global digital reserve currency, that really and truly is going to replace the US dollar. We could be the ones to create that technology and sell it to the Central bankers. We won’t design it to piss off the Central Bankers the way cryptocurrency was designed; we’ll design it to appeal to central bankers.
I thought that might be what happens next, but what I failed to consider is the child billionaire. We’ve got Facebook now clearly has designs now, not on building something to sell to Central bankers, I think Facebook has recognised like I have that the approach Bitcoin takes is just to piss off the central banking community, to annoy and frustrate governments. There is no way that is going to be allowed to become a new global standard money system. But I think that what Facebook wants to do is, say we’ll engineer something that could coexist in the banking system. We’ll design it and call it a convenience system, for now, just a convenient electronic payment system from your friends at Facebook who you know you can trust and it’s going to make your life easier because you can just use your phone to make all kinds of payments, it’s going to go simple.
In reality, what they are doing is designing a new global digital currency system that they, Facebook, have designs on, I believe, replacing all government-issued money with something they’re in charge of. And I don’t think they want to sell it to governments; I think they want to be in charge of it. And unlike the Bitcoin guys who I don’t think had a realistic chance of challenging central bank authority, Facebook got a lot of resources and from everything I can see, what they are doing is they are trying to make this look innocuous for now, so eventually they can promote it in some future incarnation, so it becomes the global reserve currency that replaces the dollar as the centre of the global financial system.
I cannot think of anything worse than Mark Zuckerberg being in charge of designing how money works for the rest of the planet. But I do think that this is his goal and I think that he has a not completely unrealistic chance of succeeding, but he poses a significant threat and it should be taken really, really seriously. The reason I think some people love me and some people hate me is if you have bought into the religion of Bitcoin, where we are going to take down the central bank baby. Next, we are going to replace government-issued money with Bitcoin. You know what, I am the non-believer; if you don’t like me because that, that’s fine. What I am looking at is how the inventions that Satoshi and subsequent people in the crypto community have created are going to be used against them eventually, and I think that is the more likely outcome. Some people have been receptive to that message, and some people haven’t. I think that is what it really comes down to.
Sam: To take a bit of a historical perspective, in the book , you reference Alfred Nobel who created dynamite, he created it for a completely innocuous reason for commercial purposes to allow for miners to more easily extract ore from the Earth, but at the same time, many years down the road, it was turned into bombs and weapons of mass destruction and then went on to claim the lives of many millions of people. So even though there may be an invention, just like Bitcoin, that may seem innocuous and have these libertarian ideals and views at first; it can always be taken and used for different purposes by a government or another actor that uses it maliciously… I think that is the important point to take from it. Also, from a historical perspective, the United States more than 100 years ago outlawed (in the eighteenth century) private banks and also state banks from coining gold and silver coins into circulation. They took the process of money issuance and monopolised it to the federal government, and that is something that has become a central responsibility of every single government around the world, a currency to use at an international level. I would think a corporation like Facebook when they start trying to extract this technology which was designed, primarily, to be used in a decentralised manner and take it and start to incorporate it into some sort of enterprise or corporation, I agree with you, that it is going to backfire, that any regulator or government is not going to look nicely on upon Facebook especially after the Cambridge Analytical scandal that happened shortly after, nearly two years ago now. Who would want to trust Facebook to design the monetary system of the future?
Erik: I don’t think Facebook is going to gain the trust of government. The risk I see is Facebook has got enough money and market savvy; they could very easily engineer a really cool digital currency system that they could then promote to all of their Facebook users. What they create is something that is cool, and it works. And certainly, governments will be in a position where they feel that we are the government, we should be the one’s coining the money, we should issue the currency.
And what I think Facebook’s strategy is going to be, is that there is no way we can fight city hall in that we should be allowed to do it, but if we create this Libra thing and tell everybody that it has very modest aspirations, that is will be a convenience payment system that will make it easier to conduct online commerce and its safer than putting your credit card in to a web browser, that’s all it is. Well, what you do is you get people hooked on it, and I think what Facebook is betting on …is that they know governments are famously slow to embrace and adopt technology.
Central bankers in Stockholm, I wasn’t there, but from what I heard, they kind of talked about gee, should we be starting to think about this stuff? It is not like they are writing code. They are a long, long way from this. If Facebook can do the first-mover advantage angle. The Crypto guys would say no we’ve been here for 10 years. But the thing is Crypto is still kind of a niche thing. It’s not mainstream. Facebook could take digital currency mainstream and provide ease of use features that cause people to say this is great. And then years later when governments are trying to get their acts together, make their own system, Facebook will say we are only trying to help, we’d be happy to donate what we’ve designed in the interest of being good citizens, we will be happy to donate this and allow the world to use our currency system as the centre of the global economy. At that point, if you have enough people hooked, it becomes a lot harder for governments to say No to that. I think that is where their strategy is headed.
Sam: Right, exactly you have the association, and right now it’s a bunch of public companies like PayPal and MasterCard who are on the board but if you switch out all those companies with Central Banks, and then you have Facebook as the technology provider. Essentially, they have cemented themselves as the kind of core developers of the monetary system for the inevitable future. Which is again, scary.
Erik: I think that is their premeditated goal, they have a plan, and they know exactly what they are doing.
Sam: It has to be one of the FAANGS, Apple or Google, Apple hasn’t jumped into the fray yet, but I am sure they are looking at it. especially after missing out all the government contracts that went to Microsoft for Windows in the 1980s and 90s to build out the computer architecture…. I am sure they are looking at crypto as a way to grow themselves into having more government contracts and a larger monopoly over the financial system in the future. Whether that bears out the case, we will see… I think you mentioned in the video that it does make the most sense for the corporations to pick up the baton and run with it as they have the most developers ready to jump into these projects. They have huge amounts of capital to throw at developing a monetary system, so why shouldn’t the government sit back and use the giant tech companies, just leverage them and let them build it and fit them into the system we already have?
Erik: Well I think that probably is their best model or avenue to work with a major tech concern and say we really need to get to a central bank-issued digital currency, digital currency is better than physically issuing currency but government needs to be the one coining and keeping the profit from coining that money, so we need technology to do this, someone sell it to us. And you contract with some high-tech concern to build this central bank-issued digital currency system of the future. What I predicted in the book was that the tech concerns would see that outcome before the governments did and they would design the digital currency system to be sold to governments before governments even figured out that they were a customer for it. So the day the governments woke up and said we really need to be issuing our own digital currency, the Google salesman would be sitting at the door saying we knew you were going to be coming around to that and we already built one for you, it’s ready to go. We are ready to sell it to you.
What I didn’t predict and what I should have as it’s easy to see it coming, was that Facebook could say no, we can control the world, this is cool let’s see what we can get away with. Facebook is not stupid; they probably see a range of possibilities; the ideal outcome for them is that they control the world’s money system; that’s what they want to achieve. They probably have several different plans to scale back from that and cooperate at various levels of government along the way to whatever extent they need to…to get as much power as they can and capture as much data as they can, every single transaction, every single time someone spends money, Facebook wants to collect metadata about that and sell the government the ability to capture that data, and they want to capture that data so they can sell it privately.
At what point do we the people get a say in the design of this digital currency system, so it meets our needs, not just the special interest needs of government? Certainly, the crypto guys would be probably screaming in the aisles at this point saying you idiot that is the whole point of what Crypto is about. Bitcoin is precisely about designing something the bankers cannot tamper with. Unfortunately, I just don’t think they are being realistic. The government really does have the ability to outlaw things that they don’t like. The reason Bitcoin has not been outlawed because the government is powerless to do anything about it, as the crypto guys would like to have you believe. It’s because they are clueless and they haven’t figured it out yet, and I predict once they have that they will outlaw Bitcoin and other cryptos. That does not mean they are going to go away or not be used after that, but they can take a big dent out of it by making it illegal.
Sam: I was wondering if you could provide a quick description of what makes a central bank-issued currency different than Bitcoin or any other different types of cryptocurrencies? And why Bitcoin, in your opinion, can never become a central bank denominated currency?
Erik: By design, what Bitcoin is designed to do from the ground up is to make it impossible for central bank to do all the things they want to do. The view of the cyberpunk and inventors of Bitcoin was that central banking is a very bad thing. That giving the authority to debase everyone’s money system to the whims of central bankers is a bad thing. It is bad way to design society, and they should not have this power. And what Bitcoin was designed to do is create a money system that would be impervious to any kind of monetary policy control. It was designed to be a money system that would allow private actors to transact in Bitcoin without a central authority, there is no oversight from anybody, and furthermore the whole network is decentralised so there are no server in the centre of everything that could be shut down by the government in order to turn it off. So, the whole goal of everything that Bitcoin was designed to do is to make central bankers’ jobs impossible. So that they can’t control the size of the money supply, they cannot stimulate the economy by stimulating lending or fight inflation by discouraging lending. They no longer have the ability to do these things; this was the goal that Bitcoin was designed around. It is no surprise that Central Bankers are not about to look at Bitcoin and say yeah, we can adopt that as our national currency, that would put the central bankers out of a job because it was completely designed to prevent us from doing anything. Let’s get it. That’s not going to happen.
What you can do is design a digital currency system as Bitcoin was designed to take power away from central bankers, which is what Bitcoin is all about. Or you could use some of the underlying technologies like distributed ledger and double spend-proof digital cash to create a digital currency system which is designed to dramatically increase the amount of power that central bankers have. I don’t think central bankers have figured out the full extent to which it is possible to increase their power with new monetary policy tools that go way beyond what was ever possible before. But I assure you all those things are possible; they are eventually going to figure it out. They are going to be more excited – I have always said that digital currency technology benefits government more than anyone else, but it only begins to benefit government when you use it to address government objectives and agendas. So far, Bitcoin was designed to the opposite of that. We are starting to see governments recognising that we need to get our heads around this, and we need to figure out what we want a central bank-issued digital currency to look like.
From everything I have seen and read, they are in their absolute infancy of figuring this out. I described in my book, a few things, like a digital sovereign bond market, an enhanced digital monetary policy tools, some of the reasons that this digital currency technology would dramatically improve the ability of central bankers to manage the economy in the way they think it is their job to manage the economy. They haven’t even figured it out yet. So eventually they will. What you will see is I think the big question at this point is … Central Bankers are going to want their own. They want to be in charge. They want to be coining the money. They want to keep the profits from coining money for themselves. Not give it to private enterprise. They don’t have the resources to build state of the art technology themselves. They have got to get it from somebody else.
Does that come about because people who have the wherewithal to engineer those solutions saying, we are going to be in the contracting business? We are going to negotiate with Central Banks to design a functioning specification for central bank-issued digital currency. We are going to hire a team of software engineers. We are going to go design and build that for them and sell it to them so the central banks can be in charge OR are you going to be more aggressive if you are Facebook… and say it might come to that someday but let’s go for the gusto. Let’s go for trying to control the world money system ourselves and see if we can get away with it. And only if we can’t really pull that off will we step down and maybe sell some of this technology to the government and let them be in charge. So, I think that is where the real question mark is in my mind what lies ahead. Will we see Facebook type Libra initiatives where I think Facebook’s agenda lies is, they want to be in charge of designing how money works or will we see the other tech concerns working with central bankers. The central banks will be in charge of their contractors and build the tech they need. Just like the military, you know having a background in the military.
The military doesn’t build any weapons systems. They decide what weapons systems they need, and they let the contractors do that stuff. I think the question is, who is the most capable contractors? Do they want to be contractors? Do they want to take Facebooks approach and see if they can be in charge of how the whole world’s money works? I know what Facebooks agenda is, wait and see what others are doing. The other thing this has brought about is, as I described in the book that I am convinced that Russia and particularly China, those are central banks that are way ahead at the curve in looking at digital currency technology and it’s not because they want to have bitcoin so they can have no power. They are looking at how they can design a digital currency that doesn’t take Bitcoin’s approach. They’ve been very secretive about it, but as soon as Facebook came out with Libra, all of a sudden PBoC said well we are going to have to introduce a digital currency. It is not like they have just started thinking about it. They have been ready to do this for a long time they just decided that it is the time to be public about it.
Sam: Just to come back to the central banks, I think a lot of the people hear about central banks lowering rates, raising rates, but they don’t actually understand how the money system works and when we are talking about Libra specifically. When I see it, I see it more dealing with the retail side where individuals like you and me who deal in things like cash. Cash is one part of the monetary base which central bank controls; the Treasury actually prints more cash, but the central bank chooses how much base money is going to be out there. In addition, to that, there are the wholesale markets, which is the commercial banks and other private entities who the central banks are creating money for and giving to them so they can lend this out. And normally when we are talking about the central bank policy, we are more on the wholesale side; but what Libra’s done and just coming back to what they seem to be getting, they are more focused on the retail side… developing a monetary system for retail customers. Now I would want to know what, if anything, Facebook is developing for the wholesale side. Because most of that is already done electronically and the things you talk about in your book, about implementing smart contracts for the wholesale markets so that policymakers can have more effective policy locations and uses which is something very interesting… I suggest people go check it out in the book. I would want to know what is Facebook trying to do to bridge the retail and the wholesale gap; to be able to intersperse themselves into what central bankers are doing.
Erik: The way that I interpret it is that my speculation. I do not have hard evidence to prove the things I am about to say. These are my speculative beliefs. What I believe is the reason that Facebook is focusing on retail, Facebook is really good at getting consumers on side and liking their stuff. So, if you can provide retail convenience features that make it really easy to use… just go to the convenience store. I’ve got my Facebook app on my phone, as soon as I walked in the store it registered me with the stores server, I don’t even need to wait in the line for the cashier, I just go and take the stuff I want, and I walk out of the store with it as if I was shoplifting. The camera system automatically checks my facial recognition and make sure the person really carrying my phone is really me, and it charges my Facebook account for whatever I did, and I didn’t even need to wait in line like everyone else at the store, and this is just great.
Now a lot of Americans don’t realise that Asia already works this way to a large extent. Most people pay for most things across most of Asia with their phone. In Hong Kong, it is a little different; it is a system called Octopus. But the idea of a digital cash card where you don’t really need to carry cash, and you can pay for most things with an electronic mechanism has been around for years in Asia. For Facebook to create that for the US and European markets would certainly be concurrent with what Facebook is doing in general. The question you got to ask yourself is wait a minute, the way that those electronic payment systems have always worked in Asia and in other places where they have been implemented is that they have always been payment systems that works with the local, national currency.
If Facebook only wanted to address the things that say they are the objectives of this Libra system. If that is what they wanted to achieve, they don’t need a currency for that. They could just create an electronic payment system that works in US dollars. The reason they want to do it with their own currency system; I’m convinced is because they ultimately have much, much grander aspirations of designing the digital currency system that will eventually be used for global commerce. Why would they not be doing that much on the wholesale side and focusing on the retail side? Because that is what Facebook’s good at, it is getting retail to like them, so they gain more power, and they gain access to all of retails metadata. Then they can start selling it on the wholesale market. And I think all of that is coming. But I think the fact they are starting where they are starting perfectly fits into a plan as far as I can see it.
Sam: I completely agree with you there. What they are doing with Libra, in the beginning, they are going to be using short-term daily treasuries and other cash equivalents to fund the Libra coin. They are going to be using a basket of currencies from around the world, probably dollar, euro, Swiss franc, Canadian dollar and a few others. This would allow them in the beginning to make a stable asset that they can use internationally, which would have some sort of stable use around the world. What I would think at some time if there is enough usage, they could slowly start to take away the backing of those short-term treasuries and cash equivalents to the point where it’s no longer backed by anything. It’s just the Libra coin that everybody knows and trusts, and at that point, you’ve essentially reached corporate monetary global domination.
Erik: Well, I think that their aspirations are to create the global currency that replaces the US dollar as the world’s global reserve currency. There is no doubt in my mind that this is what they want to achieve. They would never admit to that now as it would scare too many people. But everything they are doing is consistent with that agenda.
Sam: The thing that scares me the most and we have seen over and over again large corporations they operate on a different set of value systems to the government. So, when it comes to people at the edges, whether politically or morally, or other types of things, which deviate from the typical ideas and beliefs of the times. Those people tend to be excluded in these big corporate systems, and I would expect in this giant new monetary system of Libra coin, that Facebook wants to build, those people will also be excluded too. And one of the things government does is that in addition to providing services, it also protects rights and that is one thing that I haven’t seen Facebook or Google, or pretty much any other Silicon Valley-based corporation, really take into effect. They don’t really believe in following the same rules as the government in protecting rights, they are more about establishing their own play nice moral value system, that if you don’t abide by you can be pretty much excluded and because they are a private company there is no recourse. They can just determine whether to include you or exclude you from the system. That sort of outcome for a financial system would be very scary and something I would not be looking forward to.
Erik: Well, my confidence in governments to protect rights is not as strong as yours is. But certainly, you are right; in theory, the government is supposed to protect our rights, at least that’s their job. It is not the job of private enterprise to protect anyone’s rights, and this whole digital currency revolution has the potential to profoundly improve humanity in so many ways. OR it could be the source of really horrific collapse of individual rights. Where is the common man represented in the public debate? There is no public debate, and I think most people in government are so confused they don’t really understand what’s happening with digital currency they don’t know how to have a public debate. We need to get to the point where we as a society recognise that hey, digital currency needs to happen, it could make the world a much better place, but we need to design the digital currency system for everyone’s benefit. We need to make certain that the people designing it do not get the chance to build in special features that benefit the designers at the expense of everyone else in society. And that is what I fear on every level. I fear that if government designs their own digital currency system, they won’t consider their citizens rights. It will be focused primarily on giving government increased law enforcement abilities, increased abilities to fight terrorism like freezing currency or digital currency accounts globally, some global override capability where they can claw back and freeze any transactions. Who is looking out for the rights of individuals and saying before the government is allowed to build anything? We the people should have a say in this. No one is. I am very concerned as much as I don’t think the crypto agenda is realistic. I almost think it is the best outcome if it could occur; if there was some way Bitcoin could go over the world the way the Bitcoin crowd thinks it should. I think that is better than Facebook being in charge of how money works, by A LOT.
It would be better still if we all had our act together, and there was a public debate and an opportunity for the needs of the people to be considered, with proper protection of our interests. Unfortunately, I don’t see any structure in place to make that happen.
Sam: So, if Bitcoin became the global reserve currency, it would almost be a return to Commodity money with Gold. In the past, credit would be expanded when gold flowed into certain banks, and it would contract when it flowed out of certain banks. With Bitcoin, the difference Gold and Bitcoin is that this can all be completely transparent. If you had Bitcoin flowing into a bank, you could see the amount of money that was being lent out and check the reserves and the portion of which they are actually holding. Since we have gone away from those systems and moved toward the fiat system we have now, it is difficult for me to see how we essentially go back without some sort of crisis that propels us into a state of fear of taking up Bitcoin or Gold or cryptocurrency is forced back upon us because of a degradation of the system.
Erik: You know something that the Goldbugs love to talk about, is that Gold has been money for 10,000 years of history it has proven over and over again that gold holds its value. What they do not tell you is that throughout history there has never ever been a case of voluntary abandonment of fiat currency where government says this path were one of just paper money that has nothing behind it really isn’t responsible we really shouldn’t be doing this we’ve had a lot of objectors in our society so we should go back and have hard money again. It’s never happened. What happens is entire civilisations collapse, and when they collapse, you end up with mayhem on the streets, all the paper money is worthless because the government doesn’t exist anymore. That’s when you go back to a gold standard because whenever people can get their hands-on gold, they know that it has value. And you go back to a gold standard, and it lasts until they reintroduce fiat currency and eventually the fiat system fails. But there has never been an example in recorded history where central bankers have said we should go back to gold. It has never happened.
Sam: You are correct. I have been reading a book called The Battle of Bretton Woods recently. I don’t know if you have read it.
Erik: I haven’t.
Sam: Put it on your list. It is about John Maynard Keynes and Dexter White and the past of those two people and their experiences that led them into Bretton Woods and what actually happened on a historical basis, what led to the creation of the new monetary system. The biggest thing that I learned from the book was that both men were influenced by how both their countries were experiencing the post-Depression, Post-World War I, I guess monetary and fiscal policies of the time. So, in Britain, they were at the end of the Empire, it was the decline of the British, and so Keynes was seeing the rapid growth of debt in society, rising unemployment and the loss of Britain as an empire. So, his ideas of using monetary and fiscal policy to affect things as unemployment and to restart the economy were all responses to the end of the Empire of the British. This wasn’t very popular at the time in Britain; they were still on the gold standard. Although there was still high unemployment, no one wanted to devalue their currency further or take these extreme steps toward fiat currency at the time. Now those ideas were rogue standard in our new financial economy. Even at the time in the United States, it was not until the Great Depression that people started looking for answers to see what could government do, what could policy do, what could we as Americans do to jump-start the economy at the time. Keynes, when he came to the US, gave these big speeches about. We need to get rid of the gold standard the government needs to spend and, one of the things I think people miss from Keynesian policy is that even though governments spend to get out of depressions to restart the economy.
In the same sense, when the economy gets going, they should pay down the debt. Nobody has actually every listened to that, and now you are seeing governments around the world with skyrocketing debt which nobody is ever going to be able to pay off. We are moving toward this MMT style economy of the future and what worries me especially about the use of these central bank currencies is that some of (I think you published a list of three points in the back of the book of specific things that central banks could do with the central bank digital currencies, but you left off 25 different things because you thought they were too crazy to put in that list because they would mean terrible things for society) so when I look at what policymakers can do today with raising rates. They are bound in some respects by the greater economy and the fact they can’t lower rates theoretically below zero, and they can’t access other extreme policies to where we are today. It is really restrained for them. If you were to enable this style of central banking digital currency, it would effect and give them the green light to try anything they wanted to do, and you’ve seen Christine LaGuarde come out and say negative rates are beneficial for society with the decline in cash. It would be easier to implement them if everything was digital and so I look at these extreme policies of negative rates, MMT and what they are doing in Japan. It really worries me. If we bring in a currency system like this, who knows what could happen if you put a bunch of academics in charge of running the financial ecosystem. I would like to hear your views on the policy implications that you wrote about in the book and whether we should really be handing the keys over to a bunch of central bankers with a lot of strange ideas about what should work for the economy and should we allow them to test things like negative rates, should we allow them to tamper with the economy as much as they want?
Erik: That’s a really good point. I am glad you gave me this opportunity to clarify my view and saying we should let the central bankers be in charge, that makes a lot of sense. I am not saying that at all. Frankly, I am very concerned for many of the reasons you have just described. But to go further into this question of negative rates. We’ve gotten to the point; Kenneth Rogoff has just written a bit about this; we’ve gotten to the point where the academics and the central banking elite have gotten to the point where we have to do something to eliminate cash.
Why do we need to eliminate cash? The reason we need to eliminate cash is that they want to construct a system with negative interest rates where any sane, rational actor would respond to by abandoning the entire monetary system, taking their cash out and putting it under the mattress or in a safe someplace and not being part of the financial system. They know a rational actor would do that, so they know they have to outlaw cash to make it impossible for anyone to protect themselves by simply walking away from the financial system they want to create. That’s the reality of this situation. I am certainly not saying that things would be so much better if the government was in charge. I don’t think that at all.
But I don’t think the Bitcoin agenda of hey were are going to design this technology which is intentionally engineered for the purpose of pissing off the government and expecting it to become an alternative to government money which people who don’t believe in government money have the opportunity to use. They have already achieved that goal, and I am sure they will continue to be successful in that respect. But the idea of Bitcoin winning over the favour of the mass populace and becoming a major part of the global financial system I just don’t see it happening. In many ways, I wish Bitcoin had never been invented. I don’t think that Bitcoin for the sake of Bitcoin is ever going to succeed. What I really think they want to provide an alternative to government money that displaces government money. I don’t think they will ever be successful with that. What they have done is let the cat out of the bag, that this new technology exists to create true digital cash, which is not the same as a digital payment system. And once you have the ability to do that somebody, I think now everybody is recognising the future of money is going to be digital money.
The question is who is in charge of it. What Bitcoin has done is let this cat out of the bag so now we are going to have a fight to see who is in charge of the digital money. I don’t think it is going to be good, whoever it is. The best way would be for it to be designed for the benefit of the people, not for any special interest. When is the last time you saw anything in government or corporate America happen for the benefit of the people, and not for special interest or government? I think it is a sad situation overall; if it is going to happen, what I would like to do is see that the interests of the people are represented as well as possible? I would like to see more people in society become aware of what is going on and understand it, which most of them don’t right now.
Sam: In your book, you talk about the creation of this central bank denominated currency, its primary focus on emerging markets. And for Bitcoin I think emerging markets is one of the issues of where it can be used and where it typically has a use case, where people say look at Venezuela, it could help with their super high inflation. The central bank denominated currency has some sort of use case in Venezuela just like Bitcoin. So it seems to me as we go forward there is going to be almost some financial and fiscal war between the two products until it comes to the point where they outlaw it, or it’s let to go to the free market for whomever/either side to decide which one is the better product. Whether it is, the gold backed central bank denominated currency or something like Bitcoin.
Erik: My guess as to what is going to happen is that eventually, they will outlaw Bitcoin and other cryptocurrency which are designed to frustrate law enforcement. That doesn’t mean that they will stop being used, it just means that their usage will go down dramatically because if they are illegal, it will take a whole bunch of players out of the market because they won’t be able to use them. It will continue to exist. First of all, there will be a battle between central banking interests; the Feb is in charge because everyone knows the US dollar is in charge, and therefore, the Fed should be in charge. America is in charge of everything. Or is it more likely to be the other central bankers who are sick and tired of the hegemony that the US dollar has had over the global financial system and want to see it replaced that will take the lead? It is probably both. So, there will be power struggle between central banking interests. Meanwhile, in Silicon Valley, particularly Facebook are going to say We can move much more quickly and efficiently than any government can. We can start building our global scale digital currency in stealth. We will tell everyone it is a convenient payment system called Libra and it exists to make it easier for consumers to go to the store and check out with out using cash and does not pose a threat to anybody. While in reality, what they are doing is they have designs on how they place the entire world’s money system with something other than their own design. The angle they will use is to make it popular, so millions of people like it so that it is too difficult for governments operating at a government pace to compete with it, or to design something that is better or more useable or likeable to the masses. None of these interests are looking after you or me or all of the rest of the good people of the world. There is so much you could do with digital currency to make credit and lending more efficient that would be of true humanitarian benefit to the entire planet. Nobody is focused on that; they are all trying to figure of the power grab of how they can be in charge of the money system of the future and how they can game that to their own advantage. I think it is a very ugly picture and I don’t see any outcome here that is great. I think the most likely outcome to occur is that cryptocurrencies that were designed to piss governments off will succeed; they will be outlawed. This will not stop people from using them; but then there will be this power struggle between Silicon Valley and Central Bank Issued digital currency. I don’t think Facebook will be the last of the Silicon Valley companies to enter this space.
Sam: Have you spoken to any policymakers or anybody who would be worth listening to or someone at the commercial banks and gotten any feedback from them?
Erik: You know they don’t invite me to the Central Bank Digital currency conference; my friend Steve King got to go speak there. Nobody called me. I am actually going to work on a new video that will have a target audience of central bankers and government officials, and I want to explain the history and the motives of the cyberpunks were and why they created Bitcoin.
I want them to see the gift horse that has been thrown to them, the technology of distributed ledger. We could reengineer the entire international monetary system not just currency but the fractional reserve system which makes credit and lending possible. We could reengineer it using digital technology to make it work in order of magnitude to the way it works now. Nobody is working on that. Everybody is working on grabbing power for themselves and being in charge of the money system of the future. I am going to try and get that message across in the video. I have made contacts with people who have said if I make a video not offensive to central bankers and that tries to explain it to them, they think they can get it in front of central bankers. So hopefully they didn’t read the quotes from my book where I criticise central bankers for not getting what is really going on with digital currency, but I am going to try. It is very hard. Most people take my view and say you’re not speaking the words of the Bitcoin religion…. For most people once it is outlawed, they will stop using it. Facebook’s Libra represents a much greater risk than central banks or Bitcoin or anything else. They really want to design money to benefit themselves.
We’ve got this opportunity how to get governments on board to using this technology to deliver the greatest possible benefit to society. Nobody is focused on that right now.
Sam: This is a suggestion for a podcast. Try to get a former central banker who has left who could come on and critique your view about what can be done with a central bank issued digital currency. Or there was just a report I was reading today from the BIS; it is a paper on central bank digital currency back in March 2018. Maybe it would be good to find one of the authors of that report to come on and talk about what can be done with Central Bank digital currencies.
Erik: I have been talking to Steve Keen about this. We are building out new content for the Macro Voices podcast.
Sam: What was the catalyst for creating Macro Voices?
Erik: In the beginning the way I had been doing someone else’s podcast. This is a marketing thing for the hedge fund, which is not true as if that was the case, I would have done a podcast about investing in hedge funds. This was in 2016. Everything about Macro Voices was designed for sophisticated investors who don’t invest in hedge funds because they can do it themselves. Why did I do that? I guess it is just a passion really. I get excited about interviewing some of the smartest people in the world every week and eventually when I shut the hedge fund down; it had never been a very effect way of marketing the hedge fund but I no longer had the rationalisation that it was a marketing function. And I was paying for it out of pocket. At one point it cost me more to produce the Macro Voices podcast than I was spending on my primary residence. Okay this is pretty crazy. I love giving it away for free but there is something I always enjoyed about the free thing. When I realised, I spent more on this than my house. I had to change something. What I in the process of doing now after shutting down the hedge fund, is that I either have to shutdown the podcast or turn it into a business that is actually profitable and supports itself. And what I am in the process of trying to do now is set up an entirely free for the listener advertising monetised network. And the whole idea of Macro Voices from day one and I have to credit Nate Edgar my first co-host. When I conceived this idea, Nate was a retail investor and a relatively new trader who I met travelling. Dave said you should do your own podcast, forget about being on someone else’s. The problem is that what I would want to do is pretty advanced content podcast. It would be subject matter that most retail investors wouldn’t understand so we’d have to figure out how to dumb it down to a retail level and still get the content you want. He was emphatic; I am the guy you are worried about dumbing it down for, I don’t want it dumbed down. You could be the first podcast that gives me what I really want. Content I don’t understand and challenges me to make me go and do my homework and figure out what you are talking about. And I thought he was crazy. Nobody is going to want to do that. We could create a podcast where no one is interested except hedge fund manager or portfolio managers or professionals. That is a relatively small audience. The retail audience is never going to want it unless we dumb it down to something they can understand. Nate said, they will like it better if you don’t dumb it down. We also have a following of finance professionals. There is a prejudice about podcasts that you have to dumb down your content.
Sam: One thing that separates the video network with your podcast, when they come to your podcast – they are presenting an idea in detail.
Erik: It is a fascinating aspect of our podcast and we are getting into a level of detail. Most of the audience does not download the chart book, even though they are not looking at the chart book.
Sam: What is the most popular episode of Macro Voices?
Erik: There is no single stand out episode. There are some that got undeserved fame for calls made on them. Sometimes the average listener does not fully grasp the full extent of the content. So, it has been a mixed bag.
Sam: Many of these perspectives are long term perspectives. It could take 5 to 7-year long term viewpoints.