In PodCasts



The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

China Government Introduces Its Own Digital Currency
April 6, 2021

“As we reflect on the Democratic prerogative to spend trillions—and frankly they’re just adding to the GOP’s own fiscal version (fiscal and monetary sins, as Jacques Rueff would’ve called them)—we’re hastening the day where we encounter a dollar crisis and US debt market implosion. And the real difference this time, is that an alternative in the form of the cyber yuan exists even if in a nascent form.”
    — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. 

Global currency reset. That seems to be a topic that I’m hearing an awful lot about. And I was looking back, Dave, at the 1870s when Otto von Bismarck reunited, or united, Germany. It was Prussia and the other regions against France. And I was thinking about it. One of the first things he did was he, well, he tricked France into declaring war against Prussia. And then, as soon as they defeated Napoleon III, which was Napoleon Bonaparte’s nephew, as soon as they defeated him, they took over 40 million ounces of gold from France and created a currency that actually was quite sound for almost 50 years, the German mark. And I thought about it: It can take years of discipline to trust a currency for worldwide trade, but you can ruin it in months, weeks, even days. Look at what happened to the mark back in the 1920s.

David: Well, yeah. So the journey from 1872, 1873 to just 1922. Yeah. It doesn’t seem like that long. And actually, a lot of that chaos occurred just in the 1919 to 1922 period. Only a few short years.

Kevin: You look at the chart of inflation in Germany, and actually it started a little like ours; 3%, 4%, 5% then you started to see the curve steepen. And, of course, that’s what I was talking about. You can actually, in a matter of days, destroy a currency.

David: There’s an academic at the Booth School of Business, this is University of Chicago, who a decade ago was writing about inflation and how you’ve never had an issue of major inflation/devaluation that wasn’t preceded by some fiscal debacle. That currency stability is tied to fiscal stability— and to the degree that you get out of control in terms of fiscal management, or should we call it mismanagement, then and only then do you really see major inflationary or devaluation periods.

Kevin: Well, and you’ve been talking about the cost of building materials, that type of thing, going up, but now we’re starting to see it in services. So, it’s not just the physical products that are going up in price.

David: This week, we have the ISM services stronger than expected with the notable prices paid component, the highest since 2009.

Kevin: And that’s measuring the service sector.

David: That’s right. So, that was the last period of significant commodity moves, if you go back to that 2008/2009 period, major price inflation just prior to the global financial crisis. We also have the ISM manufacturing PMI, Purchasing Managers Index, it stands for them. It came in at 64.7, and Goldman Sachs makes the observation, thanks to Liz Ann Sonders from Schwab for pointing this out, that since 1980, every manufacturing PMI print north of 60, so 64.7 is obviously higher, and stocks were negative the following three to six month period. Yeah, this time could be different by degree, but you think about the amount of leverage that’s in the system, and maybe that’s the only way it’s different this time, is in fact by degree.

Kevin: What’s remarkable is when money is flowing— There’s plenty of money being printed right now, but when money’s flowing, people actually borrow more. You were talking about leverage, the margin debt, we’re hitting all time highs.

David: And liquidity is just not an issue at this point, not only the two trillion which is likely to come from the government for infrastructure, but there’s another two trillion behind it that’s being discussed for the equivalent of a Green New Deal and a whole host of, sort of fix-it measures politically. 

Margin debt, obviously a source of liquidity for market speculators, north of 800 billion, we’ve noted that. Doug Nolan was drawing attention to the Q4, that’s fourth quarter, Z1 report. And the fact that the Fed does know how much unconventional lending is occurring and they can look at their broker dealer loans. They can look at those being at all time highs and they can look at the hockey stick rate of ascent in terms of those kinds of loans, and they want to claim that they can’t find any real aberrations in the market, that there’s nothing to be concerned about. Systemically, they see nothing that could be an issue, and yet you have Archegos, which is this family office, should be a wake-up call knowing that there’s never just one cockroach hiding in the dark. First, it was 10 billion in assets on 30 billion in bets, or 50 billion in bets, and now they know pretty sure that it was a 100 billion in bets, with only 10 billion in capital. So, 10 times leverage, which, of course, is modest compared to the Fed. I think the most recent number was above 196:1, but that’s the Fed. They get to play by a different set of rules.

Kevin: Well, and speaking of the Fed, you just wonder how good the brakes are on the Fed. If William McChesney Martin, the old Fed chief back in the 1950s, were in today’s Fed, you’d wonder if he would be tapping the brakes right now. He’s the one who said, “Remove the punch bowl before the party gets started.”

David: Well, and that’s what’s interesting about these good news numbers. The ISM manufacturing numbers, the employment numbers, and there is no one willing to tap the brakes, even though we have good news for the economy. Manufacturing, services, the jobs report. 916,000 jobs brings unemployment to 6%. And yet we still have QE of $120 billion.

Kevin: Well, how about the stimulus checks? Yeah. I may as well send stimulus checks to people who are fully employed, right?

David: Isn’t it fascinating? Stimulus checks, and we’re fast approaching full employment. And I think one day we’ll look back on it and say, “Yeah, it really was a political opportunity.” And as they say, never let a crisis go to waste. Excess liquidity continues to flow in its various forms into various pockets. And certainly speculative trends and market dynamics, that’s one of the pockets that see some of the liquidity: penny stocks, deadbeat Reddit recommendations, cryptocurrencies. Yep. No particular criticism of any of those assets. I think it’s healthy to observe. You’ve got manic behavior. You’ve got manic behavior, and, broadly speaking, you’re talking about an investment community that is discounting risk and fixating on the other side of the equation, just the rewards, get me some more of that money.

Kevin: For the last 34 years, one of the things that I’ve done for my clients along with the others here at McAlvany’s, has been to look at the banks of our clients as they ask for bank ratings. And one of the things that we found is the strong banks, the ones that really survive the long term, they limit the flow of funds coming in that they know are going to flow out quickly. The term for that is “hot money ratio,” and banks that have a high hot money ratio, which of course is money that, yes, you’re happy that it came in, but it can flow out just as quickly, if not quicker. And it looks like the Chinese are sort of taking their cue from some of these stronger banks.

David: I don’t remember if it was the Wall Street Journal or the Financial Times that Michael Pettis was pointing to, but there was an article discussing limits on foreign banks. And this was specifically Chinese authorities limiting the inflows of foreign deposits into China’s banking system. And I think the Chinese are wise to restrict the inflows. And mainly because they’re aware of the destabilizing effects of the outflows. So, inflows are one thing. Everyone’s happy to see things come in, right? But no one likes to see the funds flow out. And the Asian flu of 1998, this is not Wuhan, this is 1998, and the economic and financial markets debacle tied to what happened in that period of time. You had fast inflows and equally fast outflows of investor money from the region, and it was chaos in Thailand, it was chaos throughout Asia as it spread very quickly. And I think for the Chinese, that remains a very cautionary tale.

Kevin: And so, for domestic banks who watch their hot money ratio— you know what it reminds me of? When talking to clients, oftentimes we’ll draw out the financial triangle. And one of the main questions that I ask about the cash side is, are you going to need this? Let’s say they’ve sold a house. And they say, “Okay. Well, let’s draw the triangle. Let’s get a third in gold, have a third in growth and income, and then the third in cash,” but the question is, when will you need this money? And if the money, if you know that they’re going to take half that money in the next six months and go buy another house, in a way that’s like hot money. You don’t want to put it into something that you know it needs to stay in.

David: Yeah, and domestic banks here in the US, that’s something that they focus on pretty routinely. They monitor, they give heed to, the issue of the sporadic in, the immediate out. Those money movements are not good for them.

Kevin: That’s hot money.

David: That’s hot money. That’s the category. I don’t know if that’s a technical term, but that’s at least the industry jargon. What’s interesting is that commercial banks want to know what quantity of money on deposit might abruptly leave, yet our central bank is in the process of blowing myriad asset bubbles, pumping billions and billions of dollars into assets that have limited real liquidity. And they are recreating these little pockets of hot money risk.

Kevin: Well, go ahead and talk about that. Limited real liquidity because no one really has experienced, in at least 10 years, maybe 12, a market that doesn’t want to buy what they have to sell, but what does it feel like when you can’t sell something when there’s no buyer?

David: Well, I say real liquidity because there is an implied liquidity in all the things that are seeing these billions and billions of dollars pumped in.

Kevin: It’s because you can buy them instantly. Why can’t you sell them instantly?

David: And that is what is implied. It was easy to acquire. It should be easy to sell. The financial markets accommodate you on that most days, but if selling emerges to any real degree, you find prices are not at all what you expected. Real liquidity dries up quickly. And this is even more the case in the US markets following the implementation of Dodd-Frank, where new disincentives were introduced for market makers.

Kevin: Well, we can even see it in markets. The market is generally rising right now, but look at CBS.

David: Yeah. ViacomCBS goes from $94 a share— I mean, this is not a penny stock by any stretch, but it goes from $94 a share to $40. This was about 10 days ago. And it serves as a reminder that if you get above-average volume, again, this time it was stimulated by the Archegos unwind, it can wipe out the value of an asset very, very quickly. And again, not a penny stock, not a cryptocurrency where you have sort of radical daily volatility which is to be expected.

Kevin: Well, and penny stocks have always been treated as something that you play with with a very small amount of your money, but penny stocks now— I mean, you brought it up a couple of weeks ago. Penny stocks are just going through the roof right now as far as the volumes go.

David: Yeah. I mean, it’s clearly in a category of speculation, not investment. Mark Farber notes in his April letter that, “A boom in penny stocks is one of the most reliable indicators of an impending end of a financial mania.” The verdict of history is as clear as it can get on this one. Peter Bernstein, who’s written a lot on financial markets and history, covered this years ago, saying that, “Reality is transformed into that hypothetical future where the outcome is known. These are rare occasions, but they’re also unforgettable. Major tops and bottoms in markets are defined by the switch from doubt to certainty.”

Kevin: Well, that’s an interesting quote. “Major market tops and bottoms are defined by the switch from doubt to certainty.” Yeah, I guess that’s probably where panic comes from. You really are wondering if something’s going to happen— Oh, I got to tell you. I saw a video of some football players who were training down in Florida. These are pros. And they had been told that they were going to be— Show them running through a wooded area. And they were told that boars were in the area and it wouldn’t be a big deal, but just watch out for boars because if they did attack, it could be dangerous. Well, they had set this thing up to where these guys were running at the camera and somebody shook the bushes, and you should’ve seen— Okay, big pro players. They went from doubt to certainty. And I mean, they turned heel, you can probably YouTube it, and they ran away the other direction. I thought, “I’d do the same thing.” I’m not laughing at them, but they were certain there was a boar in the woods.

David: Right. Well, and there’s a certainty about outcomes. Yeah, there’s a gal that runs an ETF that focuses just on the most speculative issues. One of the largest positions is Tesla, and with great certainty, she knows, knows, that Tesla’s going to 3,000.

Kevin: Okay.

David: And my guess is by the time it gets to 3,000, if it were to get to.

Kevin: And it’s worth over a thousand times earnings right now, isn’t it? I mean, something in that neighborhood.

David: We need to give them the benefit of the doubt. They delivered 186,000 units in the first quarter as they open up distribution in China. So, I mean, they’re on track to do— Well, no. They’re not on track to do what Volkswagen does in a week, but that’s okay. That’s okay.

Kevin: Okay, but penny stocks. Going back to penny stocks because again that’s an area that you might play with with a little bit of money, but you’re not going to put serious money there usually.

David: Yeah, we referenced the New York Times article on this point several weeks ago with monthly and quarterly trading volumes and penny stocks reaching five to 10 times their normal levels. And, again, this is just back to this notion of, we know what a reliable indicator is, as Mark Farber says, the impending end of a financial mania by watching the behavior of some of these things. So, trading volumes and penny stocks, five to 10 times normal levels. IPOs are another signal of a financial mania running its course, bringing us ever closer to a major top. We’re now double the number of IPOs we had in the early 2000s. And, of course, the SPACs, the Special Purpose Acquisition Companies, are the latest iteration of the IPO craze.

Kevin: Aren’t people just saying, “Give me some. I don’t care what it is.” They’re just writing a check. It’s just, “Here’s the check. We don’t care what you buy. We just know that we want some.”

David: Well, Farber points out that sort of the blind blank checks, they’re not completely new. I mean, the acronym is, but raise the money first then determine what the business will be. Go back to Charles MacKay’s famous book, Extraordinary Popular Delusions and the Madness of Crowds, and you can see that SPACs, not by that name, they have existed before. 1719, the South Sea Company, it was nonexistent as a company except as a concept, right? They issued shares and this was the description for the shares that you’re buying. “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”

Kevin: But write me a check because it’s going to go well.

David: And they raised more money than Midas, it was amazing. Needless to say, raising money was no issue at the time because speculative sentiment was cresting like a wave. Investors wanted to own a piece of that visional future, even if granular details were lacking, right? So, each era has its hucksters. Each era has its moments of colossal insanity.

Kevin: Well, and you nailed it when you said you want to own a piece of the visional future because, in a way, if everyone’s making money on something that, “Okay. Who knows what it is, but it looks like it might be the future,” you sort of feel stupid if you’re not doing it yourself. I mean, in a way it’s like, “Well, gosh. Am I just caught in the mud? Am I still investing in buggy whips instead of in the automobile or a telegraph instead of the internet?” And that fear of missing out, even though it’s a little bit different each time, the emotion is the same, isn’t it?

David: That’s right. So, it rhymes. Doesn’t exactly repeat, but you have the crescendo of investor enthusiasm once again reaching deafening levels. We can set aside the all-time highs in the S&P and the Dow this week, the S&P and the Dow, and look at them. Learn from the coincidental market anomalies and coincident with those moves and the indices are the troubling anecdotes. We’ll go back to the hot pockets.

Kevin: Okay. So, give me an example of a hot pocket.

David: In 2020, SPACs raised $83 billion. That was six times the amount of money raised for the special purpose acquisition vehicles in 2019 through the end of the first quarter. We just finished end of March in 2021, 288 SPACs have gone public, raising $94 billion and exceeding the full year 2020 in just three months’ time.

Kevin: Well, and they don’t necessarily invest that money, do they? You’re just writing them a check and saying, “Someday buy something that will work.”

David: And typically the covenants are, you have two years to put the money to work. So, now we’ve got the money. Now, we’re going to write a business plan. Now, we’re going to see if we can find an asset to buy or a company to start. The good news for the Treasury Department anyways is that if the money is not spent on acquisitions straight away, it sits in Treasurys, right. But wait, the best news—

Kevin: That sounds like hot money to me. They’re going to invest it at some point, right?

David: Yeah. The bad news is that in 15 months you’ve created $177 billion in future Treasury liquidations. Again, so yet another version of hot money and potentially destabilizing outflows.

Kevin: The Fed was partially designed to stabilize markets, not create further booms and busts. And I think about it like waive cancellation headphones. The technology in wave cancellation headphones, the way I understand it, is the wave form, the sound is measured and then an opposite wave is manufactured by the wave cancellation headphone. And what it does is it smooths the sound down to a point where it cancels it out. The opposite of that is a feedback loop. Okay? And in a way, when the Fed is going and not only not removing the punch bowl from the party, but they’re actually getting drunk with the guests. That’s a feedback loop. That’s not wave cancellation, is it?

David: All I can say is when I put those things on, it feels like my brain waves are being canceled. I mean, the weirdest dizzy spell. Something’s not quite right.

Kevin: You just don’t quite like them.

David: No, but if our monetary authorities had the wisdom to operate counter-cyclically—

Kevin: Right, the opposite wave, right?

David: —versus pro-cyclically, which is right in line with the trend. They’re actually putting money into the markets when the economy is mending, not just a little mending, but we’re near full employment. I mean, this is where you begin to say— I think it’s difficult to argue that the Chinese do this consistently, but you can at least see efforts. Efforts to rein in credit growth. Periodically, they’ll do this. Right now, it’s in real estate. As I mentioned, the journal article, commercial banking sector, hot money is being monitored and it is being limited there.

Kevin: When designing a theater, I’m sure one of the first things that they look at is the exits because you’ve got an awful lot of people in a space. In a way, a theater is a little like a liquidity trap. You’ve got to be able to get the people out quickly. Obviously, I think it’s illegal to say “fire” in a theater. I don’t know if it’s illegal, but it certainly is something that Dear Abby would say, don’t do.

David: It stretches the First Amendment, for sure.

Kevin: Yeah.

David: Yeah. What do I want to buy? is never the full story. Can I sell it? has to be in the equation.

Kevin: Right.

David: So, when you’re buying your dream home, are you buying something that has no market on the other side? You’re going to be stuck with it. Here in the US, we see money flowing into what will be future liquidity traps. And when asset prices suffer from outflows and there is a breakdown in pricing in the bid like we saw with ViacomCBS, the bid drops from the 90s to the 40s almost instantly.

Kevin: Yeah.

David: Guess what it invites. Further intervention will be argued for. Further intervention by the Fed will the implemented. And it’s almost as if you’ve got a disease manufactured and a monopolistic vaccine distribution with exclusive rights already in place. Central bankers are both the cause and the cure. And I guess I should use that last word, “cure,” very loosely.

Kevin: Yeah. Going back to the party analogy. It’s a little like the cops arriving at a drunken party with the beer. Okay. You know what I mean? It’s like, “Wait a second. You guys were the ones who were supposed to break this up.” “We brought the beer.”

David: And they might have something to say once something goes haywire, but it’s not like they’re not going to add a little liquidity to the fund. So, create the bubble, step in and clean up the mess you created. To me, it reminds me of the way our State Department has operated. What our foreign policy has looked like for most of the past 50 years. It’s like a class in making omelets. First, you step in and you break it, then you beat it, then you put it on high heat, and then you serve it like a finely constructed delicacy, and expect everyone to enjoy your cuisine. And meanwhile, if you look at the process, it’s like, “Wow, there is destruction in your wake, but thank you. We’ll have another.”

Kevin: So, you’ve talked about the last 50 years with the State Department, but I’m going to stretch that to 75 years, Dave. Going back to the end of World War II because a lot of our state Department policy, you’ve brought this out, has been done because we have had the reserve currency status with the dollar. The Treasury is just as involved if not more involved than the State Department themselves at world politics.

David: We forget that rules can change. And when rules change, behavior shifts. It modifies in light of those rules which have been changed, right? So, you mentioned 75 years ago. 88 years ago this week, guess what the anniversary was? The executive order that made it illegal for US citizens to own gold here in the United States, right? So, this was—

Kevin: 88 years.

David: —the, “We’re going to inflate the domestic currency, maintain our obligations to our international creditors, have a two-tiered currency where we inflate on the one hand, maintain reliability on the other, keep our reputation intact.” And that played out until 1944, Bretton Woods agreement. That played out until ’68 technically. ’71 is what people remember, but it was falling apart in the late ’60s already. 

The biggest market shift in our generation is not, in my opinion, towards cryptocurrencies. That sounds like a hard shift. It’s really not, but some have argued that we’re moving away from the dollar and you can see the private markets accommodating bringing to market what is the replacement. And I would say this. The biggest shift in our generation is not towards cryptocurrencies as some have argued. It is away from the US dollar. Okay? 

Look at Ken Rogoff’s recent piece in Project Syndicate, “The Dollar’s Fragile Hegemony.” It’s worth reading. Exploring anticipated changes in the Chinese exchange rate regime, which would, in his opinion, significantly change the international monetary order. So, we talked about 1932, ’33 and 1944, 1968 to ’71, these are all key dates in US monetary history, but we could look at 2021 as equally important. It’s our extraordinary debt binge, both private and public, which is enabled by the exorbitant privilege tied to the US dollar’s unique status as global reserve currency.

Kevin: Right. We get to borrow in our own currency, and then we can print the money and pay it back in our own currency. That’s sort of an exorbitant privilege, isn’t it?

David: Yeah. And it draws continual attention to the global framework and the desire for change. So, the argument that he develops, it rests on global GDP and having a more accurate representation in the constituent parts, global GDP versus central bank reserves and transactional clearing.

Kevin: Okay. So, how much in dollars or worldwide transactions right now?

David: Yeah. Today, dollar transactions are cleared through US banks and total to about 88% of all global transactions. And the gripe is that too many transactions use the dollar unnecessarily, and thus give the Federal Reserve and US commercial banking system too much visibility on those transactions—and too much control, frankly. When you start thinking about the global monetary system and how things center on and flow through New York City, all of a sudden, the world says, “We desire a shift. Something that is more about us and less about you.”

Kevin: We started to see cracks in the system going back five years. Remember the special drawing rights of the central banks? It’s sort of a basket of currencies, but of course it had the favorite currencies that didn’t have the Chinese until 2016. And so, the Chinese seemed to be— We knew that that was a foot in the door when they added the RMB at that time.

David: Yeah. And I think some of these things within the currency markets, they take a long time and then they shift all at once. And the shift has been gradual to this point. We’ve had the distribution of renminbi-denominated bonds. We’ve had the 2016, as you mentioned, the renminbi is included in the IMF’s basket of currencies known as SDR, special drawing rights. It’s their version of a reserve currency. And finally, the case is, going back to Rogoff’s article, the case is that global economic trade, and particularly trade within the Asian block of countries, is today about where continental Europe was in the ’60s and ’70s.

Kevin: Well, what does that remind you of? The inflation. I mean, when people want to change, it’s almost always inspired by the loss of buying power of a currency.

David: Yeah. So, in the ’60s and ’70s, you had intra-market trade within Europe, which favored the creation of the euro, right? And it was centered on the stability of the Deutsche Mark just as intra-Asian trade today argues for a regional currency alternative. And the inflationary debacle of the 1970s accelerated the trend to the euro’s creation. And we might have, in this day and age, a fresh, post-Bretton Woods monetary crisis that hastens a diminishment of US dollar importance and justifies, even accelerates, the regional adoption of the yuan.

Kevin: Speaking of China, remember the Sesame credits where you’re measured by how good a citizen you are. We assume here in the West— It’s interesting. I’ve been reading about the French revolution. We assume here in the West that human rights, and we hold these truths to be self-evident that all men are created equal. Well, if you’ve got a system that doesn’t believe that all men are created in the first place, but they’ve evolved from something or they don’t have an equality based on their humanity—I hate to say it, that’s China. Okay? That’s the mentality of China. Then the best thing to do is just manage from the top. That’s communism, command and control. One of the things that we’ve heard about cryptocurrency, Dave, is the enormous freedom that it gives the person. The Liberty that a person has to be able to buy and sell without anybody knowing, but the Chinese are introducing a cryptocurrency for a very different reason, and it’s not full liberty of independence of transaction. It could actually be— You were talking about traps, liquidity traps. Talk about— it might be a liberty trap.

David: We’ve often talked about two revolutions and the difference between the American and the French revolution. And there was a liberality with the French revolution which was appealing. It was decidedly godless, and decidedly violent. Force, violence, revenge, retribution, retaliation. These were all themes—

Kevin: The guillotine.

David: —of the French revolution. And was different in the US. There was a combination of personal responsibility and freedom, but tied to a set of ideals. And those ideals were based in a moral and ethical ought, not just what is and what can be forced, and again, brought about expediently or pragmatically by violence.

Kevin: So, if the Chinese introduced a cryptocurrency, it’s no longer crypto, is it? At least for my buying and selling purpose.

David: I guess the main point is, if you think about there being different versions, different versions of a thing, different meanings of the word “revolution”—

Kevin: And liberty.

David: —very important that you go back and look at a Wall Street Journal article this week. I mean, this is not optional reading. I’m putting the link to the notes. “China Creates Its Own Digital Currency, a First for Major Economy.” And the Wall Street Journal this week announces the rollout of the Chinese Central Bank digital currency. It’s live. And it’s no surprise here. It does the opposite of anonymize the user. Data on spending and data on consumer habits is gold to autocrats.

Kevin: Yeah, and this is in a country that has a camera just about every third of a block.

David: Right. And what we’ve seen is the migration because we know that data on spending and consumer habits is gold to corporations, but now governments can have it, not just have access to it, they can also control it. And this is one of, if not the biggest shifts in our generation. You have paper money experiments which were pioneered by the Chinese 3,000 years ago, and today the iteration off of Bitcoin or the iteration off of cryptocurrencies has found official adoption in China.

Kevin: Is this almost exactly what Rogoff— You had brought Rogoff up before, but he predicted basically that the government would go ahead and take or regulate what was innovated privately.

David: Absolutely. This remains the greatest risk to those currencies, which are available in the market to speculate and own. Bitcoin and the cryptocurrencies will be appropriated. And this is just like Rogoff argued two to three years ago. What the private sector innovates, the public sector regulates and ultimately appropriates. And I get it. The appeal of decentralization is clear. I love cryptocurrencies for the associated freedoms they bring, but our structures of power, from politicians to central bankers, will never voluntarily relinquish control. You’re talking about a money monopoly, and it confers too great a privilege to allow private citizens to have direct access to, and to control in a decentralized fashion for themselves, control and direct money and credit.

Kevin: It’s time for our listeners to pull out a book that I read every couple of years, Bastiat’s, The Law.

David: The Chinese, of all people in the world, see the great potential of digital currency. They see the potential, and I’m talking about the politburo as a means of control, not a freedom. It’s an irony, and it’s still lost on the crypto community, that, like the law, which we celebrate, which we elevate, as Frederick Bastiat, the author of that book, demonstrated, the law can also be used as a blunt object of abuse and force. And it depends on who controls it.

Kevin: One of our favorite guests, Russell Napier, a few years back when you asked him, “Where do we go from here?” He said, “Study command and control economies.” A lot like Eastern Europe. Command and control is what we’re talking about here.

David: Digital money is the greatest monetary policy tool innovation of the 21st century. There is a clear road to macroeconomic management using digital currency. The temptation to, on a universal and instantaneous basis, apply command and control dynamics—it’s too tempting. It’s too tempting for any government to turn down. So, the political reality is in play. The political—keep in mind, that’s what we’re talking about here—the political reality is in play. The economic temptations on offer and the disruptive nature of the digital, it’s here in a brand new way.

Kevin: What if you’ve got private parties who are creating their own cryptocurrencies? Don’t they still have right to control the cryptocurrency space or is there a displacement coming?

David: You look at the original innovators of anything, and very rarely are they the ones who are in the dominant driver’s seat anymore. I mean, Palm, then Blackberry, no. Now, it’s just between Samsung and your iPhones. And the original innovators are barely relevant. From MySpace to Facebook, or from Yahoo and Netscape to Google. Who’s around now? And you find that the early innovators actually aren’t really around. I think it’s possible— I’m very aware I’ll step on toes here, but I think it’s possible that between Bitcoin and XRP and Ethereum, they preceded the central bank digital currency.

Kevin: They did the research for them.

David: Yeah. Jim Bianco writes this morning that the total value of all cryptos now exceeds the value of the US banking system. And to me, you’re talking about getting to a point where the gloves are coming off, and I think they’re coming off as we speak. There is no barrier to entry in cryptocurrencies.

Kevin: Tell Paris Hilton.

David: Yeah.

Kevin: There is no barrier.

David: 4,590, I think, are currently out there and available. If you want to start your own, you can. But they do. They pose a real threat to fiat currencies. There is in theory— This is one of the reasons why, years ago, if you haven’t listened to our interview with George Gilder on Bitcoin. It’s a fascinating conversation as to the legitimacy of the cryptocurrency space and why he likes it so much. And there’s aspects of it that I do too. But now you apply a realpolitik. This is sort of the practical, pragmatic application of raw power, devoid of morals, devoid of ethical ideals.

Kevin: That’s politik that ends with a “K” by the way.

David: You bring that into the monetary world. And you’re talking about the possibility of currency revolution and fiat demise clearly existing in the cryptocurrency space, but power is power, and hard power’s impact blow by blow has yet to be on full display. Regulation, step one. Appropriation, step two. Rules change, compliance bars are raised. Reporting requires an increase in costs. And now all of a sudden the burden to maintain a “decentralized system” is deliberately made so onerous that no one would choose it.

Kevin: So, in an anarchy. Okay. Let’s take a libertarian view or in an anarchist view. In an anarchy where everything is decentralized at that point, cryptocurrency would make a ton of sense.

David: Yeah. And if you wanted to say, “Well, I can do what I want to do. I’ll operate outside the system and operate how I want to regardless of what big brother does.” Well, keep in mind there’s consequences to operating outside the system. Keep in mind there’s consequences to— You mentioned the 88 year anniversary of the change in rules on gold. It was just 10 years in jail and a $10,000 fine, which was a chunk of change.

Kevin: Right.

David: A reasonably large chunk of change back in 1932. So, you just changed the rules and put the onus of compliance on you, the owner.

Kevin: So, the risk at that time in owning gold was state regulation.

David: And the greatest risk to free markets, including free markets and cryptocurrencies, remains that very thing, state regulation. And you can say that, well, the internet, it’s decentralized. That’s the appeal of the cryptocurrencies. It’s different by nature because it’s decentralized. Okay. Who controls the internet? Who controls the electricity? Who controls the licenses for all data that moves through radio frequencies and fiber cable? Who controls the kill switches? Who controls the narrative and the media’s representation of fact? Who controls what can be discussed publicly or what will be canceled? Is there even an opportunity for dialogue?

Kevin: So, the very thing that people thought was guaranteeing them freedom could possibly become the chains that enslave them.

David: If you want to understand control of a populace, study China. And recognize that what the US exported to the world, this US dollar-based creditism of the late 20th century, has evolved to a 21st century Frankenstein. Maybe it’s a yuan-renminbi-stein, but every government wants one for itself. Trust me. Read through this Wall Street Journal article, and recognize how appealing this is to every government. You want to talk about FOMO on a federal scale. The data generated from transactional flows is everything. To digitally influence every action that 1 million, 100 million, 300 million, 7 billion people take, it’s too great a power to leave in private hands.

Kevin: Well, and this is the sad thing about showing up to the party drunk and making people even more drunk. Going back to the French Revolution, Dave, it was brought about by the destruction of the currency originally, and you look at Germany in the 1920s. So, what we’re seeing right now— Here in America, we can print as many dollars as we want, and we act like there’s absolutely no end to it. And what we’re seeing is, there probably is.

David: I have an assignat from 1798. It’s a French currency, what was being printed at the time of the revolution. And it was sort of the last desperate throes in that era. We bring the conversation back around to debt and spending and the current proposal for $2 trillion in infrastructure spending. CNN was mocked for saying that this is a window to the soul of the Biden administration and of Biden himself. Rightly they should have been, but as we reflect on the Democratic prerogative to spend trillions—and frankly they’re just adding to the GOP’s own fiscal version (fiscal and monetary sins, as Jacques Rueff would’ve called them)—we’re hastening the day where we encounter a dollar crisis and US debt market implosion. And the real difference this time, is that an alternative in the form of the cyber yuan exists even if in a nascent form.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. You can find us at And you can call us at (800)-525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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