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Will Sesame Credits Be Xi’s Tiananmen Tank?
November 30, 2022

“There is no going back to what we just had in terms of an up trend. Now, we get to process through the excesses. That’s where we see changes in the bond market. That’s where we see changes in the stock market. That’s where we see changes in the real estate market. And all of a sudden, what you have in the cryptocurrency world is just symptomatic of excess speculation coming to the end of this particular cycle.” — David McAlvany

Kevin: Welcome to The McAlvany Weekly Commentary. Now, I’m Kevin Orrick along with David McAlvany. 

I always enjoy this time of year, Dave, because we ask our listeners to give us questions. And please send those to info, I-N-F-O, That’s spelled It’s good to get feedback from— I almost feel like it’s family that’s listening to the show every week.

David: I don’t know if I enjoy this season or not, because it’s incredibly humbling getting the questions that we do. And I will say that over the 15 years of doing this, each year, the questions have gotten progressively harder. It makes constructing an answer, it makes researching an answer, it makes responding that much more challenging.

Kevin: One of the things I heard, another podcast that I listen to, they do question and answer as well, Dave, and they ask their listeners to make the questions no longer than about four or five sentences. I think that would be a reasonable request in this case too. Some of these questions come in and there’s several pages in the past, and it takes most of the program to read the question.

David: Yeah. So keeping it brief and to the point, construct the question well. We’ll try to construct the answer just as well.

Kevin: You got a comment last week from someone. Speaking of questions and answers. You may have misspoken slightly as far as the name of one of the cryptocurrency companies. And probably worth addressing that before we even get started today.

David: Yeah. At first, we have another casualty in the crypto world. BlockFi filed bankruptcy—that’s chapter 11—this week. So that’s the first notable event in crypto land. Second to your point, last week’s comments were critically appraised, accurately judged, and by an engaged listener. And so my apologies for confusing Digital Currency Group’s struggling unit Genesis with Gemini. That’s the Vinklevoss, Winklevoss, Vinkle—I’m not in Germany—Winklevoss twins. That’s Gemini, and they’re not currently under the gun. The Gemini Earn program—this is where it gets a little confusing—the Gemini Earn program uses Genesis as a lending partner.

Kevin: So there still is a tie, to a degree.

David: Yup. Genesis paused withdrawals on that program. But when you’re thinking of Gemini, all of the Gemini services are functional. So I think the other noteworthy fact is that the Digital Currency Group’s product Grayscale Bitcoin Trust, and I’ve owned the product in the past. I don’t any longer, but it shows stress in the way that it’s trading at present. What I mean by that is it’s trading at a 30 to 45% discount to the underlying bitcoin assets. You’re talking about 10 and a half billion dollars in bitcoin assets. That’s 643,000 bitcoins, something like that and it’s trading at less than 6 billion in value. So again, there’s something wrong with the product itself. When something trades at a discount, the market is reading through to something. Why it’s trading at a discount, I think we’ll figure that out with time. Genesis we know likely won’t survive.

Kevin: Yeah. Well, there’s a complexity there. There’s a complexity too. Let’s say Genesis doesn’t survive. Does it take somebody else with them?

David: That’s what we’re finding out within the crypto ecosystem. And with Genesis too, it’s like a redneck family tree.

Kevin: (singing)

David: There’s a little crossover here and there. Or if you’re looking at the Japanese listing of corporate cross ownership, they call that keiretsu, you’ve got DCG, the Digital Currency Group, very complicated cross-holdings, and they have capital to raise. They have losses to realize. They have that unit, Genesis, which will likely go extinct. So we’re in this interesting place where some value investor out there is going to say, “Oh, buying Grayscale Bitcoin Trust. This is fantastic.” Actually, it might end up being problematic. I would consider the company you keep. In this respect, Cathie Wood would say, “Buy with both fists.” And she is doing just that. Just remember, the ecosystem is under stress. It’s better to wait and see where the bodies are buried, who goes to jail, who walks away from the continued daisy chain unwind within the crypto universe before you put real money to work. So you might, in essence, be proverbially catching the falling knife.

Kevin: Okay, so Cathie, her fund, she’s down 70 or 80% this year. Mark Mobius is saying something completely different. And honestly, I’m not going to tell you you have to follow anybody completely, but I remember going back to the 1980s reading Mark Mobius back when he was with Franklin.

David: Yeah, exactly. So when he was running sort of an emerging markets fund for Franklin Templeton, and he says, “We’re going to see $10,000 for Bitcoin. That’s the next destination.” Cathie Woods would say, “No. $1 million per Bitcoin.” That’s her price target by 2030.

Kevin: Because it’s just that practically needed. Is that what it is? How do you get a million out of something like that?

David: That’s a good question. I mean, it’s supply and demand, and ultimately it’s if there’s enough people to buy one more Bitcoin then the price goes up. Cathie’s Ark fund, as you mentioned, is down 78% from its 2021 peaks. It’s the innovation fund. I think it’s an innovation on capital destruction at this point. Maybe that gets turned around, but she broke a cardinal rule. You don’t pick a price and pick a timeframe. So price, target, and specific timeframe—that 2030 deadline now for a million dollar bitcoin—not wise to do so.

Kevin: Right.

David: Yes, Bitcoin is the future, and Mobius is the first to say, “Look, crypto survives, but the space is uninvestible today.” And a part of that is we’re still sorting out who lives and who dies. Bitcoin may be the most reasonable of the survivors, but you’re still talking about a product that has counterparty challenges, so to say.

Kevin: I wonder if Woods’s fund is even going to be around in 2030.

David: Well, that’s likely a casualty of this bear market. I mean, bitcoin has a future. I’m not sure Wood’s fund does. If I were betting, it would be on that as one of the casualties, the “innovation fund.”

Kevin: And there’s this difficult question on what is money in the first place, or what is value? Your strategy with McAlvany Wealth Management is to try to invest in things that are real. You often talk about things that you could trip over if you were walking around in the dark. I think about it. In fact, I had read an interesting piece yesterday, written by an economist back in the 1960s. If you were to give something away for free that didn’t do anything, you wouldn’t have many people show up at the door. But it’s called the Baguette Theory. If you were to give a baguette, a loaf of bread—

David: For free.

Kevin: —for free.

David: There’s plenty of people who would get—

Kevin: Everybody would show up.

David: Because it’s hunger. It’s an actual physical need. You’re meeting a need.

Kevin: Think about oil. Let’s look at what they’re trying to do with Russia right now with oil.

David: There’s something that meets a physical need. Yes, we have this ESG trend away from oil, and the world is wanting to save the planet.

Kevin: But I doubt that it’s going to zero, Dave.

David: Well, oil pricing, I mean, this is where, again, we think of what role do we play in setting the price. In aggregate, we all set the price, but then you have this small cohort of people that think that they’re wiser and smarter and for whatever reason, think that they can and will set the price. And that’s what we have with the attempt in Europe currently to cap Russian oil prices. 

The global oil market, this is one of the largest, most liquid markets on the planet. In the US, we’ve got the WTI contract, West Texas Intermediate, and that reflects a great deal of US production, and it’s used for buying and selling, hedging US oil production. Brent Crude is by far the most referenced contract in the global markets. But you’re talking about different sources, different qualities of oil, different delivery constraints. Oil from around the world trades at a variety of prices. I mean, even from one country. Indonesian crude trades in a range from $54 a barrel to $85 a barrel depending on the type of oil. Closer to home, you have South Texas Sour. You can get $61 a barrel for that. Or North Texas Sweet, $74 a barrel on the same day, very same time. Europe is trying to cap prices on Russian oil so as to limit that critical revenue into the Russian economy. And thus far have been unable to arrive at the appropriate punitive price.

Kevin: Isn’t there always somebody who’s willing to make a little money on the arbitrage between— Let’s say they cap it at 30 bucks and oil is selling for 75, 80 bucks a barrel. Somebody in the middle who’s willing to take that risk, I wonder if that’s not a good opportunity, Dave. Who’s making the laws here?

David: Well, we’re used to thinking about the US and Russia and OPEC, and particularly Saudi Arabia in OPEC, as price makers. If you increase production, decrease production, you’re going to impact the price. So they’re the makers. In this case, you got Europe trying to force Russia into the position of being a price taker. And it’s not all that easy. Number one, you have a compliance issue. Many countries feel absolutely no obligation to go along with the European plan punishment. There’s plenty of people who would say, “You can say what you want about what the price will be, and we’re going to arrange whatever we want it to be on the side.” 

So the second thing is that if you could create an incentive system that gained global acceptance, their incentive—I use that loosely, this is both carrot and stick incentive—there’s the market reality of pricing arbitrage, which you mentioned a minute ago. Create a large enough difference between the previous and current prices and now you have this—well, in these terms, it would be an illicit trade in Russian oil. And this is where billionaires are minted. Billionaires trade in the asset that is verboten. Perhaps Russian oil would then be priced below the national benchmarks, which, if you look at it today, it already is. As a result of the war, you’ve already seen the divergence away from Brent, away from WTI.

Kevin: Yeah, but 30 bucks a barrel.

David: Yeah. The difference is fairly marginal at this point with European countries, some of them, voting for a cap of $30 a barrel. That’s a big difference.

Kevin: And there’s always somebody willing to make a profit on that. And the politicians don’t miss that. The ones who, oh, boy, they’ll slap your hand, but then they’ll pardon you. Do you remember Marc Rich? And Bill Clinton pardoning him? He figured this out fairly early, and he was pardoned.

David: Very successful oil trader, and he found a niche.  I think he passed away in 2013. He would be emerging from the grave to once again trade the shadows. Where he made his fortune was trading oil with Libya, with Iran, with South Africa, with Cuba, with Yugoslavia. I mean, Milošević. You just start picking your players. North Korea—

Kevin: All these people were banned.

David: Exactly.

Kevin: We burned their books. We banned them.

David: You can’t buy or sell oil and it’s like, “Oh, well, that’s interesting.” Again, it’s an issue of compliance.

Kevin: Funny. I can. I guess he said, “I can.”

David: Basically, if there were sanctions in a price discount, he filled the gap, connecting buyers and sellers pocketing some of the difference. Was it legal? No. So he was, as a result on the FBI’s most wanted list. He relocated to Switzerland to run his trading operation. And then, as you mentioned, as Bill Clinton leaves office, Marc Rich gets a pardon.

Kevin: And that doesn’t have anything to do with future or past donations, does it?

David: Well, clearly not. Likely not. Probably not. Why would you think that? I mean, Marc Rich’s wife writes a check for $450,000 to the Clinton Library just a few months before the pardon comes through.

Kevin: Yeah, but she was a reader.

David: She was an ex. She was an ex. That’s how we know it wasn’t connected. She was an ex. Why would she do him a solid? No. The Clintons pardoned him. That was a disastrous political choice, but a financial windfall for both Bill and Hillary. And to be honest, I mean, that’s been the state of politics long before Biden came into office. You look at your Rolodex, and maybe you leave office before you start monetizing the Rolodex, but maybe you’re in office and you’re monetizing the Rolodex. 

There have been millions in contributions to the Clinton Foundation, to the library, to campaign initiatives that have a connection which his ex-wife, his attorneys, Rich’s short list of friends also in the shadows of oil trading. One of them, Gilbert Chagoury of Nigeria. I think he’s not Nigerian, I think he’s actually Lebanese, but he pledged a billion dollars to the Clinton Global Initiative. Coincidentally, the year that he pledged a billion dollars to the Clinton Global Initiative was the year the Clinton Global Initiative awarded him the sustainable development prize.

Kevin: And that’s unrelated as well.

David: No.

Kevin: I mean, sustainable development. I mean, he deserved the prize. 

Sam Bankman-Fried, he’s in a lot of trouble, but maybe not.

David: Well, it just depends.

Kevin: Could he still maybe write a check or two?

David: He could write few more checks to arrange his get-out-of-jail-free card. He’s got two years or less. Big guy is on his way out of the office. So it would seem that there is nothing that a generous contribution to a PAC or super PAC or other affiliated cause can’t procure these days.

Kevin: When we went to Argentina in 2014, you and I, there was serious price fixing going on between the Argentinian currency and the dollar, if you recall. And just as soon as we got into the van that was taking us where we were going, they said, “We’ve got a couple of leather shops that we would recommend.” We never once mentioned that we were going to be buying leather. Remember that? But that was where we could change our currency. They didn’t like calling it the black market. They called it the blue market, I guess. Black, blue, whatever the case is, the only way you could really function was by that gap. And there’s arbitrage in the gap between what the government says you can trade something for and what it actually is trading in.

David: And that’s my point is that capping oil prices and trying to enforce it through canceling insurance coverage, that’s how they’re going to leverage it. Cancel insurance coverage on the vessels that carry crude for the Ruskies. All you’re doing is creating an opportunity for oil to flow through new channels, and for an alternative insurance industry to spring up in place of the EU or UK. So look for a new insurance company in Malta or in Cyprus. I mean, come on. There’s going to be a gap that’s filled. This is the reality. Price controls have and always will drive black market trading to new heights. And before you get super critical of that, this is market solving problems. In this case, it’s a production and distribution problem. And to me, it seems silly to cap Russian oil prices.

Kevin: You’ve got countries that will be happy to buy Russian oil cheaper.

David: They’re already doing it.

Kevin: China.

David: Look, if the Covid stuff gets cleared up in China— China is already buying excess supplies from Russia. So China will buy at a discount. India will buy at a discount. Japan will buy at a discount. Did you see they maintained their project even as Exxon Mobil is leaving? I forget the project over in Kamchatka. I always remember Kamchatka because I played a lot of Risk growing up. But I can’t remember the name of the oil project that’s way over there. And Japan has an interest in it. We were forced out and they were like, “No, no, no, we’ll stay.”

Kevin: We’ll stay. We’ll be happy.

David: The market solves problems. If there’s a cheaper price some other place, great, we’ll buy it. It seems like what we have is bureaucrats and academics solving problems that are disconnected from the way the world actually works.

Kevin: And the news of this week is China. China, are we going to see bureaucrats and academics solving that problem, or are we going to see some sort of military Tiananmen Square kind of intervention?

David: Fascinating, isn’t it? China has a catch 22. The economy is moving into a bad spot. You’ve got the slowest growth rates in decades, and the real estate sector just went from cardiac arrest to being on a governmental life support system. So in recent weeks, you’ve had People’s Bank of China reduce reserve requirements. That flips about $70 billion into the commercial banking system for more loans to go out. So re-liquefying the banking sector, you’ve got the incentivization of commercial banks to support the real estate developer sector that’s bringing back the industry from the brink of extinction.

Kevin: You still need the consumer though. I mean, are the consumers going to play ball?

David: It remains to be seen because the consumers have to follow through, participate in a very critical role as the investor, as the resident for the projects under development.

Kevin: But if you have no economy because you’ve got everybody locked up because of Covid, that seems to me like how do you get the consumers even involved?

David: That’s the other part of the Catch-22. Covid cases have passed the 40,000 per day mark. Okay. When we started commenting on this just a few weeks ago, it was a thousand a day, then 2,000 and 5,025. Now, we’re 40,000 per day. Maybe it peaks in here, who knows? But restrictions on movement and strict contact tracing controls have forced people back inside.

Kevin: But not everybody.

David: This is what’s creating a political powder keg.

Kevin: Yeah, not everybody. A lot of people are coming out and saying, “no more.”

David: Yeah. And so you see some protests. They want freedom. They want freedom to speak. They want freedom to move. And of course there are those that can leave that are cautious to do so since your QR code has to be scanned anywhere you go. This goes back to the contact tracing requirements and rules that are in place. If you accidentally cross paths with a Covid-positive person, you get sent to a quarantine camp.

Kevin: If you just cross paths with somebody that they know had Covid or came down with Covid—

David: You head into a quarantine camp. And this is not liking quarantine camps. Who can blame them? This is different than a summer camp. This is different than an outdoor experience of camp. Maybe it’s closer to a hospital under lockdown. I don’t know if it’s going too far to say like a concentration camp, but it’s not the kind of camp that you want to show up at. So there is a hesitancy for those who don’t have Covid and are in a place where there’s freedom of movement to go out because they know what can be compromised very quickly. And then all of a sudden they’re under lockdown in a facility. So many are opting to stay home even as restrictions in some areas have lessened.

Kevin: What was the name of that type of prison that was designed back in the 1800s? I don’t think it ever got built, but it was a theory about a prison where just a few guards could maintain over all the people. Do you remember the name of that?

David: Jeremy Bentham conceived of it. He called it the panopticon.

Kevin: Okay. In a way, that’s what this is, because I wouldn’t want to go out if they knew that my scanned QR code, everybody that I had been in contact with makes me vulnerable. Not to Covid, but to them.

David: Right. Yeah. I mean, we had the fire in an apartment block, which took over three hours to respond to. It sparked riots, which days later have yet to subside. You’ve got youth unemployment that’s now past 20%. And a multi-year Covid response, which has included the control of movement, a very muscular use of technology to surveil and silence the populace. So these things are drawing people into the streets, and you could say, “Okay. This is youth.” These are college-age kids who are just not happy and they don’t have very good prospects. The jobs market is not very positive. Could it become more than that? We don’t know.

Kevin: Well, when you hold up a white sheet of paper and get your picture taken, the white sheet of paper in front of your face and say, “Xi needs to step down and communism needs to go.” How safe is that for those students?

David: This is an interesting moment. And again, it’ll either be a very quick hot minute or it’ll turn into something bigger. We don’t know. Xi is being asked to step down. You’re right. Chinese Communist Party is being asked to disband. The state apparatus, which has already wiped the commons of any real non-party perspectives, it’s being protested. It’s being protested with blank white sheets of paper as a metaphor for the censorship which defines the Chinese landscape.

Kevin: Wasn’t he a critic of Glasnost, Perestroika, and Gorbachev, and Yeltsin? Didn’t Xi criticize that, that Russia never really stepped in and did what they needed to do to keep that from happening?

David: This is where we get to see leadership style on display. Where does this go? He’s got pandemic numbers surging. He’s got the resolve to control it with the zero Covid policies. He now has a growing number of non-compliant citizens with the Covid closures and mandates. And going back, he was a long time critic of the Russian failure to contain protests. Whether Gorbachev, Yeltsin, that era in Russia, Xi is likely to squash the sinners and look at the non-compliant as those who need to be sort of schooled and taught a lesson. Because he wants to avoid what he diagnosed as a fatal mistake in Russian decision-making. So no, he doesn’t have Kazakhs that he can call in, but maybe he can organize the digital equivalent. If your life depends on a digital interface, maybe he can manage you remotely.

Kevin: You know that iconic picture of the tank and the man standing in front of the tank in Tiananmen Square. In a way, that’s what technology is right now. Technology for Xi is that tank. Those students are that one man standing in front of that tank.

David: Well, now we get to see what real-time application of techno control, what I think of as technocratic fascism, what it looks like. One useful reference to that term, technocratic fascism, describes it as the advanced fusion of the multinational technology-dominated corporatocracy with the authoritarian global and surveillance state.

Kevin: You’re going to have to say that one more time. The advanced fusion of what?

David: Multinational technology-dominated corporatocracy with the authoritarian global and surveillance state.

Kevin: That’s the tank.

David: China has been in the vanguard of many things in recent years. Covid research going back to 2018, 2019.

Kevin: Wink, wink.

David: Nod, nod.

Kevin: Nod, nod. Right.

David: And the real-time experimentations with social engineering, right? Social scoring known as sesame credits. And this may be the way of flexing your muscle on the public without publicly discrediting their idea of Chinese democracy. Of course, I don’t think we’re working with the same definition of democracy, but that’s a separate issue. What if you can’t buy groceries? What if you’re not allowed to travel?

Kevin: What if your phone doesn’t work?

David: What if you’re one or two or three or four degrees of separation, your network of people are impacted by your involvement in a protest.

Kevin: They go to a quarantine camp instead of you.

David: If your sesame credits are downgraded, so are theirs. I’m not saying that is the case. I’m saying that may be the case. Rather than enforce compliance and squash dissent as we see the Iranian government doing at present with brute violence and terror, you instead leverage people’s dependencies. I am so grateful that those riots are continuing throughout Iran. It’s this generation’s shot at freedom and they better not let go of it. The cost has already been high, but I hope they can endure. 

So in China, perhaps technology and leveraging social pressure becomes a part of the playbook. This is authoritarianism in the 21st century. Can you imagine such a thing where smartphones take advantage of our penchant for convenience and our reliance on them for everything we do, from driving across town—because nobody has a map book anymore. You don’t keep a map in your car. You have Google.

Kevin: Well, and they can find anybody in China. I remember reading something. I’d have to go back and look at the detail. This was a few years ago. A journalist went into China and the test was, could they find him with the surveillance cameras? I can’t remember how many minutes it took them to find him. He randomly showed up somewhere in China and out of all of the Chinese people, they were able to identify him within minutes. So I don’t know if holding a sheet of paper up in front of your face is enough obscuring or opaqueness in a system that can look at you all the time on camera.

David: But they’re not trying to hide their faces behind a sheet of paper, which is I think an added element of this boldness. They’re holding a sheet of white paper up to say, this represents our voice. Do you see how much we get to speak?

Kevin: Right. We’re censored.

David: We’re censored.

Kevin: We’re censored, yeah.

David: Yeah. Imagine that ever happening. Imagine technology being used as a weapon to censor people.

Kevin: Hard to imagine.

David: It is hard to imagine. Is this a countrywide Tiananmen or is it a flash in the pan?

Kevin: Right.

David: I guess this depends on who joins the protest next, and how the state responds, because that’s how this either has legs or doesn’t. An astute observer noted that if women get involved and the crackdown ensues, this becomes a very big deal.

Kevin: For Xi?

David: For Xi Jinping. Because now you’re talking about something that has existential significance for Xi and for the Communist Party. If women get involved, there’s sort of this national characteristic—and it’s a beautiful characteristic—but it’s a strong personality bent, a stubbornness amongst women. If you cause them to move to a particular side, your goose is cooked.

Kevin: It’s beyond politics at that point.

David: Yeah, it’s beyond Peking duck.

Kevin: So we’ve talked about this before. Does Xi wag the dog? At this point, it’s the youth that’s the problem. Right? Who goes to war when you need to go to war if you need to wag the dog and get the pressure off?

David: Yeah. You need this to be resolved pretty quickly so it doesn’t take on a life of its own. So this may necessitate conscription, right? The unemployed youth, 20%, that number we mentioned earlier moved into military service to redirect angst and frustration away from criticisms of the state and sort of refocus that energy on a nationalistic framed threat. Maybe it’s Taiwan, maybe it’s something else. But does lockdown fatigue extend beyond youthful rebelliousness to a shift in countrywide tolerance for command and control dynamics? That’s not something the CCP can risk. And the quotes are interesting. “We’re human beings, not animals.” “Step down CCP.” This one is provocative. “It started in Wuhan and it ends in Wuhan.” This is all being quoted in the press in China.

Kevin: In China, in China. Remember, by the way, to go ahead and send your questions in. We’ll answer those in the next few weeks at I-N-F-O at McAlvany,, and we’ll try to get to those questions here by the end of the year. 

We think about it. Just stop for a moment. All of our listeners need to stop for a moment. You brought this up earlier. What if you couldn’t buy groceries? What if your phone didn’t work or your heat in your house was turned off? Any number of things that are tied to the grid, basically. Let’s just call it the grid. You think about people who in the past have talked about fighting for freedom, and they think about having a gun, and it’s like, “Yeah, well, they can pry that out of my cold dead hand,” or whatever. They think that way. It’s much harder to think about not being able to feed your family or any of those types of things. This is not a military type of thing. You can see a man standing in front of a tank, and I think it turned out badly for him in Tiananmen Square. But in this particular case, we’re talking about something, it could be different for each person, too. It might be groceries for one. It might be the heat in the house for another. It might be conscription into the military. You know, the Chinese do this. They can control the people pretty quickly. What about digital currency? What about digital currency for us? We’re talking about going digital ourselves. What do we give up?

David: I very rarely listen to podcasts, but on a 16-hour journey back from Texas— There are a few things that I might indulge myself in. One was a four-hour podcast. That’s long-form content.

Kevin: That’s long. Yeah.

David: Lex Fridman, MIT grad, and he’s had some interesting interviews with Joe Rogan. And in this case, it was an interview with a guy who wrote The Bitcoin Standard, a book I read a couple years ago. And he just wrote another book called The Fiat Standard. Very sympathetic, and many of his views come from the Austrian School of Economics, but he is a bitcoin enthusiast. His critique of the state comes from the perspective of self-proclaimed anarchism. But what he loves about bitcoin is that it is something that is outside of the system. It is decentralized.

Kevin: Well, and you can understand the attraction there.

David: Absolutely. But he never does. In four hours of the interview, never does address system dependency. You have to engage with a system, a digital system, which does not provide all the things that you think that it provides in terms of autonomy. So I still have a number of questions there, but as we move to central bank digital currencies, I think we have to bear in mind all that comes with them. And the Chinese, I think, provide a real time cautionary tale for increasing technocratic fascism. I know the left likes to throw the word fascism around a lot, a whole lot, and use it as a political insult. It’s really just an ad hominem today rather than sort of a grounded historical analytical term.

Kevin: Well, and Mussolini, he said, “Fascism is big business married to big government.” Right?

David: And he came up with the term, this is 1919, he, I think actually wrote a book dealing with much of it in 1932. But yeah, the marriage of big business and big government was a consistent relationship not just in Italy, but in every iteration of fascism. Because fascists in the early 20th century, and this is I think where some of the confusion lies. I know this is a bit of a diversion, but fascists in the early 20th century oppose the communists. So it’s easy to place them on the opposite end of the political spectrum, right versus left, when in fact, fascism is socialism—a lot closer to the left, with just a capitalist veneer. So farther to the left, but the trappings of strong nationalist priorities as a rally cry for the masses bring in some sort of populist themes. It’s these nationalist themes which are the leverage point for propaganda and for coordinating mass interest. And this is I think too a point of confusion where the modern abuse of the word, anything with a pro-nationalist sentiment, gets that insult, “Well, he’s a fascist.”

Kevin: Well, and don’t you think— The fascists— It really is socialism with a capitalist veneer. They used communism and the fear of communism— is wolf in sheep’s clothing is what it was. It was almost the same thing. It was just with big business.

David: It’s power enabled by bureaucrats, run by bureaucrats, paid for through alliances with industrialists, monopolists, and other scions of business. That’s the way it works. That’s the way it works. You can come up with a dozen sociological descriptions of who’s involved and how they get involved, but in the end, you have power and the payment for that power, a cooperation, the marriage of interest between big business and big government. That’s in essence what fascism is. So now you’ve got central bank digital currencies likely to fill the gap that crypto tokens are currently creating.

Kevin: Right. So the guarantee of wonderful freedom, which is what this guest was talking about, can turn into the prison that we’re seeing in China right now and the technological tank basically, that they can employ.

David: It’s the ability to control human action.

Kevin: Right.

David: Right?

Kevin: So you can’t buy at the store, possibly, if you oppose them?

David: Well, this is where we all need to be paying attention. How are sesame credits used? Because social control, if it’s effective in China, it will be used elsewhere. This becomes the laboratory of social control. You’ve got dissent, major dissent seen on a national scale. Tiananmen was one city. It was not a national protest movement, as I understood it. So this is very significant. How they respond and the leverage points that they use. Technology has to be a huge part of that. But we should pay attention to what all is involved, because again: laboratory for social dynamics and political control. Governments all over the world look and say, “How can we do a better job?” And when they say better job, it’s not, “We’re here to protect and serve” better job. It’s more effective management, effective demand management. I mean, look at what a Keynesian planner dreams of when they see a central bank digital currency. This is a new demand management tool. We can drive consumer spending by a use of incentives.

Kevin: We can smooth out any kind of boom or bust. We can make it work.

David: Buy today with this preferred vendor, and it’s 10% off.

Kevin: So let me give you a metaphor—

David: Don’t spend today and your purchasing power will be reduced by 10% tomorrow.

Kevin: Let me give you a metaphor. Pretend like I snap one side of a handcuff on your wrist. You’ve never seen a handcuff before and you’re like, “Hey, look at me. I’ve got a bracelet here. It’s got another bracelet hanging right—”

David: Pretty fancy.

Kevin: Yeah. But see, the other one gets snapped onto your other arm. And at that point, what you felt like was freedom becomes captivity. Okay. So maybe you can control the economy with digital currencies. Maybe somebody can figure out the economics of smoothing out boom and bust. But what we’re seeing in China is what we need to make sure that we oppose here, and that is complete control of the ability to buy and sell. Gosh, does that sound familiar? I remember a book written 2,000 years ago that sounds almost exactly like that, that no man could buy or sell without a particular number—

David: It’s just difficult to see the post-Covid people controls not being leveraged further and integrated into our financial system via the central bank digital currencies. And so I can appreciate the Fridman commentator talking about the decentralized nature of bitcoin. Again, there’s going to be some application for that technology. But as a currency, you do still have the power structures that exist today who are not interested in giving up monopoly status. When you have hegemony, it’s not something that you relish giving up quickly. And each nation state that has their own currency kind of likes the control that comes with it. The control to inflate, the control that it allows in the fiat world for them to be able to create as much credit as they want.

Kevin: It sounds so much like what Rogoff said. First—

David: Private sector innovates.

Kevin: Innovates.

David: Public sector regulates.

Kevin: Regulates. Then—

David: Government appropriates.

Kevin: They appropriate.

David: Yeah. So we come back to the crypto for a quick minute. You’ve got Ted Budd, one of the signatories on a letter to the SEC. Okay? We’ve got eight house members who signed this. Four Democrats, four Republicans pushing back heavily on the SEC’s inquiries into FTC.

Kevin: That’s right. That was back in March, wasn’t it? When they were saying, “Don’t push too hard, don’t regulate these guys.”

David: Now they’re running interference for Sam and FTX. Right? And this is where it gets really uncomfortable, Budd did receive a half a million dollars in support from an FTX funded super PAC.

Kevin: Well, that had nothing to do with him—

David: Does that mean anything?

Kevin: —coming against the SEC and telling them to just leave FTX alone.

David: Of all the house members, there’s lots of people who could have that opinion, but here you’ve got, “Let me write you a check. And by the way, why don’t you make the appropriate call?” What does $150 million in political donations buy you these days?

Kevin: And that’s four Democrats and four Republicans. Evenly split. So if somebody wants to say, “Oh, well you’re just picking a side.”

David: No, no, no, no. The interesting thing is that Sam focused on funding of the Democratic Party and his business partner focused on funding the Republican Party. So it was like, “Look, we understand that politics, you got to work across both sides of the aisle.” This is an interesting view of working across both sides of the aisle.

Kevin: You called it payola. I read an article, I think you read it too, by a guest of ours that we have on periodically, Harold James. And Harold talked about the Mississippi bubble, right? We’ve read about that and talked about that for years, but that is hundreds of years ago in France. John Law, the brilliant John Law, came in and he understood that he needed to do three things to make everybody rich, including himself. Number one was he needed to be able to coin money or worthless tokens. He needed to be able to do that freely without it being backed by anything. The second thing he needed to do was create some sort of stock or something to buy into that those new tokens could buy into. And so he could just print money and then you could buy— In that case, it was considered the Mississippi Company. You could buy parts of this new land and take advantage of some of the productivity.

David: What’s a fascinating thing, he’s not even a Frenchman, maybe he was Scottish.

Kevin: Yeah, I think he was Scottish. But there was a third component though, Dave.

David: He gets in bed with the government.

Kevin: That’s the third component.

David: So now he’s legitimized. You can pay your taxes with my tokens. This is amazing.

Kevin: So we’re just going to go ahead and pay the government debt off with these tokens. And so you have those three elements. You print worthless tokens. You allow them to have value to buy something that does have value, and then you pay off the government with it. Okay?

David: Yeah, I think—

Kevin: Does that sound like Sam Bankman-Fried?

David: Absolutely. It’s a Ponzi scheme.

Kevin: Yeah. And that’s what Harold James was talking—

David: We understand it’s a Ponzi scheme. Now, just because the French government approved it didn’t make it any less of a Ponzi scheme.

Kevin: But he could provide tokens. He could just create tokens, right?

David: Right. If you’re interested, we did an interview, I don’t know how many years ago, five, six years ago, with a gentleman who wrote biographies of both John Law and Richard Cantillon. I frankly think Richard Cantillon’s story is even more interesting than John Law’s. He was a contemporary and he was able to effectively trade the currency fluctuations through this period. He would’ve been like the crypto trader of our day.

Kevin: But he got out in time. Didn’t he get out in time?

David: He was out. Right?

Kevin: Yeah.

David: He was just a fascinating guy. So look through our archives for the interview. Oh, I can’t remember the author’s name [Antoin Murphy], but it was about Richard Cantillon. Anyways, the Ponzi schemes and the bubbles of our current day feed off of a similar sociocultural dynamism, and that’s what James is getting at, Harold James. We’ll put the link in to the project syndicate article. I think it’s a really fascinating parallel going back and forth between John Law and Sam Bankman-Fried.

Kevin: And he kept it short. It was short, sweet, but it made the point.

David: But that’s what I took away from it, is you’ve got a sociocultural dynamic, which is almost identical when you’re talking about a financial bubble and a Ponzi scheme. It’s the same legitimization process. It’s the same buy-in. It’s the same fake-it-until-you-make-it mentality. And then all of a sudden when the tide goes out, there may be a real company. There may not be. Buffett’s comment, “When the tide goes out, that’s when you see who’s been swimming naked.” Well, in this case, we’ve got the sentencing in the last week to 10 days for the Theranos fraud and scandal. Was it going to be a great company? Yes. No. Maybe. Maybe not. What about FTX? Well, he’s either going to buy Goldman Sachs and end up buying the Chicago Mercantile Exchange and fake it until he makes it, and then backfill with legitimizing FTX after the fact.

Kevin: And maybe even paying off our national debt, if it was like John Law. The sky is the limit.

David: Exactly. What can you do with Sam’s tokens? Lots of things. Just ask John Law. 

So it really is fascinating. We’re in that period of time where we don’t know exactly what the landscape is going to look like in that part of the world. What we do know is that the variables which created the excess and those bubble dynamics, which fed that sociocultural dynamism and enthusiasm. They are waning. Right? And so there is no going back to what we just had in terms of an uptrend. Now, we get to process through the excesses. That’s where we see changes in the bond market. That’s where we see changes in the stock market. That’s where we see changes in the real estate market. All of a sudden, what you have in the cryptocurrency world is just symptomatic of excess speculation coming to the end of this particular cycle. We’ll have another cycle of speculation at some point in the future. We’ll have more Ponzi schemes in the future because that emotional and sociological dynamic will return. But we haven’t processed through completely the fear end and the unwind of what was going to be. The hopes and dreams of a grand and better Mississippi.

Kevin: Well, it’s that time of year. The question and answer programs are coming up. You can send those questions to, I-N-F-O at McAlvany, I’m Kevin Orrick along with David McAlvany for The McAlvany Weekly Commentary. You can also 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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