No tears. No marks. No worries. Object lessons in fiat money.
(Source: Getty Images)
Joel Bowman, writing today from Space City, Houston...
It’s been a blast, Northern Hemisphere, but today we must bid you farewell. A few hours from now, we’ll be rocketing south, over the vast Americas, to our preferred home at the end of the world...
But before we go, there’s always plenty to do. For one thing, we load up on goodies from the land of milk and honey, things that are not easily obtained in Argentina...
Quality linens... functioning kitchen utensils... Slap Ya Mama Cajun seasoning...
...and of course, a modest stack of crisp, unmarked one-hundred dollar bills. (Check the limits before you fly. Depending on the route, individuals can typically carry up to US$10,000 on their person, no questions asked.)
Yes, dear reader, we’re talking about C-notes. Yards. Benjamins. Call them what you like, US $100 notes have served as the currency of last resort in countries from Argentina to Venezuela to Zimbabwe over the years, when local currencies fulfill their ultimate destiny and return whence they came. From ashes to ashes, dust to dust...
Market Trumps Fiat
We recall visiting Zim’s capital of Harare many years ago, long after the country’s infamous central banker, Gideon Gono, had done his worst. Locals were selling stacks of brightly-colored fiat on the side of the road, along with what other paltry baubles and knick-knacks they had to offer.
As it happened, the green $50 trillion dollar stacks were selling at a premium to the blue $100 trillion stacks. Not because of any number on the face of the notes themselves... but simply because the vendors had run low on the former and still had an embarrassing surplus of the latter. It was an object lesson in the fundamental conceit of fiat money: that value can be determined by decree rather than, as is actually the case, by market supply and demand.
Argentina, though not quite in such dire straits itself, is nonetheless hard on the job. Since we left her fair shores, some two months ago, the value of the peso has fallen from roughly ~200:1 (on the all-important, “unofficial” blue rate) to ~300:1. The “official” rate, meanwhile, sits at 130:1. Another object lesson: value is ultimately determined by buyers and sellers exchanging goods and services (including monies) in the market; not para-market (government) actors that would distort reality to their own benefit.
But all this is fodder for another Sunday Session. We’re running reliably, predictably late for today’s departure...
Needless to say, for anyone planning a future jaunt to the Paris of the South, please bear in mind that not all denominations command the same rate of exchange. In other words, US$100s command a different (preferable) rate to US$50s. Same for euros. Be sure to bring fresh, $100 banknotes. No tears. No marks. No questions asked.
The Bill Bonner Roundtable
Before we set off, though, a quick mention of a project we’ve been quietly working on behind the scenes. A couple of weeks ago, Bonner Private Research founder, Bill Bonner, sent the word out to his private network of money managers, professional investors and trusted market analysts. Bill wanted to know two things...
What’s going on in the markets today and
What are you doing with your own money?
And he asked respondents to “give it to me straight” in short, ~10 minute responses. We recorded answers from Rick Rule, Porter Stansberry, Jim Rickards, Chris Mayer, Doug Casey, Alex Green, Byron King and, of course, BPR’s own investment director and macro analyst, Tom Dyson and Dan Denning.
Their responses were direct, concise... and, as you might well expect, not always in agreement.
Right now, we’re editing the video together into a (roughly) 1.5 hour special we’re calling The Bill Bonner Roundtable. We hope to have it available for paid members by the end of the (coming) week. There will be a complete list of transcripts to go along with the production, too, for those who want to print them out and go over the answers more carefully. There’s lots of information in there.
If you’d like to be among the first to see this special production, consider that it’s just one of the many perks of becoming a Bonner Private Research member. Sign up today, here...
Speaking of transcripts, we thought readers might enjoy an extract from our recent conversation with Byron King on all things Russia, resources and rubles. Please enjoy this week’s feature conversation, below...
Russia, Rubles and the Requisite Resources
A conversation with Byron King and Joel Bowman
[Ed. Note: Following is a transcript, lightly edited for clarity, from a recent Fatal Conceits podcast episode, available to all Bonner Private Research readers, free and paid. If you’d like to listen to the entire discussion, you can find it under the Fatal Conceits tab on the BPR Substack page, right here.]
Joel Bowman: Getting back to the money underpinning all of this, Byron, I asked you back in May about the possibility of a golden/gaseous ruble. You called it a methane-backed ruble, I think. How has that played out now? You mentioned, obviously, Putin playing his hand in the energy markets. What developments are you seeing along the lines of a potential bifurcation of global monetary systems and so forth?
Byron King: Oh, I think that we are watching a slow unfolding of the next step of de-dollarization. I don't think the Russians perceive any real reason to make it all happen in a hurry. The Russians are still insisting on rubles for natural gas, and so there are countries in Europe that are making these deals. I mean, Hungary is like, "The rest of you guys in the EU, you do what you want, but we're Hungary. We want natural gas. We get cold in the wintertime. We want that Russian natural gas," and the Russians are like, "Yeah, sure. We'll make you a deal, and we'll work it out with you." Serbia is in the same boat.
There are companies in Italy, in fact, that are again talking with the Russians. "Listen, guys. We want to work with you. We want to make a deal with you." You see that, but at the same time, you've got the high level political types. The Northern European political honchos, who are still banging the drum about how we're going to sanction Russia. "We're not going to buy anything from them," and everything else. It doesn't matter to Russia. They're going to sell their oil, their gas, etcetera to China, to India. Russia just fired a huge shot across the bow over in the Far East with the Sakhalin-2 project, where they essentially nationalized it.
They said, "I mean, we know that you foreign companies own sections of this, but we're taking them from you and it's ours now." Now, if you're Japan and you are entirely reliant, 98% reliant on imported energy, much of which is Russian oil, Russian natural gas, you have to be looking at this and thinking, "Oh, my God. Holy smokes. Now, what?" There's so many things going on. There's so many moving parts to it. I mean, the Saudis are talking about not adhering a hundred percent to the old petrodollar idea.
Joel Bowman: They're in talks with the Chinese, right?
Byron King: Yeah. They're making deals with the Chinese to sell oil in Yuan. The Saudis, they'll take Chinese Yuan, and then they'll go back to China and buy Chinese things.
Joel Bowman: And that's 25% of the Saudi total (oil) exports, straight to China, a not insignificant portion. And so, what happens then with Japan? To go back to the Far East, for example. If, let's say, Mr. Putin decides, for his next chessboard move, that he's going to demand gas sold down into Japan – again, another not insignificant market – if he demands that be settled in rubles?
Byron King: If they want to keep their houses warm, their industry's running, the chemical industry working, they're going to have to make a deal with the Gazprombank. I mean, Gazprombank, the bank owned by Gazprom, is set up to say, "Okay. We will take your Japanese yen," or, "We'll take your dollars. We, the bank, and we'll convert them to rubles. We will be able to say that you are buying gas in rubles." But, what's really going on here is, there's an international currency exchange going on. Yen for dollars, dollars for rubles, however the wiring diagram is on any given transaction.
But what it does, it strengthens the ruble as a currency. I mean, the ruble today is a stronger currency than it was back in February. Again, before the first Russian tank rolled across the border. I mean, when President Biden says, "Oh, we've turned the ruble to rubble," it's like, "Well, that didn't last very long now, did it?" Yeah, sure. In the context of a week or two, you crashed the ruble and things were in turmoil for a little bit, and then the ruble just got stronger and stronger and stronger. We talked about this before. When the Russians said, "We'll pay 5000 rubles per gram of gold." That 5000 has changed since then, but that's still out there.
There is a ruble to gold, ruble to natural gas, hence energy to gold if you do your geometry, your 10th grade geometry. If you start to connect these little angles here, there is a ruble energy gold connection to whatever the price of natural gas is, or gold is, in dollars, that feeds back into the strength of the ruble. I think one of the big issues is not what happens when the dollar collapses. "When the dollar collapses." It's what happens after. What will replace it?
Joel Bowman: Right. What replaces a petrodollar? What does that look like geopolitically as well, very interestingly, because the US, since the collapse of the Soviet Union back in '89 or '90, has maintained this dollar hegemony, as a kind of unipolar superpower in the world. As you mentioned at the beginning of our conversation, 30 years of diplomacy has gotten us essentially to where we are today. Now, it looks like that is being turned to rubble. Just to point out the facts.
Byron King: Absolutely. I mean, I think most Americans have a sense that, "America, we're a big powerful country," and everything. If you said to them, "Do you understand the concept of a unipower," They would think, "Well..." If you talked it through, they'd be like, "Yeah, okay. That means we're number one," and all this sort of thing. Well, that's a myth. That is a myth. That's mythology, because America is not number one. We are not an energy-dependent country anymore. We have completely mismanaged our own internal energy system. We're having brownouts and blackouts across the country as the summer unfolds. We've mismanaged basic things, like food supply. I mean, what big powerful country doesn't have baby formula for months at a time? It's crazy.
I mean, it's not that America is a weak nation. No, we're not, but the rest of the world, they're coming out of their shells. Industrially, there is simply no competition in basic industry to, say, China. I mean, they pour over a billion tons of steel a year. The United States last year, 2021, poured 85 million. I mean, it was 12 to one. China poured 12 tons of steel for every ton that the US poured. What'd they do with it? Well, they're building China. Building railroads, building cities, building ships, building whatever. Big country, big build out. In terms of Russia and Russian technology, there's this very strange concept in the US and in the West that the Russians are... "They're dumb. They can't do anything right," and all this sort of stuff. I don't know about that.
I mean, if you look at the International Space Station orbiting over the earth, two thirds of that space station was built by Russia. I mean, for 10 years, we couldn't even get our astronauts up there without riding on Russian rockets. When people say, "Well, they're getting their butts kicked in Ukraine." No, they're not. I mean, who says that? They must be reading Western propaganda, because if you actually follow the facts on the ground, the Russians are using maybe 20% of their combat power in Ukraine. They're moving at their own pace. They've got weapons and systems behind the lines that they've never used just because they don't want to show us what they look like, but we suspect we know what they are. We don't ever want our guys to face their guys using those weapons, because it's going to be a mess.
Putin talks about "new physical principles." Well, that gets back to the unipolar/multipolar aspect of the world. The world is going multipolar. The West has a certain philosophy about what life is and what the culture should be, but so does Russia. There's a concept in Russia, and very, very few people talk about it outside of Russia, it's called Eurasianism. There's a whole school of thought around this in Russia now. It's like, "We are not Europeans. Especially, we're not you Western Europeans, with all your decadence and all your weirdness. We are slightly European, but we're really Eurasians because we span the continent. The iron ribbon of the Siberian railroad ties us together." But, there is a whole school of thought in Russia called Eurasianism. That is how they see their future.
That's a whole talk in and of itself. I mean, people write books about it. If anybody's listening to this and they're curious, go to Amazon and dial in "Eurasianism" and you'll find a whole bunch of books all about it written by ivory tower scholars. It's not something that you're going to hear on 60 Minutes, or the nightly news, or something like that, but that philosophically is what's animating a lot of what's going on in Russia, Russia-China, Central Asia with all the 'stans down into India. There is a whole sense that, "Okay. You Westerners, you had your couple of centuries of expansion, colonialism, and all that sort of stuff. You've played a really good game with this petrodollar thing for half a century. You pay us these alleged petrodollars and we send you real tankers full of oil. The dollars never even leave your country, because they wind up back in your banks and your treasury bonds. Somehow or another, we send you stuff, but we don't anything back for it. We're coming to the ending whistle of that game. It's just a question of when, not if.
Joel Bowman: It does seem ultimately a kind of war of attrition, as you mentioned, with Russia happy to bide its time there on its Western front. It does seem like Putin will be able to go without Netflix and McDonald's for a lot longer than the West will be able to go without titanium and noble gasses, for example.
Byron King: Absolutely. People say these things that are just silly. They say, "Oh, the Russians are running out of ammunition." Every two weeks, there's a headline, but they have another two weeks worth of ammunition. No, they're not. I mean, are you kidding? ILook, I'm an American retired military guy and I know, I absolutely know Russia has entire mountains hollowed out filled with ammunition, with train tracks running right into them. If they need ammo, they just load up another train and off it goes. They have everything they need, whereas in the US... For example, just look at US artillery round production for the last, say, 10 years. If you took every single artillery round that the US Army Marine Corps produced in the last 10 years, and you somehow magically put them in Ukraine and fired them off, you would have about a month's worth of ammunition supply. 10 years would be shot off in about four or five weeks.
Joel Bowman: That's incredible.
Byron King: Right. The last three years of ammunition production would probably last about five days. I mean, that's the rate of expenditure. We say, "Well, we'll just buy more ammo." No, we won't. You need an ammunition factory to do that. You need a big plant. You need steel, you need chemicals, you need electronics. You need people who actually know what they're doing. People think, "Oh, yeah. You just crank those ammo rounds out like hot dogs," or something. Actually, no. You don't. I mean, you practically hand build an artillery shell, which means you need hands, which means you need somebody attached to the hands with a brain inside their head who knows what they're doing. Russia has factories for this. Russia has entire cities where they do this stuff. We don't in the United States, nor in the rest of NATO and everywhere else. It's depressing to talk about, except it happens to be true.
And that will do it for another week. Thanks, as always, to Byron for his excellent insights and to you, dear reader, for reading our thoughts and sharing our words.
Bill will be back tomorrow with his regular daily missives. We’ll catch you again next week, from the fin del mundo…
In the meantime, we’ve got a plane to catch!