“The Short and Winding Road to the Dollar’s Destruction”

Addison:

I want to switch gears a little bit and discuss the petro economy, because I know you studied this a lot too. As you know, there was the petrodollar for many years, but now we've shifted into the Modern Monetary Theory (MMT) world, right?

Byron King:

Yes.

Addison:

Catch us up on how that happened. Explain first what the petrodollar was, and that replaced the gold standard.

Byron King:

The Bretton Woods.

Addison:

The Bretton Woods standard.

Byron King:

Right. Yeah.

Addison:

And then, we moved forward to today which is like nobody has written the history on this one yet, but MMT has replaced the petro dollar really, right?

Byron King:

Yeah. That's a fair way to put it. It goes back to World War II. The global monetary economy just broke apart. You know what I mean? Everybody's fighting wars. Europe was destroyed. The Soviet Union was destroyed. Asia was destroyed. Japan, China. And the rest of the world was underdeveloped. After the war there was the Bretton Woods Agreement named after Bretton Woods, New Hampshire in the White Mountains, which I'm sure you've been there a few times. It's a beautiful old resort.

People came together and basically signed the deal that they were working on. The US promised to back the dollar against a certain percentage of gold, and then the rest of the world would fix their currencies to the dollar. The dollar would be the north star, and everybody else would align with it, and we would rebuild world trade when the war ended. The world was destroyed. We agreed to rebuild it and it was going to take a lot of trade.

This all worked in the late '40s, the '50s, and even into the '60s, but then came Lyndon Johnson with we're going to have guns and butter. We're going to have the Great Society, the War on Poverty, and we're going to do this Vietnam War thing as well, and so all of a sudden the US just started spending like crazy. And actually, it was our dear friend Bill Bonner who told me this story one time that the soldiers in Vietnam were spending their money there. A lot of the banks in South Vietnam were affiliated with French banks, because it had been a colony of France. And so all of these dollars wound up, literally, on pallets, just big bags of cash going back to France.

And then France was coming to the United States, saying, "Here, we've got these millions, billions, and billions of dollars. Give us gold for them." And so at any rate, in 1971 on August 15th, and actually it's the 50th Anniversary coming up in a couple of weeks, Richard Nixon went on television one night, and I remember it. I was there. I watched it. And he said, oh, we're going to do this, and this, and that. And now we're going to put wage price controls.

Addison:

You almost sound like him.

Byron King:

Oh yeah. But one of the things he did was, he closed the gold window and said, we're not going to redeem our paper dollars, or we're not going to redeem our overseas dollars for gold anymore.

And so that threw the world into turmoil. Now, obviously, the sun came up the next morning and people went about their business. It didn't destroy the world overnight. But within a very short time, within months, within a year or so, things were getting way out of hand in terms of valuing currencies?

If you're not exchanging it for gold anymore, and you're inflating your US dollars, how does everybody else do their thing? Well that all resolved out of the Arab Israeli war in 1973, the Yom Kippur War, where long story, but in the end Henry Kissinger and Richard Nixon worked with the Saudis, mainly, but the rest of OPEC as well and said, “listen, if we start keeping our dollar valued against a barrel of oil in terms of the price of oil or whatever, that's what will stabilize the global trade.” So we kept the dollar, the US dollar, as the World Reserve currency. And it was backed up as an item of value against oil because oil is energy and energy is a way of calculating value.

Addison :

Do you think the petro dollar regime is coming to an end?

Byron King:

Yes, certainly the dollar oil regime is. It lasted through the seventies, the eighties into the nineties. Obviously the price of oil is going up and down, and up and down. Much of that has to do with availability of oil, much of that has to do with the global economy.

But through it all, if you look at it, the US has just spent money like crazy. If you look at every chart, go to every Federal Reserve chart, every big monetary chart, you see we're here with big huge debts and big huge numbers. If you trace it all back, a lot of that stuff all started to really metastasize in the end of about 1971, 1972, when we went off the gold standard.

There's been paper after paper written on it, and you can, just as somebody who does a little bit of their own research can see it.

So here we are today where we've gone through the whole oil cycle. And obviously we are where we are. The US did well with fracking in the last 10 or 12 years, and got itself up to about 12 million barrels a day of oil production.

That's peak oil for the United States. I don't know where, when, or how we're ever going to get more than that out of the ground. It's heading down what the last year with the pandemic and the global contraction played havoc on oil prices, coming out of all that on the other side, the dollar and the petrodollar is not going to have the strength that it used to have.

Addison:

So what replaces it? What kind of currency?

Byron King:

Yeah, that's a good question. On the one hand, people talk about SDRs, Special Drawing Rights, based on a basket of currencies.

Addison:

Yeah, Jim Rickards is big on SDRs.

Byron King:

It's a Jim Rickards approach to it. Yeah, our good friend Jim. And the SDR is going to be a basket of goods, or a basket of currencies and goods, but it will include dollars, euros, and probably yuans, and maybe some yen, maybe some pounds.

But I could see a gold component to it, and a petrol component to it. But whatever it's going to be, the US dollar itself is not going to be the conductor of the whole global monetary band anymore. The US is going to have a tough time just throwing dollars out into the world, willy nilly, without a care in the world of what it means to the purchasing power of other places in the world.

Addison:

I want to ask you what investors should do, but before that, any thoughts on crypto currencies? That's been a theme of ours lately.

Byron King:

Oh sure, yeah.I had this discussion with Jim Rickards, and we were talking about how the world runs on money, obviously, but really the world runs on credit.

And there is a developed global credit system that's built around real currencies. Dollars, euros, yen, yuan, throw it all in there. There is a developed global credit system that's built around that stuff. We can talk about, oh, the Chinese want to de-dollarize, or the Russians want to de-dollarize... Yeah, they want to de-dollarize and they want to re-establish their currency as the trade vehicle. We got that.

But when it comes to cryptos, is there a global credit system in cryptos? And the answer to that is not yet. Not yet.

Addison:

It's too variable, right?

Byron King:

It's too variable. Yeah. And one of the real dangers of crypto, is that crypto reminds a lot of people of a video game. Where people are so used to playing video games, and they actually think that they’re in a video game, and actually driving the tank. They’re actually flying the jet. They’re actually carrying the rifle or something like that.

For a lot of people, video games are real. When no, they're not, they're like video games. That's why they call them games. Well, the same thing with crypto. Crypto could really hurt the dollar in terms of wrecking its credibility as people say, "Oh, the dollar is terrible. We're going to get out of it, get into crypto."

But without a credit system on the other side, how do you run a global economy based on crypto? And the answer is, nobody has figured that out yet.

Addison:

I think that's the real answer.

Byron King:

A crypto yuan, or a crypto dollar, or crypto euro, yeah, you might see that. But really all you're doing is just sort of electronic-ing, to make a word here. You're turning your current currency into an electronic component. And that's good and it's bad.

If you've got cash dollars, they're not traceable. If you've got electronic dollars, electronic euros, what have you, they are traceable. And so, there goes your financial freedom.

I think the idea of moving to a cashless society is along the lines of the central planners, the ones that Garrett Garrett didn't like, and John Flynn didn't like, they want to control everything, they want to see every transaction, because they want to be able to tax everything. And they want to be able to affect your behavior by forcing you to do things using money and monetary powers.

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