Luke Gromen on the Strait of Hormuz and Supply Chain Collapse

This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Luke, welcome to the Human Action Podcast. Thanks for having me here. I'm I'm excited to be here. Yeah, this is great. I've been looking forward to this. Uh we got a lot of topics to hit here, but before we dive in, just on the off chance that some people have been living in a cave who are watching this, can you give uh just a brief background, you know, who you are, what

you know, what your organization and, you know, what you're all about? Sure. Uh I'm I'm Luke Groman, founder uh of FFTT uh LLC, which stands for Forest for the Trees, and it's a macrothematic investment research firm. I aggregate uh a large amount of of publicly available data points into um trying to discover and find uh economic what I call economic bottlenecks for our clients. Um, as I I've been in investment research for nearly 30 years, and over the course of that career, I found that excess investment returns uh acrue to those sectors that are positioned

to either benefit from or be hurt by what I call economic bottlenecks, which are essentially something's happening, it can't keep happening because of constraints. And basically I I try to uh highlight those constraints ahead of time particularly visavv um you know When positioning is the other way against those constraints and and flag them for our clients. So that's the sort of the the 30 secondond nickel tour of of of who I am and what we do. Okay. Well, great. And and yes, it's just again to put so just for your background, Luke, that you know,

this is more of an academic thing, but just I I've been following your views and your your commentary and and think this is going to be very uh useful for our listeners. So, economic bottlenecks, gez, I can think of one uh over there straight of her moves. Uh can you and again I' I've I've seen your commentary. I saw you recently you did a show Lyn Alden was also a guest with you. Can you just lay out, you know, some like for example, just to give you a foil right now, the line coming from many

people who are, you know, pro the Trump administration and their stance on this is, hey, a lot of people are willing to pay high gas prices for a few extra weeks in order to keep Iran from getting a nuclear weapon. Give me a break. And so, what what are your thoughts on all this kind of stuff? Um, I I would equate it to um having your dentist say, "Here, you need a root canal. Take this shotgun, put it in your mouth, and pull the trigger, and that'll get rid of the root canal." Um, you know,

that way I won't have to do a root canal. It's a very, very blunt instrument that will ultimately be fatal to the global economy, the US economy, if it's if it's allowed to transpire for too long. Um, and that is simply because we are in a globalized world now and and you're in a globalized world and supply chains are Very very long and um we're in a highly levered globalized world and when you're making something any product um the reality is is if you are missing one component of thousands you can't make that product. And

as it turns out, the combination of the stuff that comes out of hormones, be that oil and gas most obviously, but then things that are less obvious like um sulfuric acid for uh uh refining all sorts of critical minerals that go into our, you know, nifty little devices here. Um fertilizer, uh which to to to feed the world. Um and then when you connect that to Southeast Asia, China in particular, uh when they start suffering any kind of shortages of those inputs, then you know this is a nonlinear breakdown in supply chains. If there isn't

enough helium in China or Taiwan, this doesn't just hit a couple things. This hits, you know, a factor of a hundred things more, which then hits a factor of a hundred things more. And so we quickly, you know, we've been saying since this uh war started, a that I think it's going to last a lot longer than people think and b we've got until about midappril until uh supply chains start breaking down nonlinearly. And so uh you know, so far on those two, I feel pretty good about both of those comments. It's lasted longer than

most people thought seven weeks ago. And right on Q, right around midappril, we're starting to see much more acute breakdowns in supply chains. And so, uh, it's pretty alarming, um, in terms of where things Will go over the next month, 6 weeks if if Hormuz stays closed as a result of these supply chain breakdowns. And, and again, even if they fixed it today, even if everything went back to normal today, there's again this sort of financial macro policy maker view. It was like, okay, well, let's we'll just, you know, turn it off and turn it

back on like we do our computers. And that's not how it works in the real world. In the physical world, there are physical constraints. There are things that have to come back up that plants that take a while to be um basically uh kind of restarted and and rewarmed up. Uh when you talk about things like aluminum, etc. So, uh we're looking at very serious very very serious disruption best case at this point. And every day that it stays mostly or entirely closed from here, it's a nonlinear worsening of of the US and of of

the global economy and the US economy. Yeah. Yeah. And I I mean that's consistent with the things I've heard from people that seem like they know what they're talking about. And also it's not like they have a dog in the fight that they're, you know, reflexively anti-American or something. They just seem pretty soberminded analysis of what's happening. Um, another point that I've seen people make too as well, just to your point about even if they just flipped a switch and it all went, you know, if total peace Broke out tomorrow, still like there's been some

physical damage inflicted on various, you know, plants and so forth and refineries and whatnot. So again, it's not just that, oh yeah, they go back to how things were on February 27th or something just if they if they stop tomorrow. No, that's exactly right. And it's there's this, hey, it's just a little bit of inflation, you You know, I think it was really telling. Um, you know, yesterday Scott Bessant came out and Treasury Secretary Besson came out and said, you know, hey, I think it's 50 or 100 or more days for 50 years of stability.

And people said, oh, good. I said, wait, wait, wait, wait, wait a minute. Go back in time. March 22nd, same secretary Bessant said 50 days for 50 50 years of stability. Well, that was 23 days ago, sir. And there's not a single person that raised their hand in that audience and said, "Hey, 23 days ago, you said 50 days for 50." Here we are 23 days of the 50 days later, we are no closer to having anything worked out. And now you're extending it. So now we're 73 to 123 days or more for 50 years

of stability. Well, what happens in the likelihood that at day 85 supply chains start breaking down really nonlinearly? You know, oops, you know, Taiwan hits constraints on LNG or on helium or um China is unable to produce components that Taiwan needs. So, Taiwan's probably not going to be the first thing that breaks. But, you just don't you just one component somewhere. Boom. Oops. Ford needs to shut down in Michigan because they can't get XYZ from or in all likelihood, hey, data center, you know, ABC is not going to get built till 2030 now because guess

who makes a lot of the components you need for it da da China and Europe. So then they have to shut down because they can't get the energy they need. So there's this I'm astonished by the complacency uh at the moment in markets and amongst policy makers and I'm acutely aware that I think part of at least from the policy makers side that it is a very cynical uh complacency. In other words, they want the markets complacent because if the bond market starts revoling or supply chains really start breaking down, they're going to have to

the US is going to have to seek terms of peace in this in this conflict that are not necessarily uh what they were hoping for. It will sort of uh cement a strategic loss for the United States in the straight of Hormuz. So they're happy to keep, you know, keeping markets, you know, to to let markets be of the mind that, hey, everything is awesome. Everything is fine. This isn't a problem. And they're actively encouraging that view. I think that view is totally wrong. I think we're a couple weeks from really starting to see that

happen, but that's what makes markets. Okay. Yeah. Let's pull on that third for a bit. So I was surprised early and just to give you some of the background here Luke that I am an academic economist or I was and I write a lot about like the social function of stock speculation and futures markets and forward contract things like that and my go-to example for decades has always been just because it was you know such a rich thing for people to just to focus on is say oh what if war broke out in the Middle

East and you know all that oil stopped flowing for a bit and then oh if speculators see that coming they would bid up the prices and blah blah blah and that'd be good because you that's exactly what you want to happen. People economize. They start pumping, you know, domestic wells more rap, finding more domestic wells, whatnot. And so I was surprised when my scenario that I've been writing about for decades comes true and oil was up like $3 a barrel or something in the beginning. And so it's in fairness because then I I my buddy

and I were getting into we were wondering like, well, gee, should we should we buy, you know, call options on futures contracts or something? and the implied volatility was through the roof and so it was pretty expensive to get in there but still the spot price of uh you know WTI or whatever even Brent for that matter weren't near moving nearly as much as I would have thought. So were were you surprised by that as well or can you just comment on that? Yeah, I you know it's been I I think it's exactly that we

are you know last week for clients I wrote there's you know the old adage there's there's no atheists in foxholes and there's no free markets in wartime you know we're we're in a war and you know but it's a it's sort of shorting Schroinger's war right we're in a war where it's useful to make policy But we're not in a war as it relates to you know sort of markets and and and what have you and it's sort of a continuation that we've seen under Bush and Obama and others, right? Is this, you know, hey,

we're at war. This is very serious, but not so serious that you need to make any changes to your lives at home, Americans. Um, and so, yeah, initially, you know, when Moose closes, you go, it's like 20% of the world's oil flowing through there, and oil just sat there and and you go, hm, am I crazy? And then the next week, the answer was, nope, nope, you're not crazy. Right? because oil promptly goes and you have very serious people say no it'll be fine it won't go over 70 won't go over 80 won't go over

90 boom 120 and you know then we get sort of active management certainly from the uh policy makers right hey we're going to unsanction Russian oil we're going to unsanction Iranian oil in a war against Iran can can you just elaborate on that just to make sure everyone gets that because yeah that that's shocking like in and of itself just for in case people miss that. Sure. So yeah, um the uh Treasury Secretary of the United States un we had sanctions on Russian oil, we had sanctions on Iranian oil. Um and in in sequence over

the course of maybe seven or eight days after oil, you know, it laid there did nothing for the first week and then exploded this higher the second week. And as it went over $110 a barrel, Secretary Bessent unsanctioned Russian and Iranian oil, which was uh you would run a foul of the US Treasury if you were trafficking in Russian oil Or Iranian oil. And that was effectively further tightening supplies of oil at a time when 20% of the world's oil just got taken offline. And so as a way to try to loosen oil supplies um

the Treasury unsanctioned even though the story had come out that the Russians were helping the Iranians target American assets on the ground uh and even though we were at war we're were hitting and you know he tried to spin it with some BS that you know some we're jujitsuing the Iranians with their own oil and it was all it was BS. The reality was as they oil markets finally did respond, it started threatening the functioning of the treasury market. We saw treasury market volatility explode higher to near levels that has driven um uh very prompt

responses from policy over the last 5 years, usually in the form of of additional dollar liquidity injected. You can inject all the liquidity into the treasury market to calm it down when oil is negative 37 like it was in CO. It's much harder to inject all the liquidity to save the Treasury market when oil is 110 and going sharply higher. And so whether we saw the unsanctioning of Russian and and Iranian oil, whether we uh saw various uh you know the Trump always taco, Trump always chickens out the taco. Uh we saw jawboning of oil

from Trump uh at key levels uh from Netanyahu at key levels. Hey, the war is not going to be it's going to be over soon. It's going to be over soon. It's going to be over Soon. Um and we've seen indications that somebody has been front running oil markets in a big way. In other words, uh March 22nd, Trump tweets out that he's going to um you know, basically wipe out Iran's infrastructure and oil skyrockets as soon as it opens in Asia. And somebody shorts $500 million of oil and then he releases a tweet 6

a.m. on on on Monday morning, you know, oops, I was just kidding. And oil plummets. Mhm. Who was that? Right. Now, in in commodity markets, my understanding is there's no such thing as insider trading. If you would have done that in stock markets, you in theory would be in trouble. But in commodity markets, hey, all's fair and love and war. Uh, but did somebody, you know, did somebody get a heads up? Was somebody politically connected shorting oil in size trying to um help the administration manage oil prices? Fast forward uh to last week when they

did the ceasefire. Somebody was short $950 million in notional loyal futures into the announcement of the ceasefire. Who was that? Why did they do it? Did they get a heads up? Look, if it was me, I would if I was best and I would be calling buddies going, "Hey, short oil, you know, to help help me contain this at key moments and I'll get you back." Right? That's how that's how The Wall Street works. How do how do I get you back? Well, hey, at key moment, you're short oil. Hey, Trump's going to release something

about a ceasefire. You're going to want to be short oil here. Boom. Now, that all makes sense in the very short run, but you're you're you're indicting the sanctity of of US markets. People are you're starting to you market participants are looking at these types of activities. And this is purely speculative on my part about about that. I mean, but it's what I would do if I was, you know, if I was if I if I was Bessant and I, you know, was watching sort of my economic platform get imploded by this war and then

was instructed, hey, keep oil down. This is kind of what I would do. I like I get it. But the challenge is is is you're you're eroding long-term sanctity of US markets, long-term faith in US markets, right? If this kind of thing happens, it's like I'm I'm not going to play anymore because it's it's a rigged game. People don't like to play rigged games, especially when they're rigged. So, obviously, so these are the things they've been doing to try to manage, you know, jawboning, unsanctioning, you know, someone's in there playing with oil futures at key

turns ahead of key announcements. Um, you my guess is they're politically connected in some way, shape, or form. So, you know, It erodess the sanctity of markets over time. In the short run, it doesn't really matter. But, you know, the longer it goes on, the more people just say, I'm going to take my ball and go home. This is this is BS. Okay. Let me ask you one more on this and then because there are a bunch of other things going on as well that I love to hear you elaborate on. So, what about the

blockade of the blockades? Just again the the timeline it's you know the the threat was and lots of analysts have been saying this for years like yeah you you can't go to war with Iran or if you do it's going to be painful because they can just shut the straight up hormuz and so then they did that and then you know Trump famously in a press conference or something was like yeah nobody's you know do I can't believe they're doing they're attacking the other people in the region that's that's crazy you know and people are

we okay and then he's you know open the effing tweet praise be to Allah you know that thing okay so it one would have thought the point was yeah we want and that's like it was the thing that yeah we we want them to open the straight they can't hold the world hostage and then it and then it's you know and then things had been moving into a new equilibrium where Iran was you know charging up to what $2 million a vessel or something so it was like my my joke there Luke was Iran should

just call it a carbon tax no this has nothing to do with geopolitics we just care about care about climate change okay so but the point being that you know I think the world breathe a sigh of relief like, okay, yeah, Iran's getting money, but $2 million for a big tanker just to get that stuff flowing out of there. Okay, Revert catast. And then I think I presumably because the Trump administration was getting feedbacks from certain key people saying this is unacceptable that you look like a fool. Like they clearly won, however you want to

spin it. And so then now they we blockade that. So I guess one question is presumably they could have done that from day one, did they not? Because that would have been seen as too provocative. Whereas now with the sequential thing, it seems like, oh well, it was tit for tat and now we ended up in this spot. In other words, from day one, you're you're bombing around, the US presumably could have said with our navy, if anyone tries to buy their oil, we're going to seize it. And yet they hadn't been doing that up

until this more recent move. And then just more generally, like did he flip the tables now? And Iran's, you know, got a few months left or you know, because you keep saying you think this is going to go on for a while. So it's kind of an open-ended question. Feel free to take whatever you want. I I I'm of the view that the blockade of the blockade was done I think yeah to manage perceptions. Uh what I keep hearing from you know very credible rumblings on the ground credible sources on the ground is that uh

tactically Iran lost a lot of stuff. Um strategically Iran was winning. Um it's a much lower bar. They just have to survive and keep their moves closed. That's it. And that's what they were doing. Um there have been discussions, oh there was, you know, 5D chess at Trump wants It closed and and that's going to choke off, you know, Europe and UK and, you know, China and then they'll all come begging to us for our oil. And it's like that theoretically makes sense, but when you look at the actual amounts involved, whether that be, you

know, what China needs, what Europe needs, etc., doesn't really make sense. It's not going to work out before the global economy collapses. I I think part of what happened was, you know, again, I began hearing that the Chinese may have have recut off our um exports of of rare earths to us a couple few weeks ago. And if that's the case, war was over. It's just a question of when because we've run down interceptor missiles so fast. We're running low as are the Israelis and faster. We're running out of interceptor missiles faster than the Iranians

are running out of offensive things. And so, uh, if China and we can't make those things without Chinese rare earths. So, if China tightens the exports on that, war is over. Like, it's just okay. We're just going to wait and see. And you know, do the Americans want to completely run out and make it very obvious to everyone they've run out or do we want to have a ceasefire and start talking? And what we've had is we've had a ceasefire and everyone started talking. And yesterday, Bessant came out or two days ago said, "Hey, the

the the the Chinese are not being good partners in wartime. They're they're choking off Exports of certain goods." Is he complaining about plastic trinkets going to Walmart or is he complaining about rare earths again? I would bet I'd bet you know dollars to donuts he whether intentionally or unintentionally highlighted the Chinese have recut off rare earths and we've gotten our ceasefire talks. Um, in that world, if I'm Trump, I think re, you know, blockading the blockade makes me look less like I lost and maintains some level of of strength and and and certainly provides some

leverage relative to the US and or excuse me, the EU and UK around their energy supplies. Uh because you know Chinese energy supplies has been flowing through the entire time and apparently you know tanker trackers this morning on on X came out and I I retweeted it cuz it's interesting 2 million VLCC tanker flowed through you know it's transponder on and it's a sanctioned tanker and the Americans didn't touch it. Mhm. Why not? You know and there's where's it going? Why didn't it get interdicted? There's a lot of uncomfortable, you know, there there's a whole

bunch of potential answers to that, but none of them line up really well with the mainstream narrative about what's going on here. So, you know, it's fog of war. But I I don't I I ultimately think the the the blockade of the blockade is not the power move that, you know, some people are asserting that it is. I think it's more, you know, and optics. It's it's putting lipstick on a bit of a pig. Okay. Yeah. Yeah. I mean that people are lots of people are wondering okay so you know a tanker goes through and

they have a deal with Iran and it gets past and it's a Chinese it's headed for China and the US is going to grab it and then the Chinese say you know that's our ship give it back and you know we got to you know go to the brink of war with China over this and that's just trying to think through like two and three moves ahead here how this stuff is going to play out. It's pretty d. So yeah, I could see you're what would make the most sense in terms of the position he's

in is is that yeah, if they maintain officially, yeah, we're blockading the blockade and you got all the MAGA influencers and stuff like, yeah, Trump's flipped it on him, haha. But really, they're letting it through partly to to contain oil prices because it's Yeah, that's on on the issue of um you know, the US doing it. If they had time to go develop it, but right now the US is actually a net importer of crude. It's a net exporter if you include crude and all like refined petroleum products. But strictly speaking in terms of it's

some of it's like we send stuff to Canada to get bitamin and back. But this idea that you know right now they could just flip a switch and the US could just send barrels of crude and replace what's going on over there is is crazy. That just the numbers don't work. No. And that's exactly right. There's a logistical issue there. Um that is that is number one that doesn't make sense. But then again, if you start You get you just raised a point of are we going to go to the brink of war with China,

right? Like China cuts off pharmaceutical ingredients. You met to the US in response, you know, like one of one of my best relationships in China. He's he's American. He's been there 30 years. Brilliant. And he's been very steadfast since Trump got back into office and still is saying this. The Chinese haven't even started playing hard ball yet. They haven't even started. Right. know take away pharmaceutical ingredients. How many millions of Americans are dead in six months when their drugs don't come? Like that's the like these are the things we hear sort of these you know

the ma influencers like hey but it would fix the social security problem. Oh boy. You're going to go there, huh? Yikes. Okay. Well, so this leads into we can move on to other things in here that are also disturbing. By the way, I should probably mention, Luke, just for uh everyone to know, we're recording this on April 15th. So, I don't know exactly when this is going to drop, but in terms of, you know, there's a lot of current events, things are fluid, so in case it looks like we're ignoring something obvious, it might be

because you're hearing this after we recorded. Um, you had a provocative uh phrase. You said that China has us by the short hairs. Uh, can you explain, and you and I both have similar hairstyles, so that's uh relevant to us. Can you explain what you meant by that? Yeah, it it is ultimately if you they've boxed us in in a lot of different ways, right? They've got us on rare earths. They've got us on electrical equipment. They've got us on, You know, when we spend the structure of the system that we've allowed to evolve has

been based on a misapprehension, a fundamental misapprehension of economics in the long run. And this ties into the Austrian, you know, I think I think it ties into the Austrian school pretty well, which is, you know, the the the chimes to whatever you want to call it system. All right. China goes into WTO, we send our factories and jobs to China. China makes stuff, they send it to us, we send them dollars to pay for it, they take the dollars, they recycle them into our capital markets. Capital markets go up, people make more money, and

and financial conditions loosen. They borrow more money, buy more stuff from China, wash peace. It's a virtuous cycle. And it all worked great until ' 08 when we blew up and the Chinese are holding all of our asset, all these all these bonds. And for 40 years, when a crisis such as the one that hit America in '08 hit anywhere else, whether that be Southeast Asia in the late 1990s, whether that be Latin America in the early 90s and the 80s, whether that be Russia in the late '90s, everywhere else, the recipe from the Americans

via the IMF and the World Bank was always the same. Austerity, cut government spending, break up your igopies, break up your big banks, devalue your currency, and u change your political structure, you know, change your change your politicians that led you here. And what did the Americans do when it was their turn in this banking machine? They're like, we're America, our currency, your problem. Well, we're just going to print the money and we're not going to change a thing. Mhm. So, China, sorry, we're just going to devalue your bonds. You know, we're Russia, we're going

to devalue your bonds. Europe, we're going to devalue your bonds, but we're not going to do anything. We're not going to restructure a thing. And that was seen as a financial attack in Beijing and in in Moscow and elsewhere. And those are not my words. Those were words of former CIA operative in 2014. Luke, just to make sure people are So, you're saying like the rounds of QE, for example, it wasn't just Glenn Beck that and me that was freaking out that people in Beijing were Oh, absolutely. The CIA. You had former CIA, senior level

guys, guys that have been in there in there for 25 years going, Beijing is pissed. Mhm. And so the thing about China is Americans want China. They they want they they they uh They they they put their own views of how they would act on China, but that's not how the Chinese react. The Chinese are very passive, aggressive, and patient. Mhm. So, Chinese waited until um the crisis ended and then they said, "All right, we're done buying your bonds in 2013, late 2013." Mhm. Uh they they phrased it nicer, you know, they're going to say,

"Hey, we're not buying more treasures." They said, "It's no longer in Chinese interest to grow FX reserves anymore." It's like, "We're done buying treasuries." Mhm. And they began instead of recycling dollars into treasuries, they started buying copper mines, nickel mines, portaare, other ports around the world, invested in the Panama Canal. They started putting these dollars into hard assets uh because they saw that as the real value. And by virtue of not just that, but then in 2015 they came out and said, you know, we're also in addition to buying up all the stuff, we're also

going to invest in China, China 2025, we want to dominate in these industries of the future in 10 years. And at the time, most Americans and certainly American investors like, oh, they're we're powerful. They're not idiots. Well, by ch by 2021, people like, whoa, they've done it. They're they're being very competitive. And so now there's really only a few high-end industries where they are not dominant, you know, Semiconductors, few other things. And so by virtue of this longun investment in in dominance, I mean, including subsidies. Look, people like, oh, they subsidize their industry. Of course

they do. They don't play fair. Of course not. But my whole ongoing point for this last 15 years is like they're subsidizing their industry. We subsidize our industry. We subsidized our bond market. 08 right with QE we subsidized wars of choice in the Middle East to the tune of 8 to10 12 trillion you know that spent what $5 trillion in Afghanistan or $3 trillion in Afghanistan being there for 20 years to take Afghanistan from the Taliban and then give it back to the Taliban like that is literally like they should have just handed out like

coke and hookers to like the entire country lit the money on fire it would have at least been a fun party for America as opposed to what we did That's how much we wasted the money. And so while we were wasting tens of trillions of dollars on this stuff, the Chinese were investing in infrastructure and and and setting up the dominant industries. And so that brings us to today of why do they have us by the shorthairs because they were patient. And I wouldn't say they invested everything smart, but the bar is just so low.

They invested, you know, they didn't go to war in stupid wars of choice where they literally got nothing out of it. uh and completely wasted the money. You know, They've got cities and rails and factories and and they own mine, right? So, now we're into this situation where the US has to either completely blow up the rules-based global order, right? Because now China, you know, China took American dollars and said, "We're going to buy a stake in in the Panama Canal, fair and square. That's the rules-based global era." They had the dollars. The dollar is

the reserve currency. It's accepted everywhere. They bought their in they made the investments there. They put the cranes up and made in China blah blah blah. And then the Americans are like, "No, that's not the rules." Like, wait, you use dollars, right? So, they now have us in this position where, you know, if they want to go to Porta, if they want to go to Africa and start seizing copper mines or whatever they're, you know, they go down to Venezuela. You know, Chinese made a whole bunch of investments in Venezuela fair and square with dollars.

Americans went down and said, "No, that's the that's why they have us by the shortorthairs, which is America has to blow up their the rules-based global order. They have to discredit it by their actions, which they're doing in order to basically undo the folly of the last 20 to 25 years, which is we don't need to produce stuff. We can just print dollars. We can just we can just focus on paper financial assets. But the problem is you can't fight wars with paper assets. You can't you are not a sovereign country if you don't make

your Own defense base. It's gotten to the point where a quorum of the of the US military u has its components made in China which is a problem if you're pointing you're trying hey China I need you to speed up the rate at which you're making missiles for me to point at you. Right. And by the way, buy our bonds to finance the missiles that you're making so we can point them at you. That's how they have it by the short air. Uh yes, a lot a lot there to unpack. I I really like that

because there is there does seem to be this tension in, you know, right-wing free market austrol libertarian circles where holding up the Chinese is like this, you know, lurking even not a threat but just this this force like in as a foil to like our bumbling, you know, people what we're doing on our end, but yet underlying it, you know, I have some people say, but are what are you saying that centrally planned economies work if you just do it right? And I but I think you kind of hit the nail on the head that

no I I think yeah if the United States actually were you know a limited government obeyed the constitutions and so forth like yeah we'd be crushing and then there wouldn't be any animosity anyway they'd have no reason just like Switzerland's not worried about the threat from China like why you know that's fine they engage in commerce. So I I think that you know that that's the that for various reasons yeah given the intervention that the Chinese have in their economy the government and what we're doing in ours that theirs is is more farsighted and this

might be goofy Luke tell me I was watching like this is years ago it was Some movie it was like a crossover it was like Jackie Chan and Arnold Schwarzenegger but it was like co-produced in China or something and it was like trying to cater to their audience in the beginning of the movie where they're given the backstory so you understand like where the people are coming from was ridiculously long. It was like 15 minute and I was like an American audience wouldn't sit through this but the Chinese no they're willing to they're patient. They're

like, "Oh, okay. That's the background of these people now. I understand the story." Okay. So, it again, it's probably a goofy thing. But it really was just telling me that, yeah, the American attention span and like we have our democratic elections and you know, you get there and you got two years till the midterms, you got to do something big. Whereas the Chinese can just kind of sit back and let America squander everything they spent 50 years building. No, that's sadly that's how it's gone for the last 25 years. And you know there there is

definitely an action a foot to try to fix that. The challenge for me is that it looked like it was moving in that direction until this war hit. And there's sort of this view like well this is going to do it right like the we're going to get you know we're going to use war to reshore and re-industrialize. And you go, are you familiar with any of the wars we've ever fought? Any any you know, There's a reason why Sunn Sue whatever 2,000 years ago said there is no instance of a nation benefiting from prolonged

warfare. Like what what how there there is no greater misallocation of resources than warfare, right? You you borrow money to buy build a bomb, you drop it once, it goes boom, and then you still owe the debt and the bomb's gone. And it probably reduced productive capacity somewhere on the planet, you know, killing. No, that's right. So like literally when you look at that way, I mean it it is it is it's it's like it's, you know, it's the exact opposite of what you're trying to do. what we should be doing is hiding and biting

as to use the Chinese term and and and in spending all this money we're spending on war on domestic infrastructure taking the hit to the bond market take right if you're going to if you're going to mess with free markets which they already are for this war anyway like let's mess with them for a productive reason let's let's cap bond if we got to cap bond yields because we've run up so much debt we can't afford to really do anything without the bond market revoling you're going to have to cap it for some reason fine

cap it for something productive, right? Have the Fed cap the bond market while we rebuild our industrial base. Great. That'll work. But, you know, for this, this is just the very antithesis of that kind of, you know, you're you're you're messing with free markets for the worst for the least productive thing you can Possibly do in economics. It hasn't worked over and over and over the last 50, 60, 70 years. Yeah. Uh so Luke, can you give your thoughts on the the fate of the US dollar as the global reserve currency? is just to some

background on where I'm coming from that with the rounds of QE and then certainly once um you know the war in Ukraine broke out and then the US came in with you know penalizing people via the swift system and whatnot that there were all these things that just kept piling up where and I was making the case that various parties around the world even if they don't have any inherent animosity with the United States just thinking there's a they can just flip a switch and exclude us from global commerce like that's way too much of

a club that they have and so looking for alternatives, but a lot of people over the years just there there's nowhere else to go. No, where what are you going to do? You go to the the Chinese yuan or something? What are you going to do? Um, so anyway, and my thought was with the rise of stable coins, for example, as as the financial sector revamps to be able to have digital based tokens, currencies, call them what you will, yeah, they can do it on a, you know, uh, US-based ones initially, but then once you

have that system up and running, it's easy to have a pull down menu and switch to a stable coin that's tied to a bar of gold, not one US dollar. So anyway, I know I'm throwing a lot at you here, but what are your thoughts on all that stuff? No. Yeah, I think it's it's I think you're exactly right that the the sanctions uh etc. have undermined Um have undermined the dollar system in a major way. Um and in a way that its propon its biggest proponents downplay wrongfully so in my opinion. Um, when you

go back to 2012 and we kicked you around out of the Swift system, to me that was like using an elephant gun to kill a fly. Mhm. Um, because, you know, had we not done that at the time, we would have still had that surprise in our bag. And when you look at how China reacted to that, you know, here too, there is just not the appreciation. You rarely hear this. The Chinese were scared to death. The Russians were scared to death. like, "Oh my god, they could hyperinflate our economy overnight by doing this." By

2015, China had the CIP, China International Payment System up and running. Second set of rails alongside Swift. Um volumes on that have risen massively. Um I think it's doing, you know, what is it? 45 trillion yuan. So, you know, $7 trillion a year now through there. Um, they've had other and and you know, as a friend of mine said, it's not just like so much what the Chinese do, they don't invent it, but when they make their own version of it, it's better than yours. Mhm. And that's what they do with CIS. So, It's not

just a messaging system. It is also it's messaging, it's settlement, it's it's everything. And so, they've set up this entire, you know, and then they set up yuan offshore yuan clearing banks in every major gold hub in the world. You look around, there's an offshore clearing bank in London, Switzerland, Dubai, Singapore, uh, Hong Kong. And so they've they the rails are already all there. They've already have, you know, e, you know, the EUAN's been being tested. Guess where they tested at first in oil markets and gold markets. Um, the the project embridge with the BIS

has been discussed, some of the oil guys. You know, to me, I think there's maybe something there. I don't know. But I think your point is is very very valid, which that is wildly underappreciated in dollar circles, which is they can absolutely just hit a switch. There's no, you know, there's no more kicking them out. They've got all the factories. They're short energy uh and food on some level. Uh but they're partnered with Russia and we've angered the Russians as well. I mean, to me, the history books will not be kind about the weaponization of

the dollar, unless the goal was getting rid of the dollar system. Um, and pushing Russia and China together. I mean, how foolish from a strategic standpoint. Uh, And so, yeah, I think ultimately when I look at dollar reserve status, there's a lot of debate around what that means. And to me I any debate anytimes people want to talk to me about that I first want to define that what what what are we discussing here um are we discussing FX reserves because if we're the the reser you know the actual reserving of dollars which is in

my opinion what matter right the US dollar is the reserve currency is is the it is the currency that is most reserved well gold just supplanted treasuries as the as the biggest reserve asset of global central banks if you would, you know, there was an article in uh Bloomberg uh last week or two weeks ago. If you make adjustments based on um some, you know, sort of it's an adjusted figure, so it's not a gross figure. Um as it stands now, the dollar is still bigger slightly than gold in in global FX reserves at $6,000

gold. Gold's bigger than the dollar. So, it's not that far much higher than here, right? uh but on an adjusted basis gold has already supplanted um has already supplanted the uh the dollar in FX reserves and so will dollar reserve status what will happen to it well it's already being supplanted by gold like nobody wants to hold you on people say oh who's going to hold you on of course they're not going to hold you on number one back up anytime someone says to you would you hold on back up and ask them first in

order to reserve a currency you have to run a surplus against that currency for Them to pay you in that currency. Who runs a surplus against yuan? Nobody. Except for the except for the Gulf Arabs and Russia sometimes. Every now and then the South Koreans do and semiconductors. Okay. So that's the only way you could even get you starters. But then they've set up this system of it's our currency and it's our problem which is if you do end up you're a Gulf Arab, if you're a Russian, you end up with Yuan payment for your

oil and commodities. What can you do with that? Well, turns out they're the factory of the world. So you there's a whole lot of really good stuff you could buy from them in yuan. And then if you have any yuan left over, take it to Switzerland, take it to London, take it to Dubai, take it to Hong Kong, and exchange it for gold at any of these offshore clearing banks. And you want to take the gold home with you, great, take it home with you. You want to leave it in Shanghai, great. You want to

leave it in Hong Kong, great. You want to leave it in Switzerland, great. And so what we're watching in real time is the supplanting of of treasuries as as premier collateral by gold for this parallel system. And you know when you know I think the dollar will always be the primary you know primary used currency number one because we're running the biggest deficits. Number two, it's a resort. There's But the dollar, you know, when you talk about usage, oh, it's 90% dominant. Great. You know what? In Chuck-E-Cheese, you know, the tokens are are 100% Chuck-E-Cheese

tokens in Chuck-E-Cheese. And the world, you know, The dollar is based on where we are, the world is Chuck-E-Cheese and and and you know, the dollars the Chuck-E-Cheese tokens, but tell your kid, hey, just, you know, store all your money in those those tokens. No, they want they want to win tickets and they want to go to the prize counter, right? And China is the prize counter. That's that's where the real value is. And I think what's going to happen is, you know, we're going to push this thing too far in Iran or elsewhere. And

and China's just going to go, look, switch is on. Boom. We're, you know, you want to cut off our oil? Great. We're now demanding you on for rare earth. We're now demanding you on for the components from XYZ. Well, h how's anybody going to get you on? We saw this question around Iran in the in Hormuz around well people, you know, when they demanded yuan for payment, people that's stupid. There's there's, you know, China doesn't run the surplus or the deficits to supply the yuan. Exactly. That's what the Chinese are doing. How do you get

yuan? It's very very simple. You sell dollars, you buy gold, you take the gold to the Chinese, you sell the gold to the Chinese for yuan, you take your yuan, you go to the Iranians and say, "Here's here's yuan, my oil." So when you know, if we push this too far with China and they go, "We're done here." You know, pay us in yuan like we did to the Brits, by the way, in World War II, right? When the Brits needed money for us or needed weapons from us in 1940, reserve currency, 150 year history,

great relationship. What did we Say to the Brits? Mm-m. No, none of that sterling toilet paper. reserve currency, toilet paper, we want dollars or we want gold or you don't get your ships, you don't get your bullets. Same thing's gonna happen. It's just a matter of time. What what's the trigger? And so the Chinese are going to go, you want or it doesn't fail. Okay, what do we have to do? We got to go buy a bunch of gold with dollars. Print dollars, buy gold with printed dollars. Take the dollars to China or take the

gold to China, excuse me, sell gold to China, obtain the yuan. Here's your money. And so it's very interesting to me in the light of all of this. People like, "Oh, Luke, that is so far-fetched." Guess what the number one export of the United States has been for four of the past 5 months as the US trade deficit has narrowed to the celebration of all the, you know, of of the Trump administration, nonmonetary gold. For the last 5 months, the United States, the mighty United States's single biggest export has been non-monetary gold. Bigger than airplanes,

bigger than pharmaceutical preparations, bigger than the automotive industry, bigger. Where is it all going? China, Hong Kong, Switzerland, some to the Gulf countries. Where's it going from Switzerland? The Swiss are very Precise with their records. Guess guess where guess who Switzerland's biggest export market has been over these past five months? China, Hong Kong, some of the oil countries. Like I think we've we're I think China may have already flipped this switch on some level at least for certain goods, right? I think they're already saying we'll send you all the rare earth you want for gold.

None of this toilet paper dollar crap. None of these treasuries that you print at will. Forget that. Send us gold. And I think we've been forced to, you know, because what lines up with five months ago, that's when Bessant and Trump met with the Chinese in South Korea. Oh, by the way, the fifth month the it was only the second biggest export. So anyway, that's a long-winded answer. So like I I I think the dollar reserve, you know, is the dollar going to still be the reserve currency? Gold's already supplanting it as a reserve asset.

Um and I think that's going to continue and everything we're doing is going to keep pushing us in that direction. Okay. Yeah. Great. Um I know I just have you a few more minutes here. Are you able to give a succinct explanation? I I saw you uh you were on Tucker's show and the the headline, you know, the clickbait was the CIA doesn't want you owning gold. Can you uh give us the the brief version of that thesis? Yeah. You know, it's hard sometimes, you know, you you you know, you don't get to choose the

titles, especially that's what I think. I I don't mean to put you in an unfair spot, but Yeah. Yeah. Yeah. No. Yeah. No, the conversation was was simply uh because it was a very positive uh gold conversation and and um you know and and by the way it was at 2,700 bucks on gold, right? So it's it's almost doubled since then. Um and that wasn't that long ago. It was a year ago. Uh so yeah it was really the conversation was just going through the history of um the parts of the of of of you

know kind of how we got you know what is gold? How did it you know come to be the reserve asset? Why is it a reserve asset? Why did the US move away from it? And then what are the different interests that you know there are some people who want gold back in the system within the US. There are some who do not. And you know, the people that want it back in the system tend to be in favor of things like reshoring and you smaller government and lower deficits and and the people that don't

want it back in the system as a reserve asset tend to want financialization and unlimited debt and unlimited wars and unlimited entitlements and uh that's really the fundamental you know gold is a pivot right as as as Alan Greenspan famously said before you know going to the dark side some would say in becoming a central banker, right, that it's the shabby the shabby secret of status is that gold limits gold limits their their power. Okay, very good. So, yeah, people if they want to see that elaboration, you can I'll we'll link to that in the

show notes page. Well, I'll I'll let you go Here. So, folks, my guest has been Luke Roman. Luke, um I'm sure people have been fascinated by your commentary. Where can they go to hear more of you? Oh, thank you. Yeah. Uh, fft-lc.com for more information about our uh, mass market and institutional research products. And if they are on X, they can follow me, follow me, excuse me, at Luke Groman, Lu K- R-N. Okay. Thanks so much for your time, Luke. Thanks for having me on. And thank you everybody for tuning in. We'll see you next

time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org. Heat. Heat.