Thread by @gladstein

1/ Thread with some highlights from a superb interview with Zoltan Pozsar and @YraHarris on Bretton Woods III and the macroeconomic landscape for the coming decade, where Z says the world will begin to move seriously away from dollar hegemony

2/ Zoltan has laid out his "Bretton Woods III" thesis in a series of recent articles, link to the latest here

TLDR:

From 1944-1971 was Bretton Woods I, where the world saved in dollars pegged to gold

plus2.credit-suisse.com/shorturlpdf.ht…

3/ From 1971 - 2022 was Bretton Woods II, where the world saved in dollars secured by the petrodollar and eurodollar systems (energy pricing and financial assets)

But now begins Bretton Woods III, where foreign central banks will diversify their savings and commodity pricing

4/ “As we shift away from the dollar’s role as reserve currency, what will be the impact on US interest rates?”

Zoltan: "The impact will not be good"

He sees a coming decade of high inflation, higher interest rates, and high commodity prices

5/ It's worth remembering, as he points out, that the G7 triggered Bretton Woods III by freezing Russia's central bank assets abroad in places like Germany and Japan.

This, he says, will amplify a trend of foreign CBs dishoarding US debt + loading up on gold and commodity stocks

6/ He gives an example of how JPMorgan might give a loan to Glencore, creating a deposit with which Glencore would pay the Saudis. Then the Saudis might take the petrodollar earnings and buy treasuries

"When you break that loop," Z says, "you create a demand problem" for US debt

7/ Z describes both a stock problem (less central bank savings in US debt) and a flow problem (less payments denominated in dollars) that will create "inevitable, but not imminent" systemic change

These trends have inexorably begun, but the world may not feel it for a few years

8/ W/ respect to US interest rates, Z says "money markets are all about the marginal demand and creation of cash," and when the marginal buyer is now the American central bank, "that's obviously going to have an impact on the USD"

He says this about as diplomatically as possible

9/ He sees "commodity inequality replacing income equality" as the big discussion of the coming decade.

"In a world like this," he says, "it makes no sense to accumulate paper wealth, which is just going to be eroded by inflation"

10/ In addition to dollar liability wealth shrinking away, he also points to "confiscation risk if you come into conflict with another great power"

Something that we've already seen with Russia and Afghanistan

11/ For foreign central banks, he says that diversifying away from the US-debt based system is "imperative" in this new era

Gold is part of the answer, he says, as well as commodity stockpiles

China, for example, has 50% of the global wheat stockpile, while the US has only 6%

12/ He calls the narrative "nonsense" that other countries won't save in Chinese yuan for political risk reasons.

He expects more and more countries to diversify into both stock and flow in yuan over time

13/ "China has been laying the groundwork for the internationalization of the renminbi"

But, he says, "it's always wars that become the catalyst for one currency to grow in importance and for one to decline"

14/ He says this outlook is bad for the West, if it's going to need uranium and steel and cement and rare metals to make the wind and nuclear power that it wants for energy sovereignty

15/ In the BWIII system, he says, "governments will be inelastic spenders"

They will be forced to deficit-finance to achieve national security and energy security goals

He expects more QE but says US rates will rise no matter what

16/ His advice?

Quite simply:

Buy gold and go short euro, long RMB

17/ In his first BWIII paper, Z says that "after this war is over, “money” will never be the same again…and Bitcoin (if it still exists then) will probably benefit"

He doesn't mention Bitcoin in the latest interview, but says something very interesting

plus2.credit-suisse.com/shorturlpdf.ht…

18/ “Currencies are not born reserve currencies, they grow up to be reserve currencies," Z says

This is a theory also advanced by @allenf32 in his essay "Wittgenstein's Money," which describes what it would look like if Bitcoin did monetize from zero

allenfarrington.medium.com/wittgensteins-…

19/ So while Z has amazing analysis here, I'd disagree slightly w/ the conclusion

Yes, there will be more investment in RMB/gold in coming years, but ultimately IMO we're heading for a Bitcoin Standard

But I look forward to following Z's analysis as we go down that journey :)

20/ and H/T to @LynAldenContact for sharing this excellent interview!