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Is there common ground the among proponents of gold and bitcoin? John Flaherty and CEO Keith Weiner take on that question in this episode.

They also discuss:

• • What bitcoin has been able to accomplish that gold hasn’t
  • What gold and bitcoin have in common
  • A billionaire’s comments regarding a bitcoin bubble
  • Why ‘engineered money’ may give people pause

Episode Transcript

John Flaherty: Hello and welcome again to The Gold Exchange podcast. I’m John Flaherty. I’m here with Keith Weiner, founder and CEO of Monetary Metals.

Today, we’re going to talk about bitcoin. Of course, bitcoin has been on an absolute tear recently, going from about $10,000 mark back in late summer up to north of $40,000 per coin just a few weeks ago. This price action has obviously attracted a lot of attention, especially in the alternative investment space where gold happens to live. Keith has been a guest commentator on a spate of recent podcasts and other interviews lately on this subject.

We wanted to dedicate a podcast, summarize his core thoughts on the subject, and compare and contrast bitcoin with gold.

Keith, it seems like there is a shared core ethos among proponents of both gold and bitcoin. They observe the astonishing expansion of central bank balance sheets across the world. They know in their bones this is not sustainable and that it will lead to some form of monetary sea change.

They feel that what will emerge in the aftermath will have to be something outside of government control. Both bitcoin and gold seem to be the two leading candidates that seem to check all the right boxes.

Keith, we’d love to get your thoughts on this.

Keith Weiner: You know, in a way, it’s incredible that for years, decades really, Mises and those who followed after tried to get people interested in what used to be called the currency question, or the currency debate. Like with so many other things in our culture, there’s almost a non-ideological, anti-ideological thinking.

You’re absolutely right that what central banks have done and continue to do, in collusion with, in the Treasury Department. So, one side is spending and the other side is monetizing the debt. What they are doing is just off the charts, gobsmackingly, stupefyingly amazing. And I don’t mean any of that in the good sense.

The gold movement and the movement for sound and honest money has not necessarily attracted huge numbers of people to even ask the question. Forget the answer. First thing is asking the question. And we as a movement have not built any kind of mainstream following to even ask that question.

But bitcoin has. It has brought millions, if not tens of millions, of people to look at this with fresh eyes for the first time and say, is there is there anything bad that’s going to come of what central banks are doing?

And of course, there’s a whole new wave of monetary cranks. I call them cargo cultists, that are pushing Modern Monetary Theory. And the bitcoiners have found what they think is the answer. And obviously we think gold is the answer. But at least now people are asking the question and can start to look at the problems that are coming from the central bank and what it’s doing.

John: So you often hear bitcoin referred to as the new gold. A new technology for a new monetary age. What would you say are the major differences between this archaic technology, as it were, and this new hip technology?

Keith: So for thousands of years, people understood the need for a final payment that you can take home when you didn’t want to leave your marbles in the market sandbox. And this is a non-trivial problem.

An example that I’ve used in my writings on and off over the years: if you choose a perishable food like fish, sure, you can take the fish home. But then what you find is obviously, it’s perishable. So, before it perishes, you have to trade it for the next thing.

And trading in and out of fish has a big loss. There is a wide bid-ask spread on fish. In part because it’s perishable. So over a period market process that we theorize must have occurred over thousands of years of largely prehistory, gold emerges as the thing that is, in Carl Menger’s terms, (the founder of the Austrian School) gold emerges as the thing that has the most marketability, which means the narrowest bid-ask spread.

Everybody understood that. The problem is sometimes people need a means of taking their marbles home and that this metaphysical thing, where physical beings live in a physical world, marbles being an analogy here, but there’s a need to take some physical thing, take delivery of it and walk away from a market that people, if they feel the market has gone off the rails generally, meaning the risk is too high or the return is too low for the risk, taking something physical home.

And bitcoin is saying that thing need not be physical. But the problem with something not being physical is that it still somehow, some way ends up being a credit to some third party. Now, not a debt in the sense, there is no debtor in bitcoin that owes you it. But there’s a ledger and a blockchain and bitcoin miners and whole infrastructure that if one were to feel that that was unsound in some way or the risk was too high or one didn’t like that the bitcoin miners tended to be in China because there’s really cheap subsidized electricity there or whatever the reasons, there is no way to take one’s bitcoin home.

I mean, one can print out QR code or something like that to represent the bitcoin. But the bitcoin’s identity is on the blockchain and what one has printed out is merely the key to accessing that blockchain. And so I think that’s the key difference.

John: But what if the whole world agreed or there was this massive paradigm shift that it was safe, that it was impenetrable, that everyone agreed this was digital money, as you’ve defined it in prior episodes? Is that the only thing standing in its way of competing with with gold?

Keith: What if everybody agreed? What if the ocean were boiling? What an amazing amount of energy that we’d be able to harness from all that water at 100 degrees centigrade. What if everybody in the planet flew to New York City and got onto the island of Manhattan, which is a mile and a half by 12 miles or something like that? And on one, two, three, everybody agreed to jump.

Could they not knock Earth in its orbit? I respectfully submit that any question that begins, what if all seven billion people on the planet agreed is starting off on the wrong foot with a question of that sort.

John: So back to bitcoin as money…is there any way that bitcoin could ever be considered money or does it, as you suggest, this fatal flaw of not operating on the physical plane? Can it never be considered a candidate because of that?

Keith: Well, it’s that it’s not a physical thing and therefore it’s a credit on the ledger. And so one theme of mine is if you take a look at the evolution of currency… Let’s take America because in other countries there were some deviations from this, but largely they all follow the same basic trajectory. Which is first we have actual gold chunks of metal coins and then somewhat unique to the Anglosphere…and the reason why the U.K. becomes the wealthiest European country is because they have the rule of law that made people feel comfortable enough to deposit their gold in the bank, which is a credit relationship.

In the continent, of course, there were banks as well, but people didn’t feel as comfortable that the rule of law would assure them the return of that gold when they wanted it. And if you don’t trust the deposit-taking institution, obviously you’re not going to deposit your gold. But in the U.K., they had that. So people deposit their gold and they get a piece of paper that says this is the receipt. And under the terms of this piece of paper, you can get your gold back.

And so the piece of paper is often called money. Most people today would call that money. In fact, I’ve had arguments – even with Austrian schoolers – that that piece of paper is deemed to be money. And I’ve said to them, if the word for the piece of paper is money, picture now, you’re going to the bank, you go up to the teller window and you slide that piece of paper across the counter and you say, you know, I want the gold coin.

If the word for the piece of paper is money, there’s a question that’s hanging in the air, screaming out to be answered. And every once in a while, each era, I think there’s one or two questions that are like that. In Copernicus’s era, the question was, if everything is orbiting around the Earth, then how do you explain the so-called retrograde motion that the planets appear to go forward in the orbits and then backwards for a bit before going forwards again and then backwards and then forwards?

How do you explain that? And he said the only explanation is they’re not going around the earth, they’re actually going around the sun, and we are, too. And when you look at it that way, things become much simpler and much easier. So the question today is, if the word for the paper is money, what is the word for the gold coin for which the paper redeems?

When I said this in my talk at the annual Austrian Economics Conference at University Juan Carlos in Madrid, I said, you know, you don’t owe me an answer. I’m just some American who’s come here to ask annoying questions. But you owe yourselves an answer and you owe yourself a rigorous answer. If that paper is money, then, well, number one, what the heck is the purpose of redeeming it in gold? Number two, what’s the word for the thing for which it redeems? Is there not a distinction between the paper which represents something and the thing which is represented and which is actually redeemable, redeemed when the paper was handed in?

So of course, in 1800, shortly after America was founded, I don’t think anybody would have dwelled on this question. They might have said, well yeah, the gold is the money, the paper is the bank note, note being a word for credit. But then you fast forward and there’s been a number of adulterations imposed by law, imposed by government force, since 1792 through today. Obviously, or most obvious, is both President Roosevelt in 1933 and Nixon in 1971 taking further steps to divorce the currency from gold.

And so after 1933, American citizens could not exercise their right to redeem the paper to get the gold back. And after 1971, foreign governments and foreign central banks couldn’t do it either. And so we just accept that, OK, now money means something irredeemable. But the fact that it’s not redeemable doesn’t change the fact that it’s currency, that it’s a credit of the central bank.

What bitcoin has done is they’ve gone one step further and said not only is it not redeemable, there isn’t really a debtor either. It’s just a record on the ledger. And I argue that that ledger is a record of liabilities, which are the assets of those who hold it.

But the liabilities of the system and the fact that there is no systemic issuer, per se, and the fact that it’s not redeemable doesn’t change the fact that they’re liabilities. And so, the deeper answer to the earlier question is there’s a time when somebody doesn’t want to hold another party’s liability. That isn’t everybody and it isn’t every day. But it’s important. And when it’s important, it’s important.

John: There’s been a lot of jawboning recently about money laundering concerns with bitcoin, most notably Christine Lagarde and Janet Yellen. I think gold owners have these same types of concerns. Any thoughts about the ease by which governments might throw cold water on the bitcoin party versus the gold party.

Keith: First of all, I don’t think it’s the gold owners that are concerned about so-called money laundering. I think it’s the government and therefore all of the financial companies that have to answer to the government for regulatory compliance.

Somehow the whole world has become inverted. It used to be that if someone was a criminal, it was the government’s job to catch the criminal. So long as you weren’t aiding and abetting, which I think is an objective standard. If you didn’t harbor, I think is another word that’s used, and invite the criminal into your house and give him a place to hide while the police ran by, you didn’t have anything to worry about. But somehow we’ve inverted all of that.

And today private companies are effectively deputized. That is, they’re supposed to help a government catch the criminals. But not only that, it’s at their cost – the government doesn’t pay these deputies – and at their liability. If they fail to catch a criminal, the government can hold them either financially or potentially criminally liable. And not only are they supposed to catch criminals, in other words, someone who’s actually committed a crime, they’re supposed to catch people before…they’re actually supposed to prevent somebody from committing a crime.

So they’re supposed to catch pre-crime, essentially. And, the government keeps broadening the definition of a crime. So, if somebody takes a plant and dries it out and smokes it, that’s now, that’s a criminal act.

Financial businesses are responsible for somehow preventing these bad plant smokers and others from doing whatever it is they want to do. And so businesses that are caught up in all this regulation are eager to prove to the government that they’re not enabling, or not failing to catch these bad actors, that all of this anti-money laundering regulation is enacted and becomes more and more aggressive as time passes.

And, of course, the people that want to smoke plants, or sell plants to others who want to smoke it, and all kinds of other things become more and more creative in concealing their activities and what currencies they prefer to use and so forth.

One final perversity…if those people concoct some sort of scheme to use dollars and conventional dollar banks in the process of committing their dirty plant smoking deeds, then everyone just says, oh, well, criminals are being clever.

But if those if those people somehow use bitcoin or gold as part of their payment mechanism or part of their process, then suddenly it’s bitcoin or gold that a lot of people are ready, willing and able to leap to the conclusion that these things are intrinsically enablers for criminals. And then they call for whatever it is they call for, probably bitcoin, much more than gold. bitcoin, part of its basic proposition, promises anonymity and irreversibility, which isn’t really true in gold.

I mean, obviously, if you hand a gold coin to somebody, that would be anonymous and irreversible. If you did it through some kind of financial intermediary, that wouldn’t. But in the case of bitcoin, it is. And so it’s easy for regulators to say, well, the bitcoin network is designed to enable this criminal activity. And so then they can self-righteously argue for further controls or restrictions or whatever it is that they want to do.

John: So, as we mentioned, bitcoin has had this meteoric rise. It’s since pulled back about 25% off of its highs of a few weeks ago. Do you expect this trend of volatility to continue as bitcoin potentially becomes more widely owned and adopted? Same question for gold.

Keith: Well, I would say gold does not have anywhere near that kind of volatility. And in a certain sense, I would say that as the dollar goes off the rails, everything becomes more volatile because one day there’s the rising desperation of everybody to get their hands on dollars. Not as a trade, but because everybody is in debt. And if you owe a million dollars and you don’t make the payment when it’s due, then the bank takes your farm, your business, your house, whatever.

So one day everyone is desperately trying to get their hands on dollars, the next day, traders and speculators are trying to sell dollars with two hands in order to buy whatever they think is the safe haven. And so asset prices gyrate all over the place. And I just referenced my previous answer about what if everybody agreed. But of course, the market shows they don’t.

John: Keith, a billionaire institutional investor, was recently asked, is bitcoin in a bubble? His paraphrased response went something like this: Any new revolutionary technology, be it the wheel, electricity, automobiles, the internet, is going to appear as a bubble as it becomes universally adopted. And until you consider bitcoin as “engineered money” on an engineered monetary network, you’re not going to fully understand the trend. How do you respond to this line of thinking and or explanation?

Keith: Well, the first part is the concept of bubble. If you were to look at the automobile and say, well, the automobile obviously succeeded, but if you were to pick any of the – and I don’t know how many of the companies in 1899 or 1901 were publicly traded in that business. But chances are, if you would have made a bet on one automobile stock in 1900, that wouldn’t necessarily have been the company that ultimately succeeded.

So even if cryptocurrencies as such are the wave of the future, that isn’t necessarily so for bitcoin. If you read the arguments between bitcoin and ethereum and some of the other leading contenders, there isn’t even necessarily agreement in the cryptocurrency world as to which features are necessary and proper. So, does bitcoin have all the necessary and proper features, I think remains to be seen. I’ve argued a number of shortfalls in some articles. Number two, the concept of “engineered” should give people pause.

That is, there’s a central planner. In this case it’s Satoshi. Now, it’s not a central planner in the case of fiat. I mean, there’s no government that forces this, but it’s a designed system where somebody, Satoshi, whoever he or they may be, has decided – and I use a Capital D for deciders – that decide that the right number is 21 million. And for that matter, that there is a right number and that the right number is not to vary, that the bitcoin is going to be produced at an asymptotically slowing rate until it asymptotically approaches 21 million, and then that’s it. Production shuts off.

So somebody decided that production should shut off. Is that the right engineering decision? And then secondly, somebody decided 21 million is the right number. Is that actually true? Is that the right number? Does the right number vary as it does with gold? And so I would say that statement is packed full of assumptions that should be checked.

John: I’d like to wrap up by returning to the first question. It seems that bitcoin and gold have a lot in common. People sense that there is something rotten in the state of Denmark and are anxious to, at a minimum, hedge against currency debasement. Others in both camps, bitcoin and gold, want to speculate their way to prosperity.

But there are those in both camps that truly believe that buying these assets will truly move the world to a better place. What would you say to this third group? And why is gold in their best interest or their best option if that is their true motive?

Keith: Well, I guess the easier part of the question, first, gold was not engineered to be what it is. It emerged in a market process over thousands of years and has been money for thousands of years. To owning gold, it has the confidence that comes with something that is – and I know it’s a cliche – but has stood the test of time.

The main part of the question…is it helping the world move forward to something to buy it? And I know this premise is often touted by gold people, that it’s just a matter of gold hitting a certain price and then it will circulate as money. And I’ve argued in the gold world long before this argument came up in crypto, that, no, it’s not a matter of price. People could have been making that argument and probably were when gold was under three hundred dollars an ounce.

And at that time, it would have been almost impossible for them to conceive of gold getting to $2000 an ounce, which it nearly did in 2011, and which it did do in 2020. So gold, if one measured in dollars, gold went up enormously from those days until now, no closer to circulation than ever before. It’s like a desert mirage.

You see this thing that looks like water and then you travel for days or weeks and you finally get to the spot that you had originally thought had the water. And as you look forward to the horizon, it seems equally far off. It is not a matter of price.

In order for something to circulate as currency, there’s a certain set of incentives need to be in place. And the fact that the prevailing market price is X or Y or Z isn’t one of those incentives. And so it’s not a matter of any price. It doesn’t circulate a few thousand dollars an ounce. We now know that for certain.

We’ve now proven that at $2000 there’s no more force for circulation than at $250 or whatever it was back then. And it won’t be true, it won’t happen at $20,000 either or $200,000.

If anything, that would increase the reluctance, especially if it happened quickly, of those who owned gold to bring it out and use it for anything, because of course there’s capital gains tax. So whatever the difference is between the price you paid, the price you’re letting it go at, federal government’s going to take 28% of that, and then your state government may take another pretty hefty bite of that.

And so it’s going to take something else other than “its price has gone up” or that its price is currently rising. So there’s high price is one argument and rising, as in a chronically price rising process, both of which are nothing to do with whether gold will circulate or not. And I’ve argued the answer is: it’s the interest rate. There has to be a way for everybody who wants to, to deposit their gold or their bitcoin and get interest on it. And when that condition is true, then bitcoin or gold could circulate and be used to settle transactions, including financing businesses and extinguishing the debt created in that financing.

Of course, Monetary Metals, that’s our business, to pay interest on gold, using gold to finance something productive. And I’ve predicted that that cannot be done in bitcoin. It’s too unstable. And the very predictions of the proponents of bitcoin prove why no business in their right mind should ever borrow bitcoin. The proponents say bitcoin is going to go up from $40,000 to $200,000 or a million dollars.

If that’s so, why would I borrow it? Isn’t that just a recipe for bankruptcy? My debt is going to go up by 20 times or 50 times? So if I borrow today and I have a monthly payment of ten thousand dollars, you’re saying my monthly payments are going to go up to two hundred thousand or a million? Why would I do that? And so that’s, I suppose, another key distinction between gold and bitcoin. Gold today is being used to finance productive activities and bitcoin cannot be used for that.

John: Well, that’s all the time we have today. Keith, as usual, we appreciate your thoughtful insights. Thank you for joining us on The Gold Exchange.

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