The End of the Petrodollar | Luke Gromen

most people are still assuming dollar equals oil they're they're assuming the denominator is the same and I think they're different and not even I think I know they're different I can show it to you on the charts S&P 500 Total return since January 1 2020 in dollars up 75% in Gold up 15% in Bitcoin down 81% that CH that's telling you the denominators are wildly different

welcome to bankas where today we're exploring the frontier of energy Empires and maybe the end of the Petro dollar O wa this is Ryan Sean Adams and I'm here with David Hoffman and as usual we are here to help you become more bankless energy is the base layer of money that's how our guest Luke groman puts it in today's episode we look at money and Empire through the lens of energy costs and we see why Luke says the price of oil is about to force a massive monetary

system change David I I really think this is um essential learning for people on the bank list Journey we haven't often unpacked an episode that looked at money primarily through the ends of uh through through the lens of energy which is what we're doing in today's episode and I walked away from this kind of convinced that you don't really understand money until you start understanding energy markets and all of the forces surrounding them one of my favorite parts of this episode is in addition to exploring these topics Luke actually leaves people with like some actionable ideas on how to prepare like

what to invest in and uh here's maybe a hint the 6040 portfolio is dead folks so that's a definite takeaway from today's episode understanding what Luke means when he talks about the relationship between energy and money is certainly interesting I think any topic that unpacks a little bit of how money comes to be is is worth uh discussing um definitely learning from this episode before there was money in finance there was just resources and money and finance is like built on top of just Commodities and resources in the 21st century we're kind of blessed to live in a

sufficiently stable global economy that we don't really have to think about what's going on in the basement of financial markets the trading of physical Commodities and that's relationship with geopolitics and financial markets um but things aren't always so calm and as we've been exposed to over the last like five years or so the world's just getting like pretty crazy so it's probably best to be kind of informed about how energy resources impact economies and that's what Luke gives us on the episode today so let's go ahead and get right into the episode with Luke growman but first a moment to talk about some of these fantastic sponsors that make the show possible

bangas Nation we are very excited to bring on Luke groman he is the founder and president for forest for the trees that's fftt where he helps investors see the big picture so they can prepare for the future and we're going to be doing some of that preparing I hope on the podcast today because Luke thinks there is a coming monetary system change up in the works driven in part by high energy costs it's going to shake up everything we know about markets about investing so we'll talk about that how to prepare Luke welcome to bankless thanks for

having me on guys great to be here so let let's start with a a question maybe just to frame up the entire conversation we're about to have um I think every good investor has a thesis for how things will play out it's just like something that they believe the market is fundamentally mispricing so for for bankless our thesis has been hey the the world doesn't understand crypto yet and they will and it's going to have a massive impact and and so I want to begin this conversation by asking what your thesis is in in the broadest Strokes like what do you think the rest of the market isn't seeing right now I

think the market is not seeing that I guess two things number one the productivity enhancements implied by AI you humanoid robotics Etc are overtime exponentially deflationary and fundamentally incompatible as a result with the

global sovereign debt backed and based monetary system uh what does that mean that means if Ai and humanoid Robotics are even directionally do directionally what what people think they're going to do over the next 5 years 10 years Global central banks are going to have to fully Reserve Consumer Debt sovereign debt starting with sovereign debt fully reserved what does that mean buy it all with printed

money can you can you illustrate why does it mean that simple because you know I just saw uh in Korea there's a Starbucks running with two people and 100 employ 100 robots M uh there was an article on rethink X last month earlier this month actually suggesting that wages that that humanoid robotics wages will go towards a Dollar by 2035 And1 Cents by 2045 an hour who

can afford their student loan payments if Global wages go to 10 bucks an hour by 2035 the answer is barely anybody who can afford their car loan payments barely anybody who can afford their mortgage payment barely anybody who can afford their apartment rent barely anybody their credit card barely anybody deflation is fundamentally incompatible with a debt back monetary system which requires exponential growth so practically speaking those people won't be able to afford their payments they will default as they default they'll

take down Banks as they take down Banks Banks would uh sell what they can not what they want to what do they hold is their wealth reserves they hold treasury bonds they'll sell treasury bonds we saw that start to happen last March and we saw what the FED did btfp more dollar liquidity they'll buy it all so that's that's it it's that is the I think perhaps the biggest fundamental thing it's quite the Paradox normally if I say hey there's something

in deflationary coming bu bonds you don't buy bonds when debt to GDP is as high as it is when sovereign debt is as high as it is when you have deflation it becomes impossible to pay the debt back for the whole system so that's number one number two is at the same time it's getting much more expensive to find a marginal sources of oil to find marginal sources of copper we're going to build all this electric stuff um to replace the use of oil

except it's going to require a lot higher prices of copper a lot higher inflation great who wants to hold $35 trillion in US Government debt if inflation has to rise to get the copper to support the electricity transition not me and nobody has a 35 no one has a balance sheet to hold that except the Fed so here too you get to the same point they're going to have to reserve much of the government debt and so these two things and I guess the last thing is just per capita you know people

say well great we'll Electrify and then oil won't matter China right now is a billion four people they use one5 the oil of the US per capita India has 1.4 billion people they use 115th the oil of the US per cap both of those numbers are 2021 numbers if India goes from using 115th to 110th oil demand will explode if China goes from 1/5th to 1/4 oil demand will explode because I'm talking about in total 2.8 billion

people and why would they begin to use more oil per capita simple why does the US have why does the US consume so much more is it because we're better is it because we're smarter no it's because we can print dollars for oil and we've been able to for 40 years and guess what China and India are starting to be able to do they are in the pregame they aren't even in inning one they have just started print be gaining the ability to print Yuan and rupee for oil and as they gain more of

that ability through gold uh and through their own productive capacity their economy their per capita oil consumption is going to rise so there's this fascinating set of conflicting Dynamics one deflationary one inflationary all of which though point to the unsustainability of a debt sovereign debt backed system that's been in place for the past 50 plus years and all of which suggests that we're going to continue this trend of higher rates

rates get too high cause a crisis fed comes in essentially cap rates with more dollar liquidity or the treasury it doesn't really matter uh they're basically both the same at this point anyway fed and treasury uh we get more liquidity asset prices go up wash R repeat and away we go so that's what I think are the two are the two biggest fundamentals the energy side and then this you know everybody's hyped up about AI Etc maybe for good cause but I don't think they've I know they haven't thought through the second D us because

they wouldn't be doing what they're doing bonds bond in the US wouldn't have a for handle the FED would wouldn't still be selling bonds if that was the case if people really understood what it meant so Luke you you really think the market really hasn't priced these things in and and you're kind of like maybe front running this I I um want to ask you to give us a energy lens on things because this is something we've not really explored deeply in our content we we've explored all sorts of different lenses on like this this question of course that's very relevant to crypto

which is what is money but I don't think we've done the energy lens uh justice and I know um you know Helen Thompson uses this term energy blindness to describe policymakers who basically like make policy in a vacuum and don't consider the geopolitical uh social ramifications monetary ramifications of seeing the world through the lens of energy and I I kind of fear that like maybe I don't I don't see the world through the energy lens enough too and I've got some energy blindness uh here

myself and maybe some Bist listeners do as as well C can you give us the story of why energy matters so much I I noticed in the intro and I asked the question of like um what do you see that others don't see like one was was AI being deflationary Source the other answers was all to do with energy costs and energy demand so like why does energy price matter so much to the world to asset prices to Empires like where should we start this conversation energy is the base layer of

money um why because human life is finite as much as we'd all like to live forever none of us are going to live forever okay so if we have finite lifetime during our lifetime we work how do we work we expend energy so when we work we work for money money comes to us we work is just the expenditure of energy okay so if work is just the expenditure of

energy when I borrow money to buy something more than I can afford today a house a car whatever uh I am promising to work in the future I am promising the future expenditure of energy to pay my loan over time so I can afford something today if the price of energy changes if it goes up a lot if I can if my wages don't keep up with

energy I can't afford my house the whole system the whole I I default Etc so energy is it is it is really debt is simply a future promise to expend energy and so once the the the challenge within that I guess is twofold number one in order for that to work energy has to remain a small enough percentage of the overall economy If energy gets too

big as a percentage of the economy it becomes impossible to pay back the debt uh because people are consuming too much of their own energy just to pay for energy it doesn't leave the extra funds over to pay the interest on the debt the debt starts to default similarly if you make a bunch of promises unbacked promises like governments do sovereign debt entitlements etc those are all promises to expend energy in the future and

once you promise too much if you promise too much relative to the size of the energy Market you either in the in the future in terms of what the energy Market evolves to you either have to default on those promises which has a political and monetary and inflationary impact or you have to inflate the energy Market to be quote unquote big enough to back those promises with which also has an inflationary monetary systemic impact uh

but either way the energy is just fundamentally the base layer because it debt is nothing other than a promise to expend energy in the future money is just nothing but a manifestation of the expenditure of energy okay so do the central Bankers know this does the FED know this does treasury know this does do the the lawmakers know this uh does the does the president like know this how come uh we have this energy

blindness how come so so many people if if energy is the the base uh layer of money how come people so many people have had the luxury of not having to think about it like and you know I would argue I don't think about energy costs in my day-to-day life like maybe price of the pump like just that sort of thing but but you're saying it's the base layer for money which means it's also the base layer for the US dollar and of course the dollar is so Central to um you know us Financial Capital markets uh dominance as well so it must be Central

to the US Empire and yet we don't think about it we have this luxury of like not having to worry about it at least up to this point can you explain this sure because you get the media to tell people that you're not in Iraq because of the oil it's because of Freedom it's because of weapons of mass destruction you you you you know why does why why is there something called the Carter Doctrine you know that existed from the 70s up until just recently which translates to no Russians in the Middle East why does the US even care about the

Middle East the answer is in plain sight it's hiding in absolute Plain Sight why have we why have we been at war in Afghanistan in Iraq and what like why why have we done these things why why do we prop up if we're if we're so pro- free if we're pro democracy explain the 80-year relationship between Saudi Arabia and the United States the answer's right there it's all hiding in plain sight the answer is is that energy is

fundamentally that that's why we don't think about it we don't think about it because the US Military and and you know people willing to do violence on our behalfs have been doing it while we sleep comfortably in our beds I mean I'm I'm going to call the the US and Empire for a second I don't know if you use that framing but I've heard others use that framing so so let's go with that to like to what extent do you think uh every Empire in history has based sort of their empire on having access and securing a cheap source of energy is is that a thing that is just Central to the

US or have other Empires done this throughout history is this just table Stakes if you sort of like you know 101 if you want to become an Empire like step one go get a cheap source of of energy and then like step two is secure it and then make your population like forget how you secure it and just like that Fades into the background but how Central is this to uh to Empire in general it's Central to the life of Empire it's Central to the life of every living thing on this planet right energy

is just food you stop eating You're Going To Die full stop I can tell you within you know roughly a couple days when it'll happen so you have to secure enough energy there's something call there's a concept called entropy which is essentially what the the the the I'm going to Mis phrase it but it's the amount of energy you have to expend just to kind of keep stuff together and Empires the bigger and more far-flung they get the more energy they require

just to avoid collapse uh there's lots of ways you can do that lots of them are unpleasant uh but they all involve around fundamentally mispricing or buying energy on the cheap you can do it with gigantic pools of slaves you can do it with robots and and productivity

enhancers you can do it by militarily enforcing a deal where the world has to buy oil in your currency full stop or else you invade it and replace the leadership there's lots of ways you can do it and that like I said this is what's true for Empires is true for humans if we stop eating all of us are going to be dead in under three weeks full it's it's scientifically proven uh if we stop fertilizing our Lawns our

Lawns will eventually die uh it'll die a lot faster in Arizona than it might here in Ohio but they'll die same concept um it's it's it's just natural law so I think ultimately it's just about how do you couch that how do you achieve that what are the various uh ethics morality of of the regime in question uh how you know what's your worldview what can you do culturally Etc and that varies over time

but Empires require lots of energy and that's where you can see things that's the fundamental miscalculation most Americans and most people in Washington think American power comes from the dollar but without the energy without that dollar think about it this way how many dollars do you want to hold if every gas station in the United States is empty if you show up with your dollars to fill up your car and they're all empty what value is the

dollar we have we have at least the directional experiment we can refer to it's called the 1970s gas lines didn't doe so well in 1970s no fiat currency really did but that's that's the fundamental base layer for currencies is energy and that look that can change that doesn't necessarily have to be oil if we were had a lot of foresight we could build up an electrification and and a domestic infrastructure and build up a bunch of nuclear power plants and

run tens and hundreds of thousands of miles of of electrical trains and completely you know in electrical Vehicles there where we didn't need oil and oh by the way this is what China's been doing for 15 years now uh while we spend $7 billion for seven charging stations like the Biden Administration just did energy is the fundamental layer it is understood at the highest levels of Finance at the highest levels of the US administrations dating back decades it's understood at the highest levels of us and Global militaries um and you just

all you have to do is watch what they do not what they say they're not where they are for freedom and democracy and all this stuff come on I mean if that happens as a as a side benefit great that's not why they're there we've done macro episodes talking about like the Primacy of the US dollar there's always um kind of this connotation of an arc to the dollar and like growing up as a child maybe it was just because I was naive maybe maybe it was because in the United States was in good times in the 9s when it had like energy backing the dollar and I just

kind of remember as we uh invad ated Afghanistan and Iraq just the obsession around like the price at the pump it turns into like a reoccurring news headline on like my local news so like FL flashing red lights price at the pump and then like the the uh price of gas would just like be on the screen and that was like a news story for like all of my childhood maybe it still is I just don't watch TV anymore I'm wondering Luke if if like the Arc of the dollar is like coming to everyone kind of alludes to like a coming to an end of the Arc of the dollar and I'm wondering if like this is something that you are also

similarly doing just with the context of uh using energy to kind of frame that conversation are you is there like a uh like a a a collision course that the dollar is having with like energy is that kind of what you're alluding to well I think it's well underway I think when you again when you watch the behavior of of players at the highest level I think it's been well underway for 10 years so when Global central banks stop buying treasury bonds and buy gold instead they're telling you in essence we are nervous

about the purchasing power of Treasury Bonds in oil terms um the deal in essence the US had with the world in 73 after you know this sort of set up the P dollar system was never expressed but you can see it in the financial prices of charts of Treasury bonds and oil and rates Etc which is the US had to keep the dollar as good as gold for oil they had to to keep the treasury bond as good as gold

for oil if you go back 150 years the price of of oil in gold is remarkably steady and if you go from 1973 to 2003 the price of a treasury bond in barrels of oil is fairly steady it's 15 to if I'm doing the math right uh you know say it's a $1,000 face value of Treasury bonds um and oil from 73 or 74 through 2003 or 2004 consistently traded between

$15 and $30 right so uh 30 33 barrels or 33 barrels to you know 60 barrels per treasury bond give or take uh 33 to 33 to 50 something like that anyway uh the dollar was as good as gold for oyal that was the deal and so people didn't mind holding dollars and starting around 2004 2005 five combination of factors China entering WTO and growing and so their CH

oil demand was exploding um geological realities where uh Peak cheap oil was starting to bite as some of the world's biggest oil fields that account for a remarkably high percentage of the world's daily oil production began peaking and rolling over things like canell in the Gulf of Mexico um some other ones uh oil prices stopped that the dollar stopped being good as gold for oil um the treasury bond stopped being as good as gold for oil uh so much

so that by summer of' 08 oil was 150 right so now you've gone from a 30-year period from 73 to 034 where oil is you know $15 to $30 a barrel or you know what did I say uh 40 to 60 40 to 60 barrels per treasury bond now you're getting six barrels of oil seven barrels of oil at $ 150 for your thousand treasury bond that's not a good deal to hold treasury bonds anymore and

I think ultimately the reason why central banks are move have been spent the last 10 years slowly and more recently much more rapidly moving away from treasuries instead and and holding gold instead is a big part of it is is energy awareness we have to have an a reserve asset that holds its value in terms or else we're dead we and and you can see this with China you can see this with Russia uh you can see this quite honestly as far back as 99 with Europeans with the structure of the Euro

with how they treated gold uh more recently there's been some sanctions issues as well that I think accelerated this meaningfully but this this fundamental monetary reality that nobody's going to hold paper if paper Falls against the necessities of living energy for very long uh and they will switch to reserve assets that hold their purchasing power in energy terms like gold um if that situation is violated

for too long it's really interesting when when when you're looking through an energy lens and and you're looking at like what is money and you're answering that question we we often talk about money as a um store of value medium exchange uni of account and you could just add the I guess the suffix for energy at like the end of each of those like what is a good money it's a medium of exchange for energy it's a store of value for units of energy it's a unit of account for energy it's all of those things and the Petro dollar has has had that in the past I I want to ask this

this uh question though and this this might be still a like a 101 type question for you Luke but I think it's on like many listeners Minds when you talk about like the price of energy uh you you were going back multiple times to a barrel of oil and it's like why a barrel of oil right so i' I've got a chart open this is from like visual capitalist and so it's it's starting uh human energy use from the 1800s all the way to like you know 2020 and uh in the in the early days in the 1800s we're using a lot of traditional biomass and I

imagine that's stuff like um like wood uh as energy like coal burning coal um you know out of whale blubber stuff like this right biomass and now of course we're we're you know well into the 2000 a lot of our energy comes from coal oil natural gas nuclear and and Renewables that's kind of that energy mix but you uh keep going back to barrels of oil are these things like composable are they like fungible like why why barrels of oil when our Energy Mix is like more

diverse than just oil oil is still I mean you can look at that chart right if we especially if we take out traditional sort of biomass out of it you know we're talking about coal we're talking about Oil we're talking about gas and then there's nuclear Renewables and everything else and it's you know oil eyeballing it looks like it's probably still 40 40% of the mix uh oil and gas is is still easily a majority of the mix uh particularly as they're phasing out coal uh so I look at it

as it's still by far one of if not the biggest marginal sources of energy uh it is still the primary transport fuel by far which in a a globalized supply chain world is critical so it's really you know it it's it's a still a very critical it's the it's the biggest marginal source and or it's a yeah it's still 40 40% of the of the of the production and it's easily

identifiable I mean we could we could certainly use BT a gas we could could use um uh you know I don't even know what we would use for for Uranium you know if you want to use uh you know whatever the thermal unit is that they're using end of the day it doesn't really matter it's it's a you know BT it's it's basically proxy for BTUs and so I guess to follow up to this one one thing I've I've just learned in my uh investing journey and this is probably one of the most important learning lessons in general is uh pick your

denominator very wisely for how you measure investment returns I like what is your denominator is it is it dollars or maybe should it be something else I I remember a conversation David and I had with um Arthur Hayes who said like if he could pick any denominator of wealth right uh he'd probably pick barrels of oil in fact in fact if if he could like store enough oil uh he he'd have like a little oil can around his belt he said and just like store his wealth um that way he he says hydrocarbons are

essentially the denominator is you of energy right so any investment return is just not enough to outperform dollars not enough to outperform the stock market you actually have to outperform barrels of oil or else you're better off like holding energy let me ask you the kind of the same question when you approach investing just in general is energy kind of your denominator or do you something else how do you think about this I think about when I think about what oil is I

think gold is just ax proy I think about Bitcoin Bitcoin is just a proxy through the proof of work uh uh expenditure of energy gold you have to expend energy to uh to to to mine it and refine it and then then you have it you hold it and and there it is so it's it is I think about the denominator I mean I live in a dollar country it's a dollar Reserve currency world and so I can consistently have two

things in mind uh what's the dollar return and what's the real return and that's I think ties back to my initial point that I think most people don't understand what's happening still which is most people are still assuming dollar equals oil they're they're assuming the denominator is the same and I think they're different and not even I think I know they're different I can show it to you on the charts I can I can I have a chart on my Twitter feed or X feed today

S&P 500 total return since January 1 2020 in dollars up 75% in Gold up 15% in Bitcoin down 81% that CH that's telling you the denominators are wildly different and yet most people are still viewing Bonds in particular but markets more broadly in general through this lens that the dollar is as good as gold