BIS Insider: Gold Is Rising for a Reason – The Debt System Is Reaching Its Limits
Summary
Macro Outlook: While headline data looks stable, the guest warns that decades of rising debt and fiscal/financial dominance threaten macroeconomic stability.
Sovereign Debt: High public debt, shorter duration refinancing, and doubts over central bank independence raise risks of higher long-term yields and potential inflation.
US Treasuries: Divergence between falling short rates and rising long yields, a $9T refinancing need, and possible treasury market malfunctions (carry trades) are key watchpoints.
Currency Risk: Safe-haven currencies are less clear-cut, with the dollar weakening and the yen falling, implying rising currency risk premia and limited flight options.
Gold: BIS tier-one treatment and rising reserve diversification support stronger demand from banks and central banks, reinforcing gold’s role as a safe-haven.
De-dollarization: Sanctions and the weaponization of the dollar spur reserve diversification into alternative currencies and gold, challenging long-term dollar dominance.
CBDC Payments: Project mBridge shows viable, instant, low-cost cross-border settlement, with growing participation (including Saudi Arabia), potentially bypassing SWIFT and reducing dollar reliance.
Emerging Markets: EM nations are driving alternative payment rails and governance debates to avoid weaponization, reflecting their larger role in global finance.
Transcript
Gold is trading near historically high levels. Southern debt is at very, very high levels. The world is indebted like you would not believe. And of course, questions around fiscal dominance and long-term monetary stability are rising. We've done a great job on this channel really trying to explain this, but there's so much to it. And now we've really invited or we've invited an absolute insider to the whole plumbing of how this system works. Really looking forward to the conversation with Dr. William White. He's a a senior fellow at the CD How Institute and formerly served as the head of monetary and economic development or department at the Bank of International Settlements, the BIS, the central bank of central banks. You might have heard us talk about the BIS here before in different contexts. So, I'm really looking forward to having that discussion with him because uh he can tell us what is really happening behind the scenes and uh how are the central banks thinking about things. So, I'm really curious to hear more. But before I switch over to my guest, hit that like and subscribe button. Helps us out tremendously, reach a wider investor audience of course, but also bring phenomenal guests like Dr. White onto the program. Now, Dr. White, it's an extreme honor to having having you on the program. Thank you so much for joining us. >> Oh, it's a real pleasure to be here, Kai. Thank you for inviting me. >> Yeah, really looking forward to the next 30 minutes with you. We just spent 30 minutes already talking about like everything like there's so much to talk about of course but let's let's see if we can condense our conversation that we just had off record on record and make it palpable for our audience. Um Dr. White let's start off very high level. Um what what is your current assessment of the economy like where are we at? Well, I mean, when you look at the numbers, uh unemployment, inflation, um you can make a case that things look uh things look pretty good. Inflation is probably running still a little bit too high. Um but unemployment is still very low. Uh growth is has not been all that rapid. Uh but um certainly growth is continuing. So, superficially everything looks fine. But I guess what I've been worried about for a long period of time has been um the the joint problems of what they call financial and and fiscal dominance which is the question of debt levels relative to GDP both public and private have been building up for a very long period of time uh really starting in the the early 1980s and it's been a steadily upward trend for these ratios. for a long long period of time. And that obviously raises some questions about um going forward, whether there's a possibility in light of all of these um uh these high debt levels of of something going something going wrong, some kind of a financial crisis. And um again I I think the PIS for a very long period of time has been stressing the the the point that central banks really ought to give more attention to financial developments than they do and that they shouldn't use labor markets and inflation alone as a as a primary goal of of monetary policy. In other words, I guess they have been and I have been saying for a long period of time that price stability as they define it uh is not exactly the same thing as macroeconomic stability and it doesn't guarantee macroeconomic stability. So that's sort of what I'm worried about is uh you know the side effects of past policies which have been in my view too easy resulting in this buildup of debt and that the the buildup of debt might might in some way come back and it causes some serious problems. >> Yeah, you you've advocated for that like through various cycles all we do is we just add more debt. We keep kicking the can down the road but there's no real solution and uh fewer policy options left. like how close are we to that debt trap being exposed and maybe you know kicking the can down the road we'll hit a wall. How close are we there? >> Well the private sector side um problem with the debt on the private sector side is so much of it is migrated out of the banking system. So in a certain sense we have no clear sense of who's doing the lending and who's doing the borrowing and the purpose for which that borrowing has been done. Okay. The purposes for which the debt's been taken out. So, it's just a kind of black box at the moment. I know that the authorities are trying to sort of throw some light on it, but still there's a lot of uncertainty about what might happen. And I think that's been one of the reasons why people have been so eager to get interest rates down um after the period when they went up because of the inflation coming out of CO. Um but the more recent concern I think has been on the fiscal side and for the first time really that I can remember in a pretty long career uh you know there are there are people sort of raising serious doubts about the capacity of of major governments uh to honor their debt service um which has been going up with higher interest rates. um to to to do that without in fact turning to um the central bank to buy some of that stuff. And um I think when you look back over the the COVID period um it it didn't help to observe that the overall increase in sort of debt government debt was more or less the same as the size of the increase in the C central bank balance sheets. So that you know there's prima facy case for for worrying that um well the central the last time the government had a big financial requirement the central banks printed the money and they're likely to do the same in the future and that fundamentally has got to lead to inflation in the long run and I'm out of here. Now the question of I'm out of here, you know, basically saying I I don't want to hold government bonds anymore. We are starting to see some aspects of that. Uh certainly when you think about the United States, you know, where official reserve holdings in dollars uh really have been sort of flat to down since about 2014 and much of the external demand has come from really very short-term money. And uh the the uh the BIS actually uh had a a recent um the general manager had a a speech about this that um a lot of sort of the long-term bonds are being financed with short-term repos and a lot of the foreign inflows people get the dollars through using short-term swaps. So there's there's a lot of short-term hot money out there that's financing long-term government deficits. So they can turn on a dime if they want to. And the question is um do they want to and there I think the jury is still out but it is interesting that in the states in well I won't say the states in particular but as short-term rates have been trending down the long-term rates have been flat to up and that's very unusual and another thing I mean when you think about the states is that um even as the short rate the short rates have gone down. The long rates have gone up and the dollar has been weakening after being strong for for many many years. And that sort of together with the increase in the price of gold makes one wonder whether there's not a tipping point sort of in the in the near future. But we haven't seen um um anything sort of totally dramatic up until now. But um just little little tremors, you know, the the real worry is that the the tremors foretell a real earthquake. They're not a guarantee, but um sometimes it happens. >> You you just mentioned the divergence in bond yields like the shorter term bonds, the the bills like trending lower while the 10-year 20-year yields are trending higher like directionally. Like is that is that a signal that there there is a problem maybe refinancing down the road here? uh the US has to refinance $9 trillion this year. Most of it will probably be short shortdated builds. Um so the question is like is is that that crack that you you might have mentioned is that that tremor and uh how do we con contain it perhaps and what should we be paying attention to when the refinancings are starting off and we're hearing more and more about it? Well, I I I certainly think you ought to be looking at directly at what's happening to the long-term yields. And uh if you have a world in which you lower interest rates and the long bond rates go up, then you have to start asking yourself what's what's the underlying problem. And one of them could be just a simple fear of inflation. you know this this will end in higher inflation relative sorry moderately higher inflation. Um another possibility is that people are getting more and more concerned about the independence of central banks. You know we've had particularly what President Trump has been doing with Jay Powell and uh and and the Fed. Uh but a third thing that sort of is is sort of more dramatic is that it may be people are starting to focus in on the debt dynamics and the recognition that the more you finance your debt shortterm the more you're you're exposed to higher interest rates severely having an impact on your debt service charges. Okay. So it's it's a question of how how much debt is there and how much of it is short-term that needs to be financed. And the more that they move in the direction of sort of le let's let's issue shortterm as opposed to long term. Okay. Um you can see that they're saving the long term from going up. Okay? Because they're not issuing today. But what you do know is that the chances of them having to issue still more debt at still higher interest rates has gone up significantly because the duration has now been shortened. So there's all these things sort of working together. And the the other thing is that um people might say well listen the long-term rate is going to be held down somewhat at least by um the anchor of inflationary expectations. But I think there's an increasing literature now sort of really questioning whether that anchor is as strong as you think it might be. So there was a paper by Jeremy Rudd came out four or five years ago in which he he basically said there were no grounds for belief uh either empirical or theoretical that long-term inflation expectations were pegged with the target of the central bank. You know this was just all a myth. And sort of more recently there have been people like the BIS Claudia Boreo for example has written a couple of pieces on this talking about the anchor of stability. You know an idea that actually came out with Axel Leonford many many years ago but anyway that the contention is that inflation expectations are anchored only because nobody's paying any any nobody's paying any attention to them because inflation is low. Okay. So it looks it looks anchored, but it's because people are just not thinking about inflation at all. But once you get above a certain level, then all of a sudden it's the actual inflation that starts to kick in. And people have a tendency not just to um take the higher inflation as this is what the future holds. But there's also the possibility that they just start extrapolating. So, it's gone up so much, it'll probably go up that much more tomorrow. So, there's a lot of a lot of pieces here that could sort of come unstuck. And it's not to say that they will, but it's to say that they could do. And um we know I mean historically I mean we always like to say well we're smart guys and the other guys weren't smart guys but there's so many historical examples of governments um basically uh overextending themselves very frequently because of problems in the banking sector or in the financial markets where they have to take private debt onto the public public sector debt and in the end they can't hope and it winds up in very high inflation or even hyperinflation. You know, the the Latin American solution to this problem. So, we've got a theoretical basis for concern. We got an empirical basis for saying it happened before it it can happen again. Do you know the old line? Even an economist when he sees something happen will admit it is possible, right? Well, history shows us this stuff is possible. Um, so those are the kinds of concerns that one one has and I I would be looking at the the long bond rates. The the other thing that I I would look at is is currency and I mean there's another think about Japan for example, you know, where the the the short rates are going up, uh the long rates are long rates are going up and the yen is falling. And you sort of say, well, what what what's consistent with with that configuration of events? >> And the answer is there's an increase in the in the currency premium. You know, that the the the risk premium being demanded to hold yen has now gone up. And um anyway, the but when you talk about currencies, I mean, here's the the the real problem is that when you think about one country that's got a debt problem or fiscal problem, uh it normally sort of starts in the the the worries normally start in the currency market, right? And the long bond market, but the currency market, I'm out of here. I'm I'm going to sell anything that's denominated in that particular currency. The the real complication at the moment is that all of the current no not all but many of the currencies that you would consider to be um um h have problems. There's so many of them where where would you flee to? You know you're in the UK for example and you start looking at sort of you know thinking about a repeat of the trust moment. You say well I buy by euros. You say, well, what what about France then? You know, or France has got a big budget deficit. Um, and the Xile Jon are in the street sort of protesting against any kind of effort to deal with it. Seems to be no political will to deal with it. So, is the, you know, is the euro a good idea? So, well, you're buys. Well, I think we've talked a bit about the dollar already. You know, that they may have um the biggest transition of them all because they have been sort of the safe currency. uh the Japanese yen which we just mentioned which also used to be considered as a safe currency. This is where you went when times got tough and now we see the yen is has been falling like a stone. Um so there there's some there are some puzzles. I don't think we've seen this. I don't I don't I'm not the greatest student of history, but certainly in recent history, you know, I can think of no examples where you'd say I don't like any of them. Um this is sort of an interesting period. >> Yeah. And we're we're running out of options, right? And uh like I'm going to make a hard cut in the conversation because we're going to talk about gold here now. But uh I think if the audience gives us a bit of leeway here, I think they'll understand that how we will come back to the initial discussion here. Um cuz you were at the BIS. Um you had an important role at the BIS. And recently um the Bank of International Settlements made gold a tier one asset, right? And you you gave me some interesting points before the conversation here. That's why I believe we can make the circle back to the original discussion here by throwing gold into it. Um why do you think that happened and how do you see that implemented? Meaning gold being a tier one asset with the with the banks and the institutions and how much of an effect does it have on the price right now as well? Just more of a tangent question there. >> Yeah. Well, I'd have to say two things. One, um I've been away from the BIS for a long time. I left in 2008 although I still have contacts obviously. The second point that has to be realized is that the stuff that gets done at the BIS gets done by the committees made up of national experts. Okay. So the Basel committee is made up of people who are either at the central bank worrying about supervisory issues or in the supervisory agency in the country that we're talking about. So it's those people who come together in the committee format who make their own decisions about what's best for them collectively. So I was not involved with the discussions at all about tier one. Um but it would be consistent with the recognition or sort of growing recognition that gold is um gold has got a kind of moneylike quality about it and that um it deserve to be in there in tier one and certainly what it's going to do and I I have no idea at all about the magnitude here is that it will increase the attractiveness of gold for banks. Uh physical gold um the treatment of goldbacked derivatives and things like that that's that's a different story, but certainly the demand for physical gold will be higher than it would previously been. And I think too there's going to be a symbolic although again I can't I couldn't put any numbers on this but you know if you've got a group of people like the supervisors who basically say gold is more moneylike than we had previously thought it to be. that that's going to have an impact on other people who will also look upon gold rather more as a money than as a commodity or something is used only for jewelry or whatever. So I think the symbolic implications of that could be could be quite significant >> now because you were talking about like how do we get out of this and you were talking about the bond market. Of course you don't want to hold bonds and and before we hit the record button you hinted maybe gold is that uh that safe haven that people are now fleeing to as as well. I think that's why I was trying to make that connection between gold and our initial discussion here. Um because you made some really interesting points before hitting that record button, why that is the case and why gold all of a sudden is that tier one asset, right? That's that's why I wanted to bring that up. >> Yeah. Yeah. Of course. >> Well, what one of one of the other things and this is all linked back into the dollar question, you know, dollar dominance and you know, the the um the the privilege of being able to issue a a reserve currency. I think the sanctions, the Russian the sanctions against Russia and the sort of the the weaponization of the dollar um really sort of although done obviously for for a good purpose at least as viewed by the western countries that it really put the wind up a lot of people and I think there's been sort of two implications of that is one that there has been an attempt to diversify reserve holdings and we see it sort of not so much in people worry about the sort of the the mimi coming to be a sort of more dominant currency. It it hasn't been that up until now but it's been a gradual increase in the holdings of Canadian dollars, Swiss Franks, Australian dollars, you know, sort of good reputable countries. Um but I think it's also been reflected in an increase in an increase in interest in gold. And the thing about gold, I mean, as as you know, is um there's no liability associated with it. You just own it. You know, you you don't have to worry about it being a claim on some counterparty that goes bankrupt. You just own it. It's in the vaults. And now of course with this tier one thing as an added attraction there'll be more of a tendency for both banks and central banks to to want to hold some of it. Um but it it there is this broader broader question of the sanctions and the worries that people have not just about not being o able to hold how can you know not being able to get access to their assets which is what happened to the Russian assets you know held in Belgium and elsewhere. But the whole idea that your banking system can be cut out of the international global payment system. So there's a lot of interest going on there. And uh again I think it's it's linked back to the business about if we do it through a different mechan if we can make the payments through a different mechanism. uh and one, as it turns out, that's both cheaper, faster, and overcomes all the disadvantages of Swift. Um there'd be an inclination to want to do that, particularly if the governance arrangements of that system were set up in such a way that it couldn't be weaponized. Okay. The difficulty now is that it's essentially a dollar system. um not just not principally because the US owns as it were the sort of the central clearing houses and that stuff you know CLS and um swift etc are not in fact US-based but the influence the political influence the US has is extends extr territorially as as well so um I think there's a lot of interest in sort of getting out from that problem >> and um I was just reading a piece from the it's a joint thing from the Royal Academy and the Carnegie Institute sort of saying that the dollar system had now become a source of instability because there were so many people. So the Americans apply sanctions, people increasingly try to avoid the sanctions that just demands more sanctions which avoids which demands more avoidance. You can see again we're on a kind of bad path >> that could lead to a bad end. >> But um anyway, that's you're starting to see papers written about people who've got worries of this nature and I think that's helping gold as gold as well. >> Well, even Marco Rubio just the other day expressed his concerns that the long-term effectiveness of sanctions are in question if the US dollar loses global reserve status and the dollar dominance is waning. Right. So, um, they're they're fully aware of what is happening, >> right? Fully aware. Um, and while the yuan or so is not a tier one asset yet, gold is, maybe that's one of the reasons gold has run up. It's a that diversifier in that tier one >> tier. Um, so that makes sense. But coming back to that and I think it's a good segue to talk about project. Um I I mentioned to you I'm keen on like understanding how that a that project was started, how it evolved, but then also how it was cut from the BIS. It was part of the innovator hub or innovation hub at at the BIS and now it's been let's say release released into the world meaning ties were cut at the BIS and the the project is stands on its own feet. So I'm really trying to understand like the system behind it. We've we've talked about this on our channel a number of times but more on the of a bricks from the bricks angle of course. So I'm curious what your take on project embridge is. Is it is it viable and should we be concerned about it or is that something we should uh be looking forward to? Well, being concerned about it, I mean certainly the banks will be concerned about it because uh a bankbased payment system from which they receive substantial compensation um will no longer be viable or could no longer be viable. And um of course it's going to be opposed by people who like to use financial you like to use the dollar as a financial weapon and presumably that includes the US government. So um there's a lot of vested interests here that are going to be threatened. Um from what I understand and again I've been gone from the BIS the for a long while the technology hub was set up after I left. Um but the BI the BIS I think quite rightly got into this because they recognized that the crossber payments in particular was really very inefficient and Embridge was just one of I don't know half a dozen if not more of the projects that were set up to take a look at alternative ways of doing things. So it's not as if um the BIS was sort of you know directly what's the word focused solely on on embbridge. It was one of a number of different projects and um the BIS basically said that Austin Carson basically said when the BIS withdrew that it had really gotten to the stage where they proved that it was viable. I can't remember the technical term that they used but it was viable. Uh they done some tests uh large sums of money which cleared almost instantaneously without any difficulties whatsoever. Um so the the the thing works. uh the question is whether people will be uh inclined to use it and uh the number of countries I think the number of them there were four or five originally it was very important I think that when the Saudis joined okay so now we've got whereas in the old days we always thought about the kind of deal was that uh the oil states would use the dollar as a reserve currency and as a sole means of payment uh and that the US in return would give them military protection um because the US needed the oil. But now we have a world in which the US is basically oil you know shale whatever um independent and uh the question arises of whether the US would in fact uh spring to their aid if they had problems and if that sort of is in doubt well then the other side of the bargain is also in doubt about uh so Saudi sort of entering into the embbridge thing I think was a was a big development um I can't remember how many countries are now associated with it as observers 30 30 plus including the IMF and the um uh the World Bank um and I imagine the BIS is I imagine is still there as an observer I don't know but the the next step in a way is if this starts to become um a real sort of competitor to the current way of doing things and it could do because like I say it's instant virtually inst instantaneous. I see estimates that it costs 10% of what it costs to do things under the current set of circumstances. You see the attractions of doing this. You can pay in local currency. Um so you don't have to go through the dollar. You don't have to hold dollars and maybe see their value go down as the value of the US dollar goes down. See all sorts of advantages particularly for people in the south. Uh and another thing of course is that the the southern countries have sort of made the running on this. the emerging markets and it sort of helps to redress the balance a bit because you know when you think about post-war it's basically the US at the top but all of the western industrial countries really basically running the system and in the interval of course these emerging markets have become much much more important in the economic side and the financial side and they want to have a say in the running of things uh quite rightly and um it's sort of been denied to them when you start thinking about the you know the IMF leadership of the IMF and the World Bank and all that kind of stuff. So here's a way to sort of assert their importance and there's all sorts of reasons why because people would be interested in doing this and of course it would done under bricks opus would do something to to help the reputation on that front too but if you're going to have a kind of world system like that world payment system and I'm not saying it will happen but it it looks to me as if there's grounds for relief that over time it could become much more important then you'd want to have some kind of world governance. It seems to me I think the IMF has already started to you know put out feelers about you know shouldn't we have a say in how this sh how this thing should be run and clearly one of the things that we top of the list was the payment system cannot be weaponized to suit the interests of any particular country. So that that's going to be very interesting in terms of new new ways of doing things that threaten not just the financial but also the political status quo. That's very interesting. >> Absolutely. I think the biggest challenge as you pointed out is really trying to keep it neutral and not weaponizing it and making it a geopolitical like >> farce perhaps almost right. Um so that that's really important. Dr. White, I could chat with you for hours. There's so much going on in the world, but maybe just to to sum up the conversation and give our audience a bit of like guidance, like what what do you expect or what should we be paying attention to over the next 6 to 12 months here that you think are probably the most influential or crucial that could shape markets here? Well, I think the inflation outlook, as I said before, I I think we're heading sort of quietly into a new age of scarcity uh that could conceivably cause uh bond rates to go up. And if inflation is a byproduct of these intended new of these expected new developments, then the policy rates might start moving up as well. So inflation is certainly something to look at. um the long bond rates um are are clearly also very important. You know, whether the expectations are starting to come unanchored, I think that's going to be very important to look forward to. Um I think those would be the two big things. The currency of course is is also very important. I'm I'm looking at Japan so you know particularly at the moment. But um there you do run into this problem of uh you know what's the cleanest shirt in the laundry. >> So um >> but those would be the big big macro things that I'd be looking at. And of course um any signs of um malfunctioning in markets. I know a lot of people at the moment are concerned about the treasury market, US treasuries and the extent to which you've got uh you know this uh carry carry carry trade between the the the the spot in the future treasuries and what will you know zillions of dollars being involved in that and what might happen if it all starts to unravel. So there's a lot of a lot of questions about short-term market functioning that I think people should look at. It's not at all clear to me that everything will unfold smoothly as we might like. >> No, lots of challenges ahead and we haven't even had a chance to talk about the new incoming Fed chair as well and how he might shake things up and why he was nominated in the first place. So, lots of uh turbulence on the horizon, I would say. Uh it's like a pilot putting on the seat belt sign before we hit the turbulence because uh we we can see what's coming, right? So absolutely doc Dr. White, it was a tremendous honor having you on. Is there is there a way our audience can >> So um is there a way our audience could follow they can see all the they can see >> Yeah, sure. I've got my own website and it's simple enough. It's williamwide oneword.ca. So, it's a Canadian website because that's where I'm from. >> Fantastic. Dr. White, thank you so much for coming on. We'll have to have you back soon because we we have so many topics still to to to cover. We'll we'll have to do a part two at some point. So, really looking forward to that already. And everybody else, thank you so much for tuning in to Soar Financially. I hope you enjoyed this conversation with Dr. William White as much as I have. I've learned a lot. He's a wealth of knowledge. He's seen a lot and he he was part of a lot that has been discussed as well or is being discussed today. So really really important conversation. Um you should listen to it twice. I know I will do that again later today as well. So thanks so much for tuning in. Hit that like and subscribe button. We'll be back with lots more on sore financially. Take care out there.
BIS Insider: Gold Is Rising for a Reason – The Debt System Is Reaching Its Limits
Summary
Transcript
Gold is trading near historically high levels. Southern debt is at very, very high levels. The world is indebted like you would not believe. And of course, questions around fiscal dominance and long-term monetary stability are rising. We've done a great job on this channel really trying to explain this, but there's so much to it. And now we've really invited or we've invited an absolute insider to the whole plumbing of how this system works. Really looking forward to the conversation with Dr. William White. He's a a senior fellow at the CD How Institute and formerly served as the head of monetary and economic development or department at the Bank of International Settlements, the BIS, the central bank of central banks. You might have heard us talk about the BIS here before in different contexts. So, I'm really looking forward to having that discussion with him because uh he can tell us what is really happening behind the scenes and uh how are the central banks thinking about things. So, I'm really curious to hear more. But before I switch over to my guest, hit that like and subscribe button. Helps us out tremendously, reach a wider investor audience of course, but also bring phenomenal guests like Dr. White onto the program. Now, Dr. White, it's an extreme honor to having having you on the program. Thank you so much for joining us. >> Oh, it's a real pleasure to be here, Kai. Thank you for inviting me. >> Yeah, really looking forward to the next 30 minutes with you. We just spent 30 minutes already talking about like everything like there's so much to talk about of course but let's let's see if we can condense our conversation that we just had off record on record and make it palpable for our audience. Um Dr. White let's start off very high level. Um what what is your current assessment of the economy like where are we at? Well, I mean, when you look at the numbers, uh unemployment, inflation, um you can make a case that things look uh things look pretty good. Inflation is probably running still a little bit too high. Um but unemployment is still very low. Uh growth is has not been all that rapid. Uh but um certainly growth is continuing. So, superficially everything looks fine. But I guess what I've been worried about for a long period of time has been um the the joint problems of what they call financial and and fiscal dominance which is the question of debt levels relative to GDP both public and private have been building up for a very long period of time uh really starting in the the early 1980s and it's been a steadily upward trend for these ratios. for a long long period of time. And that obviously raises some questions about um going forward, whether there's a possibility in light of all of these um uh these high debt levels of of something going something going wrong, some kind of a financial crisis. And um again I I think the PIS for a very long period of time has been stressing the the the point that central banks really ought to give more attention to financial developments than they do and that they shouldn't use labor markets and inflation alone as a as a primary goal of of monetary policy. In other words, I guess they have been and I have been saying for a long period of time that price stability as they define it uh is not exactly the same thing as macroeconomic stability and it doesn't guarantee macroeconomic stability. So that's sort of what I'm worried about is uh you know the side effects of past policies which have been in my view too easy resulting in this buildup of debt and that the the buildup of debt might might in some way come back and it causes some serious problems. >> Yeah, you you've advocated for that like through various cycles all we do is we just add more debt. We keep kicking the can down the road but there's no real solution and uh fewer policy options left. like how close are we to that debt trap being exposed and maybe you know kicking the can down the road we'll hit a wall. How close are we there? >> Well the private sector side um problem with the debt on the private sector side is so much of it is migrated out of the banking system. So in a certain sense we have no clear sense of who's doing the lending and who's doing the borrowing and the purpose for which that borrowing has been done. Okay. The purposes for which the debt's been taken out. So, it's just a kind of black box at the moment. I know that the authorities are trying to sort of throw some light on it, but still there's a lot of uncertainty about what might happen. And I think that's been one of the reasons why people have been so eager to get interest rates down um after the period when they went up because of the inflation coming out of CO. Um but the more recent concern I think has been on the fiscal side and for the first time really that I can remember in a pretty long career uh you know there are there are people sort of raising serious doubts about the capacity of of major governments uh to honor their debt service um which has been going up with higher interest rates. um to to to do that without in fact turning to um the central bank to buy some of that stuff. And um I think when you look back over the the COVID period um it it didn't help to observe that the overall increase in sort of debt government debt was more or less the same as the size of the increase in the C central bank balance sheets. So that you know there's prima facy case for for worrying that um well the central the last time the government had a big financial requirement the central banks printed the money and they're likely to do the same in the future and that fundamentally has got to lead to inflation in the long run and I'm out of here. Now the question of I'm out of here, you know, basically saying I I don't want to hold government bonds anymore. We are starting to see some aspects of that. Uh certainly when you think about the United States, you know, where official reserve holdings in dollars uh really have been sort of flat to down since about 2014 and much of the external demand has come from really very short-term money. And uh the the uh the BIS actually uh had a a recent um the general manager had a a speech about this that um a lot of sort of the long-term bonds are being financed with short-term repos and a lot of the foreign inflows people get the dollars through using short-term swaps. So there's there's a lot of short-term hot money out there that's financing long-term government deficits. So they can turn on a dime if they want to. And the question is um do they want to and there I think the jury is still out but it is interesting that in the states in well I won't say the states in particular but as short-term rates have been trending down the long-term rates have been flat to up and that's very unusual and another thing I mean when you think about the states is that um even as the short rate the short rates have gone down. The long rates have gone up and the dollar has been weakening after being strong for for many many years. And that sort of together with the increase in the price of gold makes one wonder whether there's not a tipping point sort of in the in the near future. But we haven't seen um um anything sort of totally dramatic up until now. But um just little little tremors, you know, the the real worry is that the the tremors foretell a real earthquake. They're not a guarantee, but um sometimes it happens. >> You you just mentioned the divergence in bond yields like the shorter term bonds, the the bills like trending lower while the 10-year 20-year yields are trending higher like directionally. Like is that is that a signal that there there is a problem maybe refinancing down the road here? uh the US has to refinance $9 trillion this year. Most of it will probably be short shortdated builds. Um so the question is like is is that that crack that you you might have mentioned is that that tremor and uh how do we con contain it perhaps and what should we be paying attention to when the refinancings are starting off and we're hearing more and more about it? Well, I I I certainly think you ought to be looking at directly at what's happening to the long-term yields. And uh if you have a world in which you lower interest rates and the long bond rates go up, then you have to start asking yourself what's what's the underlying problem. And one of them could be just a simple fear of inflation. you know this this will end in higher inflation relative sorry moderately higher inflation. Um another possibility is that people are getting more and more concerned about the independence of central banks. You know we've had particularly what President Trump has been doing with Jay Powell and uh and and the Fed. Uh but a third thing that sort of is is sort of more dramatic is that it may be people are starting to focus in on the debt dynamics and the recognition that the more you finance your debt shortterm the more you're you're exposed to higher interest rates severely having an impact on your debt service charges. Okay. So it's it's a question of how how much debt is there and how much of it is short-term that needs to be financed. And the more that they move in the direction of sort of le let's let's issue shortterm as opposed to long term. Okay. Um you can see that they're saving the long term from going up. Okay? Because they're not issuing today. But what you do know is that the chances of them having to issue still more debt at still higher interest rates has gone up significantly because the duration has now been shortened. So there's all these things sort of working together. And the the other thing is that um people might say well listen the long-term rate is going to be held down somewhat at least by um the anchor of inflationary expectations. But I think there's an increasing literature now sort of really questioning whether that anchor is as strong as you think it might be. So there was a paper by Jeremy Rudd came out four or five years ago in which he he basically said there were no grounds for belief uh either empirical or theoretical that long-term inflation expectations were pegged with the target of the central bank. You know this was just all a myth. And sort of more recently there have been people like the BIS Claudia Boreo for example has written a couple of pieces on this talking about the anchor of stability. You know an idea that actually came out with Axel Leonford many many years ago but anyway that the contention is that inflation expectations are anchored only because nobody's paying any any nobody's paying any attention to them because inflation is low. Okay. So it looks it looks anchored, but it's because people are just not thinking about inflation at all. But once you get above a certain level, then all of a sudden it's the actual inflation that starts to kick in. And people have a tendency not just to um take the higher inflation as this is what the future holds. But there's also the possibility that they just start extrapolating. So, it's gone up so much, it'll probably go up that much more tomorrow. So, there's a lot of a lot of pieces here that could sort of come unstuck. And it's not to say that they will, but it's to say that they could do. And um we know I mean historically I mean we always like to say well we're smart guys and the other guys weren't smart guys but there's so many historical examples of governments um basically uh overextending themselves very frequently because of problems in the banking sector or in the financial markets where they have to take private debt onto the public public sector debt and in the end they can't hope and it winds up in very high inflation or even hyperinflation. You know, the the Latin American solution to this problem. So, we've got a theoretical basis for concern. We got an empirical basis for saying it happened before it it can happen again. Do you know the old line? Even an economist when he sees something happen will admit it is possible, right? Well, history shows us this stuff is possible. Um, so those are the kinds of concerns that one one has and I I would be looking at the the long bond rates. The the other thing that I I would look at is is currency and I mean there's another think about Japan for example, you know, where the the the short rates are going up, uh the long rates are long rates are going up and the yen is falling. And you sort of say, well, what what what's consistent with with that configuration of events? >> And the answer is there's an increase in the in the currency premium. You know, that the the the risk premium being demanded to hold yen has now gone up. And um anyway, the but when you talk about currencies, I mean, here's the the the real problem is that when you think about one country that's got a debt problem or fiscal problem, uh it normally sort of starts in the the the worries normally start in the currency market, right? And the long bond market, but the currency market, I'm out of here. I'm I'm going to sell anything that's denominated in that particular currency. The the real complication at the moment is that all of the current no not all but many of the currencies that you would consider to be um um h have problems. There's so many of them where where would you flee to? You know you're in the UK for example and you start looking at sort of you know thinking about a repeat of the trust moment. You say well I buy by euros. You say, well, what what about France then? You know, or France has got a big budget deficit. Um, and the Xile Jon are in the street sort of protesting against any kind of effort to deal with it. Seems to be no political will to deal with it. So, is the, you know, is the euro a good idea? So, well, you're buys. Well, I think we've talked a bit about the dollar already. You know, that they may have um the biggest transition of them all because they have been sort of the safe currency. uh the Japanese yen which we just mentioned which also used to be considered as a safe currency. This is where you went when times got tough and now we see the yen is has been falling like a stone. Um so there there's some there are some puzzles. I don't think we've seen this. I don't I don't I'm not the greatest student of history, but certainly in recent history, you know, I can think of no examples where you'd say I don't like any of them. Um this is sort of an interesting period. >> Yeah. And we're we're running out of options, right? And uh like I'm going to make a hard cut in the conversation because we're going to talk about gold here now. But uh I think if the audience gives us a bit of leeway here, I think they'll understand that how we will come back to the initial discussion here. Um cuz you were at the BIS. Um you had an important role at the BIS. And recently um the Bank of International Settlements made gold a tier one asset, right? And you you gave me some interesting points before the conversation here. That's why I believe we can make the circle back to the original discussion here by throwing gold into it. Um why do you think that happened and how do you see that implemented? Meaning gold being a tier one asset with the with the banks and the institutions and how much of an effect does it have on the price right now as well? Just more of a tangent question there. >> Yeah. Well, I'd have to say two things. One, um I've been away from the BIS for a long time. I left in 2008 although I still have contacts obviously. The second point that has to be realized is that the stuff that gets done at the BIS gets done by the committees made up of national experts. Okay. So the Basel committee is made up of people who are either at the central bank worrying about supervisory issues or in the supervisory agency in the country that we're talking about. So it's those people who come together in the committee format who make their own decisions about what's best for them collectively. So I was not involved with the discussions at all about tier one. Um but it would be consistent with the recognition or sort of growing recognition that gold is um gold has got a kind of moneylike quality about it and that um it deserve to be in there in tier one and certainly what it's going to do and I I have no idea at all about the magnitude here is that it will increase the attractiveness of gold for banks. Uh physical gold um the treatment of goldbacked derivatives and things like that that's that's a different story, but certainly the demand for physical gold will be higher than it would previously been. And I think too there's going to be a symbolic although again I can't I couldn't put any numbers on this but you know if you've got a group of people like the supervisors who basically say gold is more moneylike than we had previously thought it to be. that that's going to have an impact on other people who will also look upon gold rather more as a money than as a commodity or something is used only for jewelry or whatever. So I think the symbolic implications of that could be could be quite significant >> now because you were talking about like how do we get out of this and you were talking about the bond market. Of course you don't want to hold bonds and and before we hit the record button you hinted maybe gold is that uh that safe haven that people are now fleeing to as as well. I think that's why I was trying to make that connection between gold and our initial discussion here. Um because you made some really interesting points before hitting that record button, why that is the case and why gold all of a sudden is that tier one asset, right? That's that's why I wanted to bring that up. >> Yeah. Yeah. Of course. >> Well, what one of one of the other things and this is all linked back into the dollar question, you know, dollar dominance and you know, the the um the the privilege of being able to issue a a reserve currency. I think the sanctions, the Russian the sanctions against Russia and the sort of the the weaponization of the dollar um really sort of although done obviously for for a good purpose at least as viewed by the western countries that it really put the wind up a lot of people and I think there's been sort of two implications of that is one that there has been an attempt to diversify reserve holdings and we see it sort of not so much in people worry about the sort of the the mimi coming to be a sort of more dominant currency. It it hasn't been that up until now but it's been a gradual increase in the holdings of Canadian dollars, Swiss Franks, Australian dollars, you know, sort of good reputable countries. Um but I think it's also been reflected in an increase in an increase in interest in gold. And the thing about gold, I mean, as as you know, is um there's no liability associated with it. You just own it. You know, you you don't have to worry about it being a claim on some counterparty that goes bankrupt. You just own it. It's in the vaults. And now of course with this tier one thing as an added attraction there'll be more of a tendency for both banks and central banks to to want to hold some of it. Um but it it there is this broader broader question of the sanctions and the worries that people have not just about not being o able to hold how can you know not being able to get access to their assets which is what happened to the Russian assets you know held in Belgium and elsewhere. But the whole idea that your banking system can be cut out of the international global payment system. So there's a lot of interest going on there. And uh again I think it's it's linked back to the business about if we do it through a different mechan if we can make the payments through a different mechanism. uh and one, as it turns out, that's both cheaper, faster, and overcomes all the disadvantages of Swift. Um there'd be an inclination to want to do that, particularly if the governance arrangements of that system were set up in such a way that it couldn't be weaponized. Okay. The difficulty now is that it's essentially a dollar system. um not just not principally because the US owns as it were the sort of the central clearing houses and that stuff you know CLS and um swift etc are not in fact US-based but the influence the political influence the US has is extends extr territorially as as well so um I think there's a lot of interest in sort of getting out from that problem >> and um I was just reading a piece from the it's a joint thing from the Royal Academy and the Carnegie Institute sort of saying that the dollar system had now become a source of instability because there were so many people. So the Americans apply sanctions, people increasingly try to avoid the sanctions that just demands more sanctions which avoids which demands more avoidance. You can see again we're on a kind of bad path >> that could lead to a bad end. >> But um anyway, that's you're starting to see papers written about people who've got worries of this nature and I think that's helping gold as gold as well. >> Well, even Marco Rubio just the other day expressed his concerns that the long-term effectiveness of sanctions are in question if the US dollar loses global reserve status and the dollar dominance is waning. Right. So, um, they're they're fully aware of what is happening, >> right? Fully aware. Um, and while the yuan or so is not a tier one asset yet, gold is, maybe that's one of the reasons gold has run up. It's a that diversifier in that tier one >> tier. Um, so that makes sense. But coming back to that and I think it's a good segue to talk about project. Um I I mentioned to you I'm keen on like understanding how that a that project was started, how it evolved, but then also how it was cut from the BIS. It was part of the innovator hub or innovation hub at at the BIS and now it's been let's say release released into the world meaning ties were cut at the BIS and the the project is stands on its own feet. So I'm really trying to understand like the system behind it. We've we've talked about this on our channel a number of times but more on the of a bricks from the bricks angle of course. So I'm curious what your take on project embridge is. Is it is it viable and should we be concerned about it or is that something we should uh be looking forward to? Well, being concerned about it, I mean certainly the banks will be concerned about it because uh a bankbased payment system from which they receive substantial compensation um will no longer be viable or could no longer be viable. And um of course it's going to be opposed by people who like to use financial you like to use the dollar as a financial weapon and presumably that includes the US government. So um there's a lot of vested interests here that are going to be threatened. Um from what I understand and again I've been gone from the BIS the for a long while the technology hub was set up after I left. Um but the BI the BIS I think quite rightly got into this because they recognized that the crossber payments in particular was really very inefficient and Embridge was just one of I don't know half a dozen if not more of the projects that were set up to take a look at alternative ways of doing things. So it's not as if um the BIS was sort of you know directly what's the word focused solely on on embbridge. It was one of a number of different projects and um the BIS basically said that Austin Carson basically said when the BIS withdrew that it had really gotten to the stage where they proved that it was viable. I can't remember the technical term that they used but it was viable. Uh they done some tests uh large sums of money which cleared almost instantaneously without any difficulties whatsoever. Um so the the the thing works. uh the question is whether people will be uh inclined to use it and uh the number of countries I think the number of them there were four or five originally it was very important I think that when the Saudis joined okay so now we've got whereas in the old days we always thought about the kind of deal was that uh the oil states would use the dollar as a reserve currency and as a sole means of payment uh and that the US in return would give them military protection um because the US needed the oil. But now we have a world in which the US is basically oil you know shale whatever um independent and uh the question arises of whether the US would in fact uh spring to their aid if they had problems and if that sort of is in doubt well then the other side of the bargain is also in doubt about uh so Saudi sort of entering into the embbridge thing I think was a was a big development um I can't remember how many countries are now associated with it as observers 30 30 plus including the IMF and the um uh the World Bank um and I imagine the BIS is I imagine is still there as an observer I don't know but the the next step in a way is if this starts to become um a real sort of competitor to the current way of doing things and it could do because like I say it's instant virtually inst instantaneous. I see estimates that it costs 10% of what it costs to do things under the current set of circumstances. You see the attractions of doing this. You can pay in local currency. Um so you don't have to go through the dollar. You don't have to hold dollars and maybe see their value go down as the value of the US dollar goes down. See all sorts of advantages particularly for people in the south. Uh and another thing of course is that the the southern countries have sort of made the running on this. the emerging markets and it sort of helps to redress the balance a bit because you know when you think about post-war it's basically the US at the top but all of the western industrial countries really basically running the system and in the interval of course these emerging markets have become much much more important in the economic side and the financial side and they want to have a say in the running of things uh quite rightly and um it's sort of been denied to them when you start thinking about the you know the IMF leadership of the IMF and the World Bank and all that kind of stuff. So here's a way to sort of assert their importance and there's all sorts of reasons why because people would be interested in doing this and of course it would done under bricks opus would do something to to help the reputation on that front too but if you're going to have a kind of world system like that world payment system and I'm not saying it will happen but it it looks to me as if there's grounds for relief that over time it could become much more important then you'd want to have some kind of world governance. It seems to me I think the IMF has already started to you know put out feelers about you know shouldn't we have a say in how this sh how this thing should be run and clearly one of the things that we top of the list was the payment system cannot be weaponized to suit the interests of any particular country. So that that's going to be very interesting in terms of new new ways of doing things that threaten not just the financial but also the political status quo. That's very interesting. >> Absolutely. I think the biggest challenge as you pointed out is really trying to keep it neutral and not weaponizing it and making it a geopolitical like >> farce perhaps almost right. Um so that that's really important. Dr. White, I could chat with you for hours. There's so much going on in the world, but maybe just to to sum up the conversation and give our audience a bit of like guidance, like what what do you expect or what should we be paying attention to over the next 6 to 12 months here that you think are probably the most influential or crucial that could shape markets here? Well, I think the inflation outlook, as I said before, I I think we're heading sort of quietly into a new age of scarcity uh that could conceivably cause uh bond rates to go up. And if inflation is a byproduct of these intended new of these expected new developments, then the policy rates might start moving up as well. So inflation is certainly something to look at. um the long bond rates um are are clearly also very important. You know, whether the expectations are starting to come unanchored, I think that's going to be very important to look forward to. Um I think those would be the two big things. The currency of course is is also very important. I'm I'm looking at Japan so you know particularly at the moment. But um there you do run into this problem of uh you know what's the cleanest shirt in the laundry. >> So um >> but those would be the big big macro things that I'd be looking at. And of course um any signs of um malfunctioning in markets. I know a lot of people at the moment are concerned about the treasury market, US treasuries and the extent to which you've got uh you know this uh carry carry carry trade between the the the the spot in the future treasuries and what will you know zillions of dollars being involved in that and what might happen if it all starts to unravel. So there's a lot of a lot of questions about short-term market functioning that I think people should look at. It's not at all clear to me that everything will unfold smoothly as we might like. >> No, lots of challenges ahead and we haven't even had a chance to talk about the new incoming Fed chair as well and how he might shake things up and why he was nominated in the first place. So, lots of uh turbulence on the horizon, I would say. Uh it's like a pilot putting on the seat belt sign before we hit the turbulence because uh we we can see what's coming, right? So absolutely doc Dr. White, it was a tremendous honor having you on. Is there is there a way our audience can >> So um is there a way our audience could follow they can see all the they can see >> Yeah, sure. I've got my own website and it's simple enough. It's williamwide oneword.ca. So, it's a Canadian website because that's where I'm from. >> Fantastic. Dr. White, thank you so much for coming on. We'll have to have you back soon because we we have so many topics still to to to cover. We'll we'll have to do a part two at some point. So, really looking forward to that already. And everybody else, thank you so much for tuning in to Soar Financially. I hope you enjoyed this conversation with Dr. William White as much as I have. I've learned a lot. He's a wealth of knowledge. He's seen a lot and he he was part of a lot that has been discussed as well or is being discussed today. So really really important conversation. Um you should listen to it twice. I know I will do that again later today as well. So thanks so much for tuning in. Hit that like and subscribe button. We'll be back with lots more on sore financially. Take care out there.