Dr. Pippa Malmgren, a US policy analyst and former member of the Working Group on Financial Markets, a government entity better known by its nickname, the “Plunge Protection Team,” appeared on Erik Townsend’s MacroVoices podcast to discuss bitcoin and the European refugee crisis, while also offering some clues about how the PPT, famous for its secrecy, operates.

On The Financial Implications of Europe's Refugee Crisis

Townsend started the interview by asking Malmgren, who also served as a special assistant to the president during the Obama administration, her thoughts about the thousands of refugees who continue to pour into Europe. Surprisingly, despite her liberal views regarding the free movement of people, Malmgren said she’s “quite worried” about the crisis, and believes it will only worsen as governments in Northern Africa become increasingly unstable, potentially leading to a financial crisis in Europe.

Erik: What do you see the outcome of this refugee crisis being? We had Italy the other day threatening to issue EU visas to refugees to force other countries to do their part to absorb more people. We have seen German politics affected by what seems like a growing divide in the German populace in their attitude towards accepting refugees. mIs this going to lead to a bigger problem or is it coming under control?

Pippa: I think there is a much bigger problem in immigration coming. To be clear, I am actually in favor of the freest possible movement of people, which means human capital and goods, and capital across borders. But there are always limits. And the socially acceptable limits seem to be in flux right now across Western Europe. Here’s the problem. We are not just talking about the magnitude of refugees we have already seen. We are talking about what’s coming. And so this is where the Italian threat is very important. They basically said, look, nobody is helping us and we get all of them because of our geographical location. So unless you guys give us a hand here, then we are just going to issue them papers and then let them loose. They can go anywhere they want in Western Europe. That is of course a bit scary for the rest of Western Europe, which would prefer to have the problem contained, but they are not prepared to help Italy in the containment process, just as they weren’t particularly prepared to give Greece any extra money to deal with their refugee problem, which happens for the same reason. But this is the beginning.

The bigger issue is that you still have a buildup of immigration happening in Turkey, and the Turks have also been very threatening, saying if you don’t give us what we want, and we have got a long list of things, then we might have parts of the border that there’s just nobody to police it that afternoon. And suddenly, you get a big wave. But even more important than that, I now see Northern Africa becoming more destabilized. So Algeria, Libya, and Egypt all becoming a little more wobbly and unstable, and that wave of immigration, I think, could begin to dwarf what we have already seen. In addition to that, there’s also the fact that everybody in Africa has registered that it is possible to get to the north. Of course, all of them would like to because they are not stupid. They completely understand that there’s a potentially better quality of life and much greater opportunity. It is not just a temporary phenomenon. It is now that people in that part of the world have begun to register I can get to Europe. Look, turn on CNN and you will see, which they can all do these days because they have got the telephone in their pocket. The television is on their phone.

This is the key thing. The realization that movement may be worth it. They are saying now in parts of even Sub-Saharan Africa that the greatest luxury good, the thing a person will buy when they have any extra money is passage to Europe. And so this is why there’s a really big question about what is the European Union’s immigration policy. Do they really have one? Or do they really believe in this concept of having basically no border whatsoever? I think it is a big debate. A lot of Europeans are like we never signed up for a world where we had no borders at all. Others say once you are inside the border, you are in. And I recently had a German say to me. For example, the Polish citizens that were in the United Kingdom weren’t immigrants. They were just European Union citizens. This is the type of debate that’s occurring. But at the end of the day there is still no money to deal with them for whatever reason they are arriving, and so it will continue to be a pressure on finances. I explained the example of Britain in 1834, when they abandoned the traditional system they had used for 1,000 years at that time, which was called the Tally Stick system. So when we say we tally things up or the word stock market refers to the use of little wooden stocks. They were little pieces of wood on which you record every transaction during your life, every borrowing, every lending deal, every asset acquisition, every tax payment.”

On The Rise Of Blockchain and Cryptocurrencies and The Fall Of Dollar Hegemony

Moving on, Townsend took the conversation in a direction that he said might be outside of Malmgren’s comfort zone: The rise of cryptocurrency’s like bitcoin. Contrary to his expectations, Malmgren said she’s been closely following the increasing use of cryptocurrencies, adding that they will likely play a role in determining who dominates the global economy, and therefore determines the monetary framework, after precipitating the next big paradigm shift, which will lead the world away from the dollar-based framework that exists today. Governments like China and Russia, which are seeking to create their own digital currencies, pose a greater threat to the long-term dominance of the dollar than they, or the US, realize.



Erik: I want to shift gears now to a topic I didn’t used to think of as being geopolitically oriented, which of course is your area of expertise, and that is crypto currencies. In the beginning, Pippa, if you look at what BitCoin was at the very beginning, it was something only interested extreme Libertarians who were very interested in financial privacy. Nobody else was paying attention to it. It was designed really to usurp the ability of government to interfere with and control people’s finances. It seems that it is almost going through a complete transformation where now we have the Ethereum guy, I forget his name (Vitalik Buterin), meeting with Putin talking about some kind of partnership to create a digital crypto currency that will become a national currency for Russia. Meanwhile, PBOC is advertising to hire block chain engineers to help to design the digital yuan or digital RMB. So all of a sudden, it seems like what’s going on, and I don’t remember the gentleman’s name. But there was someone from PBOC, a very senior official, saying it was time for central banks to stop ignoring crypto currencies and recognize that we have got to take the lead and we have got to be in charge of these things and design what we

want them to be. Where is this going? It seems like to me this is a game changer if national governments are going to get behind crypto currencies. Where does this take us?

Pippa: Totally. I think it is a massive market and geopolitical issue. I have written a little article about this, which I put up on LinkedIn, where I said you have got to understand if the size of your debt problem is so big that it can’t be paid off and in fact even inflation, which is the usual way you would seek to default on your debt slowly over time, you can’t get enough inflation generated, then there is one further option. And that is you literally abandon the entire system of money, and accounting. I know that sounds unbelievably radical, but we have seen it happen before. I explained the example of Britain in 1834, when they abandoned the traditional system they had used for 1,000 years at that time, which was called the Tally Stick system. So when we say we tally things up or the word stock market refers to the use of little wooden stocks. They were little pieces of wood on which you record every transaction during your life, every borrowing, every lending deal, every asset acquisition, every tax payment. The way it worked was it was literally a wooden board. You cracked it half really roughly so the two sides definitely did match and couldn’t be faked. Then the borrower and the lender each marked all their transactions. The stock end was always the smaller end, so that’s where we get stock market. There was a market in the stocks, these little wooden sticks. Bottom line was why would you abandon a system that has worked perfectly beautifully for 1,000 years. The answer is you had 200 years of war debts that had accumulated. They were unable to get inflation up enough without causing social unrest, and so the government said hey, let’s take the tally sticks back, and give people this great new innovation called paper money.

You can imagine everyone said I am going to hand over this record, this ledger of my entire net worth, and you are going to give me a piece of paper. Really? This is a joke. In the end, what the government had to do was confiscate the tally sticks, and they took them to parliament to burn them. They misjudged how much heat the fire would throw off, and that is what caused Parliament to burn to the ground in 1834. It was the destruction of the system of accounting and money. In its place, we adopted what we now use, which is piece of paper we call cash. Today, we are on the brink of similar step change, and the way you will do it is you move to electronic money in conjunction with blockchain. Blockchain is the new ledger, and e-money is the new currency.

The question is whose e-money. So everybody in government circles have been watching the Indian experience because the prime minister stepped up to the platform in early November and basically said we are going to move all of you, a billion people, off paper money and onto electronic money, and we are going to do it in three months. They did it, and they did it successfully. Now governments everywhere are saying we want to do that because, guess what happens when you move to e-money. First of all, you really eliminate the black market because you can’t transact anymore without it being seen. And so, for example, the European Union are talking heavily about moving to electronic money because then all this black market activity that happens in Greece and Italy where there’s no tax, we will be able to get all that tax revenue off it. That’s one reason. The second reason is with blockchain you have total transparency over every single step of a transaction, complete providence of every single transaction. The question is who gets to see it. I think this is where governments are suddenly a little schizo because on the one side they think they are going to have the ability to see every transaction that you and I and all the listeners are engaged in, but Ethereum has created this platform where actually they won’t necessarily be in government’s hands, maybe in private hands.

The question is can you trust the private hands who are issuing Ethers as much or more as you trust governments. So governments are being to say let’s create our own version, and that’s where you get the PBOC saying we’ve got to control this. Because otherwise, you are going to end up with private sector currencies that possibly are trusted more than government currencies, and that will lead to transactions offline that governments can’t see. There was a report going around the Internet recently about some guy who made $200 million bucks trading on Ethereum in a month, and the question was who will tax that. The answer is nobody. That freaks governments out to say the least, particularly given their debt situation. So I think this is a huge, huge thing, and all investors have to think very carefully about it. I will say one last thing about it. You have got to get familiar with quantum computing, and there is loads of stuff on the net about it. But the reason it matters is because of the speed at which you can process information. We now have quantum computers. The Chinese apparently have the fastest. There is D-wave out of British Columbia, but basically you can break a block chain password or a Bitcoin password in like less than a minute if you have a quantum computer. The question is who is going to have them, and the answer is mainly governments but big corporations are buying them like crazy. Volkswagen just bought one. We are going to see major corporations buying that computer power.

The question then is who has most transparency over the block chain and e-money, and I would argue it is going to be whoever has the most and fastest processing power, which may be governments at times, it may be private at times, it may be fluid. That’s what we have to think about as investors.

On The Real Power Of The Plunge Protection Team

Finally, Townsend said he couldn’t resist asking his guest about her time at the PPT, to which she responded that the group’s activities are far more mundane than the popular narrative that portrays them as staunchly interventionist, buying stocks to prop up the market every time there’s a forceful correction. The group’s meetings mostly consist of strategizing about monetary policy, geopolitics and how developments in both realms might impact US investors.

While the group does operate a trading desk, Malmgren said it’s mostly used to monitor capital flows, not actively participate. The group’s genuine operations generally involve crafting statements meant to influence the market that are given by prominent administration officials like the Fed chair or Treasury secretary. The group also leverages the heft of the Fed and Treasury Department to influence markets in more subtle ways. As Malmgren points out, sometimes all that’s needed to move the price of a security or currency is to have the Fed’s trading desk call up a bank and ask for a price.

Erik: Finally, Pippa, I would like to go to a topic that I know a lot of people are going to be very interested to hear from you about, and that’s the President’s working group on financial markets, better known as the Plunge Protection Team. If you were to believe in the rhetoric that you see and some of the conspiracy minded blogs and podcasts on the Internet, this is a sinister organization that exists to undermine free market capitalism by imposing government control and manipulating markets much to the dismay of short sellers and gold bugs and so forth. You have the distinction of having actually served in real life on that so called Plunge Protection Team. Tell us what they really do there. What was it like? What experiences and insights did you gain from serving on the PPT?

Pippa: What is it really? It is a working group that is the Treasury, the Federal Reserve, the controller of the currency, somebody from the White House. They call it the plus one. When I was on it, I was the plus one for the White House. Basically, they are there to confer, to swap notes about what’s going on, especially when there’s a big emergency. They do have a quote trading room, and the trading room is basically a place where they can watch markets, see prices, and see how things are unfolding. What is isn’t it is not a hedge fund. It is not an entity that can just enter the market and buy stocks. It is not like Hong Kong where they can say we are now buying stocks and suddenly the market moves.

It works in more subtle ways. My sense is it is a talk shop. It doesn’t have anything like the influence the markets attribute to it. The more important thing is that all the big financial institutions, they understand that it is better to get along with Treasury and the Fed than be obstructive or confront them. I would go even further, and I said this is in my book Signals, that a lot of people in government are definitely looking to work in the private sector when they leave. So you don’t want to do stuff that’s really disruptive to the banking sector if you expect to be named vice chairman of a major bank. So what I think actually happens is when we are in a big emergency, Treasury knows all of the people in the banking system. They are buddies, and they play golf together. They get together and go it looks really bad. It would be good if somebody came into the stock market and bought some stuff. That would be good. Yeah, I think so.

Then the order goes out to the trading floor buy stocks Monday morning. It is not because they were required to or because the government in any way has issued an order. It is just a sense of I think government is enough uneasy that they will do something. Nobody asks what can they do. They just assume it is government, so they go I think they might do something so we had better get in front of this. This is why the power of words in government is so important. What you get in government, quite literally when you go serve in any of these roles, you get a pen and a flag. It is really important to understand the power of the pen and the flag. You literally write or you say words, and the market moves.

You need to do actually intervene in the stock market directly or the bond market. All you need to do is put the word out that you are getting a little uncomfortable with prices where they are, and you would rather see them somewhere else. Lo and behold, the market starts moving. It is not the Plunge Protection Team that actually do this; it is much more subtle. It is much more subtle than that, and it would happen even if you didn’t have a Plunge Protection Team. It is just Wall Street sniffing out what’s the sensibility of Washington. Having served on it, whenever I read these articles saying we had so much power and we controlled the markets, I burst out laughing because I thought they couldn’t punch their way out of a paper bag. But perception is everything in markets, and the perception is not wrong that government can influence the tone. I just don’t think it does so directly as people think.



Erik: So what you are saying is that the trading room that is operated by the Plunge Protection Team is for monitoring only. There is no account with which to massively short VIX futures in order to try to suppress volatility. There is no money to spend to try to influence prices in the market. Is that correct?

Pippa: There is one entity, and it has been so long since I was there I am ditzing on the name. It was created to deal with Mexico when Mexico had the Peso collapse. Bob Rubin was there at the time, and basically they took oil as collateral in exchange for the loans that they made to Mexico. That’s it. It is called the Exchange Rate Stability Fund. That is a pool of money that is available to the Treasury, and they can deploy it in markets. It is subject to congressional oversight, but Congress gets mad as hell every time they actually use it. What Congress doesn’t like is having pools of money that are not subject to congressional oversight prior to their use. In practice, you have the Exchange Rate Stabilization Fund as a mechanism you could use, but I think in reality it is not actually used very often. But the fact that it exists makes the market guys go, they could. All you have to do if you were sitting in that seat on the trading floor of the Treasury is ask for a price. You don’t have to tell the market what to do. You just have to call up and say just checking prices. You check prices at the right moment, and everybody knows which side of the trade you want the market to be on. Suddenly, they all start moving. Again, I don’t think that it’s really about the direct deployment of capital most of the time. It is really about using the words to create the impression that causes markets to start doing things they might not otherwise be doing.

Readers can find a complete transcript of the conversation here.

