Bankless - 165 - Death of the Dollar?! with Lyn Alden

Episode Date: April 3, 2023

Lyn Alden is one of crypto’s favorite macro commentators and also a frequent returning guest to the Bankless program. When Lyn comes on Bankless, you know it’s because Macro is confusing, and we need help navigating these chaotic waters.  Inflation! Bank run! Insolvency! Recession! Everyone’s yelling things! But what’s going to happen? Lyn has the answers.  ------ ✨ DEBRIEF | Unpacking the episode:  https://www.bankless.com/debrief-lyn-alden    ------ In today’s episode, Lyn covers whether or not the Fed Balance sheet is expanding to infinity, what’s even on the Fed Balance sheet, how the Fed actually works, why a regional bank crisis might domino to the Dollar losing world reserve currency status, and how that same bank crisis might impact the 2024 US Election.  This is a Lyn Alden episode you don’t want to miss.   ------ Topics Covered 0:00 Intro 5:09 Summary of Last Few Weeks 6:19 Speed Bump or Phase Change?  7:55 Nobody Knows What Happens Next 10:10 The Balaji to Ben Spectrum  18:14 Fed Balance Sheet Timeline 24:08 Run on the Fed?  31:05 U.S. Treasuries Value 41:31 Impact of the Economy Post-Sucking  47:31 Innovation Damper 49:18 Rethinking the Dollar’s Role in the World 52:52 Bull Case for Non-U.S. Dollar Supremacy  57:38 More Division in the Economy?  1:01:38 Loss of the Dollar?  1:08:00 Reserve Currency Predictions 1:12:47 Bitcoin Liquidity Profile  1:15:46 What Do We Do Lyn?  1:18:14 Is Crypto the Ultimate Tail Risk?  1:20:19 Closing & Disclaimers   ------ Resources: Lyn Alden Twitter https://twitter.com/LynAldenContact  Lyn Alden  https://www.lynalden.com/  Links to our recent macro series  https://youtu.be/pP_HHE0kFhA  https://youtu.be/E8lxrsF29u0  https://youtu.be/-DzY_pCFGbI   https://youtube.com/live/eregdZPLYjg   ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, we've been doing a series lately trying to figure out what is going on. Bank runs, inflation, insolvency, recession. I think this might be one of our final stops in this series of conversations. Today we have Lynn Alden on the episode, who is always rational and gives us. us her take on what is going on in the world. A lot of yelling going on, but what is actually going to

happen? A few takeaways to listen for. Number one, is the Fed balance sheet expanding to infinity? Is that a thing that's happened? We get into the question of what even is on the Fed balance sheet. Why are Treasury's worth anything at all? How does the Fed work? Lynn Alden gives us a school lesson, which is fantastic. Number two, we talk about why a regional bank crisis, like the one we are seeing right now, domino into the dollar losing world reserve currency status. Number three, we ask if that's a good thing or a bad thing. There are reasons why it might be a good thing, Lynn explains. And finally, we talk about how this bank crisis might impact the 2024 U.S. election and how to prepare your portfolio as a result of everything that's going on. David, this is a great episode. I don't know

if it's the final chapter, because we always seem to find ways to add new chapters to this series whenever we want to explore more information. But this was a fantastic episode with Lynn that kind of puts a bookend on the series that we're doing. What did you find most important from this episode? Yeah, we've had Lynn on, I think, either four or five times now. And I think this might be my favorite Lynn appearance on bank lists. And I think the reason why is because we span so many spectrums in this episode. We span the spectrum between the small regional banks of the world and then the very central, very singular Federal Reserve. And we drew those connections in how there's a pipeline of capital there and how the sucking of capital away from the regional

banks ends up going towards the Federal Reserve banks, but then also ultimately the capital needs to flow past the Federal Reserve, which brings us to the conversation of a multipolar currency base for the world. So the dollar losing its dominance into something else. Bankless listeners can only imagine how that relates to crypto, which is a topic that we talk about. But that's not the only spectrum. We also talk about the spectrum of just the long tail of the economy versus the very central world of politics and how the loss of one impacts the fruition of the other. We also talk about the here and the now, how this is going to be impacting the world in the short term in the next few months and years. But then also,

we zoom out and talk about what this looks like 10 to 15 years from now. So Lynn just really helps us navigate a number of different spectrums across a number of different timescales. And I feel has given me and hopefully bankless listeners at just a ton of clarity of to so many different issues that this banking crisis relates to. There we go. And if you want the full series, started with our episode with Bology, then Arthur Hayes, then Ben Hunt, then Jim Bianco, now Lynn Alden. This is, I think, one of the most comprehensive pictures of what is going on in the U.S. banking system right now and how that will expand and extrapolate over the coming months and years ahead. So tune into all of those episodes will include links in the show notes.

One thing I also recommend that you go check out. A lot of the source material for this episode is of course published by Lynn Alden on her website. That's at lynn alden.com or go look up Lynn Alden contact on Twitter. Give her a follow. She posts a lot of these macro charts and that sort of thing in those two locations. It's definitely worthwhile. Guys, we're going to right to the episode with Lynn. But before we do, we want to tell you about the fantastic sponsors to help you go bankless, including Cracken, which is my favorite way to get my Fiat into the crypto system and our number one recommended exchange for 2023. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on

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Bankless Nation, I want to once again introduce you to Lynn Alden. Lynn Alden is crypto's perhaps favorite macro commentator and also a frequent recurring guest to the bankless program. And we all know when Lynn comes on bankless is because macro is doing something confusing. Something just blew up. And we need help navigating all of these chaotic waters. Lynn, welcome back to bankless. Happy to be here. It seems like a good month to be named bankless. Yeah, right, isn't it? Isn't it? Yeah, it's the theme of macro at this moment. Lynn, we've been going on this journey with a number of other guests trying to explore

really just what is different now. Like, what is the summary of this whole thing? And everyone's got different opinions. And so I'm hoping we can actually start with the end, start with the conclusion. We've got a number of topics to run through. But I'm wondering if you can just start with your high-level summary of the net effects of the events of these last two to three weeks, or relates to the Fed policy, macro markets, or just what the net impact is. Sure. I think the net impact is that small and medium or niche banks are going to be under profitability pressure for quite a while. Some of them still have ongoing liquidity or solvency concerns. Some of the largest banks are pretty much in good shape. They don't really

have the same types of risks. And that's kind of the arrangement that they're in. The Fed has been pulling liquidity out of the market over the course of the past year. And I think they've kind of run into roughly the limit of how much they can pull out. And so, you know, their balance sheet has been down for a year. I think it's probably going to be sideways-ish for a period of time. You know, whether it has to shoot up again will depend on if there's another shoot-a-drop and another sort of like liquidity crisis. It's partially, you know, psychological, basically whether or not humans do a bank run or not do a bank run. So some of that's unpredictable. But I think the general base case is for somewhat of a more sideways liquidity situation and kind of a slowdown in terms of how quickly

they can raise rates and hold down their balance sheet. Okay, so following on that is, I think the other thing that listeners are in myself are really going to ask for, it's like, okay, was this like a relatively unpredictably large speed bump, but we are still going forwards or are we turning? Is this a phase change in the market or did we just hit a speed bump and now we're going to continue in the same direction? I think it's a phase change from going straight up with tightening. So they're busy balance sheet constantly down, like Fed balance sheet and rates constantly up.

I think it's a trend change towards somewhat. sideways in both of those. I think the balance sheet's probably going to be sideways-ish for a period of time. And I think rates, you know, they might get a little higher, but I think the rate of change is slowing down and they're kind of getting closer to their peak. And that's, you know, that's relevant for markets. It's obviously relevant for liquidity sensitive assets, you know, Bitcoin gold or other assets like that. And it's, you know, generally pro equity when it happens. But I think a lot of that might be behind us now. If you go back to the September 2019 period, there was a similar event. It wasn't as severe, but basically there was a repo spike, and basically

the interbank lending market kind of broke. The Fed had to come in, and that marked the end of their quantitative tightening. Basically, they ran into the liquidity floor for banks. And the main difference was that back then, it hit big banks, whereas this time it hit small, medium banks. And last time, it was not accompanied by all these big unrealized losses because there was no record increase in industry rates in terms of how much they raised it here? I think the conclusion that I've been getting to is like this is a very middle of the road outcome, as in like, I don't know whether to be bullish or bearish. I don't know if this is bearish. It seems to be for the long tail of the economy, as I've been calling it, because since the long tail of the banks are now being

unprofitable, that probably impacts a long tail of the economy. But also interest rates are going down. But also the Federal Reserve balance sheet is, like you said, going to wiggle sometimes. and like a flat. And so I actually am kind of confused as it relates to the markets about like risk on assets, which my portfolio and probably bankless listeners portfolio largely constitutes, but overall for equities at large. So I think this is, is this like a fair sentiment or a fair conclusion with this? It's like no one actually really knows whether this net effect is bullish or bearish. Yeah, I think a middle of the road outcome makes sense. I think particularly liquidity sensitive assets, it's generally a plus for them. But in terms of assets that actually make a profit,

I still, you know, the overall recession or not picture is still very relevant. The profit margins are relevant. And so we can kind of divide the economy into almost like two sections. There's ones that are interest rate sensitive. And that includes obviously real estate due to how leverage it is. And it also includes unprofitable tech companies because they're reliant on issuing equity at very high valuations, which is easier to do when interest rates are zero and harder to do when industry rates are 5%. And so basically those are the two areas that have been under pressure. I think they're going to continue to be under pressure. Whereas, you know, there's like travel companies, restaurants, you know, kind of other areas that are, you know, virtually unaffected. They don't, not really showing any sort of

economic deceleration. And then there's a bunch of things in the middle, like manufacturing and other things like that that have shown deceleration, but not to the same degree that you've seen in, say, real estate or unprofitable tech. And to the extent that the market is pricing in kind of a top in terms of fed rates, you know, maybe the first half of this year, maybe a bottom in liquidity, that's generally good for, say, scarce ads that don't have to worry about profits. You know, historically, that'd be gold. Now it's Bitcoin and similar assets where those types of things don't really have to worry about recession, but they do have to worry about liquidity conditions. And those have changed. We're trying to square some of this for bankless listeners,

Lynn, because when I hear you speak about these conditions and compared to 2019 and say where it's like, this is a liquidity issue, that sort of thing, my mind is put at ease a little bit, or at least I'm much less alarmed than some of the other messages. and guests we've had on recently. So just last week we had, or maybe this week before, David, I can't remember at this point, apology on. And of course, this is sort of the famous Bitcoin to a million in 90-day type of bet. Whether you take that as 100% conveyance of his ideas or maybe like he's 5% or 10% right,

it was a very clear message that the Fed balance sheet is going to print a whole lot of money to make up for this bank crisis, whether you call it a insolvency or whether you call it like liquidity issue. And then we had Arthur Hazan, who sort of echoed a similar sentiment, but his time range was larger. He's like, well, you know, the 90 day thing is never going to happen. But I could see Bitcoin to a million dollars in like, you know, two to four years, potentially, if domino one falls, which is kind of bank crisis run on the bank, more money is printed. We get kind of another $4 trillion on the balance sheet and that causes the next domino to fall, et cetera, et cetera. And then suddenly you have a dollar that has hyperinflated.

And then we had Ben Hunt on the podcast. This is all in a very short period of time, Lynn. So we're not only trying to get like the point, the counterpoint, we're trying to get like, you know, all of the different opinions and ideas on this out so that bankless listeners can kind of make a decision. And Ben was basically like, you can't call this an insolvency at all. He said this is just a liquidity issue. And he was actually angry. These are his words, angry at those in maybe the crypto space or sort of the hard asset space who are saying, get your money into the bank. system. He said that they were making things up, basically, that the ship hadn't hit an iceberg. There is icebergs exist, but the ship's not sinking. Everything's going to be okay. And he was

very critical of those who are calling for all of the passengers to run to the lifeboats. And then we had Jim Bianca on, who gave us kind of another take, which was a little bit between both Ben and Bologi and Arthur. And here we are now, and we're talking to you, Lynn, and trying to just square all of these different ideas. Now, if I were to position you around that kind of balaji to Ben's spectrum, it seems like you are closer to the Ben side than to the Balaghi side, but I also don't want to put words in your mouth. So I know you've been observing all of this conversation and have your own takes.

What is your take on this whole debate and all of the various opinions and ideas of what's going to happen next? Sure. So I think, you know, between your description, somewhere between Arthur and Ben would be my position. Not where Ben is similar to Arthur, but my base case would not be a million Bitcoin in four years. And then I'm pretty far from the 90-day hyperinflation scenario. So the way I would characterize it is the reason I'm fading the left tails, because I don't really see the balance sheet going straight up anytime soon, even though I don't think it'll keep going down. That's why I kind of refer to it to sideways. And in fact, in the past week, we've seen the balance sheet

go down a little bit, but that's, of course, after two weeks of very big gains. So it's still much higher than it was three weeks ago. And if you look at the repo spike back from 2019, what they did was there was a pretty rapid increase in the Fed balance sheet for a number of weeks. And then it kind of trended sideways for a period of time all the way into February of 2020. And then, of course, we all know what happened next. There was the March COVID lockdown crash and everything went vertical. And that was a different scenario. But if that had never happened, the Fed probably would have remained sideways for a longer period of time. And so I think we've seen a trend change. I don't think that trend changes going to be straight up unless there's some other big, you know,

psychological issue. Now, when you look out further, I do think this has implications because basically I think the long run outcome here is that the Fed will reach a limit where they're unable to keep tightening while inflation does have a resurgence in the years ahead. And I think that that is a pretty pivotal change for hard assets for kind of anti-dollar trades, which is maybe where I probably would align at least somewhat with Arthur on that based on your description. As for liquidity, versus solvency, I think that's very bank dependent. So that is a big difference. You know, 2008 was a very solvency related issue. Basically, banks made loans and those loans were defaulting. And they had very, very thin capital, very thin cash, so they couldn't take much defaults. In this scenario, banks have a lot

of cash and treasuries and mortgage-backed securities, basically very safe assets in general. They've not made very aggressive lending decisions. But their mistake was buying these otherwise safe assets at very low industry rates that have long duration. So if industries go up significantly, those get marked down if they have to sell them between now and when they mature. So it's like you're guaranteed to get your money back, but if you have to sell it before that happens, you could be out of luck. And Silicon Valley Bank had two sides that were extreme. On one hand, they made a very big bet on these long duration assets, right? There are other banks that were more conservative. Like JP Morgan, for example, in addition to being as big as they are, they also were careful about getting into

long-duration assets too much. They balanced their book better. Whereas Silicon Valley Bank was far on the side of like, let's just buy all the long-duration stuff. So they're getting killed on that side. And then two is your deposit risk, right? So Silicon Valley Bank also was an extreme there, which is they catered mainly to businesses. And so the vast majority of their deposits were uninsured because of the size of individual deposits. And they also were obviously very concentrated into a handful of industries in a region. And so their deposit base was very flight worthy. And so you have the combination of those two was very toxic, and so they were a outlier in terms of their risk. Now, there's other handful of banks that are close on one

metric. So, for example, First Republic did not have quite the same asset side problems, but it had a similar clientele of very high uninsured deposits, and it still had long duration kind of a liquid loans. And so that's a problem for them, less extreme than Silicon Valley Bank, but still a problem. On the other hand, there are, you know, for example, Charles Schwab is one of the biggest brokerages in the country, and they're technically insolvent right now. And you wouldn't know it by looking at the stock. And so they actually have a similar problem with Silicon Valley Bank, where they bought a lot of long-duration assets at low rates that they're now underwater on, and those exceed their

capital, right? So they're negative. What makes a difference so far, at least, is that, you know, less than 20% of their deposits are uninsured, and they have a much broader, diversified base. and, you know, they're Charles Schwab, so they're perceived as being, you know, bigger, safer, probably backstop, you know, if needed. And so it's not quite enough to say it's just a liquidity problem. The sheer speed with which rates went up and the discount that these otherwise safe assets have on their books have put a lot of banks into a solvency problem if they're forced to sell. But it's not a solvency problem that extends up to the biggest bank, so JP Morgan solvent, Citizabeth's solvent, Bank of America's solvent, Wells Fargo solvent, of the other kind of big top 10 banks are solvent. Even smaller banks, many of them are still solvent. It's very kind of hit or miss. And so I think it's an ongoing liquidity and profitability problem for a lot of banks. And then for certain banks that are outliers, there are some

solvency concerns. So this is really interesting. And I do feel like it's probably accurate that you are somewhat in between kind of the Arthur take and the Bent Hunt take here. And even kind of you described sort of a mix of problems. There's liquidity problems, certainly. But there's also for some banks, particularly maybe the smaller banks, this liquidity problem because they have long-term duration bonds that they purchased and those things are underwater. And so the small and the medium banks are feeling the full effect of this. There's this idea that Arthur also expressed, though, is just kind of the idea that this unprofitability may lead to insolvency and that there will be this kind of the sucking sound of like all of this deposits being withdrawn from some

the smaller banks, maybe the most more vulnerable banks on the asset side, into higher yield pools, right? In like, defy, we would call this like, you know, yields pools. It's like yields farming, right? And so depositors are taking a look at their checking account and they're saying, like, why would I settle for like 0.5% or like even 1% from the bank or less when I can go to a money market and get, you know, a cool 4% or 5%. And so there's almost like this slow motion crash happening where liquidity and deposits are flowing outside of these banks. And sometimes that's slow. And sometimes it's like fast motion where we see there's some kind of a rumor and there's a run on the bank. And I believe Arthur's thesis here is that that will just continue, right? Up to the

point where, you know, there won't be a flat Fed balance sheet. It will actually like start to gradually increase upwards. And there could be some catalyzing events. So there bank runs, that sort of thing that just, you know, springboard it up. What about that? Like, how does that get resolved? That's part of what I don't understand is how the problem of bonds and treasuries being underwater for some of these banks and the problem of kind of this liquidity of depositors getting sucked out of the banks. I don't know how that gets solved. It feels like we maybe bandated the issue right now, but there are these long-term persistent issues. What's your take on this? Yeah, I think he raises good points, and I think that there's a lot of truth to that. The way I would break it down is that I do think that the Fed balance sheet's going to go up in the longer term, in large part, because they'll end up kind of monetizing something. some of the ongoing large deficits. I think in the intermediate term, it's probably sideways-ish, unless there's some sort of psychological event, right? I think mathematically it can go sideways for a period of time, but, you know, specific bank runs are unpredictable because it's, you know,

it's a social media phenomenon. It's a herd phenomenon. So there's certainly outlier cases that could bring forward some of the problems that I think are otherwise going to happen over time. As far as the sucking, you know, that's why I am concerned around small and medium banks because, you know, if you look back historically, during rate hiking cycles, you know, you have T bills and money markets, they will offer much higher rates. And usually bank deposits are pretty sticky. People don't shop around their banks too frequently. And so you see a widening gap between deposit rates that don't really move, you know, at least on average. And then you have, you know, all those other things. And it's usually because the hiking cycle doesn't last

very long, you know, people aren't just, you know, super-dive, they have other things going on. They don't optimize that. It's not something they focus on. If you start to see basically perceptions around higher for longer, it does start to raise the average deposit floor. We're already seeing early signs of that. Banks are very gradually raising their deposit rates. And in addition, that hurts small banks more than big banks because, for example, J.P. Morgan does not have to raise rates because everybody wants an account at J.P. Morgan, you know, so they can just keep them low or raise them very slowly. Whereas if you're a small bank who's dealing with deposit flight, you don't have to raise rates, deposit rates. And then the problem is that that affects your profitability,

which if it gets bad enough, can affect your solvency. And the funny thing is, if you look at the Federal Reserve themselves, they are unprofitable and they have negative tangible equity. So part of their setting of monetary policy was that they sharply increase the rates on what they pay to banks, what they pay to money markets, while their assets are all these long duration assets. They hold treasuries. They hold mortgage-backed securities. And so the Fed's actually operating at a loss for the first time in modern history. And, they have a trillion dollars in unrealized losses, but of course no one can do a run on the Fed directly. They basically can control their liability side. But you basically see a microcosm,

that shows the extreme event of what a bank can look like if they have to raise their rates all the way up to the current money market T-bill rates. And so I don't think it will get that far, but basically the longer that they stay up here, the more banks have to do it. Now, the way it can resolve is partially a matter of speed. If they have to raise their rates to like three, four percent, you know, this year, you'll see a lot of banks go completely insolvent, get bought out. There's already been a multi-decade process of bank consolidation, basically smaller banks going away, getting either merging together or being absorbed by bigger banks and becoming bigger banks. So I think that's going to continue, possibly accelerate. Now, if the Fed slows down their hiking cycle,

if deposit rates adjust more slowly, basically as certain loans come due and they're redeployed into new loans at higher rates, you know, banks, both their asset side in their, their liability side, I can kind of move up together. What really hurt them here was the sheer speed with which rates went up in a given year. It's the fastest since the 70s in, you know, the number of basis points, and it's the fastest ever in terms of the percent increase, basically because you're going up from such a small base. And so that's what really hurt banks. Lynn, I'm wondering if you could help us with some maybe classroom time with Lynn for a second, because, you know, I have a, like now I feel like I have a fairly decent understanding of what's on a typical bank's

balance sheet, whether it's a small, medium-sized bank in the U.S. or one of the big cannot fail, too big to fail banks. But you mentioned something there about kind of the Fed's balance sheet. And maybe we could kind of look back at this graph here where we see that sort of rise over time. And this is showing $8.9 trillion was kind of the high. And that was in April of 2022 or so. And then 2023, March, we dropped down, you know, quantitative tightening, I believe, was going on. these assets were leaving the Fed balance sheet, and now they've spiked back up, which looks like kind of the liquidity you were talking about. Now, more recently over the last week or so, they're a little bit down. But you said something interesting there, which is like the Fed always

operates with an insolvency. And of course, like, no one can do a run on the bank of the Fed. I'm actually not sure how all of that works. So can you like explain that? It's like, so what is on the Fed's balance sheet? All of these numbers, these trillions of dollars, like, what? are they? And how mechanically does it operate at a loss every year? And why can no one do a run on the Fed? Or what would a run on the Fed even look like if that was possible? Sure, happy to cover it. And they clarify, they don't always operate a loss. Ever since September of last year, they began operating at a loss for the first time in modern history. Usually they operated a profit. And so what the Fed's balance sheet looks like has changed over time. If you go back far enough,

it was gold. But if you just go back before the global financial crisis, let's say, you know, 15 years ago, they mostly own treasuries. So they own treasuries. And just like a, you know, their own treasuries. Is this correct? It's like Fed treasury. It's federal government treasures. Yes, I got it. Yeah, U.S. Treasury, which is a liability for the treasury and asset for the Fed. Right. And, you know, just like any bank has assets and liabilities, a central bank also has assets and liabilities. And so for a central bank, their liabilities are, one, bank notes. So if you have a physical dollar, that's a direct liability of the Fed. Obviously, it pays zero interest rates because you don't you know if you hold a physical dollar it's zero rates and also bank

reserves so you know basically when your bank holds some of their cash they hold it at the Fed and they depending on the era in question they do earn some interest rates on that you know the third component of liability is a little more complex it's reverse repos but it's basically another interest bearing liability for the Fed and so those are three main types of liabilities and then their assets historically were treasuries ever since the 2008 crisis it's consisted of Treasury and mortgage-backed securities. And so they own a ton of treasures and mortgage-backed securities. Those make up the majority of those assets. You know, for most of the past several decades, their assets paid a higher interest rate than their liabilities because their assets are on

average longer duration and their liabilities because of the banknote portion has a zero yielding component. So it's actually pretty hard for their average liability interest rate to exceed their average asset interest rate. But because of the speed with which they raised rates, from such a low base this time. It's the first time in modern history, maybe in the 50s they had it, but it's the first time in modern history where their average liability interest rate

is higher than their average asset because what they pay on bank reserves and what they pay on reverse repos is closer to 5% whereas what they're earning on their treasuries and mortgage-backed securities is, I don't know, 2%, 3% or something like that, not very high.

And so now they're operating at a loss. And in a healthy environment, before they were operating a loss, you know, the Fed would earn say $100 billion a year in that interest spread. And by law, they have to give that to the treasury. So they basically operate profitably. They cover their expenses, and then all of their excess profits go to the treasury. Now that they're not operating at a profit anymore, they basically, they don't have to pay the treasury anymore. And in the future, if they're ever profitable again, they get to pay

themselves back for their accumulated losses before they'd have to send money to the treasury. So the short answer is that in the near term, nothing happens to a central bank when it goes tactically insolvent because no one can do a bank run on it and it can still cover its expenses. If it goes on long enough, then it starts bringing up questions of Fed independence. If they're insolvent and they're having issues like that, then you're probably going to hear from Elizabeth Warren or others every time Powell has to go in Congress and start bringing it up. So there is like a Fed independence question. Independence from what, the political system, the political apparatus? The government, yeah. Basically, central banks, the reason they have assets and liabilities and that they generate a profit is to try to make them independent.

Now, they're not fully independent because they have oversight. Kind of like how the Supreme Court, right, so they're put in a place by the Senate and the president, but once they're in place, they operate pretty independently from Congress or from the president. The president can't just call it the Supreme Court to help them to do something. Similarly, you know, a central bank, their heads are put in place. by the Senate and the president, but once they're in place, unless they're doing something illegal, they're now operating somewhat independently. They have their own funding source. And so, for example, during, I believe it was 2017, President Trump was not happy with Powell raising rates, but it's nothing

you can really do about it. If it was part of the executive branch, a president could, for example, tell a central banker to cut rates six weeks before an election, you know, and boosts the chances. So that's the kind of independence they want to have, that you, the president can't directly tell the head of the central bank what to do. Now, during crises, you know, pandemics, wars, central bank independence kind of goes away more or less. So extreme events, you know, that independence is an illusion, but during routine events, much like the Supreme Court and other things, it's almost like a fourth branch of government. And the reason nobody can do a direct run on a central bank is because all banks in the country have to hold their cash

at the Fed. There's no alternative. There's no error that they can flee to. And the Fed determines what those are. They can increase the amount of cash at those banks in aggregate or holding at the Fed or they can decrease it. Now, the way that a central bank can indirectly have a bank run is if everyone wants to sell the currency. Right. Bitcoin is the run on the bank. If we don't trust that Turkey central bank is going to do well, we sell the lira, and it gets taken out in the value of that currency, not from banks pulling out of their central bank and forcing them to sell and gather realized losses in the way that some of these banks do. Lynn, that is the value of that currency and also the value of those treasuries as well, because they are somewhat one and the same. Are they not? Right? So like when we look at this graph of the Fed central bank balance sheet,

you said all of these trillions in value on the left, these are mainly composed now in the modern fiat Fed, no longer bank reserves. There's a little bit, but I don't know if that's like five or 10 percent or something like this. It's mainly mortgage-backed securities, which of course, like people know, this backed by some property, some like actual house value somewhere out there. and then it's treasuries. And so kind of the question is like, all right, so what is the value of a treasury? Because when someone hears about central banking for the first time, it all seems so self-referential. So your assets are your treasuries? Wait, what? Like, is this monopoly money? Like, so why are the treasuries valuable? Maybe that's my question. Like, why are U.S. treasuries actually valuable? And who gets to say how valuable they are?

Is that where you start to have external country sort of pressure where other currencies are like, or like where the US dollar and treasuries are being devalued relative to other currencies? Tell us about that. Yeah, exactly. So to clarify one point, the bank reserves are a liability for the Fed and an asset for those banks. And they're backed up by treasures and mortgage back security. So to give you a rough magnitude, there's something like $3 trillion in bank reserves at the moment. And those are one of the Fed's liabilities along with physical bank notes and reverse repo.

So that's the liability bucket for the Fed. And then their assets are treasuries, mortgage-backed securities. And this recent spike you see in the chart, that's their loans that they've been making. So around the margins, there's things like loans and assets like that that are liabilities for the bank that borrow the loan and it's an asset for the Fed that made the loan. But the vast majority of their assets are those treasures, mortgage-backed securities. And to answer your question, if you go back far enough, now it's circular. But if you go back far enough, it was non-circular.

Gold was at the foundation of the system. gold is an asset that's not someone else's liability. It's just it's accumulated energy work. No one can just print more of it. You have to go out and find it. And so gold was the underpinned asset. And dollars represented claims, redeemable claims for gold. You know, you could deposit your gold into the banking system and now you had access to all the conveniences of a bank. And for any reason you wanted to pull your money out, you could take it out in gold. And at first it was like free banks where banks held their own gold. And eventually central banks where they held their assets at the central bank and the central bank held gold. And then as we've

moved away from that system, it's backed up by government bonds, which is circular. So, you know, basically every asset is liability. So, you know, the underlying asset for the whole system is essentially treasuries and now mortgage-backed securities too. And those are someone else's liabilities. The treasuries are the government's liability and mortgage-backed securities are homeowners' liabilities. And so you have that circular system. And what determines it is basically international exchange rates, as well as things like prices of real goods and services and alternative monies like gold. So, you know, if you have a country with a severe currency crisis, like let's say you look at Turkey, you look at the value of all of their money, you know, when they're having a problem and

nobody wants to own Turkish paper assets, that'll all decline compared to, say, the market capitalization of gold or compared to the market capitalization of, say, the United States. On other hand, if they get their act together and they strengthen and they stabilize things and more money wants to go back into Turkey, the overall value of their currency and bond market, their paper assets, will increase again to represent that. And what essentially gives a currency some degree of, you know, worthwhileness is that it's kind of like, you know, if there's an arcade and the only way to play all the games was that you needed their token to do it.

Imagine if their tokens were not paid to the dollar. They're just free floating, right? The quality of that arcade determines basically what those tokens are worth. If they have the best games and they don't change things very frequently, you're fine to hold those tokens for a period of time. Whereas if that arcade's on the decline, if they printed a ton of extra tokens,

nobody wants to hold the tokens. And so all these countries, there's like 180 currencies. they're basically local monopolies. And if you live in that jurisdiction, you have to pay taxes with that currency. And so all these basically currencies are receipts to say, okay, this can pay a tax in this country.

So, you know, if you pick a very small, impoverished country, that currency is not going to be worth much. Whereas if you pick a country like the United States or Japan or parts of Europe, things like that, that currency historically holds value reasonably well because it's a more stable system, at least outside of war, crisis, things like that. Bankless Nation, we are getting schooled by Lynn Alden. I love this. If you've not heard this before, I think this is a brilliant explanation of what's going on in central banks. So, Lynn, let me sort of

maybe try to summarize a little bit of this. So the U.S. treasuries are so valuable, and therefore the dollar is so valuable because the U.S. right now has the best arcade in the game, or maybe has for the last 80 years since Bretton Woods and people want great games, you could buy petrol with the dollar, all sorts of things. If I were to sort of abstractly, now that the dollar is very self-referential, it's all kind of fiat based,

and if I were to look at a treasury, is this kind of like a metric of U.S. power dominance, or is it like the U.S. military, or is it the strength of the U.S. economy? Or is it just like, I don't know, the games in the arcade

is maybe that the better way to phrase it? Some people say that the dollar is valuable because the U.S. has the strongest military in the world. Is that an oversimplification? What would you say to kind of summarize where the value of treasuries is actually coming from? I would say the economy and capital markets are the number one thing with military being a second. And it mattered more in the past. And so basically, if you go back to the world picture, there's roughly 180 currencies and they have ironically a barter problem. How does Nigeria trade with South Korea? They don't trust each other's ledgers. necessarily, right? Because either one of them can, you know, print all the currency they want. And so historically, it was gold. The problem is gold is it's not very quick. And so right now,

what they do is they all kind of look at the United States and say, well, you know, South Korea doesn't necessarily trust Nigeria. Nigeria doesn't necessarily trust South Korea. But they both say, well, we'll use dollars, right? Because dollar, you know, the United States is big, relatively stable, and so we can use dollars for that international solving of the barter problem. And, you know, if you look back historically, it was, you know, the United Kingdom had the global reserve currency until roughly World War I, World War II is kind of this multi-step decline. You had the rise of the United States after World War II because we were relatively unharmed by the war. We emerged by far stronger than anyone else. And so we did the Bretton Wood system, which is we basically said, okay, all your

other currencies pegged to the dollar, the dollar will be pegged to gold. And that's how we'll do international settlements. That lasted from 1940s until 1971 when the United States defaulted on gold because there were too many dollars compared to gold. And so then we've been in this floating era. And the way that the United States was able to maintain that was kind of two ways. One is that there still was no alternative if you want fast international settlements. There was no currency better than the dollar in the 70s after that default. And two, the United States made deals with Saudi Arabia and other countries to only sell their oil and dollar. and to hold a lot of their surpluses in treasuries to basically, you know, kind of kickstart this

network effect that was somewhat already there because of that Brettonwood system. And so now at this point, it's kind of a multi-decade network effect of one, biggest economy in the world, two, you know, reasonably strong property rights, rule of law, depth of capital markets. So no capital controls. So treasuries are pretty liquid market. S&P 500 is pretty liquid. bond market's liquid. You can buy and sell and move around pretty readily unless you're, you know, a pariah state pretty much. Basically, that's how it's been for a while. It's kind of viewed as almost like neutral territory with tons of depth and stability. Whereas China now is rivaling the United States in terms of some scales, but they have capital

controls. And so it's a, and less overall property rights, rule of law, but it's more like whatever the leadership wants to do, rather than kind of like independent institutions, and open borders. And so that's not really a good alternative yet, although around the margins, it's going from, say, 0% to 5% rising in terms of usage. So I think we're kind of pointing towards a more multipolar world, but essentially what gives that strength so far is the size of the economy. And Ray Dalio did some research on this a while ago. He would map reserve currency countries in terms of multiple metrics, so education, innovation, military, size of the economy and then their percentage of like world reserve holdings. And generally the

reserve holding is on a lag. So usually education, innovation, economy go up first and then the currency usage on the global scale follows. And then those things peak. And then some decades later, currency peaks and then starts rolling over. So the United States, in many metrics, you know, peaked relative to others roughly 20 years ago. And our currency is kind of rolling over, but it's still near the peak because it's one of the last things it starts to stagnate because it's got that momentum. It's got that network effect from all those prior decades. You know Uniswap as the world's largest decks with over $1.4 trillion in trading volume. But it's so much more.

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having to explain crypto concepts to your friends, go to learn.menomask.io and add Metamask learn to your guides to get onboarded into the world of Web3. While we've been talking, there's this been visual, this like spectrum that's been going on in my head. And when we talk about just the composition of the Federal Reserve's balance sheet, this is like the deepest pool in the ocean, the deepest part of the sea, the most liquid part of like the world. Right. And really this conversation and this banking crisis started, and I've been using this phrase across a couple podcast, like the long tail of banks. And I think the smallest and most regional banks, probably as a trend to make a blanket statement, the smallest banks got hurt the worst. And the biggest

banks got hurt the least worst. And ever since this banking crisis started to unfold, there's been this flight up the liquidity pools, like down towards the gravitational center, which is the Federal Reserves Balance Sheet. And the closer you are to the Federal Reserve's balance sheet, the safer you are. Like the bigger banks are super safe. And a small, you are the smaller banks. smallest and most regional banks are the ones that are most insolvent or most illiquid. And then we skipped into this conversation of like, okay, well, what happens when you do a run on the central bank? What does that hypothetically look like? And the answer is like, oh, well, you look at external currencies, external fiat assets. And so the visual I want to put in

bankless listeners' heads is that like the kind of like of a river and a river is that like converge and converge. And then they ultimately converge at like the deepest part of the ocean, right? Eventually all rivers lead to the ocean. I want to actually go back to the other end of this spectrum, where we talked about like the long tail of banks that serves a long tail of the economy. Because Lynn, what you just said just now is that like fiat demand and economic demand creates fiat demand. But right now, if I'm understanding this correctly, and I want to get your opinion on this, is that since the long tail banks are going to have a profitability problem, they're likely, I'm guessing, not going to be giving out credit. They're not going to be giving

a lot of credit out to their particular regions, which means, like, the rural areas of the economy are going to be credit underserved and undergrowth. And really, when we see this sucking, again, talking about that sucking up to the big banks and up to the Federal Reserve's balance sheet, to me, I hear that we are pulling away growth and innovation from the long-tail parts of the economy. And I want to get your perspective on on, like, what that does for the next five to 10 to 15 years of economic growth in the United States. and then after, like, we talk about this for a little bit, I want to zoom back out to like what that means for the role of the dollar. But first, can you talk about just like the

impact of the economy as a result of this sucking away of credit and capital away from the long tail? Yeah, I think it's actually a really good set of questions. You know, if you look at banks nationwide, smaller banks have a higher ratio of assets that are in loans. So they make individual loans to individuals or companies. Whereas larger banks, they do lending, but they hold a lot more securities. And, you know, when they do make loans, it's usually to very large entities. So, you know, big banks make loans to big entities and small banks generally make loans to smaller entities, you know, especially when talking about businesses. And so to the extent that the small bank environment is less vibrant, that is generally economy negative, generally negative for

smaller businesses, things like that. Now, I think the good news is it's not as though that whole long tails and solvents. I mean, there are plenty of small banks and credit unions that, you know, they manage their duration well. Most of their depositors are under the FDIC limit. So they're not, you know, they're less at risk of like immediate flight run. And instead, I think the main risk is that as they gradually have to increase their deposit rates in order to not have all their money flow to JPMorgan or money markets, they're going to face ongoing profitability problems. And yes, they're probably going to curtail their lending, especially if the Fed tries to stay tight and tries to keep liquidity down. And so what that generally does is it points to a period of

disinflation and potentially a recession. If we're talking six months, 12 months, 18 months, it generally points in that direction. Now, things can change between now and then that could reinvigorate it. So on one hand, you have pretty inflationary factors. The fact that the Fed is not tightening as fast as they were is somewhat inflationary. If we start to see China open up and spike oil prices, for example, that could be inflationary. There are a number of inflationary catalysts and risks out there. And I think the longer term story is going to be probably future waves of inflation. I think the near-term story, at least for now, was still some period of disinflation, which is demands coming down, lending is going to go down, and that kind of

points towards stagnation, recession, until there's some sort of policy change or something that kind of kickstart the next cycle. When you zoom out long term, you know, it's interesting. Most countries have fewer banks, even on a per capita basis than the United States. We're actually kind of an outlier in terms of how many small banks we have, even though the number's gone down dramatically over the past 50 years. We used to have like 13,000 banks, and now we have like 4,000 banks just in the past 50 years. And if you go back further than that, it was well over 20,000 banks. So we've actually, we've gone down quite a bit. But if look at Canada, for example, they're way more consolidated into their top four or six banks. If look at the UK, also more

consolidated. And I think, I mean, you could argue that our small bank long tail that we have compared to other countries is one of our sources of innovation because they can experiment more they can specialize more. If everybody has to go to Bank of America, they might not get the lending they otherwise would have gotten. And so I do think that's a, it's not healthy in the long term, but I think it's something that's going to keep continuing regardless. I think that we're going to see that ongoing sucking towards the larger and larger banks and money markets, things like that. Yeah. And since larger and larger banks are generally more like risk averse, and like you said, it's these smaller banks that are willing to specialize and get into the nicks and crannies of the economy,

It seems there's like an overall damper on innovation, right? I think around the margin, yes. Now, I think that some of these, I mean, obviously I think Silicon Valley Bank got excessive. You know, there are other banks that specialize in farm lending. You know, there's all sorts of different pockets. They know their community well. They know their industry well. They specialize.

So, yeah, I do think it's not healthy to have more centralization of lending decisions. Basically, access to credit in this system we've constructed that we live in is of significant importance. And so I do think it's probably going to slow down. And then also, when you just zoom out in general, you know, we've had this kind of 40-year period of ever-lower interest rates and ever higher equity valuations, ever higher, you know, X, Y, Z, of real estate valuations, things like that. And I think a challenge that we're now going into a trend where industry rates are sideways to up.

And so a lot of these valuations of, say, equities, real estate, things like that, even if they grind alongside ways in nominal terms or even if, you know, if inflation is high enough, they could even go up in nominal terms. but I think in say inflation adjusted terms, a lot of these assets are probably not going to perform very well. That can blow up the government deficit because they're kind of reliant on ever larger capital gains taxes. Asset prices are always going up. And so I do think that the United States does enter somewhat of a situation we've already kind of seen in Japan or Europe of a period of stagnation. That's at least the risk, you know, if things kind of continue pointing in this direction.

Okay. So that was the long tail of the economy. Now that we're talking about, again, like the macro, let's just ask the question, if we do enter a stagnation era, what does that do for the position of the dollar in the global ecosystem? We have a couple tweets that we're about to pull up, but just like the topic of dollar hegemony. Like, is this perhaps a time to rethink the dollar's role in the world? So I do think we're seeing diversification. Now, there's like two sides of this that I think are both wrong. There are people that are always calling for like the immediate end of dollar hegemony right around the corner.

And they've been doing this for 10, 15, 20 plus years. They're always early. It's always hype driven. It's like, okay, 5, 10, 15, 20 years go by. And it's like, no, that's not what happened. Whereas other people are basically saying, no, all that's a conspiracy theory. It's going to stay like this forever. Nothing's going to change.

And I think that's obviously, it's very backward looking. It's not dynamic. I think, you know, what we're seeing now, China has rivaled the United States in terms of economy size and some metrics. So they're way higher than us in industrial production. more skyscrapers, more electricity, bigger commodity importer. They're the largest trade partner with most countries in the world. It used to be the United States. Now it's China. They're still weaker on military, and then they're way weaker on capital controls and openness. So most countries feel

more comfortable holding U.S. assets than China, you know, unless you're Russia or unless you're Iran, unless you're basically outside of that Western sphere and you're looking eastward now. So I think we're kind of trending towards is a more multipolar world where instead of the States kind of being the only game in town. I think we're, especially with the war and the seizing of reserves, you know, countries don't want to have all their assets, you know, in the United States sphere. They want to diversify their assets. They want to have diversified payment systems so they can't be cut off from global trade. They don't want their assets seized. And so I think we're seeing kind of these regional poles of power where the United States is still a, you know,

currently the leading currency around. You know, it's better than the euro in many ways. It's more open than the yuan. It's still the number one or number two economy. And then you have these other ones that are competing around the margins, especially if you're, you know, culturally or economically tied to China more so than the United States. And we've also seen a rise in gold. So, you know, from the 70s until 2008, you had a decline in gold ownership among central banks globally. And they basically shifted out of gold and more towards dollars. Ever since the 2008 financial crisis, So the bottom, you know, central banks got down to like just under 30,000 tons in 2009. And then ever since then, it's been a V-shaped recovery.

They're just increasing their gold tonnage over time. They're back up to something like 36,000 tons. And that's kind of like, you know, neutral ground. You know, if a country holds gold reserves and it actually self-custodies of them, they now have this like sanction-resistant asset that is no one can print it. It's slow, but at least it's theirs. And they can over time use it if they need to. And so I think we're seeing a little bit more of a diversification where, you know, Brazil says, I want to hold dollars, I want to hold gold.

You know, I'm willing to hold some Chinese you want as well because they're a big trading partner. And I think you just see that a little bit more global decentralization. And then I'm hoping you can make the case for frequently on bank lists we talk about stable coins and crypto rails as a really good way for the United States government to maintain supremacy of the dollar. And that's perhaps why they should adopt these systems. But I actually want to leave that conversation just aside because it's actually adjacent to the topic at hand. I'm hoping you can actually present the bulkcase for actually the United States not having the world's global reserve currency. Like, why might this be good for our economy? Why might this be good for the actual people of the United States rather than just like being able to fund and finance our military?

Like, why should we be perhaps interested in exploring this future? Yeah, it's a good question because when people talk about dollar hegemony, they implicitly assume, it's a bad thing should it be lost. And they don't ask for who and why. And so basically the way that this works is that, you know, if we go back to the Bretton Wood system when it was all pegged to gold, the downside of the system is that in order to maintain it, the United States got emptied out of its gold reserves. We went from like 20,000 tons of gold down to like 8,000 tons until we defaulted on the system. So that was the cost of maintaining. We got a lot of advantages from it, but we also, that was our cost. We had to basically keep outsourcing our gold in order to

maintain it. And when we pivoted towards putting the treasury at the heart of the global system in the 1970s, our cost, so most currencies, the value of their currency in large part trades on how desirable it is to hold it. But another big factor is trade balances. You know, if Japan sells way more stuff than it buys globally, there's basically more revenue flowing into Japan. And that tends to keep the value of their, all else being equal, the value of their currency, you know, strongly strong. And if a country starts running persistent trade deficits, usually their currency weakens, and that has a natural effect where they're able to buy less, they're able to import less, and at the same time, their ability to export gets more competitive because they're poorer

and their labor is now cheaper and it might be more cost effective to put a factory there, assuming they still have, they're operating socially. On the other hand, if a country has a trade surplus, usually their currency will appreciate and that'll increase their import power and decrease their ability to export things cost effectively. And so that can actually shrink their trade surplus back down over time. So you kind of have this natural, you know, they kind of want to keep pushing towards a neutral trade balance through currencies. Now, one thing that happens is a problem is if a country has an extra monetary premium place on it, if more people want to hold dollars, even if they're not trading with the United States, then what it does is our currency is always a little bit stronger than it should be, which means we always have a little bit extra import power, but we also have a little bit less export competitiveness, all else being equal. And so it kind of contributes to us having a structural, like five decade long trade deficit, which basically means that we've kind of hollowed out.

our industrial base. So our ability to make cars, our ability to make precision engineering equipment, our ability to do X, Y, Z has been heavily impaired. It doesn't mean we can't. You know, if some companies particularly good, they can still be in the United States. But it's just all of the headwinds are against us in that regard. And it's way more cost effective to produce electronics and all sorts of stuff in China, Taiwan, all these other countries. And it's gotten to the point where it's gone on so long, where it's almost a national security issue, where we can't even, you know, if we want to build electronics for our military. If I want to build electronics for this, you know, if China

cuts us off, you know, we can cut them off and cause them national security issues on certain things, but they can also cut us off and cause national security things. And so we've hollowed ourselves out enough. And that's actually a downside of the system that basically having dollar hegemony is really good for the military industrial complex. It's really good for DC. It's really good for the banks. It's really good for, it's kind of neutral to good if you work in an industry where you're not trying to export kind of lower margin. thing. So if you're, you know, if you work in tech, if you work in healthcare, it's probably pretty good for you. Whereas if you are a blue-collar worker or you basically want to make stuff

in America and sell it abroad, that's, you know, it's been negative for that group. And it's kind of been negative industrial policy, pro-financialization policy. So if that were to reverse, it'd be very painful at first. But then depending on how we handled it, it would also allow us our economy more balanced again the way it was decades ago. Yeah. And so the idea here is that because the United States dollars is the World Reserve currency, we export dollars instead of exporting products, instead of exporting nouns, widgets. And so because we can't compete, our own manufacturing, our domestic manufacturing can't compete with our ability to export dollars. Why can't that be true? Because the Federal Reserve can print dollars for free, where it takes labor and materials

to produce widgets, the Federal Reserve can just press print and export that instead. So this is like where American like exceptionalism comes in. We just have all these free tailwinds because the world like demands our dollars. And so like that's the argument for why perhaps the dollar should not be or ought not to be or perhaps could not be the hegemonic currency of the world. And Lynn, when we had you on previously, I asked you the question, we've talked about this a few times of foreign bank lists, but it's been a while. I asked you the question, did the role of the United States dollar as the global reserve currency perhaps impact the 2016 election with Donald Trump versus the, you know, the Democrats. And the idea here is that he won a bunch of

swing states that were previously blue, that swung red, that were all manufacturing states. And this is why I started this series of questions with talking about the long tail of banks and the long tail of the economy. I'm wondering if you see similar political divisions as a result of this banking crisis, banking insolvency, because if all this credit is getting sucked away from the long tail and pulled into the Federal Reserve and perhaps a different currency, might this also create more further left versus blue divisions in the economy? Is this something to be worried about? Do have any perspectives here? I do. I think this does contribute to populism, and it can take different forms. Obviously, one of them is the Trumpian wing of the Republican Party. That's one of the forms

of populism. And I do think that's the type of things where you suddenly get more anti-establishment surprises with how elections can go and with things like that. And, you know, I think Luke Groman, the analyst, made a really good observation, which is basically the Petra Dollar System was probably a very good idea strategically during the Cold War, which is basically that the United States secured, you know, energy secured kind of its, you know, position in the Middle East, kind of pushed out Soviet Union. All made sense. After the Soviet Union fell and, you know, we're now in, say, the early 90s, that was probably

a time to pivot and change the system, make it more balanced. But they didn't do that. And so ever since then, the system in many ways has been harming us more than hurting us. Now, it's still helpful for the military. It's still helpful for certain kind of establishment interests. But it has been pretty negative for, let's call it the heartland, the industrial part of the economy. And so we've kind of been in this position where if you're an executive and multinational corporation, if you work around D.C.

If you work in tech or health care, you're probably doing pretty good finance. whereas if you're outside of those kind of segments, it's been this long period of stagnation and these other countries kind of eating your lunch. And that does cause, you know, just overall more polarization. And also because most people can't go into the detail of why that is, but they know something's wrong. And I think you see it come out in various ways. There's certain types of left populism and certain types of right populism, but the general theme is kind of populism and anti-establishment and people know something's wrong and then they express it in different ways. And I do think that's a risk and it's something that as long as we have the system

kind of unchanged, I think that problem is going to either remain or possibly get worse. This is really fascinating because before we started talking about like the dollar hegemony and the dollar is the reserve currency of the world, you were kind of painting a picture of a very choppy decade, right? That could have some form of like, you know, inflation on the one side and then deflation, recession on the other side. And what keeps going through my mind, head is whenever the Fed is printing or whenever there's talk about inflation or deflation or recession is like this ain't going to be good for wealth inequality in the United States. That's what I always think. I mean, just like let's say the money printer goes back on, Lynn, in some time over this decade,

which likely will. The North or Hays is right. Or apology is correct. We know where the money printer inflation primarily goes. And that's the asset prices, right? We have just a delta between the wealthiest United States and like the least wealthy that hasn't been seen since what like I don't know the 1920s before the robber baron era and so as you're painting the picture of the next 10 year that is just looking very bleak from a wealth inequality perspective and that's why we see wealth inequality spills out into our politics and all of these social issues I had never actually considered I think or thought deeply about the idea that well maybe the path out of wealth inequality and some of the social fracturing we see right now is the loss of the dollar as the reserve currency. That's kind of an

interesting thing. Maybe the antidote is the dollar is no longer the export to the world. And we kind of reverse this and get manufacturing blue collar jobs back into the United States. But I also have to like pause it and sort of wonder if reserve currency status isn't somewhat like a ring of power. Do you know? Just like Lord of the Ring style where you have the ring of power and you know it's better for you to like give it up and it's hollowing you out on the inside and you're like turning from looking like a hobbit to more and more like a gollum every single day. But it's just you can't give it away. You can't like cast it into the fire. And that is the core problem because it is such a powerful tool, isn't it? And I don't know, maybe this

goes back to Dalia's book. I don't know if there's been in the history of empires rising and falling if there's ever been an empire who has cast the ring into the fire and said, no longer. we no longer want to be the reserve currency of the world. We'll hand that off to a succeeding empire. And so I wonder if the United States is just in this impossible state. Do you have any reflections on this? Yeah, it's a great set of questions. And one is that large organizations really disrupt themselves, whether the governments or corporations, they usually get disrupted rather than disrupt themselves. And so they generally don't see the flaw in their current thing. They assumed, okay, it worked 50 years ago, it's still going to work. And it's just not working anymore. But they don't really realize

that. And to use Lord of the Rings analogy, you know, I think that the challenge is that if they were to pivot from a position of strength, then they could make use of that fact, right? That basically, if they were to support global payments, diversification of reserves, that'd be probably ironically a good thing for the United States in the long run, but they're probably not going to do that. And so basically, like, you know, in the books and the movies, Bilbo, he was one of the ones that was pretty good at getting rid of the ring before it really, you know, he got some corruption. Yeah. But he got, but he didn't turn a gallant. he got rid of it, whereas Gallup is an example, someone who held it way, way, way too long.

And so, you know, if the United States were to say, you know, pivot after the Cold War, that'd be the best time to pivot. If they were to make more practical decisions to pivot now and kind of, you know, kind of solve that problem now, be more like, you know, Bilbo or something like that. But as long as they kind of continue them this path, it's more likely the Gallum route. It's, it gets messier. And, you know, as far as money printing goes, I think the challenge with that narrative is that it's one variable among many. So when you look at Japan, for example, you know, no balance sheet has

gone up quicker than Japan's. You know, their broad money supply has been actually slow growth, but their central bank balance sheet has gone up tremendously, and it's over 100% of GDP, and yet they have less wealth inequality than the United States. And the question is why. And it's, of course, because they're doing other things. They spend very little in the military, their health care per capita is way lower, even though they live longer and they're on average older. Basically, it's their fiscal things that determine in large part, you know, there's still have, there's poor Japanese people, there's rich Japanese people. It's a capital system, but you have those less extremes, a higher average median. And in the United States, because a lot of our budget goes to the military,

we have the highest per capita healthcare costs in the world. There's a number of factors that, apart from just the money printing that contribute to wealth concentration. And so a lot of that is kind of just individual policies that we've decided. And that's also, that tends to be an artifact of being a global reserve currency, that you look more like an empire where, you know, we project outward while kind of forgetting about our homeland. So, you know, the Brown University estimated that we spent $5.8 trillion now on the war on terror. That's, you know, Afghanistan, Iraq, all these other stuff. And it's partially from the war itself. It's partially from a problem. permanent increase in expenditure, so permanent DOD increase, permanent Department of Home and

Security, veterans benefits, interest on the debt, 5.8 trillion. While at home, our bridges are like, you know, on average, very old and, you know, increasingly problematic. Our infrastructure is not great. It's kind of like we're so focused outward that we hollow ourselves out inward in multiple ways. And I think that's, that's a challenge. And it's ideally we would pivot out of that and focus more domestically, but I think that they, you know, they rarely pivot from a position of strength. That really is the story of empires, isn't it? I mean, you know, the Roman Empire and fighting wars and conquering lands all the way up to England and sort of forgetting about the domestic side of things and what actual Romans need in the city of Rome. You think we were to learn by now.

So, Lynn, how does this reserve currency thing work out then if you were to give us kind of the summary of this part? So you're thinking that there is a much more multi-pontory. polar world with respect to the reserve currency. So do you see the dollar diminishing as a percentage of use worldwide and the wand sort of taking a stronger role? Gold reserve currencies going up? Or is there any position for digital gold type crypto monetary systems here? How do you see this evolves over the next 10 to 20 years? And let's just assume that the U.S. is kind of taking the fate of Gullum and trying to grasp at the ring and hold it tight and not freely give up reserve currency status. So what happens with the world reserve currency mixed,

do you think? So I think the general trend. Now, when you look out far enough, it's one of those things that people, you know, it's not a lot can happen in a year, but a lot can happen in 10, 20 years. And so the further out you go, obviously the hardest is to predict. But essentially the general trend, I think, is that the gold trend is probably going to continue ever since it has since 2009. So especially kind of Bricks Nations will be more likely to want to hold more gold than less gold. So I think that that ratio will keep inching higher. The Juan is starting from a very small base, but I think it's generally going to increase somewhat. It has been for the past few years. There's been recent announcements that are likely to continue accelerating it. And so I think that'll

become an increasingly non-trivial percentage. I don't think it'll be anywhere near the dollar anytime soon, but the fact that it comes off zero, diversifies things somewhat, both in terms of payment, you know, the ability for countries to do censorship, persistent payments with each other, as well as, you know, what they hold their money in and therefore, you know, what countries they're exposed to, who can seize their funds, that kind of thing, just more diversification. As far as, you know, digital gold, basically, I do get the question on Bitcoin, for example, and the issue is that is still too small. You know, even though Bitcoin is pretty big for many of us, it's still small in terms of, you know, global oil trade is over $2 trillion a year, for example. And we're talking about

an asset that's hundreds of billions of dollars. It's still small enough that whales can move it. And so basically I think that as it gets bigger, that does become more interesting because you have a reserve asset and you have global payment possibility. But I think that people expecting that to happen in a year or two or three, it's premature. And we'll see how this technology matures and solidifies and gets bigger to the extent that it might become relevant. And going back to your prior point about stable coins, you know, it's interesting because that's also an area that's gone against the trend, which is that central banks are mildly de-dollarizing over. the course of the number of years, while stable coins, you know, the people are not de-dollarizing, right? So people in Egypt are not de-dollarizing. People in Nigeria are not de-dollarizing, even though many central banks around the margins are slightly de-dollarizing. So if you look at

stable coin issuance, it's over 99% dollars. And a lot of that is, you know, some of that's obviously defy and stuff, but a lot of that, especially on, you know, the lower fee, that's a lot of that is these developing market use cases where they want dollars, but they don't trust their local banking system. And should the United States support that, that I think has run away ahead of it. There's still a lot of people out there that want dollars. Now, we talked about actually the downside of so many people wanting dollars. We just covered all that for the United States. But in their mind, basically, the more that they support and allow those stable coins to exist, it does, I think, you know, keep the dollar going for a longer period of time because there's more

hands out there that they want to hold it. Whereas if they, you know, if they get super aggressive and they cut off stable coins from, you know, the offshore banking system and things like that, that can perhaps further accelerate the diversification that we're going to see probably among currencies. So I think what timeline we look out at depends on one technology, you know, the evolution of technology over time, and then two, political decisions of whether or not they realize certain things, they want to promote certain things, or whether they want to pull back. And a general challenge overall is that in periods we have high sovereign debt and some sort of inflationary pressure, you're more likely to get capital controls. You're more likely to get,

you know, lending restrictions, things like that. I think we're seeing it around the margins with, say, you know, Operation choke point, things like that. And I think the base case should be to expect that to somewhat continue. And that's a risk that we all have to deal with to varying degrees. Yeah, in a multipolar world, I don't think it takes too much imagination to understand that crypto probably does pretty well in a multipolar world. But Lynn, I do take your point that right now, the market cap of Bitcoin just isn't sufficiently large to support an entire country's or just like a net effect of migration from, you know, dollar dominance to multipolar. That also includes Bitcoin.

But, and this will be speculation on the future. So we, of course, cannot read the future. I still would expect that, like, in a world where there is demand for a diversified currency base and Bitcoin is at the still somewhat cute market cap of something like 600 billion, $700 billion, there would still be like a magnet pulling that thing upwards into the multi-trillion dollar market cap regardless, right? I think so. And a combination of that demand of just the nature of a multipolar currency world

benefiting Bitcoin plus, again, technology moving digital, and then also just the general downtrend of fiat currencies, and then also just the passing of time. Like give it two to four years. Bitcoin is in a, never mind the last 15 or so months, Bitcoin is in a 15-year bull market. And so fast forward to two to four to six years, this perhaps is when like the liquidity profile of Bitcoin could support something equivalently large as an entire nation's demand for its currency. Do you agree with this sentiment? Yeah, I think the long arc of time points towards this becoming relevant on a global scale.

It's already relevant for people, right? It's relevant for individual Nigerians, individual Argentinians, individual people in Lebanon. It's already kind of a, you know, global money for people. And the largest pools of capital, it's still, you know, kind of too small for them. But I think, you know, central bankers and sovereign wealth funds would be insane not to be looking at it and studying it. And, you know, smaller countries have an edge where they can, you know, it can be relevant for them sooner than it's relevant for the big countries. We've seen that perhaps with El Salvador. We'll see how that's the world unfolds. But you kind of see, you know, these rebel. countries can kind of get into it a little bit early. We've already seen, you know, probably like

North Korea, unfortunately, is into it because for them, it's like a tool, kind of like buying drugs in the internet, whatever. There is a tool, kind of like how in the 80s, drug dealers were early adopters of pagers. You know, it's just, that's how it works. It's useful technology. Yeah, it's just kind of how it works. When the internet came out, you know, the first thing it was used for was, you know, the things that are not the most savory. That's kind of how this works. So there's some early adopters that have a stronger catalyst to get in there quick. But basically as it gets larger and more liquid, less volatile, more widely held, more understood, that's when I think it starts to get relevant on the sovereign scale.

So these rebels are defecting first. Lynn, this has been so much fun. Thank you for explaining all of these things and rounding out some of the conversations, the series of conversations we've been having. I got to end with this. So what do we do about this? We've had you on before, and you've talked about sort of a portfolio. composition and certainly for the 2020s being long on harder assets. The digital or also,

you know, not the digital. We have rebel countries defecting. Do you have a rebel portfolio prescription, Lynn, how do we, how do we weather the next 10 years of uncertainty or even the next regime change, the next wave of what the Fed is going to do next? So I think it's going to look different for a 25-year-old and a 75-year-old, but, you know, I've kind of pointed towards, say, a three-pillar portfolio, which is one pillar, you know, profitable equities, you know, kind of, you know, 4-1-K stuff. Another pillar of commodity or alternative money exposure. So energy producers, copper producers, steel producers, gold, Bitcoin, that kind of asset.

And then the third pillar is cash equivalence, T-bills, money markets, things that are, you know, you pay your bills with that you have like a volatility reduction that you can then rebalance into the other pillars should there be volatility events. Obviously, younger investors can push out further on their risk. horizon. Older investors have to be more careful the volatility they take. A challenge in our space is that because of how extreme these events are, you have to worry about idiosyncratic events like bans or being severed from financial system, things like that, which is why I, you know, even when someone's very bullish on an asset, they should consider the tail risks and what they

would do if certain tail risks materialize and therefore have enough diversification that they're able to recover, they're able to take action, that they can, you know, make use of that as it unfolds, Even while, you know, naturally, wealth tends to be built by taking pretty significant bets, having a vision, if you're right, whereas wealth is kept by some degree of a diversification. And so every investor, depending on their age, depending on their conviction, their knowledge, they can determine how contrary or diverse they want to be. But I think that's the general thing to do is be focused on these kind of hard assets, things that have real value, you know, 10, 20 years in the future.

and then just being liquid and being conservative enough to realize that it's going to be a volatile journey. Because you said the words tail risk, I got to ask you, do you think crypto is the ultimate tail risk asset? That is basically the thesis that Arthur Hayes conveyed. So let's say there is some tail risk event having a bankless money outside of the existing system. Of course, like if you buy oil or gold or those sorts of things, generally you're buying IOUs for these items. Whereas with a Bitcoin or an Ethereum or some cryptocurrency, you can hold the genuine artifact yourself in a self-custodial way. Do you think there's value in these trying times? I do, yeah.

And so, you know, we've already seen cases where, for example, a woman from Afghanistan left the country, made this perilous journey. Like Alex Gladstein's covered it. She gets to the Germany. She has Bitcoin with her. You know, she got robbed. She had to, you know, all this stuff happened, but she still has her 12 words and, you know, can access it. I know a person who, you know, left Venezuela with Bitcoins, right? You know, the mining equipment was seized, but they couldn't get the Bitcoin and you're out. So if you can physically get out,

you know, the fact that you have this kind of portable, you have access to a portable ledger is very useful. And, you know, historically, gold has been that tail risk. And it can be domestically, right, because you have this asset, it doesn't need the internet, you know, it's resistant to all sorts of things, but you can't really bring it globally. You know, you can't bring a large amount of gold through an airport. You can't, you know, there's all sorts of restrictions. You can only bring small amounts. Whereas what makes, say, something like Bitcoin useful is that if, you know, if you know what you're doing, you're tied into this global ledger and value flows more internationally. So I think it's absolutely tail risk insurance, especially for anyone who wants to be mobile and have

their own self-custodial wealth. That's right. When they call us Stoom State Preppers, I say it's just tail risk insurance. That's all. That's all crypto is. Lynn, it's been so much fun to have you on today and to walk through all of that. I learned a lot, as I always do, spending time with you. They're always rational. Lynn Alden, we appreciate you coming on bankless once again. Thanks for having me. Happy to be here. Risk and disclaimers, guys. Of course, none of this has been financial advice. We don't know what tail risks await. We only know they probably are coming. Crypto is risky. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey.

a lot.