Bankless - 76 - Inflation in 2021 | Lyn Alden

Episode Date: August 2, 2021

Lyn Alden returns to the podcast, this time to discuss Inflation. Founder of Lyn Alden Investments, we keep coming back to Lyn because of her sharp analysis and compelling macro takes. We explore the three types of inflation, how they intersect and affect one another, and what this means for the global outlook of crypto and society. ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  🎖 CLAIM YOUR BADGE: https://newsletter.banklesshq.com/p/-guide-2-using-the-bankless-badge  ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini  🔀 BALANCER | EXCHANGE & POOL ASSETS https://bankless.cc/balancer  👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave  🦄 UNISWAP | DECENTRALIZED FUNDING http://bankless.cc/uniswap  ------ Topics Covered: 0:00 Intro 6:00 Lyn Alden & Overview 10:08 Fiscal Policies & COVID 19:02 3 Types of Inflation 27:22 Ordering & Measuring 32:50 The Long Arc of History 40:57 Transitory or Permanent? 49:22 Wages vs Assets 56:08 The Effects of Inflation 1:00:00 Winners and Losers 1:09:40 A Global Perspective 1:16:40 The Death of Dollar Dominance 1:23:03 Multi-Polar Reserve Currency 1:27:50 COVID Delta Variant 1:32:57 Where Crypto Comes In 1:39:12 Ethereum & The Bull Market 1:45:34 Advice for Listeners 1:48:34 Closing & Disclaimers ------ Resources: Lyn on Twitter: https://twitter.com/LynAldenContact?s=20  Lyn's Website & Newsletter: https://www.lynalden.com/  ----- 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://newsletter.banklesshq.com/p/bankless-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. David, inflation episode. We booked Lynn Alden on this episode because we wanted to learn more about inflation. It's in the headlines. It's everywhere. I feel like for the first time, maybe I'm experiencing it in everyday life. What a fantastic conversation with Lynn, huh? Inflation in 2021, I think, is a massive subject that we're all trying to wrap our heads around. And I'm actually really excited that I think the number one person to help answer this question

is a crypto person. I mean, Lynn Alden, she isn't exclusively a crypto person, but she really understands crypto to a very deep degree. And, you know, talks about crypto when when we talk about inflation. Interestingly enough, however, Ryan, we obviously actually didn't get to the crypto conversation until the very, very end of the podcast. It was inflation for like the first two-thirds of it. But this is a subject that I really wanted to answer for my own benefit. And we had to just go out to the leading expert on inflation and federal Federal Reserve policy, monetary policy, macro markets to help us understand like what the heck is going on with inflation in 2021. Yeah, it's funny because I feel like,

I'm seeing in everyday life, like at the grocery store, right? You know, like gas pump, like restaurant prices, supply shortages. Ever since we had Jim Bianco on and he talked about, hey, when inflation comes, you'll feel it in the form of all these things you can't get that you want. All of these like disparities in supply and demand. And I'm starting to see that everywhere. So I think it was really important. We've never had a episode that.

just dives right into the topic of inflation and it's three forms. And that's what this episode is. So if you don't know anything about inflation, this is a fantastic episode. If you know a decent amount like intermediate level, this is still a fantastic episode because Lynn gives these really deep and nuanced explanations of just about every facet of this thing, whether it's like the geopolitical implications or wage earners versus kind of capital asset holders or like all of the related subjects of you know what the Fed can do about this super nuanced super detailed this is kind of a canonical episode for me at least on inflation I plan to listen to this a few more times I find it really interesting at the very least partly also concerning that the most

the person that can explain inflation with with the level of precision that Lynn Alden can, that's not, it's not coming from the Federal Reserve. Like the word salad coming out of the Federal Reserve is not helping me understand what inflation is. Who's helping me understand what inflation is? Is somebody like Lynn Alden, who, you know, private sector does her own research, pays attention to crypto.

And not somebody you're going to see on CNBC, right? Right. Yeah, yeah. And so, like, the person that I go to to understand inflation the most is somebody who like is really bullish on crypto. And that makes me feel good in the sense that like, oh, I'm glad that I feel like I'm in the right place, but also bad in the sense that the policymakers and the leaders can't explain inflation the way that Lin Alden can. Absolutely.

I think very few people actually know what inflation actually is and why it's caused and whether it will be transient or whether it will be persistent, how to even think about the topic. And that's what this episode goes into. So guys, we are going to get to the episode. But before we do, we want to thank the sponsors that made this possible. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans,

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Dive into balancer pools at app. Bankless Nation, I am super excited about our next guest. We have the founder of Lynn Alden Investment Strategy, Lynn Alden herself. She's a leading expert in macro market. She's no stranger to crypto, and she's absolutely no stranger to the bankless podcast. We had her on the show about six weeks ago where we talked about the dollar dominance, six months ago, excuse me, we talked about the dollar dominance and the death of the dollar dominance.

She focuses on long-term debt cycles, how it's impacting virtually every market out there. So crypto, fiat, bonds, equities, everything. And when we asked crypto, because David and I wanted to have an inflation podcast, when we asked crypto, who the best person to bring on to explain inflation to us. There was a resounding message from crypto, and that was bring on Lynn Alden once again. So here we are, Lynn Alden. It is fantastic to have you back on bank lists. Thanks, I have you back. I'm always happy to talk about inflation. It's been a big topic that I've been covering for the past couple years. Yeah, absolutely. And this feels like a topic that is increasing into mainstream headlines where I'm starting to see

it, starting to get people on the street asking about inflation, starting to think about inflation. is something that they haven't thought about for a while. You've been thinking about it. David and I think about it from time to time. But inflation is here. 5.4% in June, that is from the previous years, June's has kind of a 12-month trailing. 5.4% should we be alarmed, Lynn? You know, certainly obviously it impacts people differently. And so probably people like us are less impacted than people that say have a much tighter, you know, difference between their income and their expenses, right? So people that are more sensitive to grocery prices and more sensitive to that sort of thing

are getting pretty hit by this. And so, you know, we are in a period where inflation is going up pretty heavily. And the key thing I think to keep in mind is that it's not like the same things are going up. We're kind of getting the cycle going out. So one of the big drivers of inflation over the past, say, you know, four months was use car prices. skyrocketing. There's actually ended up being a pretty big part of that component. We've also seen food prices to go up, a bunch of other things to go up. While we still had disinflation or deflation

in some other categories, like for example, men's business clothes, for example, are actually deflationary while you have things like use car prices are going up. And so it's kind of like things that are experiencing supply bottlenecks while their demand is still pretty persistent. They're the things we're seeing inflation in. And I think the thing to kind of worry about maybe, you know, going into the later half this year, the second half this year, is rent inflation, right? Because this actually, this 5% inflation spike happened while rent inflation was actually decreasing. So it was still positive. It wasn't deflating, but the, you know, basically went down from, say, 3% inflation, down to like 2% inflation because you had, you know, rent moratoriums and things like that.

But we've got this big surge in house prices. And as rent moratoriums and basically all these different things kind of expire, we're starting to see a bottoming in that rent inflation. And, you know, if they follow real estate prices as they historically have, say, like an 18-month lag, we should see some pretty significant rent and owners-equivalent rent inflation in the back half this year. So I do think that this is going to be stickier than some of the economists expect and that there is still parts of the market to worry about. I'd be especially worried if I was in bonds, right?

For example, investors that are overweight bonds and cash. Lynn, that really weaves together a story that I'm particularly trying to just to find out what this story is for my own purposes. And this story got weaved together. I remember when we had Jim Bianco on the podcast, and he talked about how there were just breakdowns in supply chains. And there were certain sectors of consumer goods that had just incredible shortages just because of the supply chains couldn't handle it. There's also labor shortages everywhere. and then there's weird market dynamics going on in the commodities. Like we saw lumber just go absolutely crazy and then now it's retraced.

But there's a lot of different things happening. And then coming in with this extremely high inflation in May, what's the common denominator to all these things that have been happening in the last few months or so? Is it all a story of inflation or is there something else that's also going on that's worth discussing? I would say the two common denominators are fiscal policy. So the fiscal stimulus on one hand, that impacts demand levels. And then, of course, you know, the virus, the lockdowns, the logistics there have kind of been backed up over the past year and a half. And so if you look at the supply side, obviously when you have, you know, basically supply constraint, shipping constraints, right? There's only so many ships built, right? They can transport things from China to elsewhere. And so when you have a highly global, you know, supply chain, you know, you basically, you increase efficiency, but you decrease resiliency.

And so we've spent the last 25 years making our supply chains as global and efficient as possible, but less resilient than they would be if they were, you know, more kind of in-house, sort of speak. And so, you know, on one hand, you have that problem. And, you know, you have specific bottlenecks like ships, semiconductor foundries. And some of those key things trickled everything else, right? So, so, for example, the car, the limitation on new cars and and now even use cars is part because of that semiconductor shortage, right? So obviously the auto industry is a big consumer of semiconductors. And so if you have supply bottlenecks there, it trickles up through the whole supply chain,

from which everything we use has semiconductors now. It's like the new oil. On the other hand, you know, you have the demand surge partially from physical stimulus. And so, for example, if you just kind of went through this, say, you know, recession we've been in and you didn't do stimulus, you'd have a reduction of both supply and demand. And so instead of inflationary conditions, you probably would have depressionary conditions, right? So fewer people would be able to afford things.

And so that would keep a lid on demand, right? So use car prices wouldn't build a skyrocket because there'd be fewer people buying cars. You know, but of course you'd have other problems. And so policymakers were kind of in a rock and a hard place, and they went the, you know, the stimulus route. And so what that does is, you know, most people got more money in their pocket.

That took the form of stimulus checks. It took the form of extra unemployment benefits. It took the form of PPP loans to small businesses that turned into grants. There's child tax credits, all sorts of things. And so that increased the demand that people have for various goods and services while supplies were still constrained. And so historically, whenever you have a significant rise in money supply, while you have some sort of supply constraints and key things, that's when you get inflation.

So in the 1940s, we had obviously inflation on all sorts of commodities and shortages like that. In the 70s, it was very much tied to oil, right? So we had a rapid increase in money supply, while we had constraints about how much foreign oil we could get. And then here in 2021, it's semiconductors and shipping and certain other things. One pattern that I've noticed is that the United States was definitely the most aggressive with its stimulus. And now it's also experiencing the most amount of inflation. How correlated would you say those two things are? I would say highly correlated, and that's something I've been pointing out to this 2020, saying that I was expecting the U.S. to have more inflation outcome, because if you look at, say,

you know, I think a lot of people make this mistake of looking at just central bank balance sheets going up, but that's not, you know, that's not tightly correlated with inflation. Instead, it's about broad money supply, so the money that's actually in people is checking in bank accounts in broad circulation, rather than, say, the wholesale money that banks have with each other. And so over the past, you know, 18 months, we've seen a much larger increase in U.S. broad money supply than we saw in Europe, then we saw on Japan, then we saw in China, most other countries, other than the, you know, a handful of emerging markets that are experiencing, you know, borderline hyperinflation. But besides those, the U.S. has been, you know, pretty much the largest increase in broad money supply, at least out of the developed and most of the emerging world. And so that's, it's, it has good and bad things. So on one hand, you know, the GDP recovery. quicker, right? So people bounce back quicker, our consumer expectations and positive sentiment rebounded faster. But on the other hand, you know, increased demand faster than the supply constraints could handle. And so, you know, basically our imports increased while our exports didn't really

increase as much, right, because we're the ones inflating more, stimulating more. And so our demand recovered faster than our supply. And so, yeah, I think that's a very tightly correlated thing. So if you look at a chart of money supply and inflation for most of these kind of, you know, large markets, you'll see that there's pretty much a one-to-one correlation between how much their money supply went up and how much inflation they're currently experiencing with a lag. Lynn, you talked about how the decision makers were in a rock and a hard place and they eventually had to choose one path. And we'll get into why people, why the policy makers are in the rough spot that they were in. And we talked about that in our first podcast with you as well. And I'm sure it's going to be a reoccurring theme. But with regards to either choosing to add stimulus or not, and then, you know, eventually

policymakers chose to add more and more stimulus, would you say that that was the correct move or just an overall good move? How would you, you know, how would you rate the goodness of that choice? I think there's parts of it that are good and bad. So I would say somewhere in the middle of that score range. And I would say that the mistakes, a lot of the mistakes that basically were paying for now were set back decades ago. So I would say the policy from, you know, say the past 25 years has been a very low score. I think that's, yeah, that's what kind of plan of the seats for this.

And so I would place the problems mostly at, you know, in that sense. So when you look at what's happening in this kind of whole fiscal round and monetary round, I would say, you know, policy makers basically, you know, because there's so much debt in the system and because they've so. so relied on on using increasing prices of financial assets to prop up the market and because of the structure of the global dollar system. The U.S. is very financialized more so than even most other developed countries and we're very reliant on our asset prices being elevated and the average consumer only has, say, a month before they run out of money, right? They don't have a lot of savings. And so when we encounter this problem, you know, in any kind of Fiat regime, right when they're faced with like nominal collapse right they always choose the print and so we saw that

this time that was kind of my base case going into this and there are certain things that are that are worse than others right so the big the big kind of you know back in ches and eight the biggest problem with how they did that was that they bailed out the banks and things like that but they didn't bail out the homeowners right so it was it was kind of the worst of all worlds it was like socialism for the rich and capitalism for the poor and so that's why you had on you know different types of populism from different sides of the political spectrum. So you had the Tea Party on the right. You had Occupy Wallster in the left. And you got a lot of pushback for that. And this time, you know, they kind of said, okay, socialism for everyone. We're going to, we're going to bail out companies. We're going to

send stimulus checks. We're going to send, you know, all sorts of things. And so on one hand, it's less bad than what the Chesanate thing was, right? But it's, you know, so you have, for example, personal income for the median person went up rather than down because if you include all the stimulus they got, it kind of offset a lot of their issues. not for every single person, but on a kind of a large aggregate. But that does come with consequences. And then there's kind of subsets of their policy response that I think were terrible, like the Fed buying corporate bonds, for example.

I think that's set a really, really bad precedent and certain policy actions like that. I also think that the Fed's kind of, you know, like verbal navigation of what's going on was in large part inaccurate and misleading and kind of, you know, it's like they can't say certain things out loud, so they have to kind of say things in ways that end up sounding like political speech. So we just kind of make fun of them. And so I would say it's a very mixed outcome, but they just didn't have that many options.

So pretty much all of their options were bad, more or less. And they kind of could navigate that in different ways. And I think they summer in the middle, I would say. So, Lynn, I want to zone in on a few things that you're saying. You said that the seeds for the inflation that we're experiencing now were planted like decades ago, right? And I think people are sort of wondering what the connection is between, say, 2008 and now. Like, at some level, are we sort of reaping what we sowed then?

And I'm wondering if you sort of get into the different types of inflation. Because for, let me throw out sort of the way I see inflation. You tell me if this is correct. There's kind of money supply inflation, which is sort of Fed balance sheet level inflation. Then you have asset price inflation, which is the price of stocks and homes and assets that investors buy. Then you have CPI inflation, which is what we were just talking about when I asked you the question of like 5.4% June, year of the year, that's large. And it seems like mainstream only focuses on that third component, right? That CPI inflation.

But I'm wondering if all of these are somewhat tied together. You also mentioned like fiscal policy. It seems like once fiscal policy, once we start printing checks and actually giving it to individuals, that's when you start to get that CPI inflation to go up. Before that, when we were printing money and giving those to bank bailouts, it seemed like that inflation went into asset price inflation. Am I thinking about this, correct? Is that like generally in the ballpark or what edits would you have to that?

I think that's a pretty accurate way to describe it. And when I referred to decades ago, it's not only that 2008 crisis, but it goes back to, say, the late 90s. And so basically, I mean, you can actually go back all the way to 1987 under Greenspan where we started to do this concept where the Fed begins caring about asset prices. So before then, they cared, you know, they cared less about asset prices. But started with that 1987 crash under Greenspan as a Federal Reserve chair, they started to, you know, have a kind of an unofficial mandate to bail out the stock market when it crashes. And so that started in 1987. And then we started to see.

it in the late 90s when you saw long-term capital management for people that are aware of, you know, that big, you know, kind of implosion that happened in markets. It's not really well-versed among, say, retail investors, but most people are, you know, involved in, say, macro-level trading or are familiar with that. The Fed and the banking system basically had to bail that out. They could have chosen not to or they could have done it in a different way. But so they kind of, you know, we started to get this concept of the Greenspan put the idea that if markets go down, green spin will be there to do things. And so even when you had a dip in, say, the late 90s, right, after a massive economic boom, massive stock price boom, when you had a pretty small dip,

green spin came in there, cut interest rates, and it was always very accommodative, always airing in the side of lower industry, it's very accommodative, try to get those asset prices back up. And so that really kind of set the stage for the dot-com bubble. And then when that, you know, fell apart, then they said, basically, we need to inflate a housing bubble, right? We need to, we need get this all back up again, so they cut interest rates. And that kind of led to a housing bubble, boom. And then when that fell apart, you had to reflate the banking system and then kind of prop up the stock market again. And so really ever since the late 80s and especially in the late 90s, they've been in this thing where they just keep pushing up asset prices and keeping interest rates

as low as possible. And that really set the stage for a lot of things we're experiencing now. Those low interest rates basically incentivize, you know, companies, households and all sorts of, you know, different entities to take out a lot of debt, especially because they're trying to buy, say, high-priced homes and things like that, let alone what corporations are doing with their balance sheet. And so that, you know, we've had this kind of multi-decade structure of encouraging debt accumulation. And so, and when you get down to where we are now, where industry rates, you know, eventually hit zero and debt's extremely high, they've boxed themselves into a corner. And so that goes back to, I learn a lot from Ray Dalio and his,

and this concept of the long-term debt cycle, which is basically that in a normal economic cycle, like a five to 10-year business cycle, you know, during the expansion phase, you get more credit in the system. Some of it's constructive, but then towards the end of it, you start to get, you know, kind of malinvestment.

People get over-exited about the market. They start making, they start, you know, kind of losing their discipline. And then some sort of external catalyst comes along or some sort of policy error or something and you get a recession at deleveraging. And so you reduce that debt. The problem is the policy makers come in and they try to prop that back up rather than letting it run its course.

And so when you kind of, you know, basically you short circuit that de-leveraging. And so debt doesn't go down to where it started. Industry rates end up at a lower low. And so debt starts going back up for the next cycle without having fully de-leverage. And so when you string multiple of those business cycles together, you get higher and higher debt as a percentage of GDP. You get lower and lower interest rates until you find out what we had, you know, in 2008. and then especially here back in 2020 was the industry rates are zero and there's all that debt in the system and everyone's so highly leverage that their next mechanism is to go down that fiscal policy route which is actually where you get kind of that consumer price inflation so lowering interest rates and doing quantitative easing is very good for asset prices so you get asset price inflation and then when you actually do that fiscal spending combined with that with that say monetization of those of those fiscal deficits that's when you get an actual increase in the broad money supply very quickly, and you get outright consumer price

inflation because that's when you get more money in people's pockets. And so you get a big kind of shift from that environment you've been in for the past 10, 20 years. This is the thing, Lynn, which kind of drives me crazy about the mainstream conversation around inflation. Like, first of all, they almost paint it like it's kind of somewhat inevitable, right? It's just like once in a while, the pernicious inflation kind of raises its head. But the other thing, when people start talking about, now we have high inflation, you know, 5% high inflation, part of me wants to go to them and be like, no, we've had high inflation. Like, let's talk about the last 15 years.

You guys aren't talking about asset price inflation. And that's where we've seen a massive amount of inflation that has contributed to what we're seeing today, but also the massive inequality that like the population is so upset about now. Why does mainstream ignore asset price inflation when they talk about, when they have conversations about inflation? Is this sort of a just a narrow definition painted by, I guess, like mainstream economists and central bankers, that sort of thing? Like, what's the reason why they don't include asset price inflation as part of this broader conversation? Yeah, partially comes down from what economic school they come from. And then it comes down from what the government figures define as inflation.

So when you look at, say, CPI, right, that's what people think of as inflation. That purpose excludes asset prices. It actually used to include home prices, but then excluded that. They exchanged it for owners equivalent rent, which is kind of an indirect proxy for housing prices, but basically understates it. And so, you know, because all of our major indicators of inflation, at least the ones that are often used by the government, the Fed, CPI, PCEs, all these. different, you know, acronyms, those are measuring just a consumer part of that inflation, and they're doing it in a way that is, of course, controversial because they have all sorts of quality adjustments in there that people can disagree with. But basically, that's what they

define as inflation, whereas you rarely hear about, say, the money supply until, of course, 2020 when it went up like 25 percent year-by-year. That's when everybody on Twitter is talking about the money supply. But in most circumstances, you don't hear about that type of inflation. You don't hear about asset price inflation. You just hear about the ones that they're officially measured by those government statistics, which focuses narrowly on that consumer component. And so I think that is a mistake. And so, you know, we've had more awareness of it, I think, over the past year and a half because you started to see this money supply growth. And there are some people out there, including me, that are trying to, you know, make people aware of

the money supply more than just the CPI. Lynn, would you say that seeing inflation in consumer prices, seeing CPI inflation, that that is like the last place that you finally see inflation. It's like the last place for inflation to finally like emerge and like instantiate itself in like you get you get asset price inflation first like you get monetary base growth first. And you know, if we do things right and play the economic game right, like we can have those for a while without asset price inflation or excuse me without CPI inflation. But ultimately like when it when at the end of the day, when it's too much money gets printed too quickly, it finally ultimately shows up at the last,

like most difficult level, which is like the CPI inflation. Would you agree with that characterization? So that's certainly the order we're experiencing at this time. Every cycle is a little bit different. And so, for example, back in the 1930s, you had a pretty disinflationary environment, so low asset prices and disinflation. And when you moved into the 40s, you got that outright consumer price inflation without really getting asset price inflation, you know, before it. And so you can have periods where you go straight to consumer price inflation. So largely it comes down to which segments of society are getting that extra money supply, right? So if it's primarily the rich that are getting the money supply, it goes into assets, right?

So they don't, a billionaire that makes another billion doesn't really consume that much more, right? He or she already has all of their needs met. So they go buy more financial assets, right? They buy more real estate. They buy more equities. They buy more businesses. They don't go out and buy, you know, if they do buy another car, it's a drop in the bucket compared to the, you know, the consumer they already have.

Whereas if you give more money to someone who spends most of their money on consumption, right, someone who makes a middle class salary, that translates right into, you know, food prices and gasoline prices and housing prices much more rapidly. And so really kind of comes down to where that injection of money is going, how quickly kind of goes from asset price inflation to consumer price inflation. So asset price inflation is more influenced by interest rates and basically the wealthy getting the money. And, you know, if we, if we, you know, kind of take a step back, you know, part of what's kind of pressure the middle class is that we've had this asset price inflation. And so, for example, we've monetized

things like our homes, right? So, so for, you know, our parents or grandparents, when they bought a home, it was a much lower ratio of their income, right? So a much lower, multiple of their income. Whereas today, when people want to buy a home, it's a much higher ratio of their income. And they're only offsetting factors that mortgage rates are so low that it keeps their monthly, you know, payment kind of moderate. But then they're, of course, very reliant on low interest rates. And so you've kind of built that up. And so that's kind of what we're going through now. So, you know, it really kind of comes down to who's getting the money, where that money supply is growing that triggers what type of inflation you get. There's also, you know, technology

over the long run has generally been disinflationary, right? So obviously, if we make technology better, we should make certain things cheaper, right? So tractors made food cheaper than paying someone to do it by hand. Whereas, you know, basically flagship type of assets like coastal property or the best stocks or gold or or Bitcoin, whatever the case may be, when you have something that people want that's inherently scarce, that's not really, you know, technology is not really taking away from that. So the money supply, kind of those things tend to attract a money supply.

supply growth, whereas, say, food and technology items, those things tend to undershoot the broad money supply growth because they're also being made more abundant by technology. It's so fascinating. And it's such a more nuanced view than you hear in sort of mainstream about inflation. I'm just curious because it seems to be the case that when we just take CPI into account, we're measuring inflation wrong at the base of it. If Lynn Alden was in charge of things for a minute. How would you measure inflation? Is there a better economic indicator out there?

So I think it's one of those things. There's no perfect metric. So I would present it as a number of metrics, which is how I do it. And so when I have articles or newsletters about inflation, I often break it into the different components. So I would say, okay, here's what's happening with monetary inflation.

Here's what's happening with, say, the broad money supply. So I would focus on that. And that kind of presents mostly the upper range for what other types of inflation can be, the broad money supply. And then from there, we can say, okay, what is a basket of goods doing? And then, of course, you can have disagreements about what should be included in that basket of goods. But at least I think when you have that combination of watching the broad money supply and then watching a basket of goods, that can tell you quite a bit about inflation.

Then if you want to get the asset price inflation, you can do things like, okay, how's the median home price comparing to that basket of goods? How is it comparing to wages? how is it comparing to broad money supply? And then you can kind of do the same thing with equities. You can say what is the percentages of the market capitalization to GDP, and you can offset it by a couple different factors that could influence that outside of inflation.

You can also look at equity valuations, things like that. So price to earnings ratios, including some of the more smoothed out ones, like sickly adjusted price to earnings ratios. And so whenever I'm talking about inflation, I would try to include multiple different metrics, say a basket of five different ways to measure it, rather than trying to encapsulate everything with one indicator. The central bank, it appears to me, does not do that level of analysis. Maybe that's part of the reason we're in the trouble that we're in.

At least it sounds like there's going to be trouble ahead, but we're going to talk about that more. One of the main questions, I think, in this mainstream discourse, though, is this people will acknowledge that inflation is here now, finally, right? They may have ignored asset price inflation, but when you see, you know, 5.4%, inflation is here. But they'll say, oh, it's just transitory, right? We're getting over this COVID thing.

Of course, you know, a price of used cars. That goes up. Of course, that's going to fall back down. Once we're over this transitory period, we're not going to have a long-term inflation problem. I think some of that message is coming out of the Fed. Some of that message is coming out of mainstream media outlets. Some of that message is coming out of mainstream economists. I'm wondering, because I feel like you are best positioned maybe to give both sides.

of the argument. Could you give us both sides? So first, what is like the steel man argument that inflation is transitory? And then what's the argument that it's that's a bit more persistent, a bit more long term? So let's start with the argument for why it might be transitory. What do people say about this? Sure. And when they're talking about transfer inflation, they're talking about the CPI and those kind of consumer indicators. So we'll focus on that. And so, you know, when to steel man that argument, basically you say, okay, we have these very deflationary backdrop. So demographics are more deflationary, right? Because we have an aging population. We have slower population growth. We have a lot of debt in the system that's very disinflationary.

And of course, we have technology disinflation. And so all those kind of structural forces, if you look over, say, a multi-century view, kind of the long arc of history is tends towards disinflation in the sense that, you know, our ability to access resources generally gets easier. So the average middle class person can live in a way that a king or queen from 500 years ago would find remarkable. So basically we have this long arc of disinflation, but is punctuated by periods of inflation. And so that part I would say is true. But then when you zoom in on it and you see, okay, so what is transitory? And so on one hand, I will say certain things I do think will be transitory, right?

So the biggest argument for being transitory is that it's due to specific bottlenecks related to the virus, related to shutdowns, related to, you know, kind of abrupt changes in consumer demand, right? So everybody wants suburban real estate instead of urban real estate and, you know, there's kind of a bottleneck for that that'll resolve. And so, you know, we're seeing price increases now, but that'll subside in, say, you know, the next year. So that'd be the more transitory argument for inflation. And another part of it is that you can look at base effect. So when we talk about, say the 5% inflation that we saw since last June, we can say, okay, well, May and June of last year were, you know, that was kind of a particularly low point for inflation, right? Because that was kind of

the heart of the lockdowns. That was when everyone, you know, was not really spending. And so if you say compare it to 18 months ago, you know, that say, or two years ago, that two rate average inflation has not been quite as high as, say, the 5.4% that we see when we specifically measure from that dip last year. And so those are the more transitory arguments. And there is a lot of truth to that. And so if we take the lumber example, because lumber went up remarkable. It was like, you know, went from a few hundred dollars per whatever quantity they used

as their futures contract. I think it's a thousand feet. And that sort all up like 1700. It was like a parabolic increase. And if we look at why that happened, obviously a lot of people wanted suburban homes, rural homes. So you had a big increase in lumber demand. And then the question is, where is that supply constraint?

And so if you look at, say, timber, which is, you know, earlier in the supply chain, there was no spike in timber. There was no shortage of timber. There was no shortage of wood. The problem was that there was a limitation in sawmill capacity. So turning timber into lumber. And, and those sawmill capacity, you know, they were at capacity and they could have, you know, built more sawmills. But they said, no, we think this is not going to be super persistent. So we're just going to have higher prices enjoy that rather than go out and build a lot more salt mills just in time for this demand to go away.

And so I would describe that as a shallow bottleneck. So it wasn't a deep bottleneck. It's a more easily resolved bottleneck. And so when eventually that demand subsided, partly because lumber prices got so high that everyone kind of put their plans on hold to build new houses and things like that. So it kind of took care of itself. And it started to get that shrinking demand in lumber. And that bottleneck got resolved. And so that's an example of truly transfer inflation prices went up and then they came back down.

Now, when we talk about transfer inflation, I think a big thing that the Fed and the corporate media leave out is that there's a difference between transfer inflation in rate of change terms and absolute terms. An example I like to use for there is the 1940s. So if you look at the 1940s, you had three really big spikes in inflation. The biggest spike was actually almost 20% year-over-year. And so you'd have this massive spike in inflation and then the next year it would go away. And partially that was from wage and price controls, but it was also partially just from that actual inflation was subsiding. And because it was kind of a very specific type of inflation because it was kind of driven by fiscal spending rather than bank lending. And so it was more kind of bumpy.

And so that big inflation spike would end. But there was no period of deflation to offset the fact that inflation just occurred. So if you look at what actual CPI did is the prices went up and then they just leveled off. And then we had another spike of inflation. They went up again and then they leveled off. And so it was not transitory in absolute terms, right? So prices went up and then they stayed at that new level, whereas the rate of change of that inflation was transitory.

And so, of course, when they talk about transitory in the media or the Fed, they're talking about that first one. They're saying, okay, it went up and they're not necessarily saying it's going to come back down, the prices. They're saying that it's not going to keep going up at that rate. And so that's important when you're holding cash or bonds, right, because to say, okay, you're losing purchasing power, and we're just saying you're not going to lose purchasing power the same rate for the next, you know, three years. We think that that rate's going to cool down

and you're going to have a one-time loss of purchasing power, for example. And so, and then, you know, but when you look at that, you still have to look at the broad basket. So individual things like lumber might very well come all the way back down. They could be truly transitory in absolute terms. Whereas, for example, when Chipotle says, okay, we're going to pay off our workers $15. We're going to raise our prices by 4% to compensate for that. You know, we're never seeing those lower prices again. That's the new floor for Chipotle prices. Same thing for Coca-Cola, Procter & Gamble, when they raise prices, I mean, that is 99% not coming back down, whereas some of these more specific bottlenecks, they can come back down.

So my overall base case is that, you know, some of this, I think, will be transitory in rate of change terms, but it's, you know, in a broad way, it's unlikely to be transitory in absolute terms. And I think that the media does not do a very good job of separating those two concepts. And so that's how I'd phrase it. And if you say, okay, you know, if I was, again, putting on the transitory hat, I would say that a lot of this inflation is, is, you know, driven by the fiscal spending we saw. And we're unlikely to get another large burst of that fiscal spending of the next year and the year after that, right? Because now we have a Senate that's more kind of divided on that subject.

And, you know, there's all sorts of, and now that you're actually experiencing inflation, that also might kind of pull them back from wanting to do more fiscal. And so without that fiscal spending, you know, we kind of will revert to that more disinflationary trend over time. And again, I would agree with that. If you don't do any more physical spending at a very large level, I think that, you know, price will kind of level out and they might not keep going up at the same rate that they happen. And so I do think that there are merits to the transfer inflation view, but that they're often not described in a very detailed way.

But I think so the message coming from the Fed, and I think mainstream is that this won't be a problem in the future, that this is a like a transitory one-time problem and then inflation's going to subside and it'll go back to normal. You don't think that's the case. You think that this is going to be a bit more persistent into the future and that that narrative that the Fed is saying, mainstream is saying, is somewhat downplaying inflation. Is that the case? Yeah, I think so. I think a lot of these prices that went up will not go back down. And so people holding cash or bonds got devalued. we're also seeing that bond yields are well below the inflation rate. And so I think that the bond market's very complacent, partially because it's being, you know,

indirectly kind of held down by the Fed. And so, you know, I think that those are actually pretty big problems for certain types of investors in those assets. And I think, you know, say we've gotten past like the lumber spike, for example, but as you go farther into this year, now we're looking at rent inflation. And then the big question, the long term question is what happens with the wage inflation, right? because it's hard to get really persistent inflation without wages going up because eventually that kind of limits demand for goods and services. But if you start to see a kind of feedback loop of wages going up, that's how you get kind of that stickier type of inflation.

And so you saw that in the 70s, for example, whereas, you know, we're kind of in the early stage of that now. So partially from, you know, we've had 25 years or so of globalization, right? Ever since the mid-90s, we've had this big structural trend of globalization. And that's put a lot of downward pressure on wages. And there's other factors like unionization, things like that. But really the biggest factor overall was globalization combined with technology automation. We found all sorts of different ways to hire cheaper labor or automate something. Whereas in the previous decades, we would have had to actually increase wages for workers.

And so if we start to see signs of that trend reversing, which I think we have, you know, globalization hasn't really reversed, but it has kind of stopped growing. So if you look at, say, global trade as a percentage of global GDP, that was in a multi-decade structural increase. But then it kind of topped out. And we've been kind of holding whatever percentage that is for several years now. Right. So and I think this whole kind of, you know, pandemic situation kind of highlighted some of the risks of, you know, extreme globalization. We're in the early phase of that pandemic.

The United States says, wait, we can't make ventilators. we can barely make masks. We have to ask China for masks, and we find out that most of our farmer's seducal components are made in China. And we say, well, that's not kind of a good thing from national security, right? And so I think we've kind of topped out in terms of globalization. And if indeed we start to see more of a political will to reshore some of those supply chains, you know, that we go back to the early thing.

We spent 25 years increasing efficiency at the cost of resiliency. And if we start kind of going the other direction, we want to increase resiliency and increase domestic, opportunities, that will probably come with the cost of efficiency and therefore come at the cost of higher inflation. And in a good way, you have wage growth, but then you also get inflation that kind of comes along with that. And so I think that's the big risk to watch from, you know, I think the media is focused on these lumber spikes or these, say, specific semiconductor shortages where I think because the broad money supply has increased and that's permanently increased,

I do think that we'll start increasingly see that trickling into wages, into rents because those people that had, you know, the housing costs went up, rents are going up, they're going to demand higher wages in order to make ends meet. And I do think that that's going to be persistent for longer than the Fed is suggesting and that the corporate media is suggesting. I really want to actually dive into that specifically because this labor shortage phenomenon is something that I'm seeing left and right. And Lynn, when you were talking about the lumber versus timber example where there was a

bottleneck in turning timber into lumber. We had no shortage of timber. We had plenty of shortages of lumber. I want to know if that was also a shortage of labor supply as well, if that also got involved with that because we're seeing a bunch of stimulus, a bunch of money get injected into the economy. We're also seeing a bunch of demand for people to move and therefore to, you know, purchase or build new houses, which is where that demand for lumber comes from. All the available supply of lumber gets sucked up. And then also the labor required to turn timber into lumber, well, all those people just got a bunch of money put into their cash pockets. And another interesting statistic I heard, I can't remember the number, but there was a massive small business

boom during COVID. And that's because people had the cash in their pockets to actually start off a business. And so maybe people are, you know, looking at their jobs that they previously had or the jobs that they are out on the market and they aren't just they aren't compelled by them anymore and therefore they're turning elsewhere. How does how does, and A, is that the way that you see it as well? And then also B, how does this factor into the whole transitory inflation conversation? Yeah, so that definitely impacts certain industries more than others. And so I would say that the lumber industry was less impacted by that because they were still,

you know, for most of the time, they were running at full capacity and they just didn't have enough facilities to kind of keep up with that. Whereas what you described is is greatly impacting, say, restaurants and other things like that, very service heavy type of environments that are often low paid as well. And people are, I mean, you know, if you're working in as a waiter or a waitress right now, I mean, a lot of them are still, you know, having to wear masks all day. And obviously it's a hard job to begin with. You're on your feet for eight hours. And now they're wearing masks the whole time. And, you know, they're, say their wages have not gone up enough to keep up the fact

that their grocery bill went up. Their gasoline, you know, that they pay to drive to work went up. They have all sorts of constraints. And so they say, you know what, it's not even worth working anymore until you pay me like 50% more than you were. And so we've seen a big shortage in labor for Uber drivers, restaurants, things like that, some of these lower paid types of either gig work. or structural work.

And so that is, along with the fact that, you know, we've had this kind of push towards reshoring some of our things, we are kind of have this pretty big gap between jobs open and jobs filled. And that's in large part because those wages that businesses have been, you know, willing to offer have not kept up with the cost of, say, running a basic life, of having rent, of having food, of having, you know, saving for college, saving, having health care covered. some of those really big expenses. And so basically until wages kind of push back up, it's really hard to kind of move forward.

And I think it's kind of been like a chess game between employers and workers because employers are saying, okay, you know, they're kind of, say, looking at that transitory inflation argument, and they're saying, well, I mean, it's hard to get workers right now because they're getting all these stimulus checks and things like that. But those have expiration dates. And so if we can kind of wait until some of that expires, then they're going to wait until some of that expires, then those workers will become more desperate and they'll come back to us and being willing to offer, say, slightly higher salaries rather than way higher salaries. And so they've been doing things like saying, okay, we're not going to offer higher wages, but we're all for a sign-up bonus, right?

So we want to get people in the door. We want to get people working, but we don't want to commit to permanently higher wages just yet. And so, you know, employers are trying to wait this out and employees, you know, potential employees, they have a good amount of money in the bank from some of the stimulus that they got or, from other areas. And as others saying, well, I'm not going to rush back into such a low wage type environment just yet. And so I think we're going to have to get into, say, late this year or next year to see how persistent that labor gap is.

We have to see kind of how people respond when some of these fiscal taps are closed. You know, so I think that could alleviate a little bit. But I think that, you know, because this money supply was permanently increased and I think a lot of these home prices and things like that are permanently higher, you know, they're going to have to get paid higher wages in order to basically build a make ends meet. And so I do think that wages will follow and it just they, they tend to do so with a lag. Hey guys, I hope you're enjoying the conversation with Lynn Alden thus far. In the second half of the show, we talk about how this current environment with regards to inflation, it might actually

lead to changes in wages that might actually be beneficial for the wage earning population of the United States, which leads us into a question of who might the winners and losers be in this new economic environment, which I thought Linold's answer there was particularly interesting. At the end of the show, we finished up with a lightning round of a bunch of different questions, such as, has crypto and Bitcoin stolen the wind out of gold's sales? And also how she includes the Delta variant of COVID into her future mental model of how the world might play out in the next few short months or so. And then also, of course, has her mind changed about Ethereum at all? So don't go anywhere. We have such a fantastic conversation left in the second half of the show,

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That's A-A-A-V-E.com. So in this kind of condition where you've got employers paying wage earners more, right? They're paying them more in nominal units. But it doesn't necessarily mean they're paying them more in like real units, right? I saw me another day, like somebody said, like 3% raise, awesome. And then looks at inflation. And inflation's like 5%, you know? And so like net earning potential.

is negative two from a real earnings increase. Is this what's sort of bound to happen in this sort of environment? Wage earners might eke out some small wins and get nominal wages increased. But under the backdrop inspector of inflation, these aren't real wage increases. These are just like nominal value wage increases. How does this play out? I agree. Yeah, I agree with a nominal approach.

And so, again, if you go back and compare, the asset price inflation, for example, to the, you know, the, say, wage inflation over the past 20 years, if you look and say, you know, how, you know, how many hours of work does it take to buy a gold coin or how many hours of work does it take to buy a share of the S&P 500, you know, those, those have gone up dramatically, right? So basically wage growth has, you know, it's kind of tread water with official CPI measures, but then it's vastly underperformed asset price inflation. So you can buy fewer kind of financial assets with your wages. And so then especially in this year, because inflation is pretty hot and, you know,

companies have been less prone to want to wage for ages. Some of them are getting these kind of invisible, you know, that they're actually getting, say, in real terms, either they're treading water or going down slightly. You also see this happen with, say, savings accounts and bond, you know, investors. They say, well, I got, say, a 1% yield. but it's like when you when you factor out inflation, you're at like a negative 4% yield. And so we're seeing that with wages. We're seeing that with paper assets.

And so I do think that that's an ongoing concern. And that's why until, you know, wages go up even faster, that's going to continue to be a problem. And then you have things like, you know, when you look at, say, what is overall kind of personal income is that wage component combined with any sort of government transfer payments that happen. And so during this whole past, say, 18 months. months, you know, you know, kind of partially filling that gap with wages not increasing as fast as inflation have been these kind of transfer payments, these stimulus payments and things like that. And so that's kind of made and meat, but it's also been inflationary.

And so we are kind of treading water over time. And I think, you know, as we're kind of getting past last round of fiscal stimulus, we're starting to see signs of consumer sentiment is dropping and things like that because they're saying, okay, well, I got all these kind of, you know, one. time payments, but now that I'm actually relying on wages, you know, it's actually getting harder to make ends meet now because, you know, I might have money saved up from some of those checks, but not a lot. And so unless I can get real wage growth, I'm going to have trouble, say, you know, paying these higher rent prices or paying these higher food prices. And so, you know,

I think there's going to be another increased round of pressure to do another round of that fiscal stimulus to kind of fill that gap. And we'll see if a totally divided Senate will be to get something like that through or not. And that's the kind of thing that can create the flywheel of more structural inflation. Yeah. And so I'm curious here about maybe you can weigh in on what the effects of inflation are. We've talked a lot about the effects of inflation on the consumer. Maybe we could talk a little bit more about that.

But a lot of people listening to this podcast, they don't remember the 1940s, obviously. They weren't there. Neither the 1970s, for that matter, right? So like most of my lifespan, anyway, has been sort of a, a normal inflationary environment, I don't know, the one to three percent or so, like, how do things change when you get into higher inflation levels? And I don't think you're definitely not saying, I don't think anyone is really saying seriously that the U.S. is going into a hyperinflationary type scenario. But like even five, six, seven percent, maybe low double digit percent inflation,

it's got to lead to you behavior change. How do people start changing and modifying their behavior of where they like how they spend, how they store wealth, how they use debt, how they think about the future in areas like the 1940s and 1970s. And what can we learn about today's present state? Well, in some of those environments, you can, you know, see speculation in markets, right? Because you saw that. I mean, I agree.

I don't think we're, I don't think the U.S. is going to experience hyperinflation, for example. But if you go to say, you know, the classic hyperinflation example of why. Germany, especially during the early phases of that, people were speculating on financial assets because they could see that the currency was debasing. That was before they realized it was hyperinflationary, but kind of that early sign did that money supply going up and that, you know, that cash not keeping up with the inflation rate, the industries they were getting, and so you'd see more speculation.

So one of the signs of inflation is that you see these periods of retail investors speculation in different types of assets. another challenge that you have is that, you know, it's partially a mindset thing. And so when you start to expect prices to be structurally higher in the future, you tend to want to pull forward your consumption. You want to buy more now because you're not sure if you're going to be able to get it in the future or if you're going to be able to get at the same price. And so that can then actually perpetuate inflation because then everybody wants things even earlier.

And that kind of, there's only so much supply of those things and that pushes up the prices even further. And so you start to get that hoarding type of mentality. And then for businesses, the big challenge is that it makes long-term planning difficult, right? Because, you know, a lot of businesses, you know, that you put in capital and then a year later, you start to actually reap the benefits of that capital. But if inflation has gone up 6% during that time, that really changes the types of calculations that you want to do. And so when you have any sort of business with a long lead time, it is kind of, you know,

has that more inflationary risk. And so if you take an example of a short lead time, you know, you know, it's kind of, you know, like say a toll road where they could just kind of increase tolls, like a private toll road. You can increase tolls. You kind of get that cash input whenever people drive through it. That's a pretty fast turnaround. Whereas if you were a supplier or some sort of, say, manufactured component, you might make six-month deals, 12-month deals, 36-month deals, even five-year deals or more with your customers.

And it's really hard to kind of make long-term capital investment plans when the unit of account is you're not sure what it's going to be. Is it going to be disinflationary? Is it going to be inflation? Is it going to go up to 10%? Is it going to go back down to 2% inflation? It makes it really hard to make long-term plans. And then that can ironically then restrict the amount of supplies in the system, which can

then still perpetuate inflation. And so that's why you risk getting these kind of one-off inflationary spikes can potentially turn into something more because as you go downstream, you start to get these feedback loops that make it harder to get inflation back down to the level that it was. Lynn, I want to ask you your perspective as to who are the winners and losers in this inflationary environment or just over the next 10 years or so. As we, you know, as the consumer price index changes because of inflation and as the things that we've been talking about tend to play out into the future, who's the winners and who are

the losers? And we can talk about this across a variety of different variables, right? like intergenerational are the boomers better off than the younger millennials and zoomers? And then also what about geopolitically? Is this going to favor the United States over other countries? And then also the classes of people, like the wage earners versus the asset holders. Is there a clear delineation between winners and losers in this environment? Yeah, it depends on which subset of environment you refer to.

And so, for example, in this period over the past 25 years of asset price inflation without wage inflation, that's obviously been really good for the wealthy, right? So if you hold assets, you've done very well, whereas if you were a wage earner and you want to buy your first home, that's a headwind against you. And so we've been in this environment of rising wealth concentration in part because of the monetary policy, the fiscal policy that we've had, especially in the United States, but also to Slimix and elsewhere. And so if you compare, say, the United States wealth concentration to most of Europe or

Japan, we have among the highest wealth concentration in the in the developed world. And that's partially because of the policies we've done. And partially because we've relied on our trade deficits. We've hollowed out our manufacturing base more so than some of our developed peers. And so we've had this kind of pressure on the, on the middle class and the working class, even more significantly than many other developed countries. And so that's that's really kind of been the detriment to that segment. Well, it's been pretty good for China, for example. They've they've been able to rise from abject poverty up to a more sustainable level. But that's kind of come out of the, you know, kind of the U.S. middle class to a certain extent

where I say the top 1%, the top 5% of the United States have benefited, you know, tremendously from that. They've said, okay, we got a cheaper pool of labor and our asset price has been up a lot. And so you've had kind of these pockets of winners and losers from that. When you get kind of a broader type of inflation, you know, some of the winners tend to be, example, if you have, say, if in the 70s, for example, if you had a house with a, with a fixed rate mortgage, you generally did pretty good, right, because your house overtime kept up and exceeded inflation, whereas your mortgage partially got inflated away.

So if you had a stable income and you could pay, you could sustain that mortgage, you actually did pretty well, whereas large holders of cash and bonds generally got devalued. And so, you know, we've been in this environment that has really kind of been good for the asset holders good for people that are that are older in terms of age because they're generally ones that have more assets. So it's not even just a, let's say, a top 1% versus poor thing. It's not just class. It's also age. Right. So because even among classes, generally when you, when you age, you get more assets if you've been somewhat financially successful. And so it's been very good for that demographic. And so going forward, if the pendulum starts to charge this change,

you can get a shift away from that, right? And so, you know, we've been in this kind of, multi-decade trend. And we're starting to see early signs of that kind of shifting back, right? We've had, say, all this globalization and automation has been very, you know, kind of detrimental to say the working class. And if you start to get kind of a political reversal of that, it could be good for them, but then it also could be more inflationary. And so you have these kind of pockets of, you know, winners and losers in terms of geography

and then losers, winners and losers in terms of age and then also in terms of wealth levels. I'm curious about this. So you mentioned sort of the, at least the effect on CPI recently has been often precipitated by the amount of fiscal stimulus that's gone out. This is like helicopter money, so we call it, like writing checks to people, get your government stimulus check. It seems like many in maybe cross political parties, I'm not sure it's concentrated in one or the other, but they're in favor of things like universal basic income, pushing

more money out to laborers. I'm curious if you think that this is a solution to the wealth inequality in equal distribution of wealth problems, or does it come with some baggage that could actually exacerbate that? So I'm kind of wondering if maybe some upside in this higher inflation, high fiscal stimulus environment that we fight ourselves in might be some increasing or some lessing of the wealth concentration problems that the U.S. faces. What's your, what's your take on that? Yeah, so it's one of those really nuanced topics. And so, for example, one thing I highlighted in my big inflation article is that if you look at the 40s and the 70s, you actually had a reduction in wealth concentration in both of those decades. You actually had a reduction in wealth

concentration, you know, because in many of those years, wages actually did go up substantially. And you had a large pools of capital were invested in cash and bonds that got devalued. In the 40s also, for example, you had much higher taxes on the wealthy than you have now. And so you basically, from inflation and taxation, you extracted out of that wealthy class. And then you injected it into basically, you know, GI, like the GI bill. When all the soldiers came back, they got, you know, tons of money for education. They got mortgages, things like that. there was a lot of money put into building up the industrial base.

And so partially it comes down to how productively that spent. And so the 40s were actually a pretty good example of, of you had kind of this MMT type of policy. We were running absolutely massive fiscal deficits. You're monetizing a lot of those deficits. But the money that they did was actually pretty productive. And so it actually increased the overall productive base of the country. We were able to kind of convert a lot of those war factories into like domestic factories

at the end of the war. You basically educated a whole class of people. And so it's actually kind of this, this, you know, kind of this, this, this, this, pretty good environment for workers and for the middle class. And so when done well, that that can be one of the effects. Obviously, it comes down to different political philosophies, how much government they want, you know, how much, how much, how much they trust the government. Sorry, that was a kind of a higher period of trusting the government.

And it was rewarded because the government actually was reasonably effective at those policies. Then when you got into the 50s, say, under Eisenhower, you started to get the, say, the interstate highway system. That was another good example of productive government spending. A lot of the space stuff eventually kind of resulted in new technologies that then trickled out into the private sector. And so that was actually kind of the best case scenario for an MMT type of environment. And so that's if you're trying to imagine where some of the MMT economists get their views from, that's the type of environment where they're kind of imagining things going. We're hoping things go.

We're trying to construct things to go in that direction. Of course, the problem is that if you don't have a lot of those, you know, kind of, I'd say, a combination of really good forces. So say certain good leaders, certain political environment that makes that kind of thing possible. If you don't have that and you kind of have the government try to do things, they could do things a lot less productively probably than they could back then. And so you risk having this kind of big injection of capital that doesn't really result in a greater ability to produce the things you want. And therefore you kind of risk getting stagnation or stagflation.

And so that's kind of the biggest risk here. So I think that there is, if you thread the needle well enough, basically it's kind of one of those things like if you're going to have a dictator, you want it to be like a philosopher king. You want a good dictator. So you can actually have an environment. We have a dictatorship that goes well, almost like an example would kind of be Singapore. It's been kind of a semi-authoritarian regime. but they've managed it very well. It's just kind of been an effective in that approach, whereas if you, you know,

if you roll the dice, you're unlikely to get that too frequently, right? So more often than not, when you kind of have that top-down approach, you're more likely to get the other end of the stick. And so I say, yeah, I mean, putting on kind of the steelmaned hat and kind of, you know, steelmaning their view, you say if you have a 1940s, 50s environment, then yes, that that kind of, you know, kind of that big fiscal heavy environment could be very productive. And just the question is, what is the probability of that happening? UBI, I mean, that's one of those things.

If you look far enough into the future, right, when humans, say robots get so good and AI gets so good that the vast majority of people just can't outcompete humans and that even like, you know, the history of technology is that whenever we make automation, it takes away some type of job, but then opens up new opportunities. So, you know, humans were able to leave the farms and, go to the manufacturing. Then when we started automating some of the manufacturing, they're able to go more into service.

But if you get to an environment where, say, 80% of jobs can be replaced by robots and AI, and most people don't have to work, then you get to all sorts of societal questions, like how is that going to function? Because only so many people can be in creative professions. And so that opens up some of those long-term kind of political questions. But, I mean, that's still, I think, quite a while is away.

And so, you know, if you do UBI with, without making sure that there's enough products and services to support that type of income, then that's when you run into stagnationary risks. Lynn, a large part of what we've been talking about so far in the show has been U.S. centric. And we talked about how we are, one of the reasons why we are, we think that we are seeing so much inflation in the U.S. is because the U.S. put out so much economic stimulus in the last year or so.

How does this conversation change as soon as we include, you know, the rest of the world? Is this the same story that the rest of the world is also going through? Or is it different if we start to include like Europe and Asia and all non-U.S. countries? Yeah, there are different environments for different countries. And so the specific like globalization problem has impacted the U.S. more than other countries. Because as a country with the global reserve currency, we've kind of, in order to maintain that currency, we've kind of had to sacrifice our manufacturing base because you can't really have, as currently structured, the whole dollar reserve system is kind of based.

on the U.S. running these persistent trade deficits. And so we've had that specific type of wealth concentration and that de-industrialization at a faster rate than our developed peers. And so Europe, for example, runs a trade surplus. Japan runs a pretty balanced trade situation, whereas the United States is kind of this big developed country that's running a massive trade deficit. So it's not just the developed country versus emerging market thing. It's really, that's more about the U.S. specifically. Europe faces their own set of problems because, as as conflicted as U.S. politics are in Europe in some ways it's even harder because you have a bunch of different sovereign countries that have then linked their currency together. Right. So it's like if the United States and Canada had a shared currency and neither of them could just print money, well, then the United States and Canada are always going to be like debating with each other about what to do, let alone different states in the U.S. and different provinces in Canada.

And so Europe's done that with over a dozen countries. And so you have this, you know, Germany wants one thing. Italy wants another thing. And you have sovereign. in countries that really kind of can't control the volume of their own currency. They're relying on the European Central Bank. And so they've had less kind of political capability to do that fiscal stimulus. And so in some ways, that's, you know, the euro has held up against the dollar over the past 18 months because they increase their money supply at a slower rate. But they've also recovered at a slower rate.

In Japan, you're kind of in the middle there where, you know, they're not doing the same kind of massive fiscal spending that they're doing in the United States, but they did a little bit more than Europe. And so they've been one of the more kind of societies that is less prone to popularization, like populist politics, because they generally have less wealth concentration. They have kind of somewhat less political conflicts, but you've also had, you know, obviously a pretty significant degree of stagnation there. When you go on to China, they're at a pretty different environment. They didn't do very much stimulus. You know, they did a little bit. in beginning, but then they kind of cool that off. And now they, they, they, they kind of

enter this cooling off period before the United States. And so they've, they've been kind of, you know, trying to de-leverage some of their debt bubbles. They've been trying to go after, say, the kind of the monopolization of big tech. And so they've been going through that cycle at an earlier pace in the United States. Some of the places we see inflation impacting the worst are in emerging markets, and especially the emerging markets, that have kind of structural issues. So some of the ones that say produce commodities, right, they've actually held up somewhat better

because they're benefiting from commodity inflation. Whereas if you're an emerging market that also generally is a net commodity importer, that's when you've run into issues or ones that have had kind of poorly managed fiscal or monetary regimes like Argentina and Turkey and Lebanon. And so that's actually where you're seeing kind of the most acute suffering

from this inflationary environment because that's where we have environments where people literally have trouble. getting enough to eat in some cases or just trouble kind of, you know, managing a business or managing a company. And obviously it varies between, say, Argentina and Lebanon, but you have these environments that it's much hard to do basic things when your inflation is well into the double digits. Is it the case that all central banks are pretty much reading from the same handbook on this, though, Lynn? So like, to one degree or another, they're sort of handling things the way the Fed is.

Or are there some countries that are doing something that's completely different? So Russia is some of an outlier in that they're doing something different. They've historically been more hawkish in terms of their, you know, they're trying to keep industry, it's higher. And so in Russia, for example, a pretty low debt has a percentage of GDP. And the central bank is pretty conservative. They're buying gold pretty regularly, right? So they're kind of this more.

Got some Austrians over there. Yeah, I mean, they still have, you know, it's funny because even despite all of that, the ruble actually, you know, went down versus the dollar in part because, you know, for a while there, they were impacted by oil prices going down now that the uptick has kind of benefited from them. And so they still have structural issues with their economy, but from a central bank standpoint, they've been pretty hawkish. They've been kind of Austrian in that sense. And so with most other central banks, especially developed central banks, have kind of gone

down in the same playbook. and they're just on different timetables there because they have different demographic reality. So Japan's kind of been ahead of the curve because they've got the oldest society. And so they, you know, they've been more aggressive in the monetary policy sense, whereas then Europe and the Fed are kind of behind them. And then we saw, you know, Canada and Australia were a little bit behind them. And so we've had this kind of all kind of going in the same direction. And emerging markets, you know, the ones that are not kind of almost hyperinflating,

but the ones that are kind of trying to manage things more realistically, they have issues where they know that they can't do as much quantitative easing because their currency is weaker to begin with. And so they risk inflation at a lower threshold. So some of them have also been more conservative than, say, the United States in terms of how much fiscal stimulus they can offer their people because they know that they risk inflation at a much lower threshold. And so you haven't really seen that kind of same massive fiscal deficits

and then deficit monetization out of a lot of those countries that you have from, say, the United States or Europe. China playing this game, too, Lynn? Less so. I mean, China's money supply grew at a slower pace than the United States since the beginning of the pandemic. So they've been doing a lot less fiscal spending. They haven't really been doing QE like the United States has.

And instead, they've kind of been actually kind of trying to de-leverage a little bit. And so they're actually on somewhat of a different path. And so, you know, central bank, central bankers do talk to each other, especially throughout the Western world and with Japan, whereas some of the emerging markets are on their own kind of approach. But generally, you do see a lot of coordination, but it's kind of then adjusted for different realities in different countries. Lynn, last time we had you on six months ago, we titled the episode of the podcast, The Death of the Dollar Dominance.

And it talked a little bit about some of the same things that we were talking about today on this episode. you alluded to the Triffin dilemma and the reducing position that the dollar has as the dominant currency of the world. Now that we have actually seen inflation show up across all metrics, how would you say that this story has evolved over the last six months since we last checked in on it? It's pretty much continued. I mean, that's a long-term thing. So that doesn't generally have a lot of news changing in six months. That's not going to tell you the dollar index is going to go upward down 3% based on these global. shifts. But we have, I think the things to watch are, you know, especially Russia and China,

you know, what are they doing with their dollar reserves? What are they doing with how they, you know, they pay internationally? And so, for example, since that last conversation, we've seen even more aggressive moves out of Russia to de-dollarize, you know, their reserves and their sovereign wealth fund and to focus on the euro, to focus on gold, to focus on Chinese currency. And so we've seen, you know, between Russia and China, For example, China is obviously an energy importer. Russia is an energy exporter. Used to see that trade is mostly dollar-based.

And we've seen ever since, especially since 2018, that start to break down where they started to rely more on the euro and more on some of their local currencies. And we've seen that accelerate since then. So the dollar continues to be a lower and lower share of trade between Russia and China, as well as Russia and Europe. And so we do see that long-term structural shift. away from the dollar being used to price all global energy and all, you know, most global trade.

And we're starting to see kind of a regional currency system where the euro is being used more so in Eurasia and a little bit less so the dollar. And so I think that that's likely to continue for like a lot longer. But it's not going to be like a straight line. It doesn't necessarily mean you have an impact on the dollar and say a six-month period. We've also obviously seen acceleration in China for their central bank digital currency. And so I think that's, you know, that's in addition to providing them all sorts of authoritarian surveillance state type of stuff that they love over there, that also potentially will, you know,

increase their currency's usage in some of their trading partners, maybe in Africa and some of the other markets around Asia that they do business with. But we'll see in time. Lynn, you recently tweeted out as something I thought was pretty interesting. It was a comparison of 2018 versus 2000. trade relationships between the United States and China. And, oh, yeah, there it is. Ryan's got it on the screen right now.

And the transition, the massive transition from the world being a U.S. dominated trade environment to a Chinese dominated trade environment is absolutely stark. It just flips from being blue, which is the U.S. to red being China. That happening simultaneously with the very strong push by the Chinese central bank digital currency is an interesting story. What story do you hear being written when you see a lot of global trade starting to become Chinese dominated while China is also pushing this new form of medium of exchange with their digital yuan? I think that those charts kind of show Triffon's dilemma in one of the clearest ways possible, especially the version of Triffon Dilemma that focuses on the current account rather than the capital account. So the initial Triffin's dilemma was more about the capital account, but kind of the restructured Triffin's dilemma trade ever since the 1970s with the Petrofen's.

dollar has really been about the fact that, yeah, that you have the chart up there. So basically, ever since we've shifted from the Bretton Wood system to the petrol system, basically the release valve for that has been that the United States had to run these massive trade deficits to sustain that. Because, you know, if we pretty much tell the world, you can only buy oil in dollars, which is the deal that the United States made with OPEC and say, okay, you can only buy oil in dollars. Well, they can only do that if they have a lot of dollars.

And so the way that they get dollars is that the United States runs big trade deficits with them. And so there's all this international demand for the dollar that kind of props up the strength of the dollar. And so it increases our import power, decreases our export power. And so it naturally hollows out our industrial base. And so depending on if you work and say technology, you don't mind that, right? You get a lot of the benefits of globalization without the downsize. Whereas if you work in manufacturing, there's a good chance that over the past 25 years you got your job replaced by someone in China or someone in some of these other countries.

And so I think that that map shows, you know, basically the downside of the system we've been in ever since the 70s. And it really kind of accelerated in the 90s. That's when that system really started working against the United States. And China's played this pretty smart because in addition to benefiting from all those trade surpluses, you know, they also started to say, okay, you know, over the past several decades, these countries that ran these trade services with the United States, they would then take those dollars and go ahead and buy treasures with it. So they would fund U.S. deficits. And so Europe did that,

Japan did that, China did that. But then about something like seven years ago, China said it's really no longer an interest to buy treasuries anymore, especially with rates, you know, so low. So we're going to go ahead and use those dollars to buy hard assets around the world. So they started making loans to emerging markets that are often collateralized by real assets like ports and infrastructure. If those loans are defaulted on, they go to China. You know, the ownership of those goes to China. And so China's been using that dollar system against the United States by basically expanding their reach, you know, the Belt and Road initiative and all those sorts of

funding that they're doing around the world. That's basically using the dollar-based system against the United States by plowing paper assets into hard assets. So they're increasing their hard asset reach, whereas the United States is kind of hollowing out its manufacturing base. And it's kind of the, you know, the, the, the, the, the, the, the, the, the, the, of people that are benefiting in the United States from that plan is mostly limited to the top, say, 10% of the population rather than the country as a whole. Yeah, it's pretty crazy.

So it's like, I mean, I'm sure people in China read Ray Dalio, you know. So sometimes I feel like economically China is playing chess and the U.S. is playing checkers here. In particular, with its reserve currency status, David and I are actually going to have a gentleman on the podcast next week by the name of Richard Turin, who's written a book called Cash List. He's lived in Beijing for the last 10 years, and this is all about the Chinese central bank digital currency and the leapfrogging that they've done on the U.S. banking system in terms of just raw usability for Chinese citizens. Very easy to pay for things, to transact on the network, to get your everyday banking needs done on Wii pay and AliChat or sorry, AliPay and WeChat in, in China and the US does not have this infrastructure. We were talking earlier, Lin, about sort of the winners and the losers from inflation. Do you think that if the US reserve currency status erodes, that a lot of this winning is going

to go into the R&B, the digital one, do you think that's the trajectory or do you see a world that is a bit more, and like maybe that will start to assert its dominance, or do you see a world that's a bit more, I guess, multi-molar, multi-reserve currencies and sort of a basket SDR type of thing. How does this play out in your mind? Yeah, so I think my base case is that we're shifting towards a more multipolar world. And so a lot of people ask if the dollar loses its status, what could possibly replace it? Could it be the euro? Could it be China's currency?

And the answer is no, really. If you look at, say, the United States after World War II and into the decades that followed, it was kind of a unique position because most of the world was devastated. The United States was like 40% of global GDP, the biggest commodity importer by far. And so it was more feasible to have kind of that one currency be kind of the king of all currencies. Whereas, you know, in previous global reserve currency eras, you know, even though there was often one kind of major currency, it was really gold that was the underlying kind of real reserve currency. And it just so happened that one country had the biggest trading network and was used more heavily than the other. It wasn't kind of that complete lock that the United States has had really since the 1940s.

But, you know, as the rest of the world recovered from World War II and then also developed from emerging market standpoint, we've had the United States go down and down and down as a percentage of global GDP. So even though we're still significant, we're a much lower percentage than we used to be. And it's not really feasible to maintain the global reserve status when you're that increasingly small percentage of global GDP. But then if you look at Europe, if you look at China, they're not really big enough. percentage of global GDP either in order to have, say, the one currency to rule them all. And, you know, I think also China kind of saw the U.S. playbook over the past 50 years, and they don't want to repeat that. They don't want to hollow out their manufacturing base.

And so China's main goal is not necessarily that they want the same structure that the dollar had over the past, say, you know, better part of the last century. Instead, they mainly want part of it. They want to build to buy commodities and things in their own currency, whereas they don't necessarily want everybody in the world to have to buy oil with yuan in the same way that the whole pet dollar system since the 70s is based on the premise that every country buys oil with dollars. And so I think we're shifting more over time to a regional reserve currency status. And if that does continue to occur, you know, that could be painful for the U.S. in many ways

to kind of lose that reserve currency status or at least change its relationship with the reserve status by basically sharing it with a couple other currencies. But it can also potentially end this structural trade deficit situation that the United States finds itself in. And basically, you know, we go through a period of pain. But then if we have, say, a weaker currency, it makes our exports more competitive again, right? So we don't run these kind of structural trade deficits. It becomes more economic to build things in the United States.

Whereas it really hasn't been for the better part of the last 50 years and especially the past 25 years. And so obviously depending on what kind of, you know, if you. say, work in healthcare or technology in the United States, you've benefited from the, from the global reserve status without really paying any of the downsides, right? So your job wasn't replaced, but then you got the benefits of your global dollar. Because if you work in manufacturing, you got some of the benefits too, but you also potentially lost your job or had your wages suppressed by that system more so than Europeans, more so

than Japanese, and obviously more so than China. And so if that pendulum shifts back the other way, you know, you could have somewhat of a re-enignment of what parties are benefiting from the system. Lynn, as we come down to the close of this podcast, and thank you so much for your time, this has already been extremely educational for me. I want to get your opinion on the COVID-Delta variant, which has really kind of come around in the news lately. And I'm actually in Europe right now, and Europe is about to go, or at least France,

is about to go into actually more restrictive lockdowns because this delta variant has kind of just gotten out of control. And meanwhile, I'm also hearing just conversations and murmurings about people coming to the terms that like a double dose of vaccine might not be enough. And as COVID iterates and, you know, has more and more of its own variance that are vaccines that we thought were going to be our silver bullet are actually going to become pretty obsolete. And so there's there's worry on the horizon that we actually might be in for like a round two of more restricted COVID environment. Is this something that you're paying attention to? And if that does unfold, how do you think that that might impact the economy as it's related to the subjects matters we've been talking about?

Yeah, my newsletter of this past weekend focused on that topic because we are starting to see that happening. And I've been covering a little bit in my research service that we had the big spike in India, for example. And then now that's on the downtrend. But then if you look at the surrounding countries in Southeast Asia, Indonesia, Malaysia, Thailand, those countries like that, they have the same. kind of spike that India had two months ago and, you know, with a pretty high death count,

things like that. And then what's interesting is there, you know, you see countries like Australia that, you know, they've had a very, they've had like two deaths in the past month, but they're already seeing this, you know, they see the smallest upticks. So they say we got to lock everything down again. And so I'm kind of watching a couple of things. I mean, obviously I'm not a medical expert. So I have to, I have to kind of see what the consensus medical opinion is, kind of look at different sources to see what, what's actually happening. And then because I'm numbers oriented, I look at some of the numbers-based things that we're seeing. And we have to watch this on three layers.

So we have to watch what the virus does and what vaccines do, things like that. So the medical question, then you have to watch what governments do, right? Are they going to have a quick trigger finger for one and to lock everything down as soon as you get some deaths? And then you have the people's reaction to those government lockdowns. Are people losing tolerance for this? Because obviously, if this cycle continues over and over, it's not like we'd like we'd lock down every year for the flu, right? We don't, we don't lock things down for the flu. And so, you know, in the beginning, when we had, say, the virus, the pandemic just come out of China.

We saw, you know, a big huge death count out of Italy, right? So they were building like emergency hospitals to support everyone. You know, you could justify certain types of lockdowns and saying, you know, we don't know anything about this virus. You want to slow this spread. We don't know what's going on. And so we're going to do a three-week thing. We're going to do stimulus to kind of offset that. You know, that's one thing. But then when you're kind of a year and a half into that, this, and then, you know, over time, you're two years into this, three years into this, you know, there's only so many times you can say, we're going to lock the entire economy down to deal with the fact that there's a virus that's killing a rather small percentage of the

population. And so I think we're going to, we're going to have politics around booster shots, right? So ongoing vaccinations. Some countries are kind of, you know, playing with the idea of making vaccines mandatory, which opens up all sorts of pushback against that. And so I think that, you know, this is not an easy environment. And it's, it's part, there's so many layers there watching the medical consensus, watching the government reaction, watching the people's reaction. And so I do think that that is a big risk for some of these more reflationary trades. And what governments find themselves in is that either if they do lockdowns, they either have to compensate people with printed money, right? So they don't have a big reserve of money

that they're pulling out from. And they have to just print it, right? So they print the money, they give it to people that can be stagflationary, right? Because if you're if you're halting how many supplies and services it can be produced, but then you're still giving people money, then you perpetuate that stagnation in your environment. On the other hand, if you don't pay them, you just tell them they have to lock down, well, then you're destroying businesses and you're destroying livelihoods while Amazon is getting all the benefits. And so it's going to be a really challenging environment. And over time, you know, people are going to have to learn to live with this and basically,

you know, make the best they can out of it. And it's going to be interesting to see how different countries navigate that timeline, right? Because obviously, if some countries that are more kind of like, well, we can only do so much, we have to keep the economy opening. And other economies are saying, no, no, we have to shut everything down one more time. And it kind of comes down to what, you know, when we have election cycles, we'll get these kind of glimpses into what the people think about that. If they reelect the leaders that have been doing those lockdowns, then obviously there's

significant political will to continue with. And if they start to vote those people out of office, then you might start to get a different, like, reaction function. And obviously, you have different politics in different countries. So, for example, the United States, lockdowns are more on the local and state level. Whereas the federal government can really only kind of issue guidance and only control certain areas. Whereas other countries, you can have like the top level of that government locked down parts of the country. So it really kind of comes down to how individual politics affect this.

But I do think it's a huge risk. Fascinating answer. You know, I think maybe for the first time in a bankless podcast, we've gotten this far without actually mentioning the word crypto. So that's the first. But now I'm going to mention it. So in this backdrop where we have potentially, Lynn, in the future, a multi-polar, polar world as far as reserve currency status, we've got inflation, we've got sort of COVID. We've got China's fintech scene, like absolutely exploding with Ali Pay and WeChat, this sort of thing. The crypto people have an argument, don't they?

And their argument is that the world needs a non-sovereign money system. And that's kind of the base argument that Bitcoiners have made. and then the defy argument is, and then we can create a non-sovereign banking system on top of this. What's your take on how that argument holds up over the next decade or so in this new landscape we find ourselves in? Are these crypto solutions workable? Do the crypto people know what they're talking about? Is there a real solution here potentially? I think so.

And obviously, we'll see how different regulators push back against that, right? because you're going to have people trying to save the system from the new entrance. But overall, I'm all in favor of, you know, basically private money, basically innovations being able to do what they're going to do. And if other people accept it as money, then it becomes money. And so that's kind of been the history of money throughout the ages. And so I'm certainly in favor of that. And it's sort of kind of like contracts that people want to make between themselves.

You know, I think I support, you know, I support that in almost any context. And so I hopefully, hoping that we're going to see basically a large and larger, you know, digital asset space over the coming decade and that, you know, more of this will be transferred. You know, because a lot of our conversation is going back to what are policymakers going to do? You know, is money supply going to go up? Is fiscal spending going to happen? We don't know. Whereas if you have more algorithmic monetary policy, then that at least gives people,

even if they're still using a currency, a fee of currency for other purposes, at least they have a digital asset that they can store value in or that they can transact with anyone they want without having to get permission. So I think that basically scarcity and permissionless payments and all sorts of permissionless, say, lending environments or trading environments, those are obviously, I think, really good things for people to have access to. And in many cases, I find that the most pushback against that is in developed markets where they're saying, well, why do you care about permissionless payments or why do you care about

store of value isn't isn't the dollar good enough store of value and it's like well sure in developed countries we've had less extreme taste of this is if you're living in argentina or lebanon you have you have to sell the idea less there because it's like well not going to say what what do you mean store of value why would we why would we need a store of value well they obviously need a store of value and so you have that argument and then even in developed countries because we're getting this more inflationary outcome especially not just inflation but also like negative real yields so inflation that's happening while bank accounts are still yielding roughly 0%, you know, it's easier to make the case to say hold Bitcoin. And you say, okay, it might be volatile, but with fiat currency, it might be

less volatile, but you're guaranteed to lose money. And so, you know, say Bitcoin is volatile, but at least it's volatile in the up direction just as often or more than it is in the down direction. And so I think over time, you know, there's more global adoption of these types of assets rather than relying strictly on their, on their fee at currency. And especially in emerging markets, where they just have fewer options. They have less access to equities. And it's really about, you know, they have the fee of currency. They have their home.

And besides that, they haven't had a lot of other ways to try to store value and offset those inflationary risks. In the last year or so, as a result of COVID, we've seen gold not do what we, at least I think, what we would have expected gold to have done in a highly, you know, inflationary environment with a lot of monetary base expansion. Would you say that the crypto world and the growth of the crypto markets and Bitcoin specifically sucked the wind out of gold sales during the last like 18 months or so? I think partially. So I think the other factor, probably the bigger factor is the fact that the bond market doesn't fully believe the inflation narrative yet.

And so they're still kind of banking on it being transitory. And of course, the bond market is partially influenced by the Fed buying bonds. So that that's kind of a complicating factor. But so if you look at gold, for example, gold historically. follows, you know, real yields, which is basically the 10-year treasury minus the break-even rate. And the break-even rate is basically the treasury markets forward inflation expectations over a 10-year period, right? And so that's measured by the difference in the yields between, say, the 10-year yield and the

tips yield, the Treasury inflation protected security yield. And so the bond market is basically saying, okay, inflation's 5% now, but we think it's going to be more like 2.5% averaging over the next 10 years. And so by that metric, it's less worried about inflation. than the near-term indicators are signaling. And so gold is kind of, you know, because it's a rather financialized asset, it's kind of following those break-evens more closely than it's following the real-time inflation numbers. And so obviously that's the biggest factor for, you know, if you just look at gold compared to those,

it's actually doing almost exactly what you'd expect it to, where, you know, those break-evens kind of peaked and gold peaked. And then ever since you've kind of had the real yields kind of, you know, come off of their bottom, you've had gold kind of also come off of its top. And so that's kind of one story. But then I do think in terms of magnitude, you know, I think that gold could have had a bigger spike. They might have corrected less if there weren't these these cryptos competing with it. Right.

So obviously, you know, among younger investors in particular, you know, when they say, I want to protect my money against fee at the basement, they go out and buy Bitcoin and then they might buy Ethereum. And then unfortunately, they might buy Doge. And you kind of go down the rabbit hole of things they might. might buy, but a lot of them are not gold. And so, you know, silver is still somewhat popular among younger investors, but, but, you know, a lot of them had, a lot of that interest has translated into the digital asset space more than just, you know, gold and silver. Since you mentioned Ethereum, Lynn, I got to ask you. So it's been about six months, I think, since we last talked. And in those six months, ETH staking has risen to about five to six

percent of its supply locked in the proof of stake, staking contract. We are less than a month out, as David liked to say, less than one paycheck out from the potential release of something called EIP 1559, which actually ties the network usage of Ethereum to ETHI asset in the form of a burning ethie asset every time a transaction is committed to Ethereum. I'm just curious over the last six months or so, has your mental model for Ethereum or ETHI asset changed at all? or is it pretty much the same? How did you describe how you think about Ether and Ethereum at this point? So it's pretty much the same as I described it in January.

And for people that follow my work closely, I have a research service where I update on, say, Bitcoin more regularly. And I also include some Ethereum updates in that service. And so, for example, even though I have concerns about Ethereum in the long run, I say, for example, in January, I'm like, if this breaks over $1,400, that's a really bullish sign. And then I kind of watched that Ethereum to Bitcoin ratio. And I kind of monitor that over time. So my overall viewpoint for this run has been that I'm somewhat tactically bullish on Ethereum

while still having kind of questions and concerns about the longer term technical details and implementations there. And so even in my January Ethereum piece, it was otherwise pretty critical. One of the things that I was pretty favorable on was EIP 1559. That was kind of the one thing I singled out, the saying I actually think that's pretty elegant for Ethereum to do. And so I do think that staking and EIP 1559 have been pretty good for the Ethereum Protocol over this past year. And I actually had a conversation with Rao Powell a couple, I think it was probably a month ago now. And based on my view was that when you have ETH two on the horizon and you're locking up, you know, with ETH into that staking, and then you also get EIP 1559, I think that, you know, that can be pretty bullish for the price in a similar way that a Bitcoin having, you know, can be pretty bullish for the price. And so we've seen Bitcoin come off of exchanges until this recent correction.

You had a brief period of Bitcoin going to exchanges. Now they're kind of back to coming back off exchanges. You've seen similar dynamics with Ethereum, leaving exchanges and going into these more illiquid formats. And so overall, that is pretty good for the price action while it happens. And so whereas my concerns with Ethereum, a more longer term, rather than, say, six to 12-month price action. So I kind of separate my how I analyze price action of Bitcoin and Ethereum versus how I analyze, the fundamentals. And it's, you know, even going back to Bitcoin, for example, when Bitcoin broke below,

like say, 46,000 back in May, I kind of issued an update to my subscribers saying, okay, I'm still long-term bullish on Bitcoin, but we're clearly seeing a risk-off environment in terms of price. And so just like when I analyze an equity, you know, there's one story about what the fundamentals are doing good or bad. And then there's another story about what the price is doing good or bad. And so I kind of monitor that kind of relationship over time. And sometimes my opinion on the fundamentals and price are roughly in line,

whereas other times I might have a difference of opinion between price and fundamentals. And so I think one way I'm looking at Ethereum and some of the alt coins is that I'm kind of treating them in a similar way that I would treat equity. And it's somewhat different than how I treat Bitcoin, which is as a money. So I think that's probably the, you know, if a mental model has clarified it all over the past six months, it's really about treating a lot of those platforms as equities in a similar way that I would treat. say, you know, equities in the stock market. Interesting. And what's your take on the crypto bull run?

So is this a brief downturn or is this going to be a more sustained bear market? Or are we just like, you know, are, is this going to turn out okay for crypto in the short to medium turn, Lynn, is kind of my question. So in the near term, I don't know. And so I've been in my research service pretty much ever since it broke down, I've been kind of unclear about the near term price action while still. favorable long term about the fundamentals. And so, you know, with with Bitcoin, for example, I was like until this breaks over like 41, 42,000, there's not a lot of, you know, bullish tactical

indicators to kind of go by. And Ethereum, I forget exactly what price target I gave, but it was like, until it breaks over this price target, you know, I'm also just not super favorable on it. Whereas, you know, I wouldn't, that that's different than say selling my cold storage stuff, right? I'm not selling my cold storage stuff. I'm also saying like, you know, from a, from a three to six month perspective until I see kind of price confirmation, I can't really be bullish. And so that is kind of separating those different time horizons, whereas long term is really going to be about what's happening with the fundamentals, what's happening with regulatory clarity to allow pools of capital to go into those assets at a bigger way. And so I do think that, you know, especially

in 2021, we've had an inverse relationship between quality and price among tokens, right? So you've had things like Doge Skyrocket, whereas, you know, say Bitcoin and Ethereum have actually gone up less than, say, you know, Dogecoin or Ethereum Classic and things like that. And so basically, I think you still have to have some of that froth kind of taken out from some of those periphery projects before you can see kind of sustained rises. And so another thing to keep in mind is that now that Bitcoin and Ethereum and some of these other protocols, you know, the whole space is like, you know, big enough to be a macro asset. it's more influenced by these macro headwinds.

And so over 2020, people were getting stimulus checks that they could pile into stocks or cryptos, whereas if those stimulus checks dry up, that's less retail money that can pour into the space. And so I think you have this period of consolidation where you separate the good projects from the bad projects until you can build a base and have the next bull run. And so unfortunately, it kind of comes down to the political question

of are we going to see more stimulus checks? are we going to see more fiscal stimulus? What's going to happen with the Delta virus? I think all those sorts of things can trickle into the crypto industry now that the crypto industry is big enough to be a macro asset. So I'm kind of uncertain in the near term, while my long-term case is still really bullish, specifically for watching the fundamentals over time and the network effects. It seems very clear from this conversation. And we started the book, this context. This podcast has been about inflation. It seems very clear from this conversation that inflation is going to impact all of our lives in very meaningful ways, potentially very, very large ways in this future.

This is going to be an interesting decade to live through. I guess maybe, you know, closing with this question, Lynn, given everything that we've talked about through the course of this conversation, what is your best advice for listeners, maybe just individual wage earners and also investors listening to this podcast? What would you tell them to do? Well, I think, I mean, you have to hold things that you understand, first of all. You have to understand what you own. You have to understand how to value it.

And then, you know, generally preference things that are real assets. And that can include, you know, digital assets, right? Basically, things that have a degree of scarcity to them that, say, fee of currencies don't. So I think that's going to be a story of the 2020s is, you know, things that are scarce are going to, you know, maintain their purchasing. whereas fee of currencies and bonds and things like that will be debased. But from there, you know, obviously some people are real estate experts. Some people are equity experts. Some people are crypto experts.

And so they have to kind of, you know, make sure that they're invested in things that they understand to a reasonable degree. The other thing I would suggest is always kind of playing the steel man approach. So I think you guys did a good job of asking the question. If you were to steal man the transfer inflation argument, how would you do so? So until you invest in something, you know, you shouldn't do it until you can steal man the reason why you should invest it, right? So for any asset, you're buying, there's someone selling it. And so you have to make sure you understand why someone is selling it. And if you can

answer why they're selling it, basically take the smartest seller of that asset, understand his or her view, and then say, you know, what is your counter argument to that? Why would I buy it? Despite the fact that there are intelligent reasons to sell it. And if you can answer all those questions, that's when I think you should go ahead and buy that asset. And then, you know, And then from there, separate the fundamentals from the price. So the price action is not necessarily saying what the fundamentals are doing because the fundamentals can be doing their own thing or price goes around. And anyone from the equity world knows that over the long run, especially value investors

or long-term fundamental investors, you know, kind of the Buffett approach type of things that you can have, say, an asset that hasn't changed year to year, but it went up 30% in price, it went down 30% in price. And it's still the same asset doing basically the same thing. but sentiment around that has changed. And obviously in digital assets, because you were earlier on in the adoption curve, because we don't know the full size, the total adjustable market yet, there's a lot more volatility there.

We also didn't even know their regulatory clarity yet in many countries. And so you have obviously increased volatility, but that still can give you more opportunities to separate price and fundamentals and keep a closer eye on fundamentals than on price. Fantastic advice, Lynn. scarce assets for this decade, build expertise in a specific asset area, niche, steel man, the arguments, and then invest in those fundamentals and double down on those fundamentals when the market doubts them.

Fantastic advice to end with Lynn. It has been such a pleasure to have you on bankless. For the second time, we hope you come back again soon. Happy to. Thanks for having me. Absolutely. Guys, another action item that I think will help your investment career, is subscribing to Lynn's newsletter.

That is at lynn alden.com. You can check that out. We will include a link in the show notes. That's action item number one. You can also follow Lynn on Twitter at Lynn Alden Contact. That is her Twitter handle. Guys, as always, of course, none of this was financial advice. Crypto is risky, although we didn't talk about it until the end.

Eith is risky. So is Bitcoin. Defi is risky. You could lose what you put in. 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. Thanks a lot. Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence.

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