TFTC: A Bitcoin Podcast - #185: Lyn Alden

Episode Date: August 11, 2020

Join Marty as he sits down with Lyn Alden, founder of Lyn Alden Investment Strategy, to discuss: - QE's affect on inequality - The Triffin Dilemma - The double edged sword of the reserve currency of the world - Inflation metrics - Why Lyn is interested in Bitcoin - How the world would look different on a Bitcoin Standard - much more Follow Lyn on Twitter Check out the article we discussed Shoutout to this week's sponsors. Cash App. Start #stackingsats today. Use the promo code: "stackingsats" to receive $10 and contribute $10 to OWLS Lacrosse when you download the app.

Take two. This is your boy Marty Ben here to introduce this episode of Tales from the Crypt. I have the immense pleasure of sitting down with Lynn Alden, founder of the Lynn Alden Investment Strategy. We just discussed a lot of things. In an article she wrote last week or the week before, dove into the Triffin Dilemma and the situation the U.S. finds itself in as it has stretched out its influence across the world using the U.S. dollar system as a weapon or a tool to gain dominance. We talked about the Triffin dilemma, how QE may not have the robust effect on inequality that many people think. It certainly does have an effect, but there are other variables at play here, and we dive into that.

We also dive into Lynn's decision to invest in Bitcoin earlier this year and why she felt comfortable this time around compared to 2017 when she first wrote about Bitcoin for her investors. So I think you guys are really going to like this episode. Incredible conversation. Covered a lot of topics. I hope you guys enjoy. This episode was brought to you by our good friends at the motherfucking Cash App.

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good friends at owls lacrosse that's owls lacrosse it's owls lacrosse enjoy this episode enjoy your life you only got one okay you've had a dynamic where money's become freer than free if you talk about a fed just gone nuts all all the central banks going nuts so it's all acting like safe haven i believe that in a world where central bankers are tripping over themselves to devalue their currency bitcoin wins in the world of fiat currencies bitcoin is the victor I mean, that's part of the bull case for Bitcoin.

If you're not paying attention, you probably should be. What is up, freaks? Welcome back to Tales from the Crypt. It's your boy Marty Bent here on a windy afternoon after the hurricane storm has passed through South Jersey. A little damage. I'm sitting down with Lynn Alden, founder of the Lynn Alden Investment Strategy. And as I understand you were affected by the storm as well yeah uh thanks for having me and uh yeah we lost power and it's just funny to find out just a couple minutes ago that we live like uh like an hour from each other like yeah so we're right in the same area and uh yeah the storms have just knocked out power in some areas more than others and it's just you know it's kind of been a hectic

week yeah it's early early hurricane season i wasn't expecting one the beginning of august yeah um while we're on the beginning of august you wrote a piece on august 2nd that i uh thoroughly enjoyed the big tax shift and as always uh chatting with you before we hit record it uh were a couple of points in the piece that sort of challenged my beliefs particularly around qe and how it affects inequality um and that's what i really loved about this piece particularly is that you dive in to the different variables that may be contributing to that and uh the different themes that may contribute to the inequality in the u.s particularly uh around u.s dollar status is the reserve currency of the world and how that's affected uh inequality and wealth distribution

in the states so i'd love to just walk through this piece what sort of drove you to write it and the conclusions that you came to yeah i'd be happy to uh it was definitely a kind of a fun piece to write because it touched on so many different things and it was kind of a challenge tying the themes together yeah and so let's let's just uh the one again uh point that really challenged My belief is that QE drives inequality, what might to an extent, you sort of point out in this piece that countries like Japan and not a country, but an economy like the Eurozone have far greater QE, but less inequality. So there's definitely some more variables. And I think to begin this conversation talking about the shift from a U.S. as a manufacturing and industrial country to a service-based economy that's got investments in foreign governments or countries and stuff like that. Yeah, anything as complex as wealth inequality always has multiple variables involved. So one of the aspects of the article touched on the fact that, you know, there's this kind of common view, which makes a lot of sense on the surface, that the more QE a country does, you know, the more that leads to wealth inequality.

And, of course, the logic for that is pretty sound, right, because as they, you know, print money to buy assets, most of that kind of created wealth gets up into financial asset prices. So those that own the assets, which is a minority of people, end up getting disproportionate benefits from QE. So the kind of the logical assumption is the more QE that a country does, the more wealth inequality we'd have from that effect. But one thing that's interesting is that the numbers kind of show the opposite or at least show that there's not a very strong correlation in the sense that Japan, for example, has done more QE as a percentage of their GDP than pretty much any other country. So their Bank of Japan's balance sheet is over 100 percent of Japan's GDP. They've been doing it longer and at a larger magnitude than pretty much any other country. And they actually have among the lowest levels of wealth inequality. And, of course, there are a variety of factors for there.

It's a very – it's not a very diverse country. It's kind of a very unified country. It's a very – not one of those politically polarized countries. They have very inexpensive health care, for example, on a per capita basis, despite the fact that they're the oldest country, you'd expect them to have very high health care costs. So they do a lot of things kind of fiscally and just culturally that kind of don't lead to a lot of wealth concentration, despite the fact that they've done a lot of this QE. And then you look at, say, the Eurozone, and they've done more QE than the U.S. has as a percentage of GDP, but not

as much as Japan, not even close to Japan. And they're, you know, of course, that's a block of multiple countries. So some of the countries there have, you know, more wealth concentration than others. But on average, it's somewhere between the U.S. and Japan, where they generally have a little bit more wealth concentration than Japan, but not as much as the U.S. for most of the countries. And then when you go to the U.S., we've done, you know, we're catching up quickly here in 2020 with some of the most rapid QE around. But if you look back, you know, since inception, we've done less QE as a percentage of GDP. You know, if you look at, say, the Fed's balance sheet as a percentage of U.S. GDP than Europe or Japan, and yet we have far more wealth

inequality. So it kind of points to the notion that there's definitely more factors involved for a country's wealth concentration than just their amount of QE they've done. And there's factors like demographics, there's different sort of tax and fiscal policies, there's geopolitical things like currency reserve status, and all those things can kind of feed into the equation that they can kind of have more wealth concentration or less wealth concentration. Yeah. And let's focus in on the reserve currency status aspect of this and the Triffin dilemma and this sort of hollowing out, again, of the manufacturing base here in the

United States over the last X decades and really moving our supply chains across the world. And And this is highlighted in inefficiency or probably a weak spot in America with this coronavirus. A lot of our supply chains are in places that are not advantageous for us at this current moment in time. And so that race to be the reserve currency of the world, while it certainly has its advantages, is proving in the long term to have some disadvantages as well. Yeah. So if you look back over, say, the past 100 years of U.S. wealth concentration, it reached a peak level in the late 1920s, and it started to decrease for a while. And then around the 1960s, 1970s, it started to find a bottom. And then ever since then, we've been in this period of rising wealth inequality the past 50 years or so. And one of the main things that happened during that whole period was the shift in kind of global monetary policy rather than just anything U.S. specific.

So starting prior to then, there's the Bretton Woods system. But then in 1971, of course, we went off the gold standard. And in the 1970s, they established the situation that we currently have today, even 50 years later, which is that the dollar is essentially the global reserve asset for most of the world. And the – all commodities around the world pretty much are priced in dollars. So even if France buys oil from Saudi Arabia, it's in dollars. It's not in either of their currencies. It's in dollars. And that holds true for most of the world. Most types of commodities are priced in dollars.

And that made sense for a while because after World War II and then into the 60s, 70s, 80s, the US was such a large portion of the global economy. And we were by far the largest commodity importer. So we kind of had this system where we run persistent trade deficits. We get lots of dollars out there, and there's so much demand for the dollar because it's the global reserve currency. You need it to buy oil. You need it to buy other commodities. And that kind of gives us a situation where the dollar is kind of always perpetually overvalued based on kind of what it would be if we didn't have this status. So currencies usually find a natural equilibrium around trade. So if you run persistent trade deficits, usually you have some sort of correction in your currency, and your currency weakens, and that reduces your importing power and increases your export competitiveness.

But because there's so much external demand for the dollar, we never really normalize. We never really kind of go back to that equilibrium, and instead we run pretty consistent trade deficits, and that gets – that's important for a global reserve currency to do because a global reserve currency only works when there's enough of those currency units out in the world. But that has effects over the long term, right? So running persistent trade deficits doesn't come for free. And so basically in exchange for having all the benefits of the global reserve currency, like it increases our kind of military power, it kind of – it gives us a very strong standing in the world. It makes it so we can print money to buy commodities. It's a very powerful force. But on the other hand, we've had to basically export our manufacturing and industrial base to do this because it made our physical products a lot less competitive than many countries, not just emerging markets, but even compared to Europe and Japan, for example.

Their competitiveness in terms of physical exports is much better than ours. And so we've had this cost. We've had to shift out a lot of this manufacturing capability. And that's, of course, disproportionately benefited working class people, blue collar workers that used to have more power in that arrangement. And now because you've exported so much, that's been one of the contributors for wealth inequality over this period. yeah we're seeing how how much that's exacerbated right now with the economic shutdowns and you point this out in the article is that they basically run on a service economy a lot of people depend on on low-level jobs in the service industry restaurant industry travel industry and it's really coming to a head at this particular moment as many of these people even when they are working only work for tips or mainly work for tips or other sorts of big on top of their they're low base pay and um yeah so this has been a theme on this podcast for a while it

feels like america's in a very vulnerable situation right now and it's uh lust for the dollar reserve status may um may be coming back to bite us in the ass and uh so that's interesting and it's interesting seeing play out in the markets right now i read about this yesterday like are are we starting to see um in inflation the beginnings of an inflationary event you're seeing the dot you mentioned that the dollars had this equilibrium over time but last three months the dixie index down what like over seven percent now you see stocks up 20 bitcoin up 20 30 gold same thing are do you think we're beginning to see confidence waning in in that reserve status uh potentially i i view it uh there's a couple different ways to

kind of look at it right so uh i shifted more to being dollar bearish back in uh the beginning of october 2019 and that's uh it basically happened because we had that repo spike uh which for people that don't know basically the overnight lending rate you know between banks uh you know blew up right so instead of being able to borrow at a very low rate suddenly that liquidity dried up and the rate like you know tripled or quadrupled overnight federal reserve came in the next day and had to basically print money to fix that hole and then that marked a shift where the federal reserve had to begin buying treasuries outright and so a lot of that was because you know prior to then the us was relying on private buyers and it to some extent foreign buyers purchasing its treasury

issuance so we had really rising treasury issuance but we were kind of saturating the amount of available buyers and so during the repo spike bank uh cash levels got down to their uh you know their low point over the past you know ever since the global financial crisis uh banks had pretty low cash levels uh you know they kind of decreased from their peak in 2014 because they were buying treasuries and in 2019 right at that right at the week of the repo spike they hit their lowest cash level you know for that decade pretty much and so basically the federal reserve had to become the primary buyer of treasuries they couldn't let banks continue to draw down their cash to buy treasuries and in my view that marked a pretty big shift in in policy so if we look back over

the past you know since 1971 the dollars had these these three uh big super cycles right so you know after 1971 it had this period of weakness and then uh you know after paul volcker raised interest rates we had a very strong dollar spike into the mid 80s and they they used the plaza cord to to weaken the dollar because it was it was hurting both the us and and other countries which is nobody's in interest to have a dollar that was just rapidly spiking like that uh and And then, you know, decreased, and then it had another, like, big increase in the late 90s and early 2000s. And then, you know, the shifting monetary and fiscal policies again, you know, that kind of had another weakening event. And then ever since 2015, we've been in another strong dollar environment.

So it's the third kind of major cycle in this kind of, you know, 50-year, you know, kind of policy that we're in. And so my view is that starting in around late 2019 or so, we're potentially kind of ending this current dollar cycle strength. And, of course, COVID came along and it diminished trade. So we had kind of a temporarily strong dollar, right, because that tends to happen in these big liquidity events, you know, because so much countries have dollar-dominated debt. They need dollars to service that debt. So when trade diminishes, we kind of have a scramble for dollars. We tend to get a dollar spike. So there's a couple ways to look at what's happening now to the dollar.

So one is you could focus on the reserve currency status diminishing. That's definitely one way, one lens to look through it, and I think that's a pretty valid lens, especially because even though the dollar still has a large status in the world, we're seeing kind of cracks in it. So, for example, over the past five years or so, central banks have bought more gold than treasuries as kind of a store of value, as a way to protect their currencies if they need it. We also have seen some of the more adversarial nations de-dollarize to some extent. So Russia, for example, has rapidly de-dollarized. And we're also seeing, for example, trade between Russia and China is rapidly de-dollarizing. And China is taking steps to try to de-dollarize, although they haven't done so as much as, say, Russia has. And so they use, you know, between them, for example, they use more rubles, yuan, and euros than they used to compared to even two years ago. They've been rapidly kind of reducing their reliance on U.S. dollar status. Another way to look at it is that the U.S. can have these big bear cycles, right? So after the 1980s and after the early 2000s, the dollar fell pretty dramatically compared to a basket of foreign currencies, but it didn't really lose status, right?

It was still the global reserve currency. It just happened to be, you know, because of the shifting monetary policies, it ended up being a much weaker for a period of time. So just because the dollar goes down substantially doesn't mean that the, you know, the end of the reserve status is right around the corner. But especially because we're also seeing in this cycle some things we haven't seen in those other bears, dollar bear cycles, which is interesting. So, for example, throughout that whole 50 year period, for the most part, the U.S. was the largest importer of commodities. But now the largest importer of commodities is China. for example. So in my view, the current system is really straining the dollar's role. And over the long term, these trade deficits are really built up. So we have, for example, a much

deteriorated net international investment position. And this was actually predicted back when this whole thing was constructed decades ago. There were economists that saw that this would eventually happen. They pointed out that in order to have the global reserve currency status and all the benefits, you have to basically export your industrial base. And so economists Triffin and Keynes both noticed that, and they proposed alternative things you can do, like a bank or other sort of neutral assets that could be used for kind of settling global trade. But because they stuck with the dollar, we had benefits for a while, but now we're kind

of on the opposite side of that, where we are getting more drawbacks, and we might be seeing some cracks in the kind of usefulness of the current system, both for the U.S. and for the rest of the world. Yeah. I think this is playing out with the civil unrest that we have going on right now. It feels like people have definitely been driven to a brink, if you will. You mentioned this in the article. Maybe we have reached the end of a pendulum swing and it may be swinging back now. you you looked at uh stock prices and how far away they are from their historical pe levels and how uh how much overvalued they are at this point in time and maybe people just seeking seeking to keep up with inflation of the dollar with the printing um in in tech stocks and in the service economy yeah so uh an interesting thing to look at is that whenever

we have these big dollar spikes something breaks in the world uh usually multiple things break so for example when the dollar spiked in the 1980s uh a lot of latin american countries broke right because they had large dollar denominated debts uh and when uh the dollar goes up in value it basically means that in local currency terms for them their debts increase dramatically it's like having quantitative tightening during a recession so many of them couldn't pay back their debts and And then they default or they have big, you know, kind of inflationary currency crises. And so they had a lot of issues in the 1980s. Then when we had the big dollar spike in the late 90s, the same thing kind of happened to a lot of South Asian countries.

So, of course, you know, Thailand, Malaysia, Korea, and then even Russia in the north. They all had kind of these big because they had very low reserves, a lot of dollar dominated debts. And so that kind of broke their system. And then lately in this current third dollar spike, we've seen Argentina break, we've had Turkey break, we've had Lebanon break, and then a lot of just kind of pressure. So we've seen like Chile have some pressure. They haven't broken to the same extent, but they've definitely had some issues because they have a lot of dollar-dominated debt. But also we see that whenever we have these strong dollar periods, the U.S. itself also – corporate profit growth tends to flatline for several years whenever we have these strong dollar environments. and because you know a lot of the globe's so interconnected right so when the dollar strengthens

it makes our exports less competitive uh and uh it makes our our kind of trade partners slow down economically and so that often gets relieved by a much weaker dollar when they have to end up shifting monetary policy uh and so the current situation now also just because there's the us's role the percentage of global gdp that the us kind of makes up is diminished over decades right Because the rest of the world's kind of caught up with us compared to where we were, say, after World War II as a kind of a dominant economic power. So trying to use one country's currency for the entire world trade is much harder to do when that country is a diminishing share of global GDP. It's easier to do when your country is like 40% of global GDP, but it's harder to do when that country is only 20% of global GDP. And I think we're kind of running into some of these kind of boundaries here.

yeah i would agree it's it drives a very interesting thought in my mind is we talk about it a lot is that the u.s government and the treasury and the economy sort of weaponized the u.s dollar against other parts of the world and financial system if it is hitting ahead like what is the next stage like trying to project forward like what does the world look like with i mean it has had it before on a gold standard but what would a transition to like an apolitical currency like gold or bitcoin how would that change the dynamic of global trade and and the inequality of the world it seems that it would create a lot less friction at least yeah there are a couple different options to go down so uh you know people often ask

okay if it's not gonna be the dollar what's what's gonna take its place right but that starts with assumption that there has to be one country's currency that is the global reserve currency and this is actually this period where the dollar has had the status is actually very unusual because even though in the past there have been you know quote global reserve currencies they've never had this far of a reach so for example there's never a time where like only the british pound was used worldwide to buy all commodities that was never part of that particular era's status as the global reserve currency so this this kind of current run uh from 1970s to the present where all currencies are fiat currencies but only one of those currencies

can be used to buy commodities anywhere in the world is historically unusual we have kind of a global lock and we've been chipping away at that so for example you know on margin china's been able to buy you know some some energy you know kind of outside the dollar system and you know just trade between like iran and other certain other countries have kind of skirted that a little bit and of course more trade between china and russia or so we're kind of seeing cracks in that system uh so there's a basically instead of one country coming along and just now we use that currency for all commodity pricing that's not a realistic uh kind of way to look at even though a lot of people look at it that way so no country now is kind of big enough to have a share

of gdp to have their currency be the only currency used for like global commodity pricing that's kind of the key foundation of what the global reserve currency is it's kind of the shared unit of account for commodity pricing so there's a couple ways that the system could transition to one is simply a more multi-polar currency world right so if if the european union uh you know the eurozone can buy more of their energy in euros for example that diminishes their reliance on the dollar and if we see china be able to increase their contracts to be able to buy energy outside the dollar system as well by using their own currency that can kind of make a more multipolar world for for uh at least for the medium of exchange portion of of uh these you

know global reserve status so instead of just one country kind of having that benefit there'd be you know three four or five currencies that are kind of like you know currencies that can buy commodities generally uh so that's one option is kind of this this more multipolar system and in that environment uh there's a variety of kind of neutral reserve assets they can use so one option is of course gold most central banks do hold gold many of them haven't been buying but other ones have been buying we've actually had more gold buying by central banks in the past two years than pretty much any other year over the past 50. so we have kind of seen an increase in gold buying especially among some of these countries like russia that have been trying to

develop de-dollarize they've been kind of shifting towards that more neutral uh kind of inherently kind of inflation adjusted asset with no counterparty risk that's one option uh an An option that really hasn't gained much traction is – so as I mentioned before, there are economists that saw this issue, right? So Triffin saw this issue. Keen saw this issue like decades ago when this was all starting. And they proposed that instead of a global dollar status, they have something like a Bancorp or an SDR. And all that is is a basket of the major currencies. So the modern version of that would be a Libra if Facebook pulls that off.

So basically, the International Monetary Fund can issue SDRs, which are just baskets of global reserve currency. So you have like the dollars in there, the pounds in there, the Swiss francs in there. It's kind of a collection of some of these major currencies. And what that does is essentially it's kind of a multipolar currency world, but it's kind of packaged together. So, of course, the older format is just issued by the IMF. You could also put it in a stable coin format. So there's different kind of technological approaches to package them together. But the downside is it requires a lot of working together. So for example, all of those countries have to agree to print their currency, put it into this package. So the IMF can't just do it on its own. It can't just create those currency units on its own. It pretty much just packages them together. So that's been kind of a – we haven't really seen the SDR really take off despite the fact that it's existed for decades.

That idea is just kind of not have ground. And then we have Bitcoin. A lot of people are excited about Bitcoin's potential role in this. So it could, for example, serve as a diversification if central banks, in addition to their gold holdings, if they want kind of another asset that doesn't have counterparty risk, that's inherently scarce and arguably inflation-adjusted because of its scarcity. And so there are a variety of different ways that this can shift to, but they all involve kind of less reliance on any one country's fiat currency. Yeah. And so obviously I'm partial towards Bitcoin, this is a Bitcoin podcast and the one thing

that really excites me about Bitcoin and going back to energy markets is I believe that's the basis of most this trade starts the commodities particularly energy oil being being the biggest obviously and bitcoin with proof-of-work mining particularly really gets to the the base level of of pricing those commodities especially the wasted energy so uh i alluded to it in the email uh i sent when we were setting up this this podcast but i work for a company great american mining and we're basically on oil and gas fields here in the us and we're using their waste gas to mine bitcoin and so they're able to find a a price if you will for gas that would otherwise been wasted and when you apply that to the rest of the world whether it be stranded renewables waste gas

or just extra energy that's being produced on certain oil fields or wherever it may be, it just inherently makes sense to me that Bitcoin may be the best sort of medium of exchange pricing mechanism for a world that doesn't want to have to play nice with each other. It could be a currency of enemies, if you will, and you don't have to worry about constructing an SDR or trying to replace the U.S. dollar reserve currency with some other country's currency.

And to me, it makes sense that we would transition to that. Sorry, I'm rambling here. I just wanted to get those thoughts out there. Yeah, it's definitely an efficient way to do it, especially if it continues to gain market capitalization. So right now, Bitcoin is still a pretty small market, which is actually one of the kind of the bullish arguments

among Bitcoiners is that this has a lot of room to grow. So of course, if you own a share of it and they're not really making much more, then each individual Bitcoin can go up pretty dramatically. But, you know, even gold has limitations, right? Because, you know, how often are these like gold reserves audited, right, on different central bank balance sheets? If they have to kind of settle in gold, that kind of creates like a logistics headache, you know, if they want to have kind of an underlying settlement layer for it. Bitcoin, of course, it's very efficient.

It's very liquid. It's easily transmissible. and so they have a kind of a fast way to verify transactions if they want to go that route for kind of using that as like a settlement asset and to your point places that have had kind of very cheap electricity or very cheap energy can have often been able to export that in certain ways so for example i believe it's iceland that that kind of focused heavily on you know aluminum processing because it's a very electricity intense industry and being able to take that extra energy converted to electricity and then you basically are exporting your electricity in the

form of aluminum right so uh bitcoin plays a similar role for kind of finding these spots in the world that have uh you know very cheap energy you know stranded stranded energy or you know overbuilt like hydroelectric dams things like that where just energy is being produced but not used and that's kind of a way of exporting that electricity as a form of value because you can you can store up this asset and you know kind of it's it's a gold deposits for example are they're pretty widespread but they're still you know only in kind of the big ones are in a handful of countries whereas bitcoin's something that that you know anywhere that has kind of cheap power can can go into and kind of use that to their advantage yeah it's revolutionary i think

and it's it's going to be fascinating to watch uh play out right now a lot of the mining is is in china off of hydroelectric but i think we're going to see a huge shift as oil and gas uh producers particularly here in north america as the united states going back to uh like triffin dilemma and trying to become self like trend towards more self-sufficiency particularly energy efficient self-sufficiency uh this provides a a alternative revenue stream for these producers who we've seen this year get blown out uh due to potentially a terrible misallocation of capital um in in the space because they just want to get the oil out of the ground and get it to market and that's the best way to monetize that but now with alternative

revenue streams you could probably have better capital allocations in that sector particularly and it can help sort of shore up our independence from an energy perspective yeah i think so especially from their perspective yeah if they were using their uh energy the fact that instead of selling their energy on the cheap if they were to use it for something like bitcoin mining uh that would have you know helped their bottom line yeah and it's i mean that's our main thesis at great american mining is that these oil companies are going to wake up to that and it's going to drive there's going to be positive externalities throughout a lot of the supply chain that people don't really realize yet.

It is still early days, though, and it's another fascinating article that you wrote a few weeks ago is why you decided to invest in Bitcoin earlier this year in April, I believe, and I really enjoyed your perspective of why you didn't get in in 2017. Obviously, the price was inflated,

but you were also cautious about the network effect of Bitcoin and the competing currencies. And so I'd love to dive into how your perspective shifted on that over the last three years. So has Bitcoin sort of cemented itself in your mind as a mainstay?

In my view, it has. So yeah, when I originally covered Bitcoin in autumn of 2017, because we had that big run up in price and I had a lot of my readers kind of email me and say, hey, what do you think of Bitcoin and other cryptocurrencies? So I did that big kind of long form

deep dive article into it. And I approached Bitcoin from a couple different angles because especially back then the narrative they were still kind of emphasizing the medium of exchange uh aspect of it uh in addition to the store of value aspect of it so it's kind of like approaching it uh its valuation from a couple different perspectives revolving around medium of exchange and store value and so i concluded that as medium of exchange it looked very pricey but as a store of value it definitely had some promise and my main concern at the time was that even though bitcoin is scarce anyone now because it's been figured

out how to do it anyone can create a cryptocurrency and then those have their own kind of scarce units so you could have a situation where the whole market gets very diluted where there's just like you know countless cryptocurrencies and none of them really have a ton of market share so it's kind of like you know none of their network effects are very strong and we don't really have a lot of value kind of coalesce into one or two of the protocols uh especially because 2019 saw like that that huge alt season and bitcoin fell below like 40 percent of market capitalization of the crypto space uh so we covered that and i said you know i'm kind of just gonna you know wait and see here i didn't take a position um and so of course we saw that blow off top at the end

of the year and then we saw a big crash and we've had this kind of consolidation pattern so i i've uh kind of reinvestigated the market earlier this year in in march and april and i saw that you know kind of during that big liquidity uh crash we had in march right so when we had that the whole covid shut down we had liquidity dry up we had the dollar spike we had even you know stocks crashed uh even treasury market became a liquid gold silver sold off and then bitcoin was was influenced by that as well it had that big uh sharp price drop because it's almost any asset other than like hard cash and like t-bills crashed in mid-march and so i just noticed it it bounced back pretty hard and bitcoin has uh you know compared to 2017 it's increased its uh market

share uh you know especially if you look at kind of there's you can look at just pure market capitalization but you can also do other things like you can take out stable coins you can take out uh highly centralized currencies and just see as among currencies that are trying to be like money uh it's got even bigger market share right so it's kind of showing that over you know 11 years into its history it's it's got very strong network effects i also see that every every single time i look at the industry the ecosystem is getting easier to use for all the different access points uh you know i looked at it back in 2011 it was like you need you know it's like the challenge of even getting into the space was very hard and then i looked at it in 2017 it was way

better and i looked at it in 2020 and i'm like it's it's just it's getting so much better so quickly so there's gonna be you know kind of the on-ramps for for both retail investors and institutional investors keeps improving i also liked seeing that they were kind of bitcoin specific companies uh so instead of just crypto companies that only uh focus on all cryptos there have been more kind of bitcoin specific uh so there's uh companies that you just sorry about that all good my internet got cut off i don't know what the last thing you heard the uh another thing that uh really drew your attention to bitcoin specifically were the uh sprouting of bitcoin only focus businesses yeah so over the past you know while now we've seen kind of uh instead of

just companies that focus on cryptocurrency in general we're seeing uh in my view more companies that kind of focus on bitcoin specifically and i think that that's kind of a value valuable part of the protocols network effect to have kind of companies built specifically around that protocol rather than being able to kind of easily switched among all the different protocols so i think over time bitcoin's network effect uh specifically as a store of value uh and as like a settlement medium of exchange has really kind of enhanced over time yeah and it's uh it's going to be interesting to see if we rip into another bull market here how how much more of a network effect and dominance it accrues and just yesterday uh it was highlighted that a publicly traded company

is going to start diversifying their cash balances into bitcoin too and that's another trend i'm very interested to start following more intently is how do corporations beyond individuals now we have corporations starting to pay attention to what the fed's doing and the relative strength of a dollar two years past and thinking about diversifying away from that into things like gold and Bitcoin. I think once you see the crowd of boardrooms asking the companies of the boards they sit on to start investing in Bitcoin, there's going to be some pretty big dominoes to fall and it'll be interesting to see how much dominance Bitcoin gains in that scenario.

Yeah, historically, I often like to emphasize long-term debt cycle, where debt kind of builds up over different cycles, multiple cycles in a row, until it gets to such a high level that it usually requires a bigger deleveraging event. So we often see these issues where so much debt builds up in a system, and instead of having some sort of sovereign default, there's kind of a soft default in terms of a currency devaluation. And if you look back, for example, after World War II, which was the only other time that federal debt to GDP got this high, the next several years, like several decades, I mean, were pretty much bad times to hold cash for treasuries. Like yields did not keep up with inflation for a multi-decade period between like if you bought treasuries in the late 1930s all the way to the mid-1970s, you didn't really make any money. You just kind of lost value by holding T-bills, 10-year treasuries, and just keeping your money in bank accounts. It just kind of wasn't worth it. And we're kind of at that part again where real yields are likely to be low for a very long period of time and most likely negative for a big chunk of that time, meaning that the yields you get on T-bills, treasuries, or bank accounts fail to keep up with inflation. So whether you're an individual or you're one of those companies that has billions of dollars in cash equivalents, right, it kind of gives an incentive to try to park some of that in something that kind of holds its value a little bit better.

So for many people, that could be gold or silver. But Bitcoin scales very well, especially if its market cap keeps increasing in this halving cycle, the next halving cycle. So there's kind of more incentive to try to hold some of that value in something that is scarce because the whole kind of the opportunity cost of holding a yieldless asset is during environments where treasuries and T-bills and bank accounts give you a positive real rate of return on your money, it can make sense to hold them. But when you're not even getting – your yields are not even keeping up with inflation, there's very little incentive to hold all of that kind of this fiat store of value. Yeah, I agree. This is another thing you alluded to in the article we started talking about in the beginning of this podcast is the real rate of return on stocks in the future. And that's, I think, something that the layman doesn't really understand. They see stock markets rallying like, oh, we're getting wealthier. But when you factor in inflation, the real rate is

not as pretty as it may seem, especially if you price stock indices and things like hard assets like gold. Yeah. So there's a couple ways to look at that. So in any given decade, an equity market in the world does pretty well. So if we're going up to the 1980s, Japan's equity market did very well. In the 90s, the US did very well. In the 2000s, emerging markets did very well. In the 2010s, the US has done very well again. And those decades usually end with that market that did very well becomes quite overvalued. So for example, in the late 1980s, of course, Japan had one of the biggest equity bubbles ever seen. In the end of the 90s, the U.S. had the dot-com bubble. At the end of the 2000s, emerging markets, many of them were

priced as high as the dot-com bubble was for the U.S., in terms of, say, the cyclically adjusted price-to-earnings ratio. India and China, they had just very expensive markets. And then now we're in an environment where the U.S., as the 2010s decade came to an end, we're now in 2020, of course, we have pretty high valuations by just about any metric, both compared to our history and compared to a lot of comparable countries in the rest of the world. And so the way that tends to kind of work out is that the next decade usually isn't very great for that equity market, especially in real terms, right? So even if, you know, you have nominal returns are okay, it often has these long periods where as priced in a hard asset,

like say you look at the S&P 500 as priced in gold, it actually peaked back in 2018. And we've been making lower lows and lower highs in the S&P 500 as price in gold since that period, even though it's, of course, making new nominal highs since then. And so, yeah, I doubt that the U.S. kind of indices, equity indices are going to be really kind of good, real return generators over the next decade, regardless of what they do nominally. And I think that investors are going to be looking for other assets that could potentially give them some alpha. And, you know, there's gold and silver that I've been bullish on. The thing about Bitcoin is that because it's still a small market capitalization, even a small allocation of Bitcoin can potentially do wonders for a portfolio. If it has anywhere, you know, if this halving cycle, the next halving cycle do, you know, pretty good price action for the protocol, you could see a lot of gain from even a smallish Bitcoin position, which is kind of the case for institutional investors to have at least some allocation,

like to have a non-zero Bitcoin allocation. Yeah, it's got that asymmetric payoff. Yeah. But going back to real returns, something that really irks me is the fact that the Fed will come out and say that inflation is not hitting their target of 2%. But if you look in certain areas, it seems that there's pretty high inflation. So I'm very interested to get your thoughts on it. what do you think of the cpi like is it a good measure of inflation like the fed came out a

couple weeks ago and they're starting to posture like they want to attempt to overshoot the two percent target and with their policy moving forward and is that just going to exacerbate the the inflation that that isn't highlighted via the cpi yeah so i don't think it's a very good measure uh especially you know they've kind of changed how it works over the time so there's all sorts of things they can do to get it down so one is that they can use substitutions uh and it also doesn't necessarily reflect the basket of goods that a normal person buys so for example this year inflation for health care costs and food are about five percent year of year right so that that's kind of and if you're not making a lot of money necessary expenses take

up a bigger share of your income than if you're making a lot of money right so if these kind of necessary things are going up in price pretty rapidly that can hurt a lot of people so we have we've seen over this this kind of quote low inflation period uh we've seen kind of a big divergence between services and goods so for example things like education uh things like healthcare uh all sorts of stuff that we can't really outsource a lot of that has gone up a lot faster than the official cpi another hand things that either greatly benefit from technology or that greatly benefit from offshoring those are the things that have been more disinflationary So, for example, you can get a much better TV now than you could 10 years ago for less money, right?

So the inflation of TVs has been greatly negative due to a combination of better technology and outsourcing. But some of these trends can reverse. So, for example, partly after decades of Triffin dilemma forcing the U.S. to have very kind of wide trade deficits, now there's more of a political interest in getting some of these supply chains back. So COVID-19, for example, showed how vulnerable we were with medical supplies. So medical supplies, we mostly had to import them. Same thing with pharmaceutical components. We had to import most of that because we don't make it here. In addition, for example, Donald Trump made the trade deficit with China one of his kind of key policy goals to try to just have kind of a less imbalance there and more kind of domestic production. And so going forward, if we have less kind of benefit from offshoring, that can take away one of the drivers that have offset some of these inflationary trends. So if we only look at, say, healthcare and food and education and services, all sorts of things like that, inflation would have been higher. So if we kind of diminish some of this goods disinflation, that can translate into higher inflation.

And the Fed, they actually don't even look at CPI. They look at something different, which is PCE. So that even that even takes out like food and energy, for example. So nobody needs this. Yeah. So basically what they're they kind of understate inflation and then they want to overshoot their understated inflation. So I do think we could have an environment where, you know, we're getting into the much higher inflation than kind of the very low levels we've measuring in this particular time. Because right now, of course, we had the impact from the pandemic and the shutdown. So we've had kind of very low inflation prints, right? So CPI is very low, PCE is very low. But of course, we're in kind of this brief deflationary shock.

So for example, people made fewer big purchases, we had a lot of shutdowns. And so even though we had kind of essential goods inflating, we had kind of a disinflation among discretionary goods. But as kind of the economy normalizes and there's a lot more money supply in the system now, I do think we could see kind of a stabilization or an uptick in velocity. We could see higher inflation. And some parts of the treasury market are already kind of sniffing that out. So in addition to gold and silver and Bitcoin all doing well, if you look at treasury break-evens, right, so the difference between treasury inflation-protected securities and the normal type that are not inflation-protected, we've seen a lot of buying interest in the inflation-protected type. So we've seen kind of the market's expectation of inflation rising ever since ever since it bottomed in March.

Yeah. And that's one thing I've been wondering, too, and thinking about writing about is this a similar situation at the Weimar Republic? I'm not saying we're going to have hyperinflation here, but the Weimar Republic was in a very similar situation, similar in the fact that they shut down their economy when france invaded them and told their their factory workers not to go to work and we'll print money to pay you it seems like we're doing something similar here where it's like hey because of this virus uh we're gonna tell you not to go to work we're gonna bump up unemployment benefits and even airdrop some money on you and i think the powers that be have not thought through the repercussions of that particular policy especially if we extend it into the future and keep the economy shut down to a certain extent?

Yeah, there are a couple of historical comparisons. So one thing I've been doing is contrasting this period with the Great Depression in the US. So for example, during the Great Depression, they didn't have like FDIC insurance, right? So when banks failed, you just lost your deposits. And so during like a three-year period from 1929 to like 1932, about a third of US broad money supply was just destroyed. It just went to money heaven. It just ceased to exist pretty much and so we actually yeah you actually had uh outright deflation in the money supply uh so that was a very strong deflationary environment uh you know until about 1933 or so when they started to reverse that partially by the the intentional dollar devaluation

relative to gold and a lot of money printing uh so if you look at this period however even though we've had a similar kind of economic shock the government has done so much transfer payments So there's direct cash to businesses, to people, to corporations. We've seen a very sharp rise, like pretty much the highest ever modern increase in the money supply, even though we've had kind of a decrease in production. And in the near term, it's not been very inflationary because, as I mentioned, like velocity just collapsed. So people aren't spending that money. They're just saving it. They're paying off debt. They're buying essentials. But as we kind of see things normalize, I do think that the increased money supply compared to the not increased amount of goods produced, and in some cases supply disruptions, could be more inflationary, especially in targeted areas. The Weimar Republic was interesting because if you look at hyperinflations throughout history, most hyperinflations occur to countries that have external obligation that's not something they can print.

So it happened in the Weimar Republic with war reparations. They – after World War I, they owed war reparations, and that kind of is an obligation that they can't print. We see similar things in certain emerging markets over the decades where if they have, for example, dollar-denominated debt. So if we go back to the global reserve status of the dollar, a lot of times the only kind of loans they can get at reasonable rates, either for the corporations or their governments, is to borrow in dollars. So when you have kind of a situation where the dollar increases and you have a recession in that country, those debts become unpayable, and they can't print those obligations away because those countries can't print dollars. So what we often see is a hyperinflation or a near hyperinflation in the currency where you just see rapid deterioration in the currency strength. One of the advantages today among developed markets is that a lot of the obligations are denominated in their own currency. So, for example, the U.S. sovereign debt is denominated in dollars, and Japan's sovereign debt is denominated in yen, for example.

So my base case is to see hyperinflations out of these major currencies. But I do expect to see kind of pretty considerable currency devaluations, probably similar to what we saw in the 1930s, for example. While we're on this subject, I'd be interested to get your thoughts on modern monetary theory. It seems like that's going to be, arguably, it's already being implemented, but it seems that it's becoming more popular, especially among people of power who have the ability to implement it. How do you think that affects all of this? So if you look back in the 1940s, they used pretty much MMT to fund the war effort. So what that is, is kind of the combination of the Treasury and the Federal Reserve working together. So usually the central bank is supposed to be independent, or at least in the current system,

that's kind of how it's supposed to work. But if you get to a situation where debt becomes very extreme and the government wants to do very large fiscal, they work together. So for example, the Federal Reserve bought a lot of the treasury issuance that the treasury issued in order to fund World War II. And so in that sort of environment, you get kind of a financial repression where you're in that environment where rates are held down to very low levels despite the fact that you can get increases in inflation. So it ends up being kind of a currency devaluation environment. So for example, I just tweeted out that the dollar officially just lost kind of a – it's 1% of what it was when we had that gold peg. So for example, the dollar used to be pegged to – it

It was $1 – it was one ounce of gold was equal to $20.67, and today we touched $2,067, right? And Warren Moser of MMT fame replied and said it's not about the value of the dollar. It's about the value of all dollars, and I think that kind of gives a good insight to how they view it. And so in this environment, we're going to have probably very rapid, very large fiscal spending combined with low rates and even yield curve control by the central bank to keep rates low. That tends to result in these currency devaluations that I've talked about, that usually these long-term debt cycles are resolved with some degree of currency devaluation. In a bad environment, it can be a hyperinflation, whereas in a more controlled environment, it's just kind of a partial devaluation like we saw in the 1930s or like we saw in the 1970s, for example. So I do think we're going to be in a more MMT-heavy environment, similar to the 1940s, but instead of fighting an external war, they'll be fighting whatever else they want to fight, either the response from the pandemic or just the massive amount of debt in society. So I do think that this is going to be an environment where a lot of these scarce assets can do pretty well, like gold, silver, copper producers, just high-quality scarce assets, and that, in my view, includes Bitcoin.

so that's my consternation with all this policy especially mmt is an extension and a amplification of the policies of the last decade and a half i would argue and it's just delaying the inevitable of this mass devaluation you're talking about like what would take for the fed or even the us government to sort of bite the bullet and swallow the hard medicine of of trying to contract a balance sheet and or maybe put some more hard assets on their their balance sheet or peg the dollar even to a hard asset like gold or bitcoin um it seems that mmt and qe are just politically expedient solutions that that we have been able to prove i would argue up to this point that aren't really effective in the long term yeah one one kind of

accident to focus on for sovereign countries that print their own currency is that they very rarely default for sovereign debt so for example uh you know a lot of the sovereign defaults you hear about it's because you know it's those emerging markets for example that owe a lot of dollar denominated debt for example whereas you would like you wouldn't really see say japan default on yen-denominated bonds or the US default on treasuries. So instead, what they do is they turn to soft default, which is devaluing the currency. And so they turn to things like QE and other ways where they print money to buy those treasuries with the hope of eventually inflating it away. One thing that's kind of different about 2020 compared to the past 10 to 15 years

is that we've kind of shifted to some of that money getting more in the real economy, which can be more inflationary. One of the frameworks I like to share is Ray Dalio's framework of Bridgewater, the world's largest hedge fund. He thinks of three different types of monetary policy. There's monetary policy one, which is the central bank can manipulate interest rates and that have different effects on the economy. Monetary policy two is that they can turn to QE or asset purchases where they print money and they buy things like treasuries and mortgage-backed securities and that doesn't really get money out into the economy it just kind of recapitalizes banks and does things like that so for example in 2008 most of that didn't really

find sway in the economy but it did kind of it recapitalized banks so they went into that crisis with three percent cash as a percentage of assets and they ended with 15 cash as a percentage of assets because the federals are printed money gave them the money and then took some of their some some of their assets so monetary policy three on the other hand is direct injections of that cash into the economy with printed money and so if you look at say transfer payments right by that by the government to its citizens and people 2008 wasn't very big in that regard they didn't actually give a lot of money to the people into companies it mostly just went to the shoring up the

banking system so even though people feared that that that QE would be inflationary, it really wasn't for the most part because it just kind of found its way into financial markets. It didn't really get out into consumer prices. So you could argue it was inflationary for asset prices, but it wasn't really inflationary for, say, the cost of bread or something. Whereas what we're experiencing now is with such a large kind of fiscal injection into the economy, this is a somewhat more inflationary environment down the road most likely because they are putting money directly into, you know, the helicopter checks that people got, the $600 a week in extra federal unemployment people got, half a trillion dollars went out in

PPP loans to small businesses. Most of those turn into grants, so they don't really have to be repaid. They just become kind of free money. We've seen, you know, kind of a backstop of the corporate debt market, right? So the Treasury allowed the Fed to buy corporate bonds and cover their losses uh so uh it's just it's i think we're in an environment now where it is kind of fundamentally different in some ways the last 10 to 15 years uh in the sense that this this time it could be more inflationary uh and uh what they're probably going to do is that they can use yield curve control or other things to lock yields at pretty low levels even though even if inflation gets higher than those levels uh so you're in an environment where if you're holding money in a

bank account or in treasuries you can lose a lot of your purchasing power over the course of a decade uh by by kind of keeping it in those negative real yield instruments yeah do you find this insane like i do am i weird to find these solutions insane i i think i i would if i didn't see how many times in history the same thing happens that's exactly yeah well that's that's the definition of insanity yeah they're repeating things that have happened many times Yeah, like I shared with some of my subscribers, there's a book that was kind of going over some of the policies in ancient Greece, so like 2,600 years ago or something like that. And they had currency devaluations then too. They dealt – they had the same problem.

They had this big debt buildup, and so one of the things they did was they devalued the currency. It's literally a cycle as old as modern history. We find ourselves, too much debt builds up, and they either can choose a big kind of nominal default and kind of just start fresh, or they can devalue the currency and kind of default in real terms. and it's just it's a cycle that keeps happening over and over again so a lot of people kind of focus on how unusual it is and it all it always is unusual but it's just funny how reliable it is every every 50 to 100 years the same kind of things happen with of course different tools each time so each time they have kind of different ways to do the same thing what if bickwin breaks the wheel i will see we shall see um and to tie this up i know we're going over the allotted time here to bring it back to uh the original paper we started talking

about and the triffin dilemma so do you think a way to sort of help uh bridge the gap inequality it's not uh it's to bring more manufacturing home and try to produce like it may be um in the short term may hurt a little bit to to produce things here but in the long term it may create a more stable economy overall yeah i think so uh i think you know running decades and decades of persistent trade deficits is is not a permanently sustainable situation uh and i think we're kind of testing the breaking points uh so we've seen a rise in populism for example and that tends to happen at these culminations of these long-term debt cycles and then especially when you add the element of that we've outsourced so many of the kind of manufacturing jobs and it's people often think

it's like an emerging market phenomenon like you only outsource jobs to emerging markets but for example japan and germany have much larger industrial bases than the us does as a percentage of gdp right so it's not just like a you know developed markets all outsourcing their job to emerging markets it's more been a specific u.s thing like it's not something that a lot of our industrial uh advanced peers have done and so there's clearly a renewed political interest in bringing some jobs back but that's probably going to require a shift in kind of the way that the global reserve currency works because you can't bring all those jobs back while still having the you know the global reserve currency at least as currently structured like where it's the only

currency that the whole world can buy commodities in for example that something has to change in in some of the ways that we previously went over either a kind of a more uh multipolar currency world or different sort of neutral like reserve settlement assets rather than just kind of using the dollar as as this kind of global lock on everything because those are kind of competing forces like trying to bring jobs back while also trying to to enforce dollar status around the world are kind of competing interests yeah the reserve status is sort of like the ring from lord of the rings it's got this somebody's got a throat in the volcano mordor yeah um well lynn uh i really love your content i appreciate that you took some time to sit down and record this conversation i

I thoroughly enjoyed it. And I think the audience is going to get a lot of value from your insights. And I guess just to wrap it up here, do you have any sort of parting notes, final thoughts on the state of the global macro situation right now or anything we should look out content-wise from you in the future? No problem. And thanks for having me. And I just think that 2020 has been a very interesting decade.

And it's a general rule that whatever worked in the past decade is usually not the same thing that works in the next decade right so of course individuals like like a like a smaller thing of course can so for example even though bitcoin worked in the past decade i think i think it'll still work in this decade but for example the dominance of u.s stocks over pretty much any other asset is unlikely to repeat as strongly in the 2020s and so i think investors would do well to kind of like look at first principles and see what what things are likely to do well in this environment and you can use kind of history as a guide or you can use you know just math just kind of looking at okay what does real what does well in a negative real rate like world right so if

we're in a long period of negative real rates for things what sort of things do well and generally the answer is scarce assets especially if they're not kind of inherently overpriced like say like you know manhattan penthouses or something like if as long as you're kind of focusing on reasonably price scarce assets they tend to do very well in this sort of environment uh that's kind of my view to kind of focus on i align with that view that's why we're into bitcoin that's why we talk about bitcoin and uh again thank you lynn i really appreciate it i hope you have a great day and hopefully we can do this again at some point yeah sounds good thanks awesome that's all we got this week freaks peace of love