The Breakdown - How the Fed Fans the Flame - The Best of The Breakdown June 2020

Episode Date: June 30, 2020

June 2020 will go down in the history books as an extremely chaotic and confusing period.  In this “Best of the Month” retrospective, we look at some of the best guest conversations from The Breakdown, including: Human Rights Foundation CSO Alex Gladstein on the importance of cash for privacy DigiChina Editor-in-Chief Graham Webster on China’s decade-long turn away from liberalism  Alhambra Investments lead researcher Jeff Snider on why the Federal Reserve’s power is a myth Popular Front founder Jake Hanrahan on the media’s veneer of objectivity Castle Island Ventures’ Nic Carter on why people should have rights to their social media profiles The Crypto Dog on mining bitcoin in 2011 Independent macro analyst Jesse Felder on the Fed’s role in increasing inequality  BlockTower Capital’s Ari Paul on how people lose faith in central banks “Think For Yourself” author Dr. Vikram Mansharamani on the recipe for inflation Independent oil and trading expert Tracy Shuchart on how easy money enabled the shale revolution  Adamant Capital’s Tuur Demeester on historical analogies for seething discontent

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and CipherTrace. The Breakdown is produced and distributed by CoinDes. And now, here's your host, NLW. Welcome back to the Breakdown. It is Monday, June 29th, and here we are at the end of another month. This one has been rough, to put it bluntly. We have seen some of the most intense civil unrest that we've seen since the late 60s. We are currently in the middle of a re-outbreak of this pandemic and all the

consequences that might come with that. We've had the somehow it makes sense absurdity of a Robin Hood rally and a Davy Day Trader Global Movement that is pumping bankrupt stocks. So on this episode, we're going to look back across some of the clips from guests that I've had over the course of this month. It's a pretty wide-ranging group of people, and I hope that you enjoy this walk-down recent memory lane. This is mostly in chronological order, but I do try to put together a sort of narrative through line, so let's dive in. We kicked off the month with the discussion with Alex Gladstein, who is the chief strategy officer of the Human Rights Foundation. The conversation focused largely on the raised stakes of the discussion in the battle between privacy and surveillance

and how the new context of electronic and digital money changes the nature of that fight. In this clip, Alex discusses how important cash is as a release valve in that system. It's just another attack vector on people's liberties. You have cash, which was certainly, you know, created from a economic, organic perspective, right, as an easier way of doing commerce to the point where I just learned this recently. I was doing some historical reading in this area. And I mean, Americans were pretty dependent on checks 120 years ago, which is pretty amazing. I didn't realize that.

Really? Yeah. And whether it was paper notes like greenbacks or whatever, let's say, from the Civil War, or checks, paper checks, these arose not necessarily because governments decided that we were going to use paper as money, but they kind of arose organically, it seems historically, with regard to market forces. If we didn't have paper money now, all we had was digital money, and someone came along and said, hey, we're going to invent cash. They would be laughed out of the room right now, right? Mainly because governments would say, are you kidding? Like, that would be

so dangerous because we wouldn't be able to monitor where all the money goes. So cash is this incredible thing that we've grandfathered in from previous times that doesn't fit with the agenda of financial authorities and government officials who want omniscience over all payments and transactions. So cash is this kind of like odd man out from a previous era that we should definitely support. And there's some great people out there like Brett Scott and others. There's a guy named Rohan Gray, Brett Scott. There are people who are promoting cash and that there's just a whole, like, hopefully they become a lobby to help underline how important cash is to different communities around

the world. But as I think you and I both know, I mean, that cash is ultimately days are numbered, right? And all of our money is going to transform if it hasn't already into this digital system. Speaking of surveillance money, one of the biggest threats for people who are concerned about financial privacy in the future is the idea of the growing adoption of a Chinese digital currency. In my conversation with Graham Webster, however, I wanted to provide some background for how the U.S.-China relationship got to where it was. Graham is the editor-in-chief of the Digi-China project, which is a collaboration between Stanford and the New America Project, and in this

clip talks about how China has spent the last decade turning away from liberalism, despite the ambitions of the Obama administration. China was on a path that would be closer to the world and would be less at odds and would be perhaps, uh, would give more space politically. In 2012, you could locate the change a little bit before that, but in 2012 and 13, uh, Xi Jinping took power. And, uh, really since then, there's been almost no, uh, turn toward liberalism at every turn. and that's perceptible in terms of public space and civil society and the public sphere and freedoms. China has been going in a more illiberal direction for almost a decade now, arguably. It's hard to locate exactly when the turn towards illiberalism took hold in China,

but it goes back at least about a decade and some people place it back in 2009, really coinciding with the Obama administration. And the Obama administration had spent a ton of time trying to rebalance, as they called it, U.S. strategic attention from the Obama administration, including the State Department under Hillary Clinton, had spent an enormous amount of time trying to rebalance attention from where they were bogged down or where the U.S. had been bogged down in Afghanistan and Iraq to the Asia Pacific. And this was both because they saw a challenge from China. China's military is becoming stronger. its economy was becoming more central to the world economy. And also U.S. interests there and allied interests are enormous. Japan, Philippines, all of the shipping lanes and all of the trade relationships and all of the supply chains that stretch across that part of the world, not to mention the fact that, you know, a good half of all people on Earth live spread out somewhere between India and China. So, you know, there was a lot of attention on that.

and they more or less achieved a simple goal, which is, let's pay more attention, let's move some of the military assets, let's try to build up our strategic thinking. But even after eight years, the Obama administration hadn't figured out, well, then what? Okay, we're paying more attention, but what to do about this basic stuff? Because remember, these basic problems are hard. There's a shift in power between the two countries. Of course, if a Chinese central bank digital currency is a threat in the future, many are focused more on what they perceive as threats today. In particular, we've seen a huge amount of discussion of the Fed Money Printer, right? Money Printer Gober. It's really been the meme of the

year. However, in this clip, Jeff Snyder makes the argument that the Fed's power is a mirage, that, in fact, it is only the power of self-fulfilling prophecy to get the market to do its work for it that actually gives it any heft in the system. The reason for that is the Eurodollar shadow banking system which overwhelms the Fed's capacity to actually act. One thing after another that is cascaded into implosion and failure because for a long time, the risks involved in it were never really appreciated, including the idea that the central bank could bail it out if push ever came to shove. And then when you had push come to shove starting in August of 2007, the Fed proved unequivocally

that it was really powerless to do much about it. And so it was just, it was a, it was a tidal wave of failures. and structural implosion that just once it started, whether it was subprime mortgages or not, it was impossible to stop. The first myth that you mentioned was the kind of myth of the no risk to this system. The second myth had to do with the capacity for central banks to backstop it to fix it. You've called this the flood myth. And actually, I think, just wrote a piece about, you know, we shouldn't have had to explain this again.

But can you explain what the flood myth actually is? History repeats itself and we're repeating basically what happened in 2008 and 2009 again. And go back to that period of time, especially in early 2009, common wisdom or conventional understanding said Ben Bernanke's Fed had just flooded the world with liquidity, had just flooded the world with dollars. You can see it. I mean, the Fed's balance sheet is expansion. We've got hundreds of billions in bank reserves that created out of thin air.

He created him digitally, printed it. It's printed money. This is going to be inflationary. The dollar's going to be destroyed. How dare he? Oh, by the way, the government's being reckless. Barack Obama's administration is spending almost $800 billion. I mean, these were astronomical numbers at the time.

And yeah, all we had was more crisis and more recession, the deepest recession since the Great Depression. And so what we're saying is that the myth is the Fed printed all this money and flooded the world with dollars. But the reality was that there was this deficit created by the breakdown in the shadow Eurodollar system, which overwhelmed anything the Fed or the federal government tried. Because it's the bank-centered system in this offshore space that actually matters, that's where the rubber meets the road. That's where credit and money hit the real economy, the bank offshore system, not what the Fed does on its balance sheet. Another way to interpret what Jeff said in that clip is that media takes what the Fed says its policy is and makes it real by making it sound real. This opens up a conversation about the

role the media plays in the economy and in society as a whole. My conversation with popular front founder Jake Hanrahan is largely about that as well. In our discussion, Hanrahan laid out a key problem with media and labeled it as it's almost veneer of objectivity. Attitude within myself with journalism was from seeing a lot of problems within the mainstream industry and getting very sick of twisted reporting or there's a very big problem as well where basically mainstream journalism generally in the UK is kind of liberal centrist kind of vibe, right? And that's fine. That's like what most of the country probably are, right? But the mainstream liberal journalists will suddenly tell you you're an activist and not a proper journalist if you

deviate any way from their central liberal line. For example, I'm seeing now, like, you know, journalists that painted themselves as kind of leftist for a while when it was popular and now suddenly being like, save the police. The police are getting hurt in the UK. And it's like, well, why weren't you saying that when people were fighting against the police in wherever? Oh, because our police are good or whatever. And it's like, for you, maybe they're good.

In your life, in your London bubble, maybe they're good. But let me tell you, I've got a lot of friends and myself as well where the police have not been good. Now, that doesn't mean I'm abolished police. I don't, any society needs a police force, whether you call it that or not. But it cannot carry on. like this is my opinion. Now all of a sudden, that makes you an activist to these people.

It's like, well, I'm not, I'm not saying to you, you're a liberal activist because you have your views. Do you know what I mean? So why all of a sudden do they want to paint the other side like that? And I think that a lot of people are waking up to that. A lot of people know that just having a different point of view doesn't make you a f*** an activist. You can be a journalist and be a human and have an opinion on things so long as you don't let it cloud your work. Do you know what I mean? Every journalist has an opinion on something. Yes, we have to be objective, but 100% objectivity means you don't really seem to feel anything. And a lot of people want to know the feeling of something, because that is all part of the human experience, which

journalism is not just bullet points. Do you know what I mean? It's not just meant to be bullet points, in my opinion. I think it should be about nuance, and I think it should be about kind of discussing and trying to break down these complicated issues and make them simple, or at least easier to understand. You can't make them simple, but you can make them understandable. So the way to do that is not to just be like have a, have a stick up your ass and be like, well, it's this, this and this because the government blah, blah. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over four million customers,

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isn't using CypherTrace to manage compliance risks, you should start now. Learn more at cyphertrace.com. So what might the answer to this problem of media be? Well, for some, it's about social media and the ability for people to have their own voice and build their own following. The challenge, of course, is that the platforms where they build those following still have the authority to shut them down, largely unilaterally. In this really fascinating conversation, Nick Carter argues that we should actually view social media as closer to something like frontier land than to a traditional private company. And in this context, squatters' rights might apply. Fights between settlers or squatters and the landlords that actually owned the land in a technical

sense. And the squatters were able to make the convincing and persuasive case that they should be the real owners of that land because, you know, really nobody was using it before them or the absent landlords or the stakes. They certainly weren't. And they had developed the land. They had mingled their labor with the land in the Lachian sense. And there were lots and lots of legal battles. But what happened in the end, actually, for the most part, was the squatters won. And the laws changed. And the laws came to recognize Tomahawk rights. as a template for legal divisions. So then you have acts like the Homestead Act, which is pretty famous.

That's kind of the 40 acres in a mule theory, which staked out lots of land further across the American Midwest. What people don't know about that is that was actually kind of a recognition of a de facto state of affairs. People had already settled and the government needed a way to bring that into legality. So this was a struggle taking, you know, common claims to land and rendering them into legal claims. This was a struggle that has lasted hundreds of years in the U.S. and then, obviously now those common claims and legal claims, there's a one-to-one mapping. There's an

analogy here. People lay claim to their digital property right now in an informal sense, but there is no ratification of that claim, right? Because the people that own these platforms, they want to retain total discretion. They want to be able to censor indiscriminately. They would like to be able to elevate certain concepts. Maybe they can monetize that discretion, right? Maybe they can tell advertisers, hey, like, we'll make this topic trend and we'll de-boost the other topics. Of course, another answer proffered particularly by the Bitcoin community for the problem of trust in media and other institutions is Bitcoin itself. In a brief departure from our main themes of economic dislocation and the role of the Fed, check out the Crypto Dog

discussing getting into Bitcoin mining all the way back in 2011. Yeah, it's been quite a journey. So I got into Bitcoin pretty early on. It was, I don't remember exactly where I found it. I want to say it was on Tom's hardware. It was in 2011 or late 2010. I was just researching how to build a really, really badass desktop computer because I was poor and I wanted to play.

crisis on max settings. So I scrounged up every last dollar and I was trying to figure out the cheapest way I could do this, the most efficient graphics card bank for my buck. And along the way, I found out, oh, hey, there's all these nerds making money by using their graphics cards and pointing it at Bitcoin. So I thought, okay, cool. I'll subsidize my gaming rig with a little bit of Bitcoin mining. And that's exactly what I did. I had fun with it. It was cool. I I would mind. I think I was on a few different pools. I remember doing slush pool for a little bit and some other just random pools that I'm sure

are dead these days. I never got myself my own 50 Bitcoin block. But I stacked up a little bit. I sold a lot of that Bitcoin for $10 or less, I remember. And I held on to a little bit that ended up getting goxed later on. In retrospect, of course, it's so frustrating. But at the same time, you know, happens. And who knows, I probably would have sold that Bitcoin.

long before, you know, 1K or 20K or what have you. So at the time, in 2013, it didn't really bum me out too much. I didn't have too much Bitcoin to really be that mindful of it. But let's get back to the Fed. While Snyder focused on their impotence, Jesse Felder in this conversation brought up a discussion that is getting much larger, which is the role of the Fed in increasing wealth inequality. There's just this pattern where the Fed is targeted asset prices And really no other central bank on the planet has done it anywhere to the degree the Fed has done it. And so that's one part of it. You know, that's not just this euphoric speculation.

It's the Fed explicitly spending 20 years at least trying to do this. How did you read Powell's comments last week or as answer to the question about whether the Fed had had any role in exacerbating inequality? It's completely disingenuous, right? I mean, you can't say we're trying to create a wealth effect, but we're playing. no role in wealth inequality, right? If you say you know that, you know, it's only a minority of households own financial assets, the vast majority of households own no financial assets. We're going to try and push up the prices of those. You're saying we know we're going to create wealth inequality. So for them to say, you know, we play no part at all is, you know, it's the

Fed trying to tell a lie enough times that people will believe it to, um, to, to bungle a Danny Conman quote. Danny Conman, terrific behavioral economist, brilliant guy, has said that, you know, people in power, whether you're, you know, Fed chair, president, you know, even a marketer, you know, marketer with a position of being able to tell stories to people. They all know that in order to get somebody to believe something, just repeat it over and over.

And I think that's what the Fed is hoping to do right now. But I really do think it's failing because they keep getting asked this question. We keep seeing wealth disparity grows worse and worse every year, and it's even grown much worse as a part of this economic crisis created by the pandemic. So I don't think Jay Powell believes it when he says it, but he's trying to get other people to believe it. The question, of course, is how far the Fed can go? As part of the Masari Main Net Conference, I hosted a discussion with a number of investors, including Ari David Paul. In this clip, Erie discusses how a loss of confidence in a central bank precedes the fall of that central bank's ability to actually influence the economy. So the markets are very explicitly reacting to Fed stimulus, which they're kind of assuming is infinite.

So talking to some of the biggest by-side investors, the disconnect that we all see, you know, rising unemployment and yet a market marching higher, it's not complicated. It's, you know, you have a Federal Reserve that has a massive amount of money to buy corporate bond ETFs that basically says they'll buy equity if they need to. You know, and we have a generation of investors who've been taught not to fight the Fed. For basically 20 years, you've been trained really the way to invest is just figure out where the Fed's going to push money. Eventually that breaks, but these things can take a really long time to break. Personally, I'm skeptical that it's going to last much longer, but wouldn't shock me if we made new equity highs over the next six months before a collapse. And the thing that breaks it, whenever you have kind of a central bank driving asset prices higher, is that can continue as long as faith in the central bank continues, which can be a really long time. Basically, making a bet that that will end is a bet that kind of the central banking backbone will itself crumble, which is a generational event or far more rare than once a generation. So I do think we're headed for that personally. But that's why a lot of investors, they would say that's almost never a good bet to make. You're almost always better just betting the Fed can keep pushing things up if they have the political will to do so. So that doesn't surprise me.

And then on protests, historically, frankly, I've been trying to catch up with my economic history and looking at market reactions to protests at different countries, different time periods. You can almost never locate riots on a chart. If you're looking at equity in almost any country, you can almost never find the riots. And I don't have like a really simple answer to why that is, except that they don't tend to have immediate massive impact on corporate earnings. At the end of the day, markets do not reflect the economy. They reflect a handful of stocks, a basket of stocks. With the S&B 500 marching higher, it's basically five stocks going up and everything else going down. So yeah, the U.S.

economy is, I was going to use profanity, is doing very badly. But the earnings of a small number of giant companies have been doing reasonably well, companies like Amazon and Microsoft. And so when investors look at the recent protests and riots, you know, is that going to impact Amazon's bottom line or Microsoft's? Maybe, right? But then we need to think about how much worse these things can get. Of course, that loss of confidence isn't the only problem that central banks face. Dr. Vikraman-Mancharmani in this clip lays out the recipe for inflation, which includes a skyrocketing budget deficit and the challenge of a growing debt to GDP ratio. our budget deficit is skyrocketing as a country.

And I've traveled a lot in emerging markets where emerging markets, if I saw a double-digit budget deficit for a country, I was like on eggshells. I was like, this is a country that's going to fail. Well, here we are in the United States well into double-digit budget deficit. And our currency is strengthening. Now, the strengthening of the currency is interesting because it's a relative measure, but it's not strengthening relative to some non-printable currencies like gold or Bitcoin or what have you. And so what I would say here is the worry that I have is a longer-term worry, the results of which could be really horrible, and that stem from this crisis.

And so what I mean by that is, is it possible that we could find ourselves with pressure on the U.S. dollar where other countries might decide now is the time to develop another global reserve currency to compete with the dollar. I think there's huge incentives for other countries to do so. It's a long-term process. It'll take time. If and when that transpires, then the logic that I've seen play out in numerous other geographies and other crises has the potential of playing out here. And here's the recipe. The recipe is, let's begin with large budget deficits.

spending. Let's add some quantitative easing and money printing. Let's have the currency get devalued. And the result, as has been the case in virtually every time you get those ingredients together, is hyperinflation. We saw it in Weimar Germany. We saw it in Zimbabwe. We saw it in Venezuela, et cetera. And so that is the latent worry that this crisis may be setting the conditions for that. I don't think it's anytime soon, but that is the worry. Of course, it hasn't just been fed action that's been wild and unprecedented in the last few months. We saw things we thought we'd never see, such as oil trading at less than $0. In this clip, Tracy Schuart explains that these things aren't as unlinked as they seem,

and how the emergence of the modern American shale industry was predicated on cheap money in the post-great financial crisis era. A little bit of background about shale is, you know, shale who came on, There was a bunch of wildcatters, right? Banks threw a bunch of money at them. And then we had the 2014-16 oil crash. Banks kind of were burned. So the private equity guys got involved.

They were like, yeah, this is great. And they threw a bunch of money at Shell then. You know, oil prices went up and everything was good, except for the fact that, you know, this whole time, the shale industry kind of has been mismanaged in a way. I mean, there hasn't been a lot of fiscal responsibility, the way that a lot of these guys run their business is, you know, they're over margin. They're not making money at any of these prices, but money kept being thrown at them. So they just kept doing what they were doing. So even after, you know, the first crash, when banks got first.

and wouldn't give them any more money, they had the private equity guys come and give them a bunch of money. So that's kind of a little bit of the background on the shale industry. But they can move forward moving up because of the behaviors of these companies and how they were run and things like that. And certainly not all of them, but a good majority of them. What happened is that, you know, starting into a, around 2015, we started seeing a lot of bankruptcies, obviously.

And every year since then, even though oil prices have gone up, they haven't gone up to, you know, we were over $100 a barrel. We haven't even gotten close to that in the last five years. And so they're not making money. So just coming into this fresh off of the oil crash of 2014-16, these guys kind of never really rebounded from that, right? So we saw from 2015 to 2019, say, I mean, there have been over 200 bankruptcies. Still, at the end of the day, the story of this past month was unrest. The breakdown focused mostly on the economic dimension of this unrest and

the feeling of being left behind that undergirds so much of it. In my most recent interview, Bitcoin investor, Terdemeister, captures this sentiment perfectly. If you have a money printing machine in Washington, D.C. or wherever you want to imagine it, and then there is a small circle of people around it and then kind of like concentrically, people are sitting around that money printing machine. And the people furthest away are, of course, the blue-collar workers and the people with fixed pensions and stuff. And so that's how you see this wealth disparity happen over the period of 40 years.

And that's part of why we're seeing, you know, everything's connected. That's part of why we're seeing these riots because people are mad. They feel like something's wrong that they're being stolen from. And they often have a hard time pinpointing like, you know, why exactly that is. But it's no surprise, right? If the wealth disparity is at the extreme, that's when you get iconoclasm. That's when you get riots. That's when you see revolutions happen.

All right, guys. So there you have it. The best of the breakdown for June. I hope that you enjoyed the conversation. conversations this month. I hope you enjoyed the episodes that are just my analysis. We've got a lot of really fun things coming for July. And before we get there, I hope that you're planning some great fourth of July trip. Happy Freedom Day. I mean, I'll be back with episodes tomorrow and every day between now and then. But it's a great time at the end of every month, I think, to reflect and see

what we've learned about ourselves, about our country, about our economy, about our society, and to ask what we could do better next month. So that's it for this one. And we'll see you tomorrow. Until then, be safe and take care of each other. Peace.