The Breakdown - Inflation or Deflation? Jack Dorsey, Cathie Wood, Elon Musk, Jeff Booth Debate!

Episode Date: October 30, 2021

This episode is sponsored by NYDIG. Last weekend, Jack Dorsey set the internet alight when he proclaimed, “Hyperinflation is going to change everything. It’s happening.” That kicked off a mighty debate involving Cathie Wood, Elon Musk, Jeff Booth and others. At the heart of it is the question of whether inflation or deflation is the more powerful force in the months and years to come.  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: OsakaWayne Studios/Moment/Getty Images, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, October 30th, and that means it's time for the weekly recap. And this week, instead of a weekly recap where we go over a little bit of every different event, I want to actually go through an amazing Twitter debate slash discussion slash conversation that actually happened last weekend.

This debate was about the nature of inflation versus deflation. This is one of the most significant macroeconomic questions of the moment, perhaps the most significant macroeconomic question. And obviously in the Bitcoin world, the inflation camp is well represented, but sometimes the deflationary camp isn't. This conversation all kicked off last Friday when Jack Dorsey, the founder of Twitter, the CEO of Square, tweeted out,

hyperinflation is going to change everything. It's happening. When someone from Nigeria responded to him, he said it will happen in the U.S. soon, and so the world. This is one of Jack's highest engagement tweets ever, ever. And one of the folks who engaged with it was Kathy Wood. Now, Kathy Wood has been on the show a couple times. She's the founder, CEO, NCIO of ArkInvest. She focuses on disruptive innovation and so spends a lot of time thinking about

this. Keep in mind, as well as you listen to her, that she also was one of the, if not the, earliest Wall Streeters to get into Bitcoin and has long-term conviction around it. But this was her perspective on this question of inflation. She tweets, in 2008-2009, when the Fed started quantitative of easing, I thought that inflation would take off. I was wrong. Instead, velocity, the rate at which money turns over per year declined, taking away its inflationary sting. Velocity still is falling. Now, we believe that three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy. Two sources are secular or long-term, and one is cyclical. Technology-enabled inflation is deflationary and the most potent source. Artificial intelligence,

AI training costs, for example, are dropping 40 to 70% at an annual rate, a record-breaking deflationary force. AI is likely to transform every sector, industry, and company during the next five to 10 years. When costs and price decline, velocity, and disinflation, if not deflation, follow. If consumers and businesses believe that prices will fall in the future, they will wait to buy goods and services, pushing the velocity of money down. The second secular source of deflation could be creative destruction, thanks to disruptive innovation. Since the tech and telecom bust and the global financial crisis in 2008-2009, many companies have catered to short-term-oriented shareholders who want profits and dividends now. They leverage their

balance sheets to pay dividends and buy-back shares, manufacturing earnings per share. They've not invested enough in innovation and probably will be forced to service their debts by selling increasingly obsolete goods at discounts. Deflation. The third and most controversial source of deflation is cyclical. Because businesses shut down and were caught flat-footed as goods consumption took off during the coronavirus crisis, they're still scrambling to catch up, probably double and triple ordering beyond their needs. As a result, once the holiday season passes and companies face excess supplies, prices should unwind. Some commodity prices, lumber and iron ore, have already dropped 50%. China's crackdowns are one of the reasons. The oil price is an outlier and psychologically

important. Oil has three sources of support on the supply side. Global demand for oil is below that in 2019 and is unlikely to return to its old high, partly because its price has broken a string of lower highs and is above the 77 hit in 2018, therefore destroying demand. On the supply side, ESG, environmental social and governance mandates, have forced energy companies to shift capital spending from mature fossil fuels to nascent renewables. Meanwhile, banks have deprived fracking companies of funding after their near-death experience in 2020. In response to the near quadrupling of oil prices since the low last year, electric vehicle adoption has accelerated, sowing the seeds of a serious oil price decline longer term. Truth always wins. But then Elon Musk wades in, and he responds

to Kathy saying, I don't know about long-term, but short-term we're seeing strong inflationary pressure. He then quoted a hilarious Babylon B article, which says, Sacky points out that inflation doesn't matter since there are no goods to purchase. anyways. NIDIG, the sponsor of this podcast, provides banks, corporate treasuries, pensions, and hedge funds with ironclad Bitcoin custody and white-gloved service. Learn more at nidig.com slash NLW. That's nydig.com slash NLW. Michael Saylor came in and responded to Elon's tweet saying inflation is a vector and is clearly evident in an array of product, services, and assets not currently measured by CPI or PCE. Bitcoin is the most

practical solution for a consumer, investor, or corporation seeking inflation protection over the long term. But Kathy Wood is not done. She responds to Elon again. Remember, his tweet said, I don't know about long term, but short term we are seeing strong inflationary pressure. She quote tweets that and says inflation is flared in response to COVID-related supply chain bottlenecks and oil supply constraints. But, in my humble opinion, the powerful and converging deflationary forces associated with AI, energy storage, electric vehicles, robotics, genomic sequencing, and blockchain technology will bend the curve. If they expect lower prices, most consumers and businesses will defer purchases, exacerbating a decline in the velocity of money. Despite the burst in cyclical innovation

during the last year, velocity is hovering at low levels. If Arc Invest is correct, the next leg will be down. I am struck by the behavior of millennials, who, at the margin, are sacrificing short-term consumption to pay down student loans or invest in crypto and other assets. bank loan growth also is tepid, which would not be the case if velocity were increasing. The consensus view is that inflation will remain an issue and could get worse, suggesting that the equity and fixed income markets are incorporating it into discount rates. Deflation would be the bigger surprise. Arkinvest is open-minded and would like to continue this dialogue.

Now, obviously, it's not just super famous people who are in this conversation. That's what makes Twitter great. And Nicole Dobrow, whose profile reads, framing Bitcoin for Progressives, promoting Bitcoin adoption through an equity lens. which is frankly fucking awesome, writes, your argument overlooks the poor and working class who are most catastrophically impacted by rising food and gas prices, but not materially impacted by a cheaper laptop.

You may also be underestimating how far the government will go to fight deflation. Kathy Wood responds again and says today, yes, soaring food and energy prices are the equivalent of extremely regressive and oppressive tax increases. In the not too distant future, innovation including electric vehicles and gene editing, will deliver the equivalent of massive tax cuts. Jeff Booth, who has written an entire book about deflation and the Bitcoin argument that stems from deflation,

responds to that tweet and says, Kathy Wood, this is where you are missing the point. The existing monetary system of the world requires inflation to survive. Technology is the opposing force and stronger, which means the existing system must collapse or concentrate all wealth and power in the hands of a few. Now, Jeff went on to add a few more nuggets. He writes, the system is based on credit. Without constant growth, the credit can't be paid back and

unwinds, unwinding everything on top of it. Bitcoin could be looked at as a network transfer from one system to another because the system can't allow it. Similar to how a large company might set up a separate or isolated unit to compete against itself so it can maintain itself while transitioning to the future, i.e. the iPhone. Inflation is flared in response to money printing, which has caused to supply constraints elsewhere. Government will be forced to continue printing or face a deflationary depression. Abundance in money equals scarcity everywhere else. Scarcity and money equals abundance everywhere else. Finally, when someone ragged on Kathy, Jeff responded, she is just a smart investor who understands technology's exponential trend

and came to the conclusions on her own. Either way, she is right about deflation, but potentially not considering how far governments will or must go to try to offset it. So as I said at the beginning, this is truly one of the most significant, if not the most significant, macro-level debate in the world. Just look at how much energy the Federal Reserve puts into defining, explaining, and pitching us on what our expectations of inflation should be. In fact, if you listen to someone like Jeff Snyder, his argument is that the Fed's main power, the main tool through which they exert power, is in fact media. It is, in fact, the narrative. and not really monetary policy.

Now, he has different reasons for that, but I think that it's an interesting way to look at this conversation when you see just how dominating inflation or deflation and expectations that arise from that are when it comes to headlines. I think one of the best things

about watching this conversation unfold on Twitter over the last week is that the vast majority of people are engaging in good faith. And maybe that's because Kathy has her bona fides as a long-term bitcoiner, but in either case, there haven't been calls to cancel her or debates or angry responses suggesting she's full of shit. It's largely people who just have different takes and are trying to express them.

I often think about how fascinating it is that you can have so, so many smart people and still not have any sort of thing resembling a consensus on this issue. Whatever the case, it's going to shape a lot of what comes next. And as I've pointed out on other shows, it seems to me pretty clear that it's not just going to to be one clean story or one clean line. The forces pushing society towards deflationary pressures, as well as the ones pushing society towards inflationary pressures, are going to be constantly interacting with one another, shaping our short-term destinies. Given that, I'm glad we're having the debate, and I'm glad you stuck around to listen to this one as well. I hope you were having a

great Halloween weekend, and until tomorrow, be safe and take care of each other. Peace.