The Breakdown - The Breakdown Weekly Recap | May 2 2020

Episode Date: May 2, 2020

The week's episodes in one long run.  Monday | Bitcoin vs. QE Infinity: The 4 Archetypes Of The Halving Debate Tuesday | The Mass Surveillance Machine, Feat. Maya Zehavi Wednesday | When Currencies Fail: A Primer on the Crisis in Lebanon Thursday | From Corrupt To Broken: An Insider’s Analysis Of The Fed, feat. Danielle DiMartino Booth Friday | Why The Dollar Has Never Been Stronger Or More Set Up To Fail [Money Reimagined Pt. 1]

Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The breakdown is distributed by CoinDesk. Welcome back to the breakdown. It is Saturday, May 2nd. And as with every Saturday, I am doing a recap of the entire week's episodes with just a quick little preview of what I thought the themes of the week were.

And first and foremost, I think the obvious theme for anyone in the Bitcoin space is the rally in the Bitcoin price. We went from the 7,000s, all the way up to 9,500 before kind of hovering at 8,800, 8,800 for the last day or so. And it's interesting because it seems driven by interest in the halving, or at least that's kind of the narrative right now. We've had so much news around COVID and around the economic disruptions from COVID that we haven't necessarily had as much of a conversation about the halving as perhaps we thought we were going to. And now that it's so close that it's right upon us, you're starting to see a little bit more. The Global Head of Equity Strategies for Jeffries this week said that people should

buy Bitcoin in advance of the having and kind of put its properties in the context of gold and other assets like that relative to the larger market environment. And you've seen an interesting assessment that suggests that it is, in fact, Americans who are driving this particular rally. So a lot of interesting stuff on the Bitcoin price. The other theme that I'm watching closely is second order economic effects from these COVID shutdowns and just the larger economic situation in general. So in the U.S., I'm noticing and watching price indexes for kind of normal consumer goods, particularly foods, rising in a way that's a little bit nerve-wracking right now. But then beyond the U.S., I'm watching situations like what's going on in Lebanon, where over the last six months the currency has depreciated against. the dollar by 60% or more. I did a whole episode on Wednesday all about that situation that I think

is a good primer if you're interested in figuring out and seeing what it looks like when fiat currencies actually start to fail. As for other episodes this week, on Monday, I kicked off with a look at the four archetypes of the Bitcoin having debate from miners to speculators to people who think it's all about the fundamentals, basically just a fun look at. how different people think about the having. On Tuesday, I invited Maya Zahavi, a blockchain consultant who is really kind of multidisciplinary to talk about mass surveillance, to talk about surveillance and tracking in the context of COVID in her home country of Israel. On Wednesday, as I mentioned, I had that primer on Lebanon and what happens when the Lebanese pound or other currencies fail.

On Thursday, I had a great guest in Danielle Di Martino Booth, who is a former Fed Reserve advisor. She spent nine years advising the president of the Federal Reserve of Dallas before writing a scathing tell-all book and basically arguing that the Fed is a corrupt and broken institution. So that was Thursday. And then on Friday, we launched something which I'm super excited about, which is a four-part documentary micro series on the Battle for the Future of Money. It's called The Breakdown Money Reimagined, and the first episode was all about the U.S. dollar and how the dollar can, on the one hand, be as strong as it's ever been while at the same time dealing with this huge amount of money printing from the Fed in the context of stimulus. And the thing that's really neat about that project, which is done in conjunction with consensus distributed, which is CoinDesk's upcoming virtual event, is that it's not just the same. standard me talking or one interview kind of show. It's actually docu style. So there's something like 12 different clips of people who give their assessment to different parts of that story. So I was

really excited to try a different format. I'm really excited to see what you guys think. Anyways, guys, I hope that wherever you are, you're having a great weekend. It's beautiful here up in the Hudson Valley. Definitely going to spend some time outside. So as always, thanks for listening. Until next week, be safe and take care of each other. Oh, and one more thing. I mentioned this yesterday, but for those of you who haven't heard, you will notice that now this show has sponsors. There's a few messages from sponsors, and I will be doing this from now on, and I'm really excited to have some great companies sponsoring the show. It's going to allow me to do so much more to produce more content, more experiments like the Money Reimagined series. So I really appreciate you listening

to this, and yeah, joining me on this next stage of the journey. So thanks, guys. Support for this podcast and this message come from Eris X. With ArisX, you can trade spot and regulated futures on cryptocurrencies through a licensed, U.S.-based exchange. ArisX believes in fair access for all. Sign up today to take advantage of zero fees and learn more at ArisX.com slash consensus. This episode is also sponsored by the Stellar Foundation. The Stellar Network connects your business to the global financial infrastructure, whether you're looking to power a payments application,

or issue digital assets like stable coins or digital dollars. Stellar is easy to learn and fast implement. Start your journey today at stellar.org slash coin desk. Support for this podcast and this message come from grayscale digital large-cap fund. In times like these, diversification is key. Consider grayscale digital large-cap fund, ticker symbol GDLC. It's the only publicly traded investment product that offers diversified exposure to large-cap digital currencies, all from your brokerage account. For more information, visit grayscale.com slash coin desk.

That's G-R-A-Y scale.co slash coin desk. Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The breakdown is distributed by CoinDesk. Welcome back to the breakdown. It is Monday, April 27th. And this week, I'm actually working on an additional micro series to go alongside the breakdown,

on the normal run. And so I'm a little bit more busy than usual with that. And so some of these episodes will be a little bit shorter, a little bit more fun, a little bit more punchy than what we've had over the last couple weeks. Hopefully you still enjoy it. I'll be sharing more about that new micro series in a few days. I'm really excited about it. I think you'll enjoy it. It's got some tweaks to the normal podcast format around some very current and contemporary issues. But anyways, what that means is that I have a little bit less time to produce this than normal. And so I wanted to do something fun today based on a rising trend that I'm seeing. In January, before the coronavirus really hit our field of vision and our focus, the thing that we were talking about most in the

Bitcoin and Crypto world was the Bitcoin halving. There was a serious debate, which of course has continued, but I think the volume has been turned down a little bit on, around whether the having was priced in. And more broadly, just what the implications of this Bitcoin having were, right? What it meant for Bitcoin that the block reward was going to be cut in half. Did that impact things? Would that impact things in a way that was positive or negative? And what were we talking about when we say positive or negative? Are we talking about security of the network and minor capitulation? Are we talking about price? The default is that we're talking about price. But that was the state of the debate. Along comes coronavirus, taking out economies with it, and that's been the focus,

right? The macro context for Bitcoin has been the focus. But we are now something like 14 days away from the halving, and the conversation is heating up again in a big way. And you can feel it on Bitcoin Twitter, where this is really starting to come back into focus. We're seeing moves from industry. And as we'll see later in this episode, I think it also has to do with a convert. with that macro narrative. So what I want to do today is talk about the four archetypes of people in the having debate. Speculators, fundamentalist, minors, and symbolologists. So let's dive in. First up is speculators. And I purposely have not actually divided this into people who think the having is priced in or people who think that it isn't. I'm including this entire group as

the folks who are engaged in this debate in the context of this priced in. question. There are, as you might imagine, a bunch of different sides and a bunch of different takes. But regardless of what take, people tend to feel very passionately. Last week, the crypto dog tweeted, do you think the halving is priced in? Be honest. Hundreds and hundreds of comments later, the vast majority of them are either, yes, of course it is, you idiot, or no, of course it isn't, you idiot. This is a very clear, strict divide and point of contention. Blockfolio did a poll. They actually did a poll in-app as well as a poll on Twitter. So the Twitter poll is the Bitcoin having already priced in. This was last week. Yes had 27.2%. No said 51.8%. And I'm not sure said 20.9%.

The in-app poll had very similar results, but spread across 10,000 people. Now, in terms of the actual content of the debate, a key question has to do with the Efficient Market Hypothesis. The Efficient Market hypothesis is basically the idea that when markets know information, they price it in in advance. And price shifts have to do with new information coming online. So people who believe in this efficient market hypothesis, and by the way, I've radically oversimplified it, tend to think that because this having is a known event, it is priced in currently, right? The market knows that this is happening. They know what it will do. And so by extension, they have accumulated and put that information into the price considerations currently. In January, Nick Carter actually wrote a phenomenal

piece called an introduction to the efficient market hypothesis for Bitcoiners, which, regardless of whether you come to the same conclusions that Nick does, you will find it extremely elucidating, I believe. He comes to this conclusion. He says, so is the having priced in or will it be a catalyst for appreciation? If you've read this far, you will understand that I consider it patently absurd that a change in issuance will have been overlooked by the price-setting entity. On the other side of this is Plan B, 100 trillion USD on Twitter and his stock to flow ratio. And that's a whole different side of the debate, which obviously has a whole additional group of adherence.

Interesting follow-up to this I saw from Guy Swan, who really, you know, in some ways Nick and Plan B became the lightning rods for either side of this in January. And Guy Swan tweeted out and wrote a really interesting comment where he said, I feel the market fails to evaluate the consequences of the having. So basically his argument is that people know that this having is happening, but they are not doing a good job of understanding the consequences, what will come after it. There's so many sides of this debate, and I wanted to point out two things. First is that it's a fun debate to have, and I think it's a reasonable debate to have, and something that is, you know, we'll find out later, but there's a good healthiness to this debate.

Second, the best of this debate is an unbelievable example of how rich the Bitcoin and crypto community is with willingness to share huge amounts of thoughts and information in incredible detail. These pieces that have come out about this are so educational and useful for someone who's trying to kind of grok this. And it just doesn't happen the same way in other industries. These are people who are sharing their perspective and mental models that they've developed a huge amount of time building. So I love the debate in some ways because it produces this incredible amount of knowledge sharing.

But archetypes of the having debate, the first, and I think all of us are a part of this to some extent, is the speculators. Next up in this archetypes is the fundamentalist. And I realize actually after starting this podcast that I probably should have chosen a different name given how fundamentalist is used in a very negative way in every other context. But by fundamentalists, I mean people who believe that the key thing here is, is the fundamental properties of the having. The idea that, in other words, Bitcoin is a system where the issuance rate declines while everything else increases, and that that fundamentally is the key factor. That if supply goes down and demand goes up over time, price goes up to,

and that presuming demand going up over time, a supply reduction is going to have a positive impact on price. There are a million examples of this. I think Jan from Swan Bitcoin articulated this really well on the podcast on Friday. But I saw another example on that thread from the crypto dog that I was telling you about where Ceteris Paribis, who by the way is one of the most criminally underfollowed accounts on crypto Twitter, wrote, define priced in. BTC's hard cap with declining new issuance will cause price to go up over time as more people store wealth in BTC. So that's the point of the fundamentals, right? the fundamentalist argument is that there is the property of the system, which is reduction of issuance, which creates a supply constraint, which makes it more attractive for its stated purpose

of being a store of value, a store of wealth, which creates more demand, which, when combined with that reduced issuance, that hard cap on supply, creates price pressure. I think it's important to articulate this, even though it's kind of obvious to people, because this group is sort of staying out of the fray, I think. You know what? I actually take that back. I think a lot of the speculators are also at heart fundamentalists, too, who just like a good dust up on Twitter. But the point here is that there is this belief set from a lot of folks in this community that the key factor isn't whether the price goes up or down in the immediate post-having environment, but the fact that the halving itself, the fact of the having,

creates context for price increase because of its properties in the system. So that's number two, the perhaps poorly named fundamentalists. Number three is the miners themselves. Let's not forget that in terms of immediate impact, the people and groups with the biggest amount on the line are the miners themselves, whose business model needs to account for a fact that half of their expected outweigh, put from their activity is now being cut. This debate is really interesting, I think, and maybe even a little bit more informative, perhaps than the normal price go up, price go down, speculator debate.

Last week, Patrick O'Shaughnessy wrote, Bitcoin getting crushed at the halving would be a very appropriate 2020 thing. Keep in mind, by the way, that I don't think Patrick was rooting for this. I think he was talking about how topsy-turvy the world is. But then he followed it up with an interesting response to this in my DMs, shared with permission but without attribution, on why having is in fact bearish. I'll read this DM that came to Patrick, because I think it's a useful note in this conversation. Income to miners falls sharply, emissions cut in half.

Then difficulty will adjust downward partially, but not fully mitigating this. The most efficient miners capture more market share, the least efficient leave the game. The extra competitive pressure means, A, miners need to invest more in A6 and other costs to stay competitive, and they'll sell some BTC to finance that. and B, a more precarious financial position for miners generally makes them more risk-averse,

which means selling some BTC into fiat. If miners were wildly profitable today, none of this would matter much. But many are just marginally profitable, and at the tail end of a 2.25-year bear market, their overall finances aren't great either. With all that said, this is all just one part of the puzzle. While I view the happening as a force to be bearish doesn't mean prices will go down, plenty of unrelated bullish forces. Key point here being an argument for why this might be bearish without rooting for it, without being a hater in any way.

Plan B actually responded to this, and he says, thank you Patrick for sharing this DM. It's a great example of minor capitulation slash death spiral fud, fear uncertainty and doubt. 2012 and 2016 having data shows that difficulty will not adjust downward but will keep rising post-having. Miners have already invested in new hardware and are prepared for minus 50% revenue. So I think the interesting thing about this is that in some way it's saying that minors have priced this new cost in already, right? We're talking about whether things were priced in, whether things were known to markets in the speculators debate. Now we're seeing that in the context of miners, where plan B is basically saying, look, miners know that this is coming. They're the ones who have the most on the line from this.

So they're already investing to try to get out ahead. And you're seeing this in articles every day on CoinDesk and on the block where there's a hardware arms race happening. Another key point that Matt DeSuzza makes is about minor capitulation being bad or not. He says, remember, minors capitulating equals more Bitcoin is allocated to miners' best position to accumulate Bitcoin, removing cell pressure from the network. Which is a really key point, right? The idea that the miners who are not as efficient who aren't doing as well create more cell pressure because they have to sell more of the Bitcoin they mine just to keep functioning. So in this way, minor capitulation is not necessarily a bad thing.

It's part of the overall game theory in this. Now, all of this is theoretical and speculative, but what's actually happening? Well, for my view, from where I'm sitting, it doesn't seem like people are slowing down. It doesn't seem like miners are slowing down. In fact, it seems like they are heating up. Just today, we saw that Binance has announced a mining pool service. They said that it would be focusing on Bitcoin using full pay per share or FPPS. Under this method, revenue from the block reward, as well as some of the transaction fees are shared among pool participants.

Future offerings will focus on both proof of work and proof of stake-based networks. So again, this is a Binance getting in on some version of the Bitcoin mining game. We saw last week, MicroBT, which is a competitor to Bitmain, rolled out and announced three top-of-the-line Bitcoin miners who are trying to compete with and take market share from BitMain. So we have competition on that front. Just last week, Marty Bent announced a project that he'd been part of for months now called the Great American Mining Company, which is designed to help oil and gas producers build a digital pipeline for stranded gas to use stranded gas to mine Bitcoin, which is just a phenomenally cool thing that I'm going to have Marty back on the show to talk about that specifically now that it's live sometime soon, hopefully.

Marty, if you're listening, I'm meaning to ask you about this. But anyways, the point here is that there is a ton of activity from the mining industry leading into this. So whatever pressures there might be, whatever potential bearishness, it seems to me more likely that this is a potential natural selection event, but not one that's necessarily bad for Bitcoin. So that's miners, the third and probably most important archetype in the halving debate. The fourth and final category is the one that I kind of relate most to, which are the symbologists. These are the folks who think that part of the significance of the having is in the context and with the

contrast it makes to what's going on in the wider world, where the having matters not just for the internal system of how Bitcoin runs, but the external perception of Bitcoin in the world as it is. And to me, this is a hugely significant having for that reason. I think that it's hard to overstate how dramatic the contrast is between Bitcoin reducing its issuance at the same time as central banks around the world are absolutely trying anything possible to them to print what they've called, in the context of the Federal Reserve, unlimited cash, infinite cash, it couldn't make the contrast clearer. And this is holding aside any debate about whether the Fed is taking the right action or not. The fact that there is this huge important event in Bitcoin, which is

fundamentally about a reduction of its supply getting to an eventual hard cap, while the idea of a cap has been totally blown out of the water in the macroeconomic system. is hugely important. And this has even got itself a name now. So last year in March, Schmeagle on Twitter said, Fiat equals quantitative easing, Bitcoin equals quantitative hardening.

This was March 6, 2009. But a year later, more than a year later, this came back. Adam Back mentioned this idea, this term quantitative hardening, Terdemister picked it up, and then Brian Kelly and other MSM figures retweeted it and said they loved it. So there's a new term for the Bitcoin having, which is

quantitative hardening or quantitative tightening. And I think that that as a meme value is so, so significant. You're seeing MoneyPrinter go burr as a meme that's extending far beyond just the Bitcoin or world. And as that's happening, Bitcoin goes through this having event, you're going to have more people on the margins start to come over into this space and look into it. So this fourth category of people in the having debates are the symbologists who are focusing on that contrast, especially in the context of what's going on right now as governments try to avoid total failure and collapse of their systems in the context of COVID shutdowns, it's a pretty significant moment. So like I said, guys, a little bit shorter, a little bit fun of an episode

today. The four archetypes of the Bitcoin having debate are the speculators or gamblers or debaters or whatever you want to call them, the fundamentalists who believe fundamentally that the key part of the having is the fact of Bitcoin's redact. issuance in eventual hard cap itself and that everything along the way to that is just noise, the miners who are trying to deal with the outcomes of this for their business models, and the symbologists who are looking at what it means that Bitcoin is reducing its issuance on its way to a hard cap while the rest of the world is experimenting with unlimited cash printing. That's the idea. That's the podcast. Thanks for hanging out. I will be back tomorrow with another

episode of The Breakdown. Until then, be safe and take care of each other. Peace. Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDisc. Welcome back to The Breakdown. It is Tuesday, April 28th, and today we're exploring a theme which has been recurrent on this show, which is the idea that this coronavirus crisis intersects not just health, but economic and even political. issues. My guest today is Maya Zahavi. Maya has been in the blockchain space since 2014. She is an itinerant consultant who's worked on a number of different projects. But I got to know Maya when I started noticing these brilliant tweets just consistently coming out of this person's account. And so I've

followed her for the last couple years. I've watched her observations across a huge number of issues and really think that she has a unique synthesizer-type perspective. I wanted to bring on Maya, generally because I think she's incredibly smart and has a great perspective, but specifically because Israel, her home country, has served as something of an interesting case study of the overlapping of political crisis with this exogenous health crisis, with serious questions of surveillance. The Israeli apparatus took extraordinary power to surveil citizens that was just unwound by the Supreme Court there, and I think it makes for a very interesting case study and microcosm of the debate going on around contact tracing the world over. We talk about that, but we also get into

larger geopolitical issues, how the COVID crisis is or isn't reorienting countries like Israel vis-a-vis their relationship with China or the relationship with Europe or with the U.S. We talk about the question of domestic supply chains and how people might shift to localism, of globalism and what the risks in that might be, but also some of the inevitabilities. We talk about Libra and Decept, the Chinese digital currencies, and about what the role of digital currencies is in this post-COVID-19 context. So it's a really interesting conversation. I hope you enjoy it. And with that, let's dive in. As always, quick caveat, when we do long interviews like this, we edit them extremely lightly to keep it as close to the original conversation

as possible. All right. I am here with Maya Zahavi, Maya. How are you? Good. How are you? Good. Thank you so much for joining.

So I feel like I met you on Twitter basically through noticing over and over and over again that this person that I hadn't interacted with or didn't know anything about was having these like incredibly insightful thoughts on a variety of topics. So my first introduction to you was like a crypto Twitter. polymath that quickly became not just about crypto Twitter. But for those of you who, or for those people who aren't familiar with you or your Twitter, what is your background? What do you spend your time on? Mostly since about 2014 full-time in blockchain, mostly emphasis on enterprise blockchain. So I kind of got into this industry really,

really early. My background is in finance and fintech, but I guess, both for the context of this or how I think of it. I started my career in the Israeli IDF as a Sagan analyst. And that kind of, you know, looking back, that kind of positioned me to connect a lot of different dots throughout finance, technology, and politics in general, I guess. Yeah, you definitely kind of come at the world, it seems, again, just going from your Twitter from this very synthesizer kind of point of view, right? Like at any given moment, a tweet might be about current geopolitics. It might be about technology. It might be about blockchain specifically. And it feels to me like they all are kind of weaving their way in and out as part of the same

story for you, which I think is super relevant for our conversation about coronavirus and the world produced by coronavirus, right? Yeah. So that's true in many ways. I think in some regard, the story really starts for me in 2008. At the time I was at Warden, and I was at Warden. I thought I had the lecturer of having a front seat, a front row seat to hear the greatest minds explain to me what the hell went wrong. And nobody wanted to talk about it. And the more I started delving into that and doing recruiting in tech that time, I realized that there's a complete failure in terms of how disconnected finance and the economy are. And that's really when identity and Facebook and the ad market started to be this big red light of like beware this

is coming at you and then I well I discovered Bitcoin in New York in 2010 but I really went down the rabbit hole in at the end of 2013 and then I realized that blockchain on the surface and this is at the time there was only Bitcoin had the potential to be a backbone of identity and data in general, not just a value of cryptocurrency. So it's interesting. This question of identity is, it's almost like the background noise lurking on a lot of our conversations, it feels like, right? It underpins questions about data and personally identifiable information. It underpins, you know, there's so many pieces of the modern story that come back to this question of identity or, or, or, or, you know, there's so many pieces of,

or, you know, data that identifies that is specifically tied to some person. And it's really interesting. So part of why I wanted to have you on the show is Israel has had, it's gone through basically a full cycle of its relationship with a COVID tracing surveillance mechanism, right? Or a contact tracing surveillance mechanism. Yeah, well, at least a complete cycle compared to everyone else, right, who's still dithering and trying to figure out what the hell they're going to do. And I noticed a tweet from, I guess, last week or maybe it was the weekend that I thought was really apropos.

You said, we built a surveillance apparatus in the West for ad optimization, and now it's slowly being converted for COVID. It's going to get a lot more difficult dismantling that after countries start relying on that apparatus. So I guess maybe as a way to kick off the conversation, tell me a little bit about, add some more context to that tweet. And then maybe we can go into, you know, what has been happening in Israel around the surveillance. mechanism between the middle of March and now. So I think actually the story kind of starts in February for Israel and Corona. And the reason it starts February is because the Corona story and Israeli politics go hand in hand in the whole way the government has come at it and civil society has bought back.

So around middle of February, Israel decided that it's basically locking down the flights from China. And I think they were the first country to decide that they're not letting people come in. But on the other side of that, you also have to remember that there was an election on the first week of March. And despite the fact that the Israeli Ministry of Health was very fast to close down the country, the minute it got serious and we entered into real lockdown, the politics of this situation post the election, which again, this is just a bit of a background. Israel has gone to the polls right now three times in the last year and a half, and the Prime Minister, Bibi Netanyahu has failed to form a coalition government every single time.

And right before the mandate to who is going to form the new government after the third election was done, they decided to lock down Israel. And it literally happened within 24 hours. Emergency orders were sent in motion. And as part of that, they decided that the Sheenbit, which is like the Israeli FBI, is going to be collecting all data under a special order in order to be able to, for contact tracing, and to make sure that they can enforce through GPS that the people who were told to quarantine are going to quarantine. And it was, I mean, you have to understand the mindset.

They went full paranoid, worst case scenario. The whole country is built for a doomsday. And this is what we're putting into action. But at the same time, the elections, right, they were supposed to reopen parliament. And as part of the emergency orders, they decided that they're stopping the judiciary and that the speaker of the Knesset won't reopen Knesset. So suddenly, in the middle of a political mess, you have everyone locked in at home. No one can go and demonstrate. They're not opening the Knesset, and they're telling us that the sheenbed is following everything that we're doing just so we can keep safe, right?

So the backlash was instant. And there were demonstrations literally the next day where people got in their car and drove to Jerusalem. and got stopped by police that were under orders to not let people go on the highway, drive on the highways. And then for them not to enter the Knesset. And then they ended up arresting some very senior national security people because they dare demonstrate that the parliament has to open the Knesset. So that's where we started with draconian surveillance laws of like we just need to get this under control.

And throughout the next seven weeks, I think the emergency orders were under a temporary, they had a time limit and they had to be renewed by the Supreme Court. And the Supreme Court started pushing back and not giving them a carte blanche to just renew and do anything. And over the last week, the Supreme Court has ruled that the police can't use surveillance in order or GPS to find the people who are violating your quarantine. Chene orders and the other day they said that they're not going to renew the Sheenbet surveillance orders at all unless they go through main legislation of the parliament.

Interesting. So it feels like there's like three at least different things going on here. One is there's the way that an exogenous crisis superimposes itself on a current political crisis, right? So that sets the context for any action. The second is, is the question of extraordinary powers, even holding aside that context, right? What is and isn't appropriate for a government to do, which is basically the question that I think every government is wrestling with right now in some ways or citizens of every government are wrestling with. And then third is efficacy.

I noticed another tweet of yours that said something like, Israel just pulled back the blanket location surveillance of quarantine COVID contacts. After almost a month, the police successfully used the entire surveillance apparatus at their disposal able to track three patients who left their quarantine. So you have these like three very different things, all of which it seems to me are worth being frustrated or at least having some serious questions about, right? Yeah, I just add one thing that I think is the basic premise to the situation, and that is that a lot of people don't trust the government to actually take care and manage the situation and it seems more like a political excuse for the negotiations, the coalition negotiations.

And instead of putting in motion all the protocols that were put in place ahead of time for exactly these kinds of situations, it's been handed over to bureaucrats and budget people who don't have that much experience with technology or operations, and definitely don't necessarily know how to coordinate with the private sector. So that was also like a big shadow of how Israel dealt with us. And that goes to the, you know, we had fake news from the Ministry of Health on a daily basis. Yeah. But wait, before I say that, I will say something good.

Yeah, yeah. They have been in Night and I, and it's amazing to see compared to other countries, the amount of data that Israeli geeks demanded from the Ministry of Health is like insane. They have a JSON file and a CVS and you can download it. And like, you know, people were asking, we want this little segmentation. How many new patients are you testing every day? And then they publish that. You know, I mean, they really have been transparent on the data.

I'll give them that. Yeah, it is interesting. Like, part of what I think makes Israel such a fascinating case study in this is, it's this relatively contained place that has a very unique context, but also it has, you know, one of the most, arguably the most technologically literate populations in the world, right? I mean, you pointed this out in another tweet. You said the state of Israel, also known as Cybernation, with some of the best known computer scientists and cryptographers, today submitted a report to the Knesset's Intelligence Committee

that the best contact tracing solution they can come up with is to hand all our data to the NSO. And so there's this, it doesn't surprise me, I guess, that, there is this, the pushback is more intense and also more specific, right, in Israel than in other places, because it's a population that actually has the tools to be specific with their critique in some ways. We also have a lot of civil society and institutions that have held firm as the, you know, the guardians of democracy.

And we, and don't forget that the judiciary in Israel is very well known, both academically and in practice, as being one of, as a very activist court, which is a lot of the critique against it, right? And I think it all goes back to like what Israel is and also how he was built. So Israel for 70 something, today is and tomorrow's Independence Day. So for 70 something years, Israel, I'm laughing because I don't remember how many. Israel has looked to the West, right? It was built as a democracy. It wanted to be a Western country. And over the last couple of years, we've looked at Asia, right?

If progress is in Asia, if the market is in China. And we were also looking eastward. And you can see that there's a very distinct split in how countries have reacted. You've got Europe, the U.S., and Asia. And Israel has had the opportunity to come out of COVID like Singapore or Taiwan because we're islands, because we're small, because we already have a very resilient food supply chain domestically, because we have a national logistical operations that the army can do in case of emergency because we know how to improvise and we know how to build fast and so forth. And looking at how we've reacted, it's literally like we left the beauty. bureaucrats who are busy sucking up for their next job to lead the operation without them knowing what they necessarily have to do.

So that's really where the privacy issue, I think, entered. But I also have to say that the Ministry of Health has also been very conscious of privacy issues, and that was a different problem that they had, that they wouldn't share data with other government offices in order not to breach any privacy laws. I'm sorry, I went on a tangent there. No, I think it's super interesting. I guess a follow up to that is kind of from this standpoint of being in a place to view these other kind of spheres of influence, right?

You know, America and the West, Europe, and China and Asia. how do you think the COVID crisis or the ongoing response to it is recalibrating how Israel thinks about those other places in terms of, you know, not just model emulation, but who they want to do business with, how they want to design the economy? I think most of the world for the first two weeks was waiting for the U.S. to get their shit together and be Uncle Sam that's going to come and rescue everyone. And then we realize that's not going to happen. And that's not specifically Israel. That's everyone, right? Because every country had to deal with the same issues of the testing and the supply chain and contact tracing and respirators and PPE and so forth. I think Israel has been known to deal to like help itself when it has to, right?

When we're up against the wall, we improvise and we get ourselves out of whatever shit is happening. On the other hand, what's very, what stands out is how prominent China is, both in terms of supplies, that you have private jets that went to Shanghai and Beijing and brought in testing kits and PPE and masks and so forth. But there's also in corporate public-private partnerships, right? So we have a new testing lab here that's going to open next week that My Heritage and BGI, Chinese company, have built that is supposed to expand our testing capacity. And the whole negotiation was very, was stalled for a long time because of privacy issues again, that they didn't want either My Heritage or BGI to have any access to the personal data or to the genetic data. So you just everywhere we start dealing with one issue, geopolitics keeps on coming up. Yeah. Where do you think, and this is all speculation.

And just for anyone listening, by the way, the purpose of these conversations is to get lots of opinions and perspectives, right? It doesn't, these are like we're not claiming expertise here necessarily. It's all subjective because I think everyone's trying to piece it through. But, you know, one of the things that I've been trying to figure out is what the, what the, what the, realignment looks like after. So in America, there are a couple things that stand out as obvious shifts that are coming out of this. One is questions of supply chains as security issues. That's something that has, I think, come home to roost in a big way. And it's kind of bipartisan, right? I think that you see a lot of folks who were, you know, pure globalist kind of mindsets before saying,

like, hey, maybe we should be able to manufacture drugs here, right? Like, why are there still testing shortages. This seems insane. And I think that that's going to have a big impact on American geopolitics in American industry, right? Are there other effects like that that you're seeing either in Israel or in kind of immediate like partners that that you think will be byproducts of this conflict or second order effects of it? Yeah. So I have this like running theory that and this is kind of maybe in response to the and recent article that you're seeing which countries have a tech debt and which don't. And by that I mean, which countries didn't invest in IT infrastructure that can be scaled up fast and can connect to a lot of different entities.

And I think the fact that it takes so long for the SBA loans to come in in the U.S., whereas people in Germany got their money within less than 48 hours is going to be. to have a very direct impact as to how fast these countries are going to get out of this crisis. And that's going to play out, that's going to affect how strong the dollar is going to remain. Because if Europe's going to get out with their consumer demand increasing a lot faster than the U.S., then maybe the dollar won't remain that strong long term. So that's one thing I'm really looking at. And then what's interesting to see is how do the different government entities share data

and what it is that they're really managing? Because it shows you a lot about the social security system and the social net and the welfare system that those governments have put in place. So in Europe, where you do have a lot of bureaucrats in charge, you know what? they did their job and it works right people got the money from the government fast loans were approved fast they had fintechs and pstd2 to access that they knew exactly where their privacy red line is and they were able to have a very um i thought informative and and substantive debate

about that um whereas you see countries where it's not the top of the priority and people aren't discussing or enjoying those benefits. It's interesting. The, the, um, this idea of tech debt, I think, uh, it's fascinated to take that as a frame of reference for what's going on in the U.S. vis-a-vis bailouts, right? Because it, so I've had a few guests on, uh, who have argued over the last few weeks that we were, we've been in a situation in the U.S. where effectively there's no, there's no more buyer of, of U.S. debt in the world other than the Fed.

And so we were always going to come to this point where the Fed just had to backstop everything. And especially in the wake of 2008, and especially in the wake of like GM getting bailouts, that all of the corporate sector basically was looking over and saying, well, something bad happens. Of course, you know, why I get a bailout too. And I think that you can be really concerned about the knock-on effects of this while also kind of seeing the inevitability of it once the train has left the stage. of the Fed backstopping everything and going to unlimited QE. But going back to your point about tech debt, one of the interesting ways that that has played out

is that in the context of being unable to efficiently distribute whatever that support is, you actually have the interesting impact of keeping people more reliant on you, because instead of people getting back to normal industry and whatever it is that they're doing, they're just kind of waiting endlessly on a bureaucratic process, which only serves to reinforce the dependency that they have, which I think is a fascinating kind of unintended or hopefully unintended consequence.

Yeah, but I'm also thinking about how fast they get the money and how that's going to impact their personal finance. You have to remember that 6% of the U.S. economy is consumer-based, right? The amount of consumer debt has spiked is like almost at the highest. the highest it's been since 2008. The leverage, the corporate leverage loan is really high. So what's interesting about the tech debt is that the government knows how to give money to the corporates.

It doesn't know how to distribute the money to small businesses and directly to people. So what you have is a disconnect that's becoming more and more jarring between the financial markets and the real economy. And because the Fed is just pumping all that money. And we don't necessarily know where every new U.S. dollars more effective long term. Is it to give it for people to pay their rent? Or is it to put more money into the repo markets or maybe buy some corporate debts? It feels like they're trying a lot of different.

at the same time, and we're going to eventually just keep on having the U.S. Treasury as the lender of last resort. And that's okay, I think for now. Yeah, so this is a super loaded and ridiculous question. So I apologize in advance, but as a representative of the world looking in, right, or at least, you know, one part of the world looking in, what is your perception of how people are looking at the Fed intervention in the markets? I guess for an informed audience, right, for people who are paying attention, is it seen as something that's like, well, that's just what you have to do right now? Or are there questions of what are the knock-on effects to the dollar? What are the impacts for the world economy that relies on the

U.S.? You mean outside the crypto circle? Yeah, exactly. Yeah. I think people understand that the U.S. had no other option and that they were very fast to act this time. And they made it very clear that they see their mandate as a blame check. They're going to pump whatever money they need to make sure that the market works. And the byproduct of that is that the dollar is very strong, whereas different other foreign exchanges have fallen. And I think we're going to see more and more defaults. Lebanon today, I saw that there were some riots there.

I mean, in the backdrop of Corona and everything, they also defaulted on their loans, right? So we might see more emerging economies in that circle. I think the credit risk in the MSCI and the emerging markets is going to spike again. I don't know if you remember there used to be this thing called the brick. And if you look at where the brick is Brazil, Russia, India, and China. And if you look where they are right now, it's not necessarily the place you want to invest in. When I talk to investors right now, most of them are just long, very few and specific assets, and the rest they're keeping it to cash.

Because it just seems like we haven't bottomed yet. And at the beginning of this, it was very obvious to me that this is going to be both the demand talk and supply shock. And I looked how long on average it took the market to bottom. And it's usually more than a year. It took us about almost 500 days in 2008. Now, considering that we live our life on speed right now, right? It still doesn't seem like we've reached the bottom.

It seems like it's just like this very optimistic exuberance that's pushing the markets up and the Fed. But at some times we're going to see earnings. We're going to see the revenues. We're going to see how many people are actually on the payroll. And I don't see how the market can run. its current prices. So speaking of this

kind of back-to-back supply and demand shock, you tweeted, we need to start defending digital globalism before rapid de-globalization becomes the third shock to our economy. What did you mean by that? I think de-globalization already started a lot before Corona ever met that bat.

But just like we were talking about earlier, the first thing, when a government sees the economic impact of people being under lockdown and understand that they need to send for themselves. And one, and two, they need to make sure that they have a resilient domestic supply to and so that if they lock down, they don't have to get on the phone and beg China to let them have some masks, right? Or some active ingredients for their drugs. So, countries are going to make sure that the next stimulus money that comes out of their

treasury is designated to build up the domestic supply chain and the domestic economy. I mean, why would you buy something foreign if you can buy USA and with that support the meat packing industry, right? Because it's going to be for the benefit of everyone if they survive. I see that impulse starting to gain grounds. Don't forget that Europe, Germany and the beginning didn't even wasn't willing to release any of the supplies for Italy initially. So that's one side of it. The other side is I just don't think that we're going to be able to overcome corona without a global coordination process.

And I think Corona also highlighted how hollow some of these international organizations like the WEF or the G20 are. Because the fact of the matter is that we ended up for a couple of weeks with the black market of PPE instead of having a real system of how can we optimize the global supply chain. I think there's a dance there between the two that different governments are trying to figure out, and alliances might change, right? Yeah, I think it's a really salient point that there's going to be competing forces for some time. And this might be actually kind of a defining economic and political factor of the next decade, which is, on the one hand, this return to kind of local national. national thinking or even more acute localism in the case of the U.S., which we're experiencing

now, certainly, while also needing to not throw the baby out with the bathwater of these abilities to coordinate when situations require it, right? Which is certainly in the case of something like a pandemic. That's a great example. Yeah, but you also see it in the policies. Like there was, I don't remember which bank it was, but several, I think it was J.P. Morgan but I could be wrong. Several multinational American banks have decided that they're reducing the credit to European companies. Why? Because they'd rather have their balance sheet full of loans to American companies if they're going to get another stimulus or if they're going to need some more liquidity from the U.S. government, right? It's just going to look good. It's more

patriotic. So I think that's a trend that we're just in the beginning of that. But it'll be will be interesting, that's for sure. Yeah, I think you're right. And speaking of policies on the fact, you know, Japan in one of its stimulus bills actually put in incentives for companies to repatriate from China, you know? They were basically like, if you come back from China to Japan,

you'll get X amount of additional resources or whatever. And I think that's something that you're going to see pretty significantly incentivized, certainly in the U.S., too, you know. I don't think we'll see mandating it. But it's not sustainable. That's another thing. Like, let's be honest, right? We're not, like, the U.S. can compete with Bangladesh for, like,

apparel. For some electronics, the U.S. can compete with Vietnam or Mexico. It's like, it's too big and the salary gaps are just too significant for the U.S. to be able to fund everything. So that's something that I'm actually, I actually think. a lot of the global supply chain will remain where it is, but it might, but just the, the essential stuff that we need for the lockdown would probably be repatriated. But it could be wrong on that. Yeah, I think it's, no, I think it's an interesting, it's an interesting nuance

take to this where right now everyone's like, holy shit, supply chains, localism and stuff. But really, there's a, there's a huge difference between, I mean, everything will involve some amount of, of consumer behavior shift likely, right? Like, if you bring, I mean, people have been trying to figure out how much it would cost to build an iPhone in the U.S. currently, right? Obviously, that would change if the system was reoptimized for it. But it's a huge, huge amount more, obviously, than the, you know, $700 or $1,000 or whatever that people pay for it now.

And it may be that where groups land, where places land, is that there are certain things that have now moved over and fallen under the banner of security, right? So, you know, reagents for drug tests and things like that. Whereas other things are fine, you know, these are whatever. These are consumer goods that they don't care about as much. But it'll be weird to see. I don't think anyone quite knows exactly, but there will be some pretty interesting pressures on that going forward. For sure.

So anecdotally, in Israel, we all have a domestic manufacturer for swabs, and they're trying to find an alternative for the Chinese reagents for the testing. So they moved really fast on those things, domestically. But I also think the other side of the domestic is going to be CBDC. There's no way, if you're going to print money and you want people to buy locally and you want to encourage the local economy, the domestic economy, there's no way you're not going to be, sorry, one of your requirements is going to be able to, is going to be to track every single purchase and make sure that this money was used for domestic products.

So that's a linkage that I thought will be broadened going forward in the West in CBDC. Yeah, well, it's interesting. You literally actually guessed at the next thing I was going to ask you about because, you know, before we were talking about the difficulty that the U.S. has had distributing stimulus, and at one point, one of the proposals during the stimulus debates was, it was from Pelosi included a digital dollar. Now, it was kind of half-baked from a previously proposed plan from a bunch of academics, and it triggered a huge amount of questions about, you know, there's obviously a huge number

of issues that have not been resolved in the U.S. vis-a-vis the relationship between commercial and central banks and consumers and all this sort of stuff. But it was fascinating that it showed up there. Now, simultaneously, we've seen, you know, China step up its push for the de-sep. You know, over the last couple weeks, we've seen a bunch of people. of new announcements around the National Blockchain Coalition and the National Blockchain Service Network, the Blockchain Service Network. We've also seen these first screenshots of apps for actually interacting with and testing the digital currency. How are you, do you think that this, the COVID crisis is going to be a catalytic force for governments as it relates

to the digital currencies? I think it's a huge catalyst for surveillance. Suddenly everyone wants surveillance and you have the biggest privacy advocates around the world saying, hey, maybe we do need this. So I think that is going to be the driving force in the West. But the CBDC in, from my conversation with the central bankers, both in Europe and in the U.S., it doesn't necessarily function the way we, or our necessities aren't necessarily the same as China. What do I mean by that? From how I understand the BSN, the blockchain service network, it's essentially across bank settlement network for data and digital value.

But at the same time, you can say that an RTGS system, which is real-time growth settlement system, as modern economies have, basically serves the same function, only it's open just to banks and some FinTechs, right? So the nuance of what it is that makes it a blockchain or digital or consensus becomes much more significant on one hand to make sure that you're not in Buzzword salad zones. On the other hand, there is a need, and we've seen this with Corona, to have a data network, an identity network, so that we can transfer data data about either our finances personally in terms of retail, not a wholesale solution, so that we can communicate

information about people's identity, about their commerce, about their actual assets, without necessarily disclosing everything. And I think that nuance is going to be much more specific as we go forward with the CBDC. It feels amazing how kind of far behind that conversation we are in the U.S. relative to the rest of the world in some ways. I was going to say, I don't think the U.S. is that far behind because you can say that Libra was going to be the private enterprise solution to resolve that, right? That's how Facebook basically positioned themselves.

It's either the Chinese Communist Party or it's us. So I think that drove a lot of the conversation in the U.S. And there's been a lot of catching up in terms of central bank digital currencies across American regulators and banks, in my view. Yeah, that's a fair point. What did you think of Libra's recent announcement, which felt kind of inevitable, but this shift from this backskid of currencies model to a group of individually fiat pegged staple coins? where to begin? Obviously, we all realize now that the use case is not the altruistic banked, the unbanked, both they initially pointed to.

I think it's an obvious step. They realize that they needed regulation, and they've responded to a lot of those issues, not all of them. and the fact that it's permissioned and not permissionless and that there's going to be full regulation on every end basically doesn't make it that compelling on one hand. On the other hand, how many governments right now want to network

where they know that all their citizens can just sign up and they can get money helicoptered directly to them? So it's a give and take. I don't think Facebook, a Facebook initiative should be the backbone of any network going forward. Let's put it this way. And that's my own bias and my prejudice against the Facebook machine. Yeah.

I mean, I don't think that bias comes unwarranted, and certainly you're not alone in that feeling. But it is interesting to see this shift from, I think that you're right, right? We went from Bank the Unbank to let us do this because if you don't China will, to, all right, Central Banks, you ready for those digital currencies? We got you. We're the consultant on this one, you know? Yeah, and we get to decide who that value-added services are,

and we get to decide who the wallets, and you know what, maybe we'll do the K-Y-C. I mean, in some ways, initially, Lieber was genius. Why? Because you realized that Facebook needed to be able to close the loop on the actual purchases for their ad optimization, right? And instead of saying, hey, we're going to go in and get an e-money license or start a payment network, because they failed in their previous attempt to do that,

they said, you know what? Because of antitrust, because of privacy, we're just going to outsource everything to other partners, and then we can say it's not us. So they just pushed out accountability to other, to who was it? and initially PayPal and Uber. And it was like I can't fault them for that.

It was pretty brilliant. But it seems to me that in the current form, they actually have to contend with regulations no matter where they fit in the different stack of Libra. And that's a net positive. Interesting. Well, I really appreciate you taking some time to give your perspective, to share this case study of Israel,

to just talk through so many different aspects. of what's going on right now, but I'd love to leave on a question that I've been asking a lot of folks, which is, as you're sitting, from where you're sitting, what's one thing that's causing you to be pessimistic right now, cause for concern, and what's one thing that you're finding optimism with them? The mass surveillance apparatus that's being deployed right now in every single country, just for contact tracing and making sure that people are following the guidelines. I think that's going to be, it's almost detrimental trying to scale that back in a couple of years. And we know after every big geopolitical event that the residue of what's been built throughout the war stays with us for a very long time.

And that's my big concern. The reason for optimism, civil society, I think you look at how many places are, are having a very serious debate about the cost benefit of every action. And it's engaging more people within their community and not necessarily across different sectors to come in and even be, just be cognizant of the other. So that's definitely optimistic. I agree. I think that the rise in consciousness of these issues, right?

It was highly possible that we were going to get this sort of creeping frog in the pot, mass surveillance, regardless of any factor. But the fact that there's at least more eyes on that, more attention being paid, I think, is a positive thing. And sort of for me, the question is, you know, what we can do about it and how fast we can move, given what's already happening and the wheels in motion. But, Maya, thank you so much for hanging out today and spending some time with us. Anytime. Thanks for having me. I think one of Maya's most salient points in that conversation was the identification that there is an inherent tension between, on the one hand, supply chains returning to within national borders, a physical localism, and on the other hand, a need for globalism when it comes to fighting shared threats. I think that tension between the unwinding of globalism and globalization and the return and resurgence of localism, be it in the context of domestic manufacturing or finance, is going to

define a lot of the next decade. I wonder, and I also worry, that we won't be able to have the nuanced conversation that says, it's okay for these supply chains to be globalized, while these shouldn't be. And to make this not always an inherently political issue vis-à-vis America first or Israel first or whichever nation first, I don't know that that's possible or pragmatic. It may be that our political structures just preclude that sort of nuance. Whatever the case, I think we are at a sea-change moment. And perhaps these forces were already there. In fact, it's for sure that they were already there. But as an accelerant, I think this was a major, major moment that we will study forever. But that's all for today. I hope you guys enjoyed that

conversation. And as always, I appreciate you hanging out and listening. Until tomorrow, be safe and take care of each other. Peace. Welcome back to The Breakdown. An everyday analysis, breaking down the most important stories in Bitcoin, Crypto, and Beyond with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, April 29th, and today we are going to be talking about Lebanon, specifically the currency crisis overlapping a political crisis, overlapping a larger economic crisis that is engulfing Lebanon, and I think has relevance for how we understand the dollar in the world, the dollar's role in the world, and the fallout from COVID-19.

I wanted to bring this episode to you because I noticed last week Lebanon start to emerge in the cryptosphere. And there were two contexts. The first was Dan Tapiero picked up on a piece by NewsBTC noticing that Bitcoin seemed to be trading at $15,000 in Lebanon via local bitcoins.com, which is a peer-to-peer platform for trading Bitcoin between people. He said, classic emerging market funding crisis made worse by deflationary dollar peg that is breaking. Study this case as it will be model for other weak emerging markets. be a key part of the macro story behind upcoming Bitcoin price rally. NewsBTC, they titled their article Bitcoin trades at 15K in Lebanon amidst economic turmoil, showing its real potential. That was part one

of how this showed up on the Bitcoin radar. And of course, you see Bitcoin trading at a seemingly 100% premium against what we were seeing it at. It's going to cause notice. The second context that Lebanon has had to enter the Bitcoin sphere, the Bitcoin Twitter sphere, is images and videos of riots in Lebanon where protesters are smashing banks and setting fire to banks over the last two days. And that is happening, but it has a specific context. And I think it's incredibly important to dig into this because this is not just a single country. This is a country that is representative of, I think, a number of, I think, a number of potential challenges that a variety of huge emerging market contexts are going to face in the

coming months and the coming years, and it deeply implicates the question of the role of the dollar in the world and the role of external currencies. So what I'm going to try to do today is give you a primer on how Lebanon got here, how this crisis happened, what this crisis means, and what the real implications are. Now, a couple caveats. First, I am obviously not a Lebanon expert. It is not my main field. It is not my main point of view. And I have put this primer together humbly by doing my own research of the last six months of Lebanese political and economic turmoil. That said, I do have some context in this region. I first went to the Middle East in 2004 to study in Cairo. I went back and forth a number of times, probably a dozen times

over the course of the next five years or so. I thought that I was going to spend my life doing either Middle East conflict resolution or just conflict resolution more broadly and spent time all around the region, including in Lebanon and Syria, but again, this was a long time ago. I was in Lebanon last in 2006, and Syria last in 2006. And as we know, those places are very different than they were then. But this is not a complete neophyte perspective, I guess. I do have some time booked both in the region and spent looking at the history of the region.

I'm not going to get too deep into the history today. I'm really just going to focus on what's been happening over the last six months and put it in the larger global economic context we have. Here's the TLDR on this. This is not a story of Bitcoin trading at a premium because people are desperate to get into Bitcoin. This is a story of a local currency failing and people trying to find any on-ramp to access U.S. that they can. That's the real story and that's the important piece of this conversation. Let's do a little bit of Lebanon economic basics. First, a key thing to note is that this is a country where almost everything consumed is imported. That's a really important note because, as we'll

see, imports are purchased with dollars and then sold for Lebanese lira. Even before all of this happened, Lebanon had a huge debt to GDP ratio, one of the worst in the country, between 150% to 170% debt to GDP ratio. This is a country that borrows a lot. It has had a dollar peg since 1997 of approximately 1,500 lira to 1 U.S.D. It has had a dollar peg since 1997 of 1,500 Lebanese pounds or lira to 1 U.S.D. An article in the New York Times, described this rate thusly. They said, but maintaining that rate required continually bringing new dollars into the country, usually by enticing wealthy investors to make large dollar deposits for high interest rates, a strategy that some economists have compared to a Ponzi scheme.

We'll get into this more and the banking system more in a minute, but the key part for our purposes is that since 1997, the dollar has been pegged 1,500 Lebanese pounds to 1 U.S. dollar, and it's been maintained through central bank policy. This is an economy that is 70% dollarized, and it has only been sustainable because of diaspora inflows back to the country. So a huge number of Lebanese depositing money into the Lebanese banking system from abroad, as well as from inflows from other regions. So Lebanese banks have attracted huge foreign inflows for years and years and years through offering high interest rates. And basically, that allows the country to pay for imports, even though it has such low exports. So in this way, the banking system is really key to the

economy. The deposit base, in fact, in Lebanon is usually something like 2.5 to 3 times the size of the economy. However, the banking system is hugely compromised right now. And this is not just a coronavirus thing. In fact, as you'll see, this story is not particularly a coronavirus. issue, although, as with everywhere else, the coronavirus shutdowns have exacerbated the situation. So the banking system is compromised. 70% of assets are lent to the state itself, but government bonds are trading 40 to 50 cents on the dollar. Of those 30% of loans that are to the private sector, 25% of those are non-performing. And what that means when you add everything up from the central bank balance sheet is that half of the assets of banks are impaired. They're problematic.

this could be okay in some short-term way if there were still huge inflows from abroad into the banking system, but there haven't been in the same way because of regional turmoil. There is the obvious crisis of the war in Syria, which has been ongoing and dragging the entire region down. There is trouble with Iran who basically uses Hezbollah to meddle in Lebanon's affairs and has for decades. there is a crisis with the relationship with Saudi Arabia, which went really bad in 2017 to say the least, and I will point you to more resources to learn about that. But when that relationship went bad, we saw some of the first grasp of dollar outflows. In late 2017, 1.5% of cash deposits were withdrawn from the Lebanese banking system in fear of what that regional turmoil might do. So effectively,

we have a very unstable economy that is largely propped up by a robust banking sector that has been attractive to both foreign Lebanese as well as to the region for years. But as political crisis engulfs the region and compromises that banking system, it makes the system of continued inputs very compromised. And so this is the context for where we started to see real problems happen last year. The center underlying problem, which metastasizes and metastasizes in this situation, is not enough dollars to keep this economy going. As I was mentioning before, if you have a net import economy that uses dollars and your local currency interchangeably, what happens is that all of those

purchases of imports happen in dollars, right? If the U.S. is sending wheat or anything else to you, it's going to bill you in dollars, not in Lebanese pounds. But then your local market, your local consumer base, uses those Lebanese pounds to buy that good. The peg keeps that system working, but if the peg starts to break, it can deteriorate incredibly quickly. Keep in mind as well that there is a dollar shortage around the world. This is not a Lebanon unique situation. The U.S. dollar has been the strongest and clearest asset, the world's global reserve currency, not just theoretically, but in a way that is profound for a long time. And so imagine the pressure of trying to get dollars everywhere, but manifested in a specific nation context

like Lebanon. That's what we've been dealing with. So last August, the 1,500 Lebanese pound-to-US dollar pegs started to break. In September, an economic state of emergency was declared, and the government actually used WhatsApp to say that they planned to raise taxes to cover government expenditures. This sparked protests because there was already a lot of questions around the legitimacy of government and corruption in government. So when the government said that they were going to come seize citizen money through taxes, basically, to cover their expenditures, there was a wave of protests. This was exacerbated in October.

On October 11th, there was a nationwide strike demanding the ability to pay for fuel imports in lira, in Lebanese pounds rather than dollars. A sign seen on Twitter said, We apologize to the Lebanese people. Due to the lack of dollars to buy fuel, we are closing our petrol station until we can secure this product in Lebanese pounds. So again, this is the situation we were just describing.

Petrol station owners sell their fuel in Lebanese pounds, but have to buy it in U.S. dollars from importers. This also happened to mill owners, people who are bakers, who buy imported wheat in U.S. dollars. What happens, of course, is that as the peg starts to come undone, that itself creates more demand for dollars, which causes the peg to come further undone. So put yourself in the situation of your average Lebanese person. You're seeing these strikes around fuel importers, around bakeries, who aren't able to

get the dollars they need to buy the imports that allow their businesses to work. You're an average citizen. You say, well, damn, if there's dollar shortages, I need to go get my dollar. out, which causes a run on the bank. Banks start to limit withdrawals, which is exactly what happened. Banks started to limit how much could be withdrawn in USD, and that creates more demand for dollars. All of a sudden, that activity moves to the black markets, because if banks won't allow people to withdraw money or get access to dollars, black markets will, but the black market price is not going to stay the same as that official peg. This keeps going on. As people start to see the peg fall further,

they want to minimize loss. They go from, I don't want to lose the value that I would have had at that official peg going on the black market to the black market's the only place I can get those dollars. If it's 2,000 Lebanese pounds to the dollar now, I want to lock in that loss rather than worry or take the risk of a loss of greater debasement of the value of the Lebanese pound in months to come. So it's a very vicious cycle. So big protests start in October. designs at the end of October. Protests continue through November. Fast forward to February, early March.

GDP is down from $55 billion to $44 billion. $220,000 jobs in a country of $5 million are lost between October to February. Food prices are up 58%. And key parts of the industry are just totally left shuttered. So this is a quote from an article, importers of critical goods such as medical supplies say their requests for dollars have gone almost entirely unmet since February, leaving many hospitals dangerously low on everything from heartstands to dialysis equipment. On March 7th, an extraordinary thing happens for the first time

Lebanon defaults on a foreign currency debt payment. This was one thing that was holding Lebanon together is that it had a relatively high standing in foreign markets because it didn't do things like default on debt payments. It did in March for the first time. time. And then COVID hits. And the economy is locked down since the middle of March, which is just pouring gasoline on an absolute dumpster fire already. So let's look again at what's happening in the currency markets. As this foreign currency default happens in the beginning of March, the official exchange rate remains at 1,500 Lebanese pounds to the dollar, but on the black market, money changers are getting 2,500 pounds to the dollar. There are a growing wave of people

who are extremely worried, right? Think about middle-class Lebanese who are paid in Lebanese pounds, but who owe tuition or mortgages that are denominated in dollars. It's the story that we hear over and over again in dollar-denominated debt. No one can get dollars to bring in goods from abroad, so businesses are shuddering. And to make matters worse, and this is how these economic crises play out, Lebanese banks, which are terrified of bank runs, are continuing to to reduce how much people can actually take out of their accounts, and they're doing so with caps. They are setting the exchange rate price lower than what the black market is saying. Then we get to April, and things get really bad. The official peg is still at 1,500, but it's gone to

3,500 in black markets. A few weeks into April, banks start making some small concession. They allow small depositors to cash out dollar savings, but at 2,600 pounds. So this is obviously more than the 1500, but way less than the 3,500 pounds that the black market was saying a dollar was worth. The blame game heats up between the Prime Minister Hassan Diab and the central bank Governor Riyadh Salima. In a televised speech, Diab said, the central bank is either incapable, absent, or directly inciting this dramatic depreciation. There's clear politicking involved, and like I said at the beginning, there's so much to Lebanese politics that I can't get into it now, but it's worth looking into, but there's credence for these accusations, at least in the context of regular

citizens and protesters, because the Lebanese Bank has at this time been trying to buy up all the dollars they can for money transfer companies at a rate of 3,625 Lebanese pounds to the dollar. So in short, the Lebanese Bank is trying to buy as many dollars as they can get their hands-on at a rate that's much higher than the exchange rate that they're allowing Lebanese citizens to withdraw at, which is obviously going to cause incredible foment. There's no way that people are going to just let that pass, especially when the prime minister is saying that the central bank governor is to blame for this crisis, which brings us to this week and the videos and images you've seen on Twitter of banks burning around Lebanon. Al Jazeera called this the night

of the Molotov, and for the last two nights, at least a dozen Lebanese banks have been torched, vandalized, and as part of this growing frustration. Effectively, these protests are now turning violent because the desperation is getting to reach a fever pitch, with no end, no clear plan in sight. Even before all this, it was estimated that poverty was around 50% in the country at the beginning of the year. Now the social affairs minister of the country is estimating that some 75% of the population require aid. Meanwhile, the economy, what's left of it, is still shut down because of the coronavirus. That's where we are now. We have a crisis in freefall, which has lost at least 50% of its value against the dollar and realistically more since the

middle of last year, with a dissent that is increasing. We have a political instability where an already compromised and unloved government is blaming the central bank for this machination. We have an economic system that's based not on economic fundamentals, but financial engineering that requires an ever-growing influx of foreign investment, foreign currency into the system, that once that dries up, just shuts down. All told, what you have is the complete currency collapse and, by extension, economic collapse of a nation that has, at times, been one of the bright lights of a very troubled region. Let's return back to the article that got Bitcoin's attention in the first place, this idea that Bitcoin was trading at 15,000 in Lebanon

amidst economic turmoil showing its real potential. The article was based on the sell price on local bitcoins.com of a Bitcoin going for as high as 22,678,227.0.0237.0.0.0.0.000 If you divide that by the official expressed Lebanese pound-to-dollar rate, which is 1,500, you get this 15,000 number. That's where it comes from. It is factoring in, or it is assuming, that the exchange rate of 1,500 is the actual exchange rate. As we've discussed, the real exchange rate in Lebanon right now is somewhere between 2,600, which is what the banks are offering people to withdraw their Lebanese pounds at. or 3,600, which is what the central bank is paying for dollars on the open markets and what Lebanese are paying in the black markets. When you divide this offer of 22 million Lebanese pounds

per Bitcoin by those numbers, you get a number that looks pretty much exactly like what Bitcoin was selling for everywhere else. Does this mean that we shouldn't see Bitcoin as an interesting, relevant asset for this region. Should we dismiss this idea that it is, quote, showing its real potential? My answer is absolutely not, but we have to understand how Bitcoin and other digital assets are functioning in the real world right now. The story of Lebanon that I've just told, which is the very TLDR's version, is a story where people don't have control over their money. Their money is predicated on a banking system that has its own interests, its own machinations, its own incentives that for a while aligned with theirs, but as soon as it didn't,

shut down their ability to actually control their wealth and effectively enabled their wealth to be reduced by a factor of 50% in the course of just a few months. Imagine that you had been saving in a bank, doing what you're supposed to do, being a good citizen, putting away your money for years and years and years, and over six months, it's cut in half, simply by the debasement of the currency. That's what we saw. What Bitcoin is reflective of and how people are using it in this crisis

is trying to escape a local monetary regime that is crumbling. What the world is doing, though, and I think that we have to expect this is going to be the case for some time, is they're escaping not into Bitcoin per se, but the dollar. The dollar is the world's escape valve currency. Even in Lebanon, before this turmoil, the whole system was predicated on being able to move easily into the dollar. The problem is that as the dollar becomes the only asset for the entire world, there's a shortage of them, and it becomes harder and harder to get into the dollar. Now, the interesting thing is,

as we watch the total circulating supply of USD-based stable coins rise, I think that's part and parcel of this as well. It is people trying to get dollar exposure and escape from local monetary regimes by accessing the digital currency world. This is not a diminishment of Bitcoin, but we also need to be clear that it's not some super premium because Lebanese who are desperate are trying to get into this new currency. Lebanese who are desperate are trying to get to the currency that they've always used to actually pay the key debts that they have, which is dollars. We live in a dollar denomination, debt world. Until that is no longer the case, part of Bitcoin's role is going to be to help people escape out of these local monetary regimes which are collapsing and get money to where it needs

to be into different currencies, even synthetic ones. I don't think that's a knock on Bitcoin. I think it's in fact an affirmation of its power as an uncontrollable non-sovereign currency. But we have to speak about what is actually true, not just go for the headline. So, Hopefully this has been an interesting or enlightening look at what's going on in Lebanon. As I said, I am not a Lebanese expert. I put this together on the basis of just my own research and reading. But I fear that it is reflective of a lot of places we're going to see around the world that face this same perfect storm of a bad local monetary regime,

a currency crisis that ensues, a shortage of dollars that makes it worse, and a lack of a fundamental basis for the economy that can solve it. Anyways, guys, let me know what you thought of this episode. Hit me up at NLW on Twitter. And if you liked it, share and subscribe. Let me know, because this is a little bit of a departure, although to me, I think this is the type of issue that is sort of the most important for us to really, really understand

if we want to think about how digital currencies and Bitcoin specifically have a role in the world to come. Thanks, as always for listening. And until tomorrow, be safe and take care of each other. Peace. Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW.

The breakdown is distributed by CoinDesk. Welcome back to the breakdown. It is Thursday, April 30th. Yes, we have made it through a full lockdown month. And today we are talking about the Fed. My guest today is Danielle DiMartino Booth. Danielle is the CEO and chief strategist for Quill Intelligence, which is a market research and analytics firm.

She is the author of Fed Up, an insider's take on why the Federal Reserve is bad for America. Now, importantly, and one of the things that makes Danielle's perspective so unique on this front, is that she spent nine years at the Federal Reserve Bank of Dallas, where she served as an advisor to President Richard W. Fisher. This was through the financial crisis until March 12. As you can imagine, Danielle's perspective on the Fed then is informed not just from hang out on Twitter and in-market analysis conversations, but through actually seeing the inner workings of this institution, which has, as we've seen, such a dramatic impact on our

lives. We talk today about why the monetary policy regime we've been living under for the last 10 years is the largest monetary policy experiment in history. We talk about why 2019 was setting up 2020 for some serious economic trouble in the context of declining world trade even before coronavirus hit. We talk about the mass expansion of facilities for the Fed in the context of the coronavirus and get into why many of those facilities are actually potentially broaches of the Federal Reserve Act and in fact threaten the fundamental independence of the Federal Reserve as an institution. We talk about the disconnect between market confidence and consumer confidence and what it's going to take to bring those into sync, if even possible. We talk about the long-lasting impacts on people's perception of savings versus consumption and what that might mean for the economy. And finally, we talk about some reasons for optimism and a return to resilience that is starting locally with families and communities.

This is a great conversation for understanding more about the federal resolution. this hugely important institution, and I hope you enjoy it as much as I did. As always, these conversations are edited only very briefly to keep the spirit of the conversation as close as possible. All right, we're here with Danielle. Danielle, thank you so much for joining. I'm so happy to be here. So for those who aren't familiar with you, you know, I just gave a little bit of an intro to the episode, but I would love to have you share just more of your background and what would you spend your time on now? Well, my background is kind of, I mean,

you almost need to take an anti-nausea pill for my background. After leaving business school in Austin, I decided that I was just, I had to work on Wall Street, which was a strange thing to decide to do if you're from Texas and not graduating from Wharton. But I ended up working at a very scrappy, beautiful investment bank called Donaldson Lufkin and Jenrette,

DLJ and it was bought out by the Swiss at the very top of the internet bubble in kind of in that 2000-2001 area which is the first time as a as a young person as a young investor as a young follower of the markets that I sensed that there was this presence in the markets if you will a federal reserve I didn't know what a federal reserve was at the time when you when you are on Wall Street in many ways they try and keep you in the dart But I knew that there was a presence that was elevating stocks that absolutely had no profitability and would later in life look back and say, gee, that was now in Greenspan. In any event, after 9-11, I met the love of my life, ended up leaving Wall Street.

I signed a non-disclosure, left the industry and wrote for the local paper for a few years outside of the shackles of compliance. It was great to be able to write whatever I wanted. and I ended up becoming kind of the world's preeminent expert on the housing bubble. I got lots of hate mail predicting that it was going to be a systemic and global calamity. And these comments ended up having me go out to Omaha and be a guest of Warren Buffett and Charlie Munger. And shortly after that, I was called upon by the Federal Reserve and Richard Fisher. And I ended up going into public service where I served at the Fed for upwards of nine years with also somebody who was not a PhD.

in economics, also somebody with a background in finance, covered every aspect of the financial markets for President Fisher when he was there. And when he retired, I left and wrote a scathing tell-all book about the Fed because I think it is a broken and corrupt institution. And now today I do in my daylife at Quill Intelligence what I did for President Fisher at the Dallas Fed. And that is I provide my insights on every aspect of economic data and, and, and, and, and, and, and, and, and, and, and, and, and, and every functionality and event in the financial system, in the financial markets, whether they be bonds, private equity, or the stock market. Amazing. Well, so excited to have that wealth of experience joining the breakdown today.

So what I want to do is, you know, the core of the meat of this conversation that I want to get to is your reaction to an analysis of Fed action over the course of the last few, weeks, few months as the COVID crisis has come in. and what you think the knock-on effects of that might be. But by way of setup, I'd love to kind of go back to comments you've made before where you've called the last 10 years or, you know, the last some number of years of monetary policy, the largest monetary policy experiment in history

that has had even failed attempts to unwind it in the past. Let's set it up, I guess, for where the Fed was over the last decade coming into this coronavirus crisis. And maybe let's start by this notion of, this being the largest monetary policy experiment in history? Well, if you like, the Merrill Lynch, interestingly enough, did some interesting math a few years back, and they actually revisited it recently, and found that we are right now in the midst of the lowest interest rates in 5,000 years. So I did not go back and fact-checked them, but in order to generate the lowest interest rates,

in 5,000 years. It has to be something that is engineered inside of a central bank. It has to be something that pops out of a hypothetical model. And in suppressing interest rates and in trying to synthetically create easier and easier monetary policy once interest rates hit the zero bound, at least in the case of the United States, obviously in Europe and in Japan, they have gone into negative interest rate territory, but in order to try and generate even easier monetary policy, the Fed resorted to buying securities, buying bonds, buying treasuries, buying mortgage-backed securities, and growing the size of its balance sheet in order to try and induce investors to speculate in order to induce borrowers to borrow. And of course, these efforts have been

sketchy at best in terms of their results, and they've had many, many backfires and intended and unintended consequences as a result. So let's talk about the pre-COVID-19, right? This has obviously been a monumental event with a lot of implications, but going into this year, what were your concerns with the state of monetary policy in the U.S. or globally, right? Had you been paying attention to repo markets last year? Had you been looking at the growth of negative yielding debt? Where were you before we got this title wave of economic shutdowns based on the virus? Well, I had been watching very closely the global economy. And if you look at the history of the world, if you will, mild recessions in the United States, the recession that we had in 2001, the recession that we had in 1990,

these recessions did not include a contraction in world trade. And I bring up such a big subject because in 2019, we had a contraction in world trade. And if it had not been for some of the stimulus measures on the part of the Federal Reserve and had it not been for basically Chinese data being cooked in a book, then we would have seen a recession in 2019. as was evidenced by a contraction in global trade. At the same time, I was watching the debt levels grow, but the time 2019 ended, global debt had eclipsed a quarter quadrillion,

$255 trillion of debt around the globe. You have to create extensive and more increasing amounts of debt in order to maintain the facade of economic growth. and I was watching very closely this explosive growth, the things that the Federal Reserve was doing, they were calling it not QE, but it was QE, and the valuations that were rising in the stock market, in the bond market and saying last year, well before any of us knew of COVID, I was saying this is a growing accident waiting to happen. So, okay, so perfect, perfect setup.

Then COVID comes along. And, you know, we start to see, after a long period of kind of denial about it, we finally start to see action, right? We start to see the markets react, even though they hadn't exactly when China was on lockdown. We got an emergency meeting and a rate cut, then a rate cut to zero, and then all these new facilities. And so tell me about your thinking as you watch this. Were there parts of it that you felt were necessary or prudent actions? What surprised you? I guess I'm interested in your take on as you saw this unfold.

And maybe some part of it just felt inevitable, even if surprising. Well, so things do feel inevitable. I kind of bristle at the characterization used by so many on Wall Street that this is the corona recession and that absent this Black Swan event that the economy would not have been vulnerable at all and it would have continued to chug along. When you introduce the high degree of weakness into the markets that you do, the Black Swan event just is the needle that pricks the bubble, if you will. The response since then has been, it's been extraordinary. It's been gratifying to see in certain countries such as Germany, where they have,

really gotten the fiscal stimulus, the fiscal relief where it needs to be. It's certainly been less the case here in the United States. And I would say that if I once viewed the Federal Reserve as being a corrupt institution, now I see it as being broken because of the relationship that has been established between the Treasury Department and the Federal Reserve. And my greatest concern remains that of the well-being of small businesses in America that employ 47 percent of Americans are employed by small businesses. They account for 47 percent of our economic output. And the fiscal relief that has been extended to viable, solvent, strong businesses that need bridge financing to get past this crisis has absolutely been a failure compared to the sheer amount of money.

that has been extended to speculators and hedge funds and private equity funds and the largest firms and stock market investors and bond market investors. So some countries have done it right. Some countries have not. And I would put the United States in the category of a country that has not done it right. Let's, I mean, go back a little bit. And this idea of moving from a corrupt institution to a broken institution. as it relates to this feeling the sentiment of the Fed as a corrupt institution, what is the root of that corruption?

And I've talked with previous guests on the show about the way that the stock market has become increasingly a political utility, right, a political scoreboard. But I'm interested in when you say corrupt, what exactly do you mean? Well, so the Federal Reserve Act, I'm going to get a little, I'm going to get a little bit in the weeds here, but it's necessary. Love it. Love it. The Federal Reserve Act explicitly precludes the Fed from taking on individual company risk and any kind of corporate risk. And it takes on, and it is not allowed to extend credit in any way to insolvent firms. So in turn, I don't know if anybody can remember the Enron saga, but Enron WorldCom, a lot of companies had off-balance sheet vehicles. that allowed them to really monkey with their accounting. And that is what the Fed has done. There are special purpose vehicles that have been set up at the Treasury Department, and it is through those vehicles that the Fed is able to provide financing and funding

to the corporate bond market, to the high-yield bond market, potentially to the municipal bond market. There's been yet another facility set up to reach out to, to municipalities that are in need of a lifeline. And these are, again, an express violation of the Federal Reserve Act, but by the virtue of setting up entities at the Treasury Department, it's now an arm's length transaction, if you will. By the same token, the Treasury Department has control, if you will.

If you take it to the extreme over what the Federal Reserve funds going forward. So we have, and by extension, the Treasury Department is answerable, that they answer to the administration. And the Federal Reserve is supposed to be by its very, by the law, an independent and apolitical institution. And that violates this. The fact that the Fed is getting off on a technicality because it's not technically holding, let's say, a corporate bond on its balance sheet, but rather offloading it onto the Treasury's balance sheet where any first losses are going to be absorbed by taxpayers is extremely problematic. And when you consider that the administration could potentially be in charge of allocating financing and funding to companies, you know, it's enough to make, at least in my case,

it's enough to make my hair get set on fire. Yeah, I think that this is a really important point and why I'm glad you went into weeds a little bit, but the encroaching closeness of elected officials to decisions that have such dramatic impact on markets creates, you know, it's not just moral hazard. It's a recipe for absolute disaster, right? And it creates this, you know, at best, a perverse incentive for what it looks like to actually take risk, right? It replaces risk in the market. with a need to have access to specific political actors, which is hugely problematic in so many ways. It is.

And you're right. This goes one step beyond moral hazard. Moral hazard is simply the Fed saying, hey, we're going to buy the largest junk bond exchange traded fund in the country. And investors swarming into the stock market and saying, this is it. the Fed's going to bail us out no matter what we buy. That's moral hazard. Having the potential for having Treasury Secretary Manusian dictate companies that are going to be receiving funding, the Fed has put out details on its quote-unquote, because it requires air quotes. The President had put out,

excuse me, the Federal Reserve has put out details on its Main Street lending facility. But I would put Main Street in quotes, because it has now been revised to include companies with revenues of up to $5 billion in 15,000 employees. That, to me, is not a Main Street small business in any shape, or form, but it could be a portfolio company owned by a private equity firm. And you start to see that you are really crossing over into a deep enough conflict of interest that a future Congress, that a future Supreme Court, that a future administration could indeed question and go back and reverse what has been done, the damage that has been done in the name of there being a crisis on our hands. This is one of the things that I think is really difficult about having this

conversation, this climate, is that it becomes instantly politicized on the basis of party affiliation when really these are, you know, these are structural challenges that, that, you know, you replace a Republican in office with a Democrat in office, and we're still dealing with these same structural issues because they take on a force and await all their own. And this is something you've talked about before, the difficulty of unwinding this, right? Once you set these sort of norms in motion, once you normalize this sort of behavior, it becomes enormously difficult to walk back from, right? It takes a political will that's hard to imagine in our current political climate. It does. And that's not even political in nature.

That is the nature of the beast. I mean, as far as I'm concerned, it was under Democratic institutions, excuse me, Democratic administrations that we saw some of the worst corruptions of the Federal Reserve because, you know, QE1, QE2, QE3, these were largely employed by Congress, bypassed administrations in order to have the public spending purse opened wide up. because if you keep the, you know, the country's borrowing cost at such artificially low levels, well, they can just borrow to Kingdom Come and blow up our debt, which we know is now, you know, with the $3 trillion and counting of stimulus, we know that we could easily have a $30 trillion debt

in no time at all. But again, with the Fed keeping interest rates at artificially low levels, politicians can say the country can easily enough service these debts because the cost to borrow is so low. Well, that is, that's, that's collusion by any other word. So let's bring this back up, I guess, to now and what people in the economy is dealing with now. I wanted to bring in another factor, obviously, which is added to this, to both the pinprick of COVID-19, as you put it, with the larger structural crisis. and then along comes an oil crisis. So how does oil and what's going on in the oil markets complicate this entire scenario? Well, so this is where politics comes back in and a sense of OPEC being made redundant.

I'll try and make this a short story. OPEC was effectively made redundant as a result of fracking in the United States. And I'm actually a huge advocate for fracking in the sense that if we take this out long enough, we are going to have energy independence, which I think is good for national security, to not be dependent on the kindness of any other country in order to have access to energy. But as a result, over the years, as the efficiencies of fracking have built up, we have been able to extract a barrel of oil out of the ground for less and less money. And that has that has been cataclysmic for oil exporting nations for OPEC, for Russia.

And they have used the crisis of COVID-19 as an opportunity. Don't let a good crisis go to, you know, don't let a crisis go to waste. but they've used this as an opportunity to start an oil war and flood the markets with supply and slam the price of oil down where it sits south of $20 a barrel, which is putting U.S. oil companies, oil and gas producers out of business. Now, I would say that the inefficiencies in the energy patch in the United States, the consolidation of the industry, the insolvencies. These are things that we've been dealing with in 2018 and 2019, both because private equity

swarmed into the industry, and the consolidation was needed. And this oil crisis, this collapse in energy prices, has expedited what had already started. But the upshot, unfortunately, especially for states such as Texas, is that it is making an unemployment crisis that much worse because you're not just putting people in travel and tourism and restaurants on the unemployment, unemployment roles, but you're also having companies who are shutting down their oil wells and going bankrupt and putting entire workforces on the unemployment roles as well. This is one of the, I think, most, well, it's discussed, but it's interesting to see how

widely perspectives vary in some ways on how people interpret the economic damage from, from coronavirus, from these shutdowns. And there's kind of the optimist point of view, which is like, you know, everyone comes back as soon as we turn the lights back, that's kind of lights back on vision of the world where somehow all of a sudden it just works again. And, you know, it's great and we're, you know, everyone's going back to the movies and go to restaurants again. There's this other point of view that that thinks that there's starting to see the second order effects in different industries that are going to be structurally affected. And I think kind of part of what you're speaking to with oil is that it coincides with that in a way that

there's even greater economic harm happening at the same time than just these kind of short-term impacts. And so I guess this gets me to another kind of theme that I wanted to ask you about, which is how you reconcile market confidence versus consumer confidence, right? And the, you know, kind of the market's trying to rally for some sort of V-shaped recovery while consumers are just trying to figure out, you know, what happens next and how they're going to live, but also potentially have some seriously shifted behaviors even when things, you know, quote unquote, get better. So I think that there is, and I don't think that there's anything necessarily wrong with having

enthusiasm and having optimism that we're going to be able to have a better tomorrow. but I would say that it's a bit naive. The confidence that you're seeing in the stock market is purely a reflection of investors saying that the Fed has our back, we can take undue risks, and there will be no consequences. That is what you're seeing in the stock market, because it's certainly not predicated in any way, shape, or form on earnings, which have completely collapsed. So there's nothing fundamental going on in the financial markets in the United States at the moment. As far as confidence in tomorrow and how we as individuals behave, I think that there's going to be an extensive healing process involved. And it has more to do with simply being fearful for your health and the health of your loved ones

and your family and your friends, that's powerful. And it's going to be with us for some time. I can't tell you when I personally will be attending the next sporting event or concert. I would certainly never attend a political rally or stand in line at Disney. And I'm certain that I'm not alone in the way that people are going to be viewing certain types of activities that, by the way, travel and tourism prior to COVID employed one in every 10 employees on place. planet Earth. One in 10 global employees were in travel and tourism. The sheer amount of wealth that's been created by central banks in recent years has made it to where the haves versus the

have-nots, if you will, but the haves have been able to travel and enjoy life more than they ever have. And that has resulted in a huge surge in employment in this industry that has been so affected by COVID. But on a deeper level, beyond the health, issue is the fact that 38% of Americans who made $100,000 or more had not one penny of savings set aside. And it's not just a matter of those who make the leave. Like those who make 50,000 and under and who are collecting unemployment are going to make more money in the second quarter of 2020 than they would have had they kept their jobs. So this is not a statement about those who make the least, and it's not a statement about those who make the most, who will always be fine.

But those in the middle who were not prepared for this, they're going to view money differently going forward. They're going to view consumption differently going forward. They're going to say, you know, in a Scarlett O'Hara way, never again. Never again will my family suffer and have to eat ramen every night because I had to have a $70,000 SUV with a payment that I could barely afford. And I simply believe that there's going to be at least for some slice of the U.S. households return to an era of frugality that's not been seen since the aftermath of the Great Depression that is going to have a lasting impact on how quickly the economy can recover and whether or not it's going to be a matter of quarters or years. So I actually share that sense. But one thing that's a countervailing force, which I think gets to these

larger structural issues, is the disincentive to save, right, based on interest rates being so low, based on everyone effectively being forced into equities markets, right, and higher risk to get yield. And I worry, I guess, about the long-term implications of just the structural disincentives to save versus, you know, invest in markets? Yes. And this is where I get the most pushback on Twitter. By far. It is when I suggest that Americans are not going to borrow as they once did.

And the cynics out there or the cheerleaders out there say that I'm making a statement that is somehow un-American. It's actually quite the opposite. Our founding fathers did believe in the virtuosity of saving today to invest in tomorrow. But it's going to be interesting to see where the dust settles on this and whether or not we truly go back as a country, as a culture, to our profligate ways of living beyond our means, not by necessity. Again, I'm not speaking about those who earn the least and absolutely have to use. credit card debt in order to get them from one paycheck to another. I'm not speaking to that cohort. I'm speaking to those who live beyond their means as a matter of choice

and felt that it was something that they would always be able to do because it was incentivized and it was asked of them by their leaders. They were told by Ben Bernanke. They were told by Bill Dudley when he ran the New York Fed, go take out a home equity loan, go do a cash out refinancing. It helps to support the economy. We're a consumption-driven economy. It will be interesting to see if there's backlash because there's been serious harm done to many families who did not have a rainy day fund. Yeah, I think it's interesting. I think a lot about narratives. And one of them that I'm most

interested to watch, which dovetails exactly with what you're describing, is whether we're going to have this national conversation about what it looks like to build a resilience economy, right? And from an individual level on down. And even the words that we use around saving are kind of forced into this fuddy-duddy old world kind of way of looking at things. And maybe part of it is needing these exogenous factors to shift mindsets. And part of it is rebranding and thinking about savings not as a thing you have to do

to deny pleasure, but as something which creates optionality and opportunity in the future. But it's hard, it's hard to imagine, I think, from where I said at least that that takes hold nationally as a whole and kind of totally shift sentiment. But I do think that you carve out some percentage of people who start to think like that and you do build a stronger economy and a stronger society, even if it's just on the margins, right? So I guess, you know, my last question for you, which is potentially a set of questions, is what are the signals that you're watching now going forward? Where's your head at as you kind of think about what comes next?

Are there particular second order effects that are important to watch? Are there certain market signals that you think are more relevant than others? What are you paying attention to? So I think what I'll be paying the closest attention to is whether, really, and this is not, it's not a cop-out answer. I don't want you to think that it is. but I'm going to be paying the closest attention to what happens with this virus. There is a second wave of layoffs that is building among corporations,

business people, people who work in back offices. If we don't have sufficient demand, then there is going to be something of a crisis because we will have a second round of layoffs that are indirectly attached to the crisis. I've written just this last week about commercial real estate and what's going to happen to this sector if rents continue on the part of tenants, strip centers, malls, retail, lodging hotels, what's going to happen to the commercial real estate sector, which is a massive contributor to the U.S. economy, if there's a protracted slowdown in it, is there going to be a round of layoffs, among construction workers who are some of the highest paid, skilled workers in the economy, akin to oil field workers who don't have educations, but they make a good living in construction. So I'm looking at the second and third derivatives, potentially, of the economy being in recession for longer than what anybody's planning for, and that really is going to dictate how I view

the ability of the economy to pull out of the contraction that we're in, and it's going to affect how consumers view the world as well, how long this recession lasts. Yeah, I couldn't agree more. And, you know, it's someone I think a lot about industries like the advertising industry where you haven't seen mass layoffs at agencies yet, but as soon as, you know, these fees stay down. And, I mean, basically, you throw a dart at a dart board of industries and you can start to see where these second order effects hit.

But listen, I really appreciate your insight. And maybe I'll just ask you one last thing. What's a cause for optimism? and what's something that's causing or giving you optimism even in these kind of turbulent times? Well, I'll tell you, I've been part of a fundraiser for personal protective equipment. And the hashtag for this is hashtag our finest hour. I've been working with Ben Hunt at Epsilon Theory for front-home. And I'm gratified as an American to see the outpouring of charity to,

those who are in need. And, you know, I gave money to a charity in Belarus that where special needs children's with weak immune systems in an orphanage have been taken down by COVID. But there are things that I think are gratifying. If you look back at the Great Depression, there were some wonderful outgrowths economically because of what people did out of the kindness of their hearts and because they were good human beings. And it is, it's gratifying to see the good in people come out in this very difficult time. And, and I think that that is something that will also make a lasting impact on our hearts is that, you know, it shouldn't, we shouldn't be as me-centric as we are. We should be more aware of everybody in our society and what we can do

to help, not just in times of crisis. So in a way, this is our darkest hour, but it is also our finest hour. And it's wonderful to be able to see day after day examples of that. Couldn't agree more. And it's a perfect note to end this conversation on. Danielle, thank you so much for hanging out and sharing your thoughts with us today. I know everyone who's listening appreciates it. I think one of the most interesting parts of that conversation to me is the idea that there is the potential for a permanent shift in consumer behavior, a permanent reconsideration of trading short-term consumption for long-term resilience in the form of savings. I think that it is a challenge that those savings are de-incentivized by the market we live in, the society that we live in. It's both

brand and structure tells us to consume or to invest in risky assets rather than actually preserve optionality in the form of safe savings for the future, but that will potentially see some amount of shift in this crisis. We've discussed before on this show the idea of resilience and the shift to a resilience economy, and it's a theme that I just want to keep hammering on because I think that it takes manifesting to actually make it real. It takes investment. It takes narrative self-fulfilling prophecy to make it real. So my hope is that we will start to come out of this with a broader sense of what a resilience economy might look like, even if it's just in the context of our individual lives or individual careers. But that's it for today. Tomorrow we have a very special,

very cool episode, the beginning of a micro series on the future of money, money reimagined. Look out for that tomorrow at the normal time. And until then, guys, be safe and take care of each other. Peace. Welcome to The Breakdown, Money Reimagined, a special podcast micro series in the run-up to consensus distributed, a free-to-attendant virtual event from May 11th through the 15th hosted by CoinDes. This series is about the battle for the future of money in the post-COVID-19 world, and it's a hell of a story. Here's your host, NLW. Welcome back to the breakdown. In a little over a week, CoinDesk will premiere Consensus Distributed. When it became clear that COVID-19 lockdowns would force Consensus in New York Blockchain Week to cancel,

the team at CoinDest got to work designing a new type of virtual event. While many things had to change to make the new event work, one thing that was consistent was a key underlying theme, exploring the battle for the future of money. So today, I'm kicking off a special micro-series called Money Reimagined. It is launched in conjunction with Consensus Distributed. Money Reimagined is a newsletter and weekly column from Michael Casey, who is CoinDesk's chief content officer. In The Breakdown's Money Reimagined podcast, we take the themes explored in that newsletter and bring them to a new type of narrative format. In this series, we'll introduce and reintroduce

the key players in the battle for the future of money, from the incumbent U.S. dollar to the aspirational Chinese decept, to the insurgent Bitcoin. And all of this in the context of a post-COVID. 19 world. Today's episode focuses on the dollar and asks how on the one hand the dollar can appear stronger than ever before while at the same time having more risk for catastrophic and systematic failure than at potentially any other point in its time. For regular listeners of the breakdown, you'll know that this is a topic that I think a lot about. But to get to that question, we have to do a little bit of frame setting first. Even before COVID-19, 2020, was poised to be a big year in the battle for the future of money. So in 2019, we had seen first

the Fed intervening again in markets, particularly in the context of overnight commercial lending markets. And this suggested to many that there were perhaps more cracks in the system than it appeared on the surface. We also saw the launch of Libra. This is Facebook's would-be pan-global digital currency backed by a basket of national currencies, but a force unto itself. We saw, in the wake of Libra, an extremely aggressive push from China to front-run both Libra, but also the rest of the world when it comes to central bank digital currencies. We saw the emergence of Defi as a meaningful tent pole in the crypto space in a way providing previews of what an entirely programmable financial system might look like. Finally, we saw the continued success of Bitcoin, consolidating

around this narrative of digital gold. When the coronavirus hit, its impact wasn't to change these players per se, but to fundamentally alter the context in which their battle for the future of money would take place. Towards the end of January, the U.S. public started to get inklings of a new virus that was spreading quickly in China. On January 23rd, China issued a lockdown order for Wuhan in Hubei province, which was the center of the outbreak. In the coming weeks, that lockdown was extended to more cities and provinces. Eventually, it came to apply to something like 200 million people or more. Some, and by some, I mean a very small number of people in the U.S., were taking the virus seriously from the

beginning. Eric Townsend, who is the host of the Macro Voices podcast, timestamped a Twitter thread on February 8th called When It Was Clear. He said, the purpose of this thread is to document and timestamp when it first became clear that coronavirus was likely to lead to a global pandemic. The purpose is to give something to cite when people later claim, but there was no way of knowing. Pretty prescient, if you ask me. On March 3rd, a few weeks after that thread,

but still a few weeks before major lockdowns in the U.S. began, Matthew Graham, who is a blockchain-based investor in China, joined the breakdown to describe what it was like actually living through that lockdown. I mean, we both work in the craziest industry, right? is blockchain, is crypto. And being in China, as an international person, it is also very exciting, shall we say. Keeping the fact that I work in China crypto in mind,

I have to tell you this is the craziest thing I've ever seen in my life. Yeah. Corona. I mean, it's just nuts. It really has been like out of a movie. As backdrop, the stories that filter out into the West, If anything, a little under-exaggerated. And I think it's important to understand. This is nuts.

There were many voices in the crypto space, perhaps in part because of our direct connection with people like Matthew, who were ahead of the curve and actually calling out this crisis for what it might become. But if we were and the crypto industry was comparatively ahead of the curve when it came to coronavirus, traditional U.S. markets certainly were not. On February 12th, as again hundreds of millions of people in the supply chain capital of the world remains stuck indoors and unable to work, the Dow Jones Industrial Average minted new all-time highs. A week later, on February 19th, the S&P followed with another all-time high. It wouldn't be until later, on Monday, February 24th, that the markets actually showed any reaction

at all. On that day, I talked to Caitlin Long, a Wall Street veteran and co-founder of the new Crypto Bank of Vanti. She brought up a third. theme, the propping up of markets by central banks that has followed throughout the crisis. I tweeted out about this in, I think, the third week of January when I started watching this because I come from a life insurance background. I've worked on catastrophe bonds related to pandemics earlier in my career. So when this started coming out, I was watching it a lot sooner, probably than it hit the mainstream headlines. And I was pretty concerned about this. This has been something actuaries have been concerned about for a long time. We're overdue for a

pandemic. And again, these extraneous events, unforeseen black swan type of events, we could handle them in the economies if we had strong balance sheets. But when you combine the fact that the balance sheets are weakened by being towards the end of, likely end of a multi-decade credit bubble on top of something like this, it's a dangerous brew. We're starting to see the traditional financial markets start to recognize the potential here for that. Well, and it's been delayed. And what has delayed is that the central banks around the world have, especially in China, have thrown enormous liquidity at the situation, which until arguably today, it really wasn't deemed to be something that was a real threat from the financial market perspective.

And so the injection of more of the same drug in terms of banking sector liquidity coming out of the central bank in China certainly put a band-aid over it for a while. But a band-aid doesn't stop a hemorrhage. And the decoupling only lasts as long as the drug injection from the central banks actually still has some oomph, so to speak. and I think we're starting to see that this is starting to overwhelm the ability of central banks to counter this. You cannot solve a pandemic if that's indeed what we're facing with liquidity. It's just not going to work. Now, as Caitlin mentioned, Wall Street did start to wrap its head around the implications of coronavirus and as it did, the drop extended. On Friday, February 28th, crypto trader Scott Melker put this

market movement in historic terms? I think that the virus is one issue. The supply chain from China is the bigger issue. But I think the biggest issue and the real elephant in the room is that I already felt, and many did, that the market itself was inflated and was extremely overvalued. And that that's the case for many of these companies that have risen 50% in the last year gone skyrocketing. So this drop, I don't think it's surprising really anyone.

but I think the aggressiveness and velocity of the drop is somewhat astounding. I mean, if you're not paying attention, this is a historic drop. The SMP, I believe, was hitting an all-time high 10 days ago. And as of today, it's officially in correction at a 10% drop from that all-time high in 10 sessions. It's not like the crypto market. This thing's only trading, you know, I mean, obviously there's after-hours trading, but this is not in a 24-7 market. So that's just during business hours it managed to do that.

And that's something that we haven't seen since literally World War II. On March 3, the Fed implemented an emergency rate cut of 50 basis points. Ikega asset management's Travis Kling pointed out in a tweet that the last time this happened was October 29, 2008, which was, for those keeping track, two days before Satoshi had released the Bitcoin white paper. Yet this time around, the markets didn't react positively. If anything, the dramatic action wasn't reassuring, but in a way, served to burst the market's last hope that COVID-19 wouldn't be all that bad. Delphi Digital's Kevin Kelly explains.

What you're seeing, too, is expectations for, you know, a lot more accommodative and easier monetary policy, right? What I mean by that is you saw the Federal Reserve with an emergency rate cut to their benchmark rate by about 50 basis points last week. And initially, you know, you saw a bit of a reaction in stocks, a very small kind of bounce within the first couple of minutes. And then you really saw the market continue to fall, right? And I think what last week, rate cut did, if anything, was confirmed to, you know, equity investors and market participants in general what they had had had had had, didn't want to admit to themselves. And that was that this was actually a real risk and something that, you know, the Federal Reserve was was now watching and monitoring as a threat to, you know,

economic activity. And up until that point, again, you know, every day we get new information and every day the severity of this becomes more and more clear to people. But again, it's one of those things where a lot of people have had, obviously, this has been an incredible bull run over the last, you know, 10, 11 years in the U.S. equity market. And so people, you know, didn't necessarily probably want to believe what the severity of this potential impact could be. Okay. So let's take a breath here before we continue this story. The impact of COVID-19 crisis is coming home to roost. Normal Fed action isn't moving the needle. So what happens next? To understand that, we kind of have to go back to what markets mean in the broader political context. That's where we turn after the

break. First, though, something new, a message from our sponsors. I'm excited to welcome a number of excellent new sponsors who are going to help us take the breakdown to the next level. for this podcast and this message come from ArisX. With ArisX, you can trade spot and regulated futures on cryptocurrencies through a licensed, U.S.-based exchange. ArisX believes in fair access for all. Sign up today to take advantage of zero fees and learn more at ArisX.com slash consensus. This episode is also sponsored by the Stellar Foundation.

The Stellar Network connects your business to the global financial infrastructure, whether you're looking to power of payments application, or issue digital assets like stable coins or digital dollars. Stellar is easy to learn and fast implement. Start your journey today at stellar.org slash coin desk. Ben Hunt, who is the founder of the very popular newsletter and market consultancy, Epsilon Theory, explains in this clip how the markets became a political scorecard. The Trump administration, Donald Trump himself, has not been shy about saying those exact words, that the stock market is my scorecard.

The stock market is my scorecard. And, you know, I think to a large extent, every president has known that. It's just that, you know, this particular president, he tends to say the quiet part out loud doesn't even make a pretense that it would be anything but that, the stock market being the scorecard. I think that's absolutely been, again, the quiet part, the unspoken part, really since the great financial crisis of two. 2008, and it's been reflected not just in the stock market, right, but it's been reflected in every monetary and fiscal policy that we've been, you know, subjected to since 2008. And I want to be clear, I think that the, in March of 2009, when the Federal Reserve started, its policies of extraordinary support by buying stuff and by using their words intentionally to

try to influence markets. I think what they did in March 2009 was exactly the right thing to do. I mean, that's why we have central banks. We have them as that emergency liquidity provider of last resort. I like to use the example of, you know, pulp fiction where John Travolta gets that syringe of adrenaline and puts it, you know, right into the heart of the, you know, Odeed Uma Thurman. That's what the Fed did in March of 2009, and that's what Central Banks are supposed to do. What's happened since then, however, is what always happens, that these emergency government actions become permanent government policy.

because it supports the power and the aggrandizement of these government organizations. Now, Ben is not the only one who thinks that the scorecard and political utility function of the markets has become more significant than its perhaps pricing future dividends function. Macro-researcher Luke Gromond locates the genesis of the stock market as a political utility even earlier, arguing that decisions made in the 90s about how executive compensation was taxed, created a spiral where the U.S. relied on asset prices going up to grow GDP. So if you understand that consumption's two-thirds of GDP and consumption can't rise unless stocks are rising, you sort of arrive at this place where it's a political utility.

The policymakers have as policy, they have to have as policy, again, again, because of decisions Clinton made 30 years ago, they have to get stocks up no matter what. Because the U.S. government can't fund itself without these asset prices rising, the U.S. GDP cannot rise without asset prices rising. We're likely going to be continually stuck in sort of this stop, start of asset prices down. Fed comes in with big amount of money, and then asset prices go back up, and then Fed tries to pull back. and we're going to wash, rinse, repeat this with both shorter periods of time between the time of asset prices selling and the Fed responding, and with ever-increasing amounts of Fed responses until we get basically no response time between sell-offs and the Fed's balance sheet getting bigger and bigger and bigger. And this, again, is I'm not moralizing on whether it's right or wrong.

I'm just saying that if we wanted to fix it, we would need an 83 DeLorean with a flux capacitor, and we would, and we'd have to go back in time, you know, take that baby to 88 miles an hour. And these are baked in the cake. And because we've made the decisions, particularly post-95 with Clinton, they have to get stocks up. And so we go from the Fed is targeting the economy to move the stock market. We have fully moved to the Fed is targeting the stock market to move the economy. Now, one final note before we bring it back to the Fed's specific response to COVID-19. Last fall in an interview with CoinDesk, Travis Kling argued that the types of Fed intervention

in the markets were likely to get increasingly, well, weird, as the normal intervention stopped working. But there are problems starting to show up here. The global economic data is undoubtedly turning down right now, and it's turning down in concert. It's all turning down at the same time. it's all turned down at the same time because the whole world is now on this central bank trade and on this cheap money trade. But it's apparent that central banks are going to cut interest rates and juice QE into infinity

to either prevent a recession or prevent the soft or kind of have the recession be as soft as possible. And those forms of quantitative easing are going to be increasingly more exotic because in the same way that, you know, if you do heroin long enough, then you got to keep taking. a bigger and bigger shot of heroin, you need increasingly more exotic forms of QE to get a similar type of effect. Because if you're in Europe and you cut interest rates from negative 40 bibs to negative 50 bibs, it just doesn't make that big of a difference. Increasingly exotic forms of QE, that's a great place to jump back into what happened next. By mid-March, COVID-19 was no longer deniable. On a fateful Wednesday, March 11th, Tom and Rita Hanks announced that they

had contracted the disease, the NBA canceled the rest of its season, and U.S. President Donald Trump finally stopped calling this thing the flu. Over the next weeks, the first shelter in place and lockdown orders would come. And with them came a distinctly new economic phase of the crisis. In this phase, Travis' notion of increasingly exotic forms of QE was pretty quickly validated. The Fed not only ratcheted up its action, but it expanded dramatically what it had a mandate to buy. Delphi's Kevin Kelly again explains the new remit. So I think this is a very unique economic crisis that we're facing right now, and I preface that because this mandated kind of global shutdown of business is large and small, is what really

has pushed policymakers into kind of uncharted territory. And so, you know, with this massive exogenous shock to revenue and cash flow. They're really trying to just pump as much money in the system and basically create this monetary and fiscal bridge to get the global economy across this massive recession crevice, right? And so some of the intervention we've seen from the Fed is basically just dusting off the old playbook from 2008, 2009. You have large scale, U.S. Treasury and agency MBS purchases, cutting of benchmark interest rates, like the Fed funds rate. But I think one of the big key differences, first off, is just the sheer size and scale. scale of these programs.

So the Fed has added almost $2.5 trillion to its balance sheet in a matter of just eight weeks. And if you go back to the period between September and December of 2008 when the Fed really kind of first started to launch QE and started to ramp up its asset purchases, that's, we're already double that amount, right? That was about 1.1, 1.2 trillion. So the sheer size and scale of these programs is one of the first notable differences. The other is how far out this mandated or how far they've expanded their mandates. in terms of what it is they can purchase.

So you've not only had these Main Street lending programs and on the fiscal side, you know, we obviously had that initial $2 trillion under the CARES Act, which funds things like the payroll protection program, which is trying to, again, keep small businesses, really just trying to keep small businesses afloat. But on the Fed side of things, you know, they're getting into municipal debt. They've expanded their mandate into buying, you know, investment grade and now speculative greater or junk bonds, high-yield debt. And they're unlikely, I think, to go so far as to buy equity ETF.

But who knows? I mean, at this point, you know, a lot of people, if you said that they were going to be buying high-yield debt, you know, even three months ago would have called you crazy. I think it's important to note, though, there is some kind of misconception or confusion around what it is that the Fed's actually mandated to do. And so the reason why you've seen kind of broad-based, you know, high-yield ETS, for example, coming to the picture is because in the aftermath of 2008, actually, Dodd-Frank prevents the Fed from bailing out any single failing company, right, a company that's going to fail and basically

bailing them out individually. And so the Fed has to create these programs that gives relief for a broad kind of class of borrow, it's not necessarily just one individually. But again, I mean, the size and scale at which they've really ramped up asset purchases, and this isn't just a U.S. story. If you look across the pond, the ECB is committed over, you know, 750 billion euros. It's over $800 billion. And the kind of key here for both the ECB and the Fed and really kind of major central banks globally

is this continued rhetoric that there is no real limit to what they can do, right? And so unlimited QE isn't necessarily unlimited QE in that, you know, if they printed $20 trillion tomorrow, that would certainly have an effect on the markets. But there is nothing that really restrains them or puts a cap on the amount of spending that they can have. And so their mandate is going to be very flexible going forward. For many, this expansion of Fed involvement was a fundamental break in what was supposed to be a free market.

Morgan Creep Capital founder Mark Yusko here describes it in an interview with the breakdown as cronyism. And the idea that we're going to socialize that risk and bail everybody out, I think is insane because it breaks. Then what you do is you break down the entire financial system that we all believe in, which is if you take intelligent risk, you get compensated for those risks. when you take unintelligent risk or you do unintelligent things, you get penalized. But if you socialize risk and make everybody pay back those that lost money, as if losing money is a bad thing,

I just think it's a very slippery slope. And I think we've been on that slippery slope for a while in that, you know, we've kept the stock market elevated by doing, I think, ill-advised things with interest rates. I think, you know, cutting interest rates as quickly as we did back in 2015, 16, 17 was ill-advised. I think we should have been, you know, raising rates and people's, oh, but we would have caused a recession. What's wrong with recessions? Recessions are actually good. They cleanse the system. We get rid of the weak companies.

That's how capitalism is supposed to work, right? We're supposed to allow the weak to go away. We're supposed to encourage the strong to survive. We're supposed to give the tools for all companies to compete and build markets. Instead, what we've got is cronyism today, whereas if you're well connected to the president or the administration, you're going to get a handout and you're going to continue to exist. And the stat I keep going to is zombie companies. 38% of the S&P 1500s, so the biggest 1,500 companies, 38% can't service their debt with their current EBITDA. Forget paying back their debt. They could never do that. But they can't even service their debt.

So interest rates have to stay low. They have to be zero. And they're going to be zero for a long time. Now, it's clear that the folks at Morgan Creek have no problem speaking their mind because in this clip, Morgan Creek, digital partner, Anthony Pompliano, puts government's role in markets in even more stark terms. The first rule of businesses don't run out of money. And if you're running out of money, you've got to figure out how not to do that. And so you have three options. You can either increase your revenue somehow. You can go to the debt markets or you can go to the equity markets. What corporations are doing right now is they're actually going to the debt and equity markets, but they're not going to find public or private investors. What they're doing is they're running to the

government. And the reason is because they think the government is the idiot in the room. And what I mean by that is they believe that the U.S. government will give them a better deal, a more attractive financial deal than they could get from the same public or private investors. And so what happens is they don't need to be resilient. To your point about the incentive, the incentive is not to be resilient. The incentive is who can get to the government and get them to give you the money. Right. That's how you survive. Whatever one thinks of the necessity of these bailouts, they're quickly a rises a question. How is the government going to pay for this? With the total stimulus package reaching well into the trillions, a new meme was born. Money printer go burr.

Not in generations has Wall Street absorbed the number of body blows it took today. The world has gone mad and the system is broken. The American financial system is rocked to its Foundation as top Wall Street institutions topple under a mountain of death. Bailed out by the taxpayers. It's pretty clear they cannot be trouble. Is that you're trying to understand this as an economic story. Once you look at it as a crime story, you'll get it. After the break, what money printer go burr means for the almighty US dollar?

The Fed is losing control once again. Support for this podcast and this message come from Grayscale Digital Large Cap Fund. In times like these, diversification is key. Consider Grayscale Digital Large Cap Fund, ticker symbol GDLC. It's the only publicly traded investment product that offers diversified exposure to large-cap digital currencies, all from your brokerage account. For more information, visit grayscale.co slash CoinDesk. That's G-R-A-Y-scale.co slash CoinDisk.

So finally, we come then to the battle for the future of money and the main contender we're discussing today. The dollar. The U.S. dollar is locked between two narratives that seem at first extremely contradictory. On the one hand is the narrative that is encapsulated by the Money Printer Go Burmeme. It's the idea that when so much money can be created seemingly out of thin air, to backstop seemingly everyone and everything in the economy, what meaning does money have at all? Daily Dirtnap publisher and market commentator Jared Dillian wrote a piece for Bloomberg called Why Money is Losing Its Meaning and described this emerging loss of confidence in the dollar and even the Fiat system as a whole.

PBS did an interview with Paul Volcker like back in the 80s. And Paul Volker basically said that one of the government's primary jobs is to instill confidence in money. And that's one of the things that the Federal Reserve is supposed to do. And I think the thing that motivated that piece was we are at the early stages of a loss in confidence in dollars. We're at the very early stages of it. And that's what motivated that piece. Now, this perspective is not limited to strictly speaking market professionals. In a recent Twitter rant, Barstool Sports founder Dave Portnoy likened the U.S. dollar to Shrewbucks from the office.

Oh, Fed this, fed that. Let me tell you something about the Fed. they're shrewpucks. We're dealing with shrewpucks at this point. Let me ask you this. If governments can just print unlimited money like shrewbucks, why doesn't every government do it? Why does every government, guess what? Inflation, your buck, your dollar, your shrewbuck, literally becomes a shrewbuck. You can't just be like, oh, here's a contrillion, contrarian, contrarian, if you flood the market of those trillions, the quadrillions mean nothing. That's basic economics. The logical endgame of this narrative has both an economic and a psychological dimension.

The economic dimension is the idea of inflation, that at some point the market switches from a deflationary environment to an inflationary environment, and people are going to want to rush out of the dollars that they're holding, which are made less valuable by that rampant printing. The psychological dimension is what Dillian was getting at and what we see in Portnoy's rant, which is a broader loss of faith in the fiat currency system. the idea of a system that is backed by the, quote, full faith and credit of the U.S. government. Okay, so money printer go burr, the potential of inflation, the eventual loss of faith in the fiat system as a whole. That's narrative one.

Narrative two is rooted in an observation of what's actually happening around the world. The dollar is right now, and it's not close, the most significant and important store of value asset in the world. Despite these trillions of dollars of stimulus and money printing, this crisis has only strengthened the dollar relative to other currencies. To some, it isn't the inflation potential of the dollar, but the current global strength of the dollar that is the true economic wrecking ball. On April 25th, Raoul Paul, the founder and CEO of Global MacroInvestor and the Real Vision group wrote, I hear the narratives that the Fed is printing money, burr, and that is all going to cause a dollar collapse. I worry that this narrative is very wrong. My strongly held view is that the dollar

is the pinnacle of all the macro issues we face. The Fed has undertaken unprecedented printing, as we know, and the ballot sheet is growing exponentially. But it is not that simple. We live in a relative world, where the dollar standard is the very cause of many of the issues we now face. There are simply not enough dollars available in the world to service all the debts, and thus a debt deflation remains the big risk. You see, the biggest problem the world faces is the dollar. We were in a vicious doom loop where slowing growth causes the dollar to rise, which causes slower growth, which causes the dollar to rise, as all borrowers play musical chairs to get access to the dollar to service debts. So how then are we supposed to make sense of these two

seemingly contradictory narratives? I asked CoinDesk's chief content officer Michael Casey this exact question. And to him, the real issue had to do with the world's debt becoming dollarized. The bigger question, though, is this dependence on the dollar, is the fact that the whole world needs it, right? Once we move into this moment, it speaks to the, you know, Raoul's concern about debt levels, where so many of the world's debts have been dollarized. If you look at charts showing security issuance in dollars. They just continued to rise over the last 15 years. That means that, you know, there's a desperate scramble to get hold of the currency that you need to pay back your debts. And it happens at every level of society and it feeds its way into the banking system.

So the fact that the world had created this dependency on the most liquid currency that was there and that in itself was also a function of the fact that so much of our trade is denominated in dollars meant that now we're in the situation where everybody is scrambling to get it and the Fed is in a situation where it has no choice because it doesn't want that edifice to fall to just keep feeding that demand which is why you have swap lines that are open indefinitely with central banks right now and the Fed essentially providing repo facilities to foreign central banks in the United States. So that all is there because we're utterly dependent on this one thing. And that's a dangerous situation to be in because at some point it could

all turn upside down. Now, podcaster and market analyst Preston Pish has a slightly different take, which is effectively that the way that we think about inflation is de minimis, that the consumer price index measure of inflation is not the right way or not a complete way to look at it. And we have to think about asset prices. And we have to think about how the growth of asset prices as disconnected from the real underlying economy creates structural issues. You have a huge network effect with the dollar. It's very dominant because so much of the debt is denominated in dollars or goes back to dollars. So there's this massive network effect for dollars. And there's a demand for dollars. So as there's impairment on balance sheets,

is there's impairment due to derivatives blowing up like we just saw in the oil market, there's a very high demand for more and more dollars. Now, as those dollars polarize themselves into very wealthy individuals' hands, which is what you see at the end of these types of events, let's just take Jeff Bezos, for example, owns Amazon. Amazon continues to take massive market share. Even through the coronavirus situation where it was really bad and it might even get worse as we move forward, money is still flowing heavily into Amazon and into the few equity holders that have it,

relatively speaking, when you look at a person like Jeff Bezos. So as these high net worth individuals collect this continuing stream of fees, dollar's they continue to employ that money into more investments they plow it into other stocks they plow it into bonds and they bid the prices of stocks and bonds higher and higher and higher what that does whenever this money is consolidating into those hands of the few is it's removing that velocity of money that currency that can be used by all the other market participants and and let's remember they're the market participants that need the money most because they're the ones that are that are hurting the most. So they need that flow of of cash in the system. It's almost like oil

in an engine as it works. And what's fascinating about this is as the U.S. continues to add more and more of that fiat of that dollar into the system, the demand for it becomes even stronger and stronger and stronger. So what I argue is both of the things that you're talking about are true, you're not seeing the inflation necessarily if you're using a CPI bucket. But if for whatever reason you started incorporating some of the biggest capitalized companies into that basket, or you started incorporating fixed income bonds into that basket, all of a sudden you start to see this printing that is happening like crazy and it starts materializing itself. So by traditional measures, your CPI index, your inflation indexes that you're using, you're not going

to see it. Right. So that's where you're, I think the money printer go burr type meme is confusing a lot of people because they're looking at a CPI bucket and you're never going to see it there. Now, a final perspective on this that I want to share has to do with the global context of the dollar and the argument that the comparative lack of alternatives is the key factor. I had a few weeks ago political strategist and author of disunited nations, Peter Zeon, on the podcast, and he discussed exactly this in the context of the strength of the dollar. Okay, so currencies. The United States is the noun, say, $2.2 trillion stimulus, fiscal and recovery program, a combination of bailouts and checks to people, loans to business,

that sort of thing. Every dime of which is fueled by deficit spending. So we're talking 10% of GDP as a supplementary program, which is entirely based upon money that we don't have in the bank. This is on top of a deficit for the Trump administration for the current fiscal year that is like the third largest in history. So just a huge amount of quantitative easing, debasement of the currency, printing of currency, whatever your preferred phrase for that concept is. And the dollar has gone up. the degree to which the United States is the sole, sole store of value in the global system was already pretty extreme in the last two years and it's only gone up during the crisis. Because there's nothing that the Europeans can do in terms of stimulus spending without actually raising debt.

Even if they decide to do something like QE like the United States has done, they didn't have to have the debate, which last time took years, over who gets how much of whatever the stimulus spending happens, be, the Europeans are having a hard time raising the capital that is necessary to deal with this crisis, whereas the U.S. can just flip a switch, and that's what we've done. Investors look at that and they're wondering, okay, which of these systems is still going to be around in a few years? And they're all flooding their money into the United States despite all the deficit spending. As for other countries around the world, the Japanese aren't interested. The Chinese have capital controls and the Brits are an economic structure that's about one-sixth the size of the United

States. And that's everybody. So we've got a centralization of financial holdings in a singular economy that is no longer interested in holding up the ceiling of the world. So love it or hate it, the U.S. dollar is where it's at. And in the last few days, since the stimulus spending was finalized, it's even versus gold, which, you know, if there is any environment where gold should be doing well, it's right now. So it's it. It's the U.S. dollar or nothing. All right, this strikes me as a good place to end this episode. As we look at the players in the battle for the future of money, the US dollar, as we can see, exists in this weird in-between

between, on the one hand, being the only currency the world demands, and on the other hand, having all of these risks associated with exactly that, made more profound by the unlimited money printing that is going on right now. So, on our next episode, we will start to shift our focus to, a group of contenders who, although different, all seek to carve out a new place in the established global monetary order. Thanks for listening to this special breakdown micro series of Money Reimagined. I will be back soon with the next episode. You've been listening to the breakdown, money reimagined, a special podcast micro series where we dig into some of the most important

conversations we'll be having at Consensus Distributed, a free-to-attend virtual event from May 11th through the 15th, hosted by CoinDesk. This episode is sponsored by Aris X, the Stellar Foundation, and Grayscale Digital Large Cap Fund. Our theme song is Money Pryor, a new track from DJ Scrillo, which is available as part of his newly released Sound Money album. This episode featured content from NLW, Matthew Graham, Caitlin Long, Scott Melker, Kevin Kelly, Ben Hunt, Luke Groman, Travis Kling, Mark Yusko, Anthony Pompliano, Jared Dillion, Dave Portnoy, Michael Casey, Preston Pish and Peter Zion. This episode was announced, scored, edited, and produced by Adam B. Levine and the rest of the team at CoinDest.

If you have any questions or comments, email podcast at CoinDest.com. And we'll be back on Friday, May 8th with episode two in our continuing story. Just waiting around the corner. Chancellor on brink of second bailout for...