The Great Simplification with Nate Hagens - Lyn Alden: "The Myth of Frictionless Finance"

Episode Date: March 13, 2024

On this episode, Nate is joined by investment strategist Lyn Alden to discuss how energy and technology have shaped our monetary system and current financial trends. While more people are becoming aware of energy's foundational role in our global systems, it is still widely overlooked, especially among those working in finance. In contrast, Lyn's biophysically rooted analysis of macroeconomic patterns expose the cyclical dysfunction of the world's economy. How has increasing energy availability and productivity offset the inflationary nature of fiat currencies - and what happens if this trend were to slow or reverse? What assumptions and biases have led most analysts to mis-read long term trends, leaving us with vulnerable economies? Is it possible to rejigger our systems and innovate more biophysically aligned tools to enable a smoother transition into a future with a lower energy throughput?    About Lyn Alden:   Lyn Alden is an independent analyst and founder of Lyn Alden Investment Strategy with a background in engineering management. Her work provides institutional-level research in plain English, so that both institutional investors and retail investors can benefit from it. Lyn also serves as an independent director on the board of Swan.com and as a general partner at the venture capital firm Ego Death Capital. She is the author of the 2023 best-selling book Broken Money about the past, present, and future of money through the lens of technology. Lyn has a bachelor's degree in electrical engineering and a master's degree in engineering management, with a focus on engineering economics, systems engineering, and financial modeling. She worked for over a decade as an electrical engineer at the Federal Aviation Administration's William J. Hughes Technical Center.   For Show Notes and More visit: thegreatsimplification.com/113-lyn-alden  To watch this video episode on Youtube → https://youtu.be/JTbZaSL1pHI

You're listening to The Great Simplification. I'm Nate Hagen's. On this show, we describe how energy, the economy, the environment, and human behavior all fit together and what it might mean for our future. By sharing insights from global thinkers, we hope to inform and inspire more humans to play emergent roles in the coming Great Simplification. I'd like to welcome Lynn Alden to the podcast. Lynn is an investor, an independent analyst, very popular on social media.

Like other guests I've highlighted in the past, Kyrl Sokoloff, Jeremy Grantham, Luke Groman, and others to come. Lynn looks at the world from an energy lens, and it's my view that just looking at money and technology the way that we did in the past neglects energy and ecosystems, which is why I only like to talk to financial people that understand energy. Lynn has a recent book she wrote called Broken Money about the past, present, and future of money through the lens of technology. This conversation was fast-moving, no nonsense about how energy, technology, and money integrate for the future of our financial and our economic system. and the way that that's reflected in current global events,

please welcome Lynn Alden. Hello, Lynn, welcome to the show. Happy to be here. It took us a while to get this schedule, but I'm happy to have the conversation. We have multiple mutual friends, but I've long followed your Twitter feed and your newsletter, and of all the bright financial analysts,

prognosticators out there, you're one of the few that has really integrated energy and how the biophysical balance sheet, as it were, relates and influences the financial situation of the world. And so I'm keen to get to your thoughts on some of that. Maybe we'll just start there. You've always been in finance. When did you start to realize that energy and its role in our productivity and supporting society in the future would be important to your story.

So I would say it largely came before that. So before I went into finance, I worked in electrical engineering. My background is in electrical engineering. And so I kind of have that strong physics background, the mathematical background. And so I kind of inherently think in terms of energy matter and the components there that are in finance, often abstracted away. It's kind of like assume infinite energy, here's this, you know, problem, or assume away these kind of real world frictions and what does the world look like, whereas, especially as kind of an engineer, I like to take those frictions back in and say, no, given these

constraints, it's a different analysis than what you see in kind of pure economics. And so I've always been interested in that kind of intersection between tech and finance. That's kind of where my background blends together. And so just that focus on while most analysts are looking in one direction, while they're all kind of focused on one thing, I try to use the skills or the background I have to kind of bring a couple of things together. For me, that's it's the technology of money. It's the importance of energy in the system rather than just what are equity markets doing,

what are bond markets doing, some of these more kind of surface level financial stuff, which, you know, the complication there, especially, there's so deep that you can go on those things. And that's where most financial people do. They'll focus deeply on market structure. They'll focus deeply on fund flows. You know, they'll pick their niche because there's so many deep niches you can go down. And it just so happens that my niche instead tends to be to take the broader components and pull them back into finance, go back to the energy, go back to the technology, and try to pull those things back in and find that intersection in finance.

I totally agree with that, and I agree with your assessment of the general financial industry. Is that changing at all? Are people starting to understand the ecology and energy, minerals, materials, are more important than they once thought, or is it still kind of a fringe group of people looking at it that way? I view that is still fairly fringe. I mean, you'll just kind of see it on graphs.

So say, hey, here's our expected copper consumption. Here's our expected copper production. There's a gap. And that's, you know, it's kind of like a footnote in a report or just kind of a highlight and people go back to, you know, whatever kind of 50 times earning stock that they're focused on. So the generally awareness of that tends to be more minimal, which I guess makes sense given the incentive structure because it's inherently rather short-term focused. And short-terms can even go out to say five.

years. It's still relatively, you know, there's, in the majority of the time, we're in a period where commodities are relatively abundant. And then there are decades, maybe two decades of commodity abundance, and then one decade of commodity scarcity in a Kappex cycle. And then another two decades of commodity abundance. That's kind of the pattern we've been on. And so as long as you're not in one of those decades, it tends to be forgotten. So, for example, in the 1970s, in the 1970s, in the 2000s, that was at the forefront. But in the 80s, the 90s, the 2010s, so far in the 2020s, at least somewhat, that's been less of the forefront. Obviously, certain recent events, energy disruptions for Europe and things like that have somewhat brought into the forefront. But I think that

until it's in a more sustained context, it's harder for people to internalize. It's very easy for people to say, well, that was a one-time thing. That was transitory. That was this shock. It's not a more structural thing. So I generally still hold a view that it's a fairly small component. Even the, you know, over the past decade or so with a rising ESG movement, even then, it was just, it was just quantified as a number. It was like a scorecard. It was like how to have the appearance of being green versus the actual underlying reality of being green. So it's like, how can we quantify this?

How can we market this more so than how can we understand this or how can we actually do things? in something that actually is more sustainable. You know, an example is just, you know, focusing entirely on one number, like carbon, for example. How can we reduce this number or at least get this number off of our balance sheet on someone else's balance sheet where it's not our problem versus soil quality, water quality, other types of, you know, air quality, other types of kind of different metrics. It's more about that gamification, that financialization and just kind of trying to put things into one or two numbers and then put that on a number one or two numbers and then put that on a, someone else's balance sheet. So, no, I don't, I don't think it's been internalized yet by most participants. Yeah, I agree with that. I don't know how much you know about my work and my podcast, but I agree with you. I'm looking at how the system works together, and it's not just carbon,

and it's not just interest rates, it's not just inequality or energy or oil. It's how everything fits together. And I also have a much, I think the market is both a narrow view versus a wide view and a short-term view versus a long-term view. So with your couple decades and one decade, I would say we've just had two centuries of relative commodity abundance and cheapness, and we're headed into a century that the opposite is going to be generally the case. So that's the story that I'm trying to unpack here. And this is not a financial podcast, but I have had Jeremy Grantham and Kirozokulov and Luke Gromiman on because I firmly believe that sustainability and climate and what's happening

in geopolitics and all those other things, we have this giant financial speed bump looming in the coming decade or so with the amount of debt that we've amassed and debt is a claim on future money and money is a claim on energy and resources and how the hell are we going to pay all that back? And I don't think enough people in the environmental, sustainability, social justice space are looking at that, you know, that roadblock in the future. future. I'm sure we're going to talk about that. Do you have any response to that? Yeah, I think there's often very different silos. You know, there's kind of, on one hand, there's, you'll get a group like just stop oil, and they're often very disconnected from what that means on society. You'll see people

their clothes are made out of oil. The paint they're using is made out of oil. The transportation they usually get there is made out of oil, and they're doing some sort of protest about just stop oil, just to stop doing this. And they don't actually realize that that means an entirely different life cycle. It's very hard to support this many people. It's very hard to support anything like the current living conditions, let alone the people that are in developing countries that want to fully develop, that they want to reach a general level of, say, energy consumption or, you know,

just master of their environment that is more prevalent in wealthy countries. And on the other hand, there's kind of, just kind of status quo. Like you said, basically assume that the current thing just continues structurally and that it's not an issue and that it's not something to focus on. And so I generally think that there's just so many silos out there and I don't really kind of take that into account together. A chart that I posted a while back, a lot of people I'm sure with this podcast are familiar

with the long-term chart of global energy consumption where it's this big exponential thing. And you can kind of layer it to see all the different types of energy that went into it. So it's biomass and oil and natural gas and nuclear and renewables at the top. And I just put a little marker there that showed when my father was born because my father was in his early 50s when I was born. So he was, you know, he's a fairly, fairly older father. And he's like actually in the, like the amount of progress we made just in his lifetime or like the amount of things that have changed in his lifetime are huge.

And yet we, you know, you have this big exponential curve. curve and this little marker that's actually kind of closer to the beginning of it. And it's like, that's literally when my dad was born. It's not that long ago is the point I was making, which is that in one or two human lifetimes, you know, 200 years is two long human lifetimes. And our entire world has dramatically changed. And the trajectory of that is, I think, something a lot of people take for granted. They don't realize how much of their current life cycle.

or their current kind of life details are heavily based on the amount of energy they consume and kind of the things that have only really materialized in the past, you know, maybe 50 years, 100 years, 200 years, depending on which which thing you're focusing on. And it's actually a fairly recent and fairly fragile phenomenon. Well, we're drawing down the principle and our stories about it treated as if it were interest. And we think somehow this will always be here. So let me give you the mic to fully unpack your current thesis. You recently wrote a book called Broken Money.

Maybe you can give a short summary of that along with just expand on your current worldview in several minutes, the state of the world according to Lynn February 24. Sure. So broken money and a lot of the work I do is focused on the financial side, even though like we mentioned, it ties into energy, it ties into other areas that are of interest. But basically, kind of the main description of broken money is that it looks through, it looks at money through the lens of technology. So a lot of monetary history books focus on money through the lens of politics. What did this political leader do? Why did he do it? How did it affect this other nation? How did it

affect this? What were all these kind of decisions involved at the time? Whereas I look at it more from the lens of technology. And the reason is, you know, political things, political decisions affect things locally and temporarily. So, for example, a political leader can influence the direction of one country in a different direction than another country, whereas technological changes affect things globally and semi-permanently, at least as long as we have civilization. So, for example, if you invent refrigeration, that transcends the local environment, and it, it turns to, transcends time. It just as long as we're, we kind of maintain that status. Refrigeration spreads everywhere and that's different than a political decision that can

come and go and kind of weave around. And so I view money kind of in that lens, which is how did different technological advancements permanently change how we interact with money or what we use as money? And how did it change incentive structures? So some of those those bring back some of those political decisions into it, how do technology change what decision points were even possible? Or how do they change what is likely to happen? So that was a kind of a key focus on the book. And kind of the short summary of it is that for the past several centuries, almost every friction

in money was solved by centralization. So moving gold around, for example, it's costly, it's slow. verifying it is expensive and challenging. And so instead, you say, okay, that's a friction. And you rely on some sort of third party to basically hold the gold. And it's easier to kind of trade claims on that gold. But of course, you have to rely on that trusted third party. And when trusted third parties failed in various regions or they got identified and kind

of connected together, we built a layer below them. So even other third parties, when they want to move gold around or move gold ownership, ship around, they would have accounts at an even bigger third party and say, okay, well, our client wants to move gold, so, you know, they're shuffling our accounts around, and we're telling you to shuffle your accounts around, and you move this over time. And my favorite source in the book was money and the mechanism of exchange. It's a book from 1875 that I cited in my recent book by William Stanley Jevins. And he talked about the state of the financial system back then, so about 150 years ago, he was talking about the financial system. And in some ways, it was kind of like my

book, but the 150-year-old version of it, which was he's exploring the technology of money in 1875. And he's talking about how all these paper instruments and all these, the introduction of the telegraph, for example, you know, the cross-atlantic telegraph cable was finished in 1866. And, you know, even though it was invented in 1830s, it took decades to actually, you know, be placed across continents and across the oceans. It took until the early 19th century to go across the Pacific and kind of connect the rest of the world. But he was exploring how we have this system where information can now move super quickly and the underlying assets rarely ever have to move. And on one hand, and this is where I think relevant for this kind of current discussion,

on one hand, he's saying, look how efficient this is. This is so beautifully, so beautifully efficient that the gold rarely ever has to move and all these claims can just trade on top of it. On the other hand, he's like, because it's so efficient, it's become levered 20 to 1. And should 5% of people ever show up and want their gold back, the system doesn't have it.

It's basically a giant game of musical chairs that can never stop. And what we know from history, of course, is it did stop in World War I. And all the gold pegs broke and all the inflation emerged and that kind of system. had to completely change again. And then kind of stopped again 15 years later, right?

Yeah. Yeah, it really never really even got completely fixed during that part. And then it kind of got entirely reconstructed. And it just shows that, you know, relying on centralization works until it doesn't. And it was fascinating reading his descriptions back then, having the benefit of seeing what happened in the decades and centuries that came after that. And so one of the things that broken money explore is that, you know, even after that time, almost every friction in money was solved by greater and greater centralization and greater detachment from what's happening at the underlying physical layer of things. And that in recent years, there's some degree of momentum to kind of shift that back to varying degrees.

And so, for example, Bitcoin is something I explore that can, for example, allow transfers of events. value and have an underlying ledger that is not centrally controlled. That you have kind of a peer-to-peer updated ledger that's backed by energy in a way that has kind of rules-based scarcity or rules-based transactions associated with it. And so there's other things as well. Like, for example, there's decentralized communication protocols. So we've had kind of, you know, periods of greater and greater communication centralization. And now some of that can potentially be changed back and push in the other direction.

And so a lot of what broken money focuses on is how technology over time created this really big gap between transaction speeds and settlement speeds. So anything that involved information could be greatly accelerated. So prior to the telegraph, even if you were transmitting just information or transactions to someone, it couldn't realistically go faster than foot horses and chips, for example. even if you were just updating a ledger, the ledger itself had to move to some other location in order to make that possible. But ever since we kind of entered the telecom era, we've been in this period where transactions are way faster than settlements, and we've always used centralization for that gap. But now there's technology to kind of make that less needed. So is Jevin's paradox ultimately a monetary observation, a monetary phenomenon?

I mean, I've always thought about it from the concept of the steam engine. Oh, my gosh, we're going to get more efficient so we won't need as much coal. But actually, we needed a lot more coal because we scaled steam engines. But from a monetary technology perspective, if we were improving the efficiency of the monetary system, it meant that that would expand commerce around the world and have those claims on reality move faster and faster in the system. Yeah, Jevins had a number of. of different areas of focus. And so Jevon's paradox didn't come from this particular work,

but obviously ties it in a certain way. You know, it's the idea that when something becomes way more efficient, instead of, you know, we end up using a lot more of it. So instead of kind of our needs reducing to that, we fill the gap. A really good example, I think, is things like data storage, for example.

You know, when we reduce the cost of a megabyte of storage, instead of spending way less on storage, we instead use way, way more storage. We use thousands and millions and more megabytes. And so that's a general thing we've seen with energy. It's a general thing we've seen with computing. Even in blockchains, for example, there's obviously there's a very tight constraints associated with those systems. And generally, the use case of it will fill whatever is kind of presented, whatever is

kind of possible to fill, it finds a way to be filled because that's historically what we do. And in fiat currency terms, it's another way of saying that any system that can be abused will be abused. So, for example, if a ledger is very flexible, it's over time, it's very likely to that, that the full flexibility of that ledger will be used. So if, for example, it's a debasable ledger, it almost certainly will be debased because it's possible to be debased. And so a lot of these things end up kind of tying together in that way. So how broken is our money, our money system? I think it, so I kind of separate that into two different areas. So there's kind of the developed market answer and this, the developing market area. And so in developing markets, it's been kind of acutely broken for a long period of time.

And the way to think about that is that there's 160 different. currencies, roughly speaking. And each one is basically a currency monopoly. And they use a centralized ledger. And if you happen to be born in one of these countries, which is where the majority of people are, your wages and your savings get devalued at a very rapid pace. And you know, you have a lot of frictions in terms of kind of connecting with the rest of the world. So, for example, there's roughly 40 currencies in Africa, roughly 30 currencies in Latin America. And we can imagine in the United States, we had a currency for every state, all of the, all of the frictions that we'd have. And then further imagine, not just in terms of payment frictions, but if you took out, if you had a business in New Jersey,

and you took out debt in New York dollars, and your cash flows are denominated in, you know, New Jersey and Pennsylvania dollars, and then there's some sort of exchange rate shift. Now you have to take that all into account. You have all these kind of additional overhead to worry about your business because you're navigating all these different currencies. And that's what, a lot of businesses have to do globally. And then those consumers in those countries have to deal with the fact that their local ledgers constantly getting debased. And so, for example, I go to Egypt every year and my family and friends there are dealing with the Egyptian pound and the debasement that it goes through. So every year, roughly speaking, the money supply grows by 20%, which means

that everybody's kind of on a very fast treadmill to try to get, you know, 20% wage increases, how to not get your Egyptian pound savings devalued by 20%. Does that result in countries like that? Does that result in a higher consumption profile of when you make money, you spend it right away on things as opposed to saving? Pretty much. It results in, one, is higher consumption, but two, it also results in kind of malinvestment of where you store your savings. So for a lot of these types of countries, their equity markets are not as attractive as, say, U.S. equity markets. And so real estate tends to be the place that they store value. And of course, the risk in that is that you can

overbuild real estate. You can build ghost cities. You can build tons of empty capacities. So you're using resources mainly for the idea of saving because you associate real estate with saving. But then you think, okay, if I want to have a little bit of excess savings, if I have my own real estate needs met, and I don't particularly trust the stock market in my country for for fairly good reasons, what else can I do if I want to save a little bit more? It might be get a second property. And if everybody does that or if a big percentage of people do that, you end up with overbuilding kind of empty properties or building too quickly and then having them sit idle for a long time until the population expands into them and it's not the most efficient use of

resources. China went through a similar thing, which is that, you know, there's a lot of interest in having second, third, fourth condos, for example, as a method of savings, especially with debt attached to it. And then you get a property bubble. You get high valuations. You get a lot of debt attached to that. And some of that is larger because of, you know, people don't want to store in the currency. They want to store in something else. And so, yeah, Yeah, in Egypt, you'll tend to see a lot of these kind of empty properties because that's what people are using as their savings vehicle. You also see, you know, there will be black markets and dollars. There will be gold, interesting gold and jewelry and things like that.

So it either comes in the form of not saving for the future and consuming or saving things that are maybe not the most optimal things to save in and that they actually have kind of a negative externality by people saving in them. And then to kind of the second part of the question is when we look at developed countries, I would say the problem is it's less acute than we see in developing countries, but it's kind of the same thing and just the magnitude to turn down. So, for example, in the United States, our currency is debasing, but not as obviously or not as quickly as you're seeing in other countries. And so people are doing a similar thing. They're monetizing the S&P 500. They're monetizing real estate to varying degrees. They say, I don't want to store $20. I want to store it in these other things.

But that does have some negative externalities to it. So, for example, if everybody stores their value in large-cap stocks, those stocks get a monetization premium, and then they can go out and issue more shares, and they can go out and buy smaller companies or display smaller companies, for example. Or, for example, if we bid up the price of real estate and we buy second and third homes, it makes the cost of affording a home more challenging. for someone who just wants the home for their shelter, that they actually want it for its utility purpose.

And so monetizing things of utility tends to have those negative consequences. And the main difference between developing countries and developed countries is mostly about the magnitude or the kind of the obviousness and the acuteness of the problem. And a little bit, I think, is the wealth and income inequality aspect as well. I think it was one of your charts I saw that the top 10%, the top 1% of wealth owners in the stock market owned over 50% of the stock market wealth, and the top 10% own 90%. So if the Federal Reserve and our system is going to maximize stock market valuations, most of the population doesn't participate in that.

And I don't know how that maps to Egypt or China or other places, but that is also an externality of how our system, our money system is quote-unquote broken. Yeah, it's a really good point. And one of the ways I phrased it is that the current incentive structure basically makes people play a game of blackjack with the system, which is that, you know, in blackjack, you want to get up to 21, but you don't want to go over. And in the current system, there's a strong incentive to take on leverage, but not so much that you go over, that you blow up in a recession, right? So the kind of the incentive structure is get close to the source of money creation, take out leverage at low industry rates, short the currency, and buy scarcer assets with it. And then what complicates it is it's a global game.

So again, 160 different currencies. And so if you're kind of near the source or near the top of the system, you have all these different levers you can pull. You can like short this currency over here and buy real assets over there. and there's a lot of value to be gained from that arbitrage, which is for the most part, not really adding value, but it's kind of siphoning value off the top. And on the other hand, if you're farther from the source of money creation, if you're lower in that kind of money pyramid and you're primarily trying to work for living, you're saving in the currency that other people are shorting. and you're earning your wages in currency that other people are shorting. And so it's really kind of, even in like a hard money system, obviously larger and safer entities are going to have lower costs of debt, and that's a strategic advantage.

But the current system really amplifies that gap because one of the key sources of wealth creation has basically been to short fee of currencies in various ways and buy scarce assets with them. even the entire kind of multi-decade kind of private equity industry is larger, more connected entities with lower cost of financing being able to go out and kind of accumulate and restructure smaller businesses. And so I think that what this system does is kind of this global arbitrage just kind of increases that gap because there's so much of it that is the financial side more so than just the real asset side. So let's get in. to energy a bit. How do you think the global oil production decline rates and kind of what's

coming and coming decades will affect the leverage and the financial story that you just unpacked? In other words, how are the price of money and the price of energy linked in a leveraged fiat system? So partially where they're linked is that the money system itself is this structural inflationary system. So the number of money units keeps going up, the amount of the number of debt units keeps going up. And by its design, it almost has to. That's kind of the structure of the system. It has those... For the last 50 years or so, right? But before the 1960s, I don't, I think it was a coin flip, whether it would go up or down. But since then, yes, every single year. Yeah, the way it's been structured. And so, so that obviously conflicts with a more finite resource base.

And the way that shows up is that, you know, if look at, say, for example, annual money supply growth in the United States is something like 7% per year on average. Obviously, it was higher during the pandemic years. Lately it's been in kind of a period of contraction. But over a multi-decade period going back to, say, the 1960s, it's average about 7%. Is that physical bills or is that the broader metrics? It's broad money supplies, all the things that we, you know, our bank account, accounts are physical bills, all the things that we kind of count as money, that general number is going up by about 7% a year. In developing countries, it'll be generally higher. So it'll be,

you know, 10, 15, 20%, sometimes more depending on the country. And so that's this like, structurally inflationary backdrop, but then it's partially offset by technological and energy deflation to varying degrees. So for example, it's way easier to manufacture. a computer of a certain set of specifications now that it was 5, 10, 20 years ago. And so, you know, we've gotten better at manufacturing, plastic toys, anything that's kind of industrialized, anything electronic-based. But that deflationary pulse due to technology happened while energy and resource total availability was still increasing.

And that may have an inflection point coming. to a country near you soon. That's what I was going to tie it into. So basically we've had this kind of multi-decade period where inflationary money supply mostly offset by deflationary technology gains, energy abundance, things like that. So for example, if you have money supply going up by 7% a year, let's say per capita money supply going up by 5% a year or 6% a year,

but then you're getting 3 or 4% more productive every year. You're getting more energy and you're also using that energy in more productive ways. Like a processor, for example, does more calculations per unit of energy than it did two years ago. That combination of more energy and then more energy productivity is offsetting, has been offsetting, at least most of that inflationary pulse. And where energy ties into it is if we do get to a point where our energy growth slows down and or reverses and or the other component, if we stop getting more productive with the energy or our rate of energy productivity decreases, then we no longer have that offset. I think somewhat of a comparison is, you know, for the past 40 years in the United States,

we had a rising debt as a percentage of GDP, but it was offset by 40 years of falling interest rates. And so interest expense was not really a problem for 40 years, but we were finding out in recent years that after you get that, after you get that, down to like zero rates, you start going sideways to up in terms of interest rates, and you still have that very high in climbing debt load, then suddenly you no longer have that offset, and interest expense is actually more of a problem. And so if we kind of carry that analogy over to what we just talked about, if you don't get these offsets that we've been getting for all this kind of ongoing money supply growth, debt growth, kind of just growth and paper assets in general, that's when

you get more quality of life problems, more inflation problems, more problems with the way the system's design and the assumptions that go into the design of that system. I'm going to get back to that, but let me time stamp this right now before I ask you the next question. It is 2.40 p.m. Central on Wednesday, February 21st. Around 20 minutes from now, Navidia is going to announce their quarterly earnings. As of right now, before that announcement, and you and I don't know what that's going to be. The value of Navidia, the corporation, is greater than the entire energy sector of the S&P 500. Can you opine on that for a second?

So I currently view the energy sector as undervalued. I think people fail to appreciate how critical that is. Even those processors obviously use a lot of energy and they're going to use a lot more energy in the future. So, NVIDIA's future growth, the ability to grow into that valuation, that's premised on the idea that their revenues and their earnings are going up in the future. And all of that is ultimately energy-based. And so one thing we've generally seen in history in the markets is that they go through these kind of disinflationary cycles and inflationary cycles. So in disinflationary cycles, we, you know, energy is fairly abundant. Materials are fairly abundant.

And so as money supply grows, a lot of that value goes into financial assets. And so the valuations get pumped pretty high and the cost of capital is fairly low. And then what generally happens is our demand keeps going up. Because prices are low, there's not a lot of new supply coming online. And eventually we actually start to get pretty scarce in those raw materials. And then we go through a decade or so of more scarcity, higher prices that then facilitates a cap-back cycle, and then all those valuations end up being overdone. So, for example, in the 1960s, you had the nifty-50, kind of these overvalued blue-chip growth

stocks, and they were doing very well fundamentally. They were the Disney's. They were the Coca-Cola's. They were the Xeroxes. They were these big growth industries that had great fundamentals, but they got bid up to 30, 40, 50, 60 times earnings. And then when the United States and the rest of the world went into energy material shortages in the 70s.

obviously all these valuations were pressured, even as their fundamentals continue to do pretty well. And then we went through a period where all the energy names did well, the commodity names did well, these kind of more real assets, until we had sufficient CAPEX, oversupply, demand destruction from high prices in certain parts of the world. And then we kind of entered this period again of inflating another disinflationary bubble. that went all up to the dot-com bubble. So oil was cheap. Commodities were cheap. All these things were kind of left for dead. Everybody was focused on dot-com names.

And that, of course, unraveled. And then the decade after that to 2000s looked a lot like the 70s in the sense that, you know, material costs were going up. Oil went from 20-something a barrel to $140 a barrel. It kind of pressured all the valuations that were kind of bit up in the prior time. And so I think that we risk going through a similar thing, which is that we're very bit up in terms of technology evaluations, which is not to say that some of the fundamentals won't continue to be good for another 10 plus years or so, but that the multiples we're placing on them are kind of assuming that energy is not a problem, that raw materials are not a problem. And should those become a problem, I think you have a very significant, like, overweight. There's a lot of claims for the energy that actually exists. Energy materials not being a problem. Also, ecology, not being a problem. Geopolitics, not being a problem. There's a lot of not being a problem priced into those valuations because it's siloed matching the past and projecting it forward into the future by a lot of people, by my analysis. So let me move on to this topic. There's so many topics I want to ask you. Jeremy Grantham, I have a lot of respect for him because he's devoting a lot of his time and energy towards solving some of the environmental problems we face.

He said something on my podcast that I pushed him on and he didn't respond. He doesn't seem to think that debt is a problem. And I know others share that belief. There's a lot of people that follow modern monetary theory where I actually think is a good description of how money comes into existence and why a sovereign nation won't go bankrupt as long as it can produce its own debt. Except all of this debt actually is relative to a same biophysical energy materials, things. So how big of a problem is debt?

and just to add one more factoid, U.S. government debt, which gets a lot of focus on, is 34 trillion odd. But Stanley Druck Miller recently pointed out that our total unfunded liabilities on Social Security, Medicare, these softer claims are upwards of 200 trillion. And even at 34 trillion, that's 100,000 per man, woman, and child in the U.S. So how big a person? problem is debt from energy material perspective that you were just expanding on. So I viewed as a significant problem, and I think that a lot of people kind of took the wrong lessons from the last few decades. So back in the late 1980s is when the famous debt clock went up. And then in the early 1990s, Ross Perra ran the most successful independent presidential

campaign in modern history. It was based on the debt and deficit. That was kind of the peak zeitgeist for especially the public debt being a problem. I think most people that would remember that are like, wow, it wasn't a problem. Look at how many cans we've kicked since then. Exactly. That's the point I was going to make, which is that a lot of that ended up being early because what they did not necessarily see is the level of disinflationary offsets we'd have of the next 30 years.

So, for example, China opened up to the world. So you had, you know, Eastern labor connected with Western capital. and that enhances productivity. Then you had the fall of the Soviet Union. You had basically all those resources come to connect to Europe and connect to the rest of the world. And kind of all these silos opened up. That was a very disinflationary kind of structural period. And so we had this rising debt, rising money supply, but a lot of these offsets and also technology,

automation, internet, you know, things that just add a lot of productivity to our lives. So both the physical reality and then the digital realities, basically gave us 40 years of falling interest rates, which offset the rising debt to GDP. And so that ended up being early. And the lesson I think a lot of people took from that was debt doesn't matter. Look at all these people that were talking about the debt 30 years ago, and nothing bad happened, and they were just kind of crying wolf.

And I think the problem is that the thing we should have taken away is that basically we underestimated how many offsets there are, or what would happen over a given 30-year period, but it doesn't mean you can extrapolate that necessarily indefinitely in the future. You might, now, there's debates around how far you could extrapolate that. So what is going to be the ecological and technological kind of offsets of the next 10, 20 years? That's certainly debatable. But the long you go out, you start running into certain limits.

And I think the most tangible example is just that, you know, the rising debt we've had has been offset by 40 years of falling interest rates. That's kind of the mathematical way to express it. And now we're no longer in that period. And that's because we've entered some real world frictions. Our global supply change are disrupted for any number of reasons. First was a pandemic and now it's war. It's multiple reasons kind of coming together. Should we get energy supply disruptions? That would be yet another input into that. Should we get copper or other raw material disruptions? That's another. factor that goes into it. And so we no longer have that kind of accelerated period of globalization

and kind of untapped capital that were able to pull in. You know, all of the people that, you know, were in China and in the Soviet Union for a period of time were basically human capital that was not being utilized to anywhere near their full potential. And so that was pen up. And so 30 years of that was able to kind of connect to the rest of the world, offset a lot of the debt. And I think it's the wrong assumption to say that the next 30 years are going to be like that. That we might still have obviously some offsets, AI and technology, but I don't think that the energy or the human aspect, I don't think we have a lot of those offsets going forward.

And so I think that kind of like how people in the late 80s or early 90s were making wrong assumptions about the future, I think we've kind of, the pendulum has swung so far to the other direction. Then now people are saying, oh, it's not going to matter anytime soon or maybe it's not going to matter at all. And I think that when we look back 30 years in the future, that's going to be the opinion that we kind of say, why did it matter? Or what assumptions were they not having that they maybe should have had? And so I think a lot of people took the wrong lesson from the last 30 years. I agree with that. How do you think modern currencies are going to hold up in a, we can print money, but we can't print energy or copper era coming our way?

Can the dollar maintain a global reserve currency status and for how long? And if it doesn't, what comes after? What are your thoughts on that? So I think we've seen a lot of emerging market currencies because they have limited outside demand and they often have to finance. themselves with other currencies like dollars or euros, when they can't print their liabilities, they face the real prospect of problems. And, you know, the United States currency and to some extent other major currencies are kind of based on the premise of that the status quo is going to continue, right?

So in the 1970s, when the United States went off the gold standard, there was, you know, if you look, people that study that period, people that invested or lived through that period, in my case it's obviously studying it from after the fact. But there was a really real concern that this was not going to work. But then after they stabilized things and we kind of went through 40 years, we've been in this period where fiat currencies, at least the big ones, work because of all these offsets, all of these kind of major structural offsets that we have. And I think that if we do enter a multi-decade period where there's all,

offsets are less or even worse case scenario reversed. If instead of, you know, not only you kind of characterize it, do those offsets continue, slow down, or reverse? And that's what I think this. When you say offsets, is that akin to saying productivity improvements? Yes, basically that either have, you have more raw materials to work with and or you have the additional layer of you're able to put those to more productive use. So, for example, you have a computer that does a thousand times many calculations for the same amount of energy that a computer did several generations prior.

Or you've made a refrigerator that can cool things for half the energy that it did, you know, 10 years ago, for example. All those different rates of productivity. Some things we can make marginal improvements on, other things like electronics we've made major improvements on. And in addition, we've increased the overall kind of base amount, how much oil we pull out of the ground in a given year compared to, say, 50 years ago. So, Fiat currencies are kind of based on the idea that both of those variables are going to keep going up indefinitely. And the problem, I think, is one, we start to enter problems when that rate just slows down. Maybe it's still going up, but it's not going up at the rate that it used to. So the offsets are shrinking.

And then two, of course, it would be more severe. should one or both of those things reverse. If we no longer get more raw materials from a finite planet, or that the rate of productivity growth on those slows down in some way. And one thing that from an engineering perspective, people kind of take for granted is they assume that technology is kind of like linear, or at least that it's smooth, that every year kind of makes marginal improvements.

Whereas technology in any one area, tends to be more bumpy. So an example of that is, you know, for thousands of years, humans wanted to fly. They made, you know, basically zero progress on doing that. Then they made some significant progress with hot air balloons and zeppelins and things like that. But it really wasn't until you combined hydrocarbons and aluminum. And then you go from Wright brothers to people on the moon in one human lifetime. But then we kind of hit some slowdown, right? So that the amount of aerospace improvements in the past 50 years have been a lot smaller. In some case, we've been gone back from what we were capable of doing 50 years ago because technology is not this smooth thing. We can

run into really, really hard limits that the amount of energy or the amount of ingenuity to overcome them is so immense that we kind of get stuck for a period of time. And people kind of, you know, they've seen the past 50 years of electronics growth and other types of productivity growth. And they is extrapolate that for another 10, 20, 30, 50, 100, 200 years, whereas in reality, we can hit certain slowdowns or certain ceilings where either the raw materials themselves are the issue or the productivity growth is kind of hits one of those heterogeneous periods where we've kind of hit some limit and we either stall for a period of time until we unlock something else or unlock some other area or we lack those offsets.

And my concern for quite a while now, at least 15 years or around 15 years, is if we didn't have leverage and debt in the system, once we run into that wall that doesn't have any more offsets, as you say, then there would be a decline, a gradual decline in the physical size and complexity and scale of the economy. However, every time the last 20, 30 years that we run into an economic difficulty and there's a shortage or price problems or recession, we want to bail people out because of the metabolism and the momentum of the system. And we do that by printing money or adding debt to the system. And so the amount of leverage built into the system makes me fear a Wiley Coyote sort of event when they're, this biophysical phase shift rears its head. So let me get into a theme that you've been writing about for a while, and that is fiscal dominance. And it seems inevitable to me that we're going to have to borrow more and more money

rather than tighten our belt and face austerity. And that seems a little bit endgameish to me in this financial regime. could you define fiscal dominance and explain why it's important and your views on it in the coming decade or so? So fiscal dominance is basically description of where the central bank's tools for controlling inflation are less effective because of what the fiscal authority is doing. So if we think about what a central bank's primary tools are, it's interest rates and balance sheet size. And mostly what they're trying to do is encourage or discourage bank land.

right because in many decades most new money supply growth broad money supply growth is from bank lending so for example the 1970s then you know we had higher average inflation and that was in large part because we had higher than average credit creation because we had the baby boomers beginning to enter their home buying years so the early baby boomers were born in the late 1940s and by the early 70s they were entering their home buying years their house formation household formation years as you had expanded credit usage at the same time as you had actually to kind of the energy point, you had 100 years of conventional U.S. oil production that was going constantly up, start to flatline and then go down.

So you had a real world constraint combined with that credit creation. And going back to this point, the Federer's main tools are about basically trying to slow down credit creation if inflation is too high. or if they perceive kind of a deflationary kind of collapse of the system, then they instead say, okay, how can we encourage lending to stop contracting and to start re-accelerating again? So this, okay, we'll cut interest rates, we'll do QE and things like that. The problem is that if you're in an environment where bank lending is the much smaller factor at money supply growth, and instead it's largely fiscal deficits that are kind of

determining the source of money and spending in the economy, then those monetary tools become less effective. So, for example, the most extreme one is the 1940s, right? So obviously had very high money supply growth, very high inflation. And that was not because banks were lending much. In fact, bank lending was very muted. It was because of World War II. It's because of all these monetized fiscal deficits going to fight the war, going towards

industrial policy. When the GIs got home, you kind of put them all. through college or technical school and finance, all that kind of stuff. So a lot of it's domestic spending as well. And that's just overriding pretty much whatever banks are doing. And so the Federal Reserve's tools for kind of modulating the rate of bank lending are fairly irrelevant in that fiscally dominant environment. And so we're seeing a similar phenomenon in the 2020s, which is, you know, the deficits

are so large, the fiscal deficits are so large that they're a structurally larger impact on the economy, a more stimulatory and inflationary force, than bank lending itself. And the Federal Reserve's tools are somewhat mixed there because, you know, in the 1970s, public debt as a percentage of GDP was 30% or so. And most of the money supply growth was coming from bank lending. So if you raise rates super high, although on one hand, you do make the fiscal deficit worse because you're paying more interest on your debt, the negative impact you do on bank lending is bigger. So you're slowing down bank lending at a faster rate than you're increasing fiscal deficits and therefore tends to be a recessionary disinflationary force, which is what Paul Volcker and others intended. But if you fast forward

to the current time and you have, say, 120% or more debt the GDP and slower bank lending, if you raise rates to try to combat that inflation, it ends up being somewhat less effective because although on one hand, you do slow down the rate of bank lending, the amount you increase the fiscal deficit through interest expense is physically larger. And so the Federal Reserve's tools become far more mixed or insufficient or sometimes even pro-inflationary and kind of backfire to some degree. And that's kind of how you describe fiscal dominance, which is that the Federal Reserve tools don't necessarily do much or sometimes can exacerbate what's happening from the fiscal side, which is not at the Federal Reserve's control, not at the bank lending's control and not really at the public's control.

So could I summarize that and describe it a little bit differently as we approach this biophysical point of reckoning, the Federal Reserve and other central banks are less and less relevant? So I think that there's overlapping themes there, because, for example, when they went through in the 40s, it wasn't because the biophysical reality was met yet. It was largely that monetary and fiscal and depth phenomenon. If you go through that environment while you also run into biophysical realities, that'd be a very different environment.

It'd arguably be a worse environment to go through because, you know, the way that they kind of got out of that prior time was through that fairly young population and the fact that they still had a lot of runway left in terms of, say, energy extraction, energy usage, technological growth. And should you try to get out of a similar physical dominance, but you don't have a lot of the capability either because your human capital is different, so you have a much higher ratio of retirees to young people, like working people, or if you run into limits of how much energy you can get out of the ground in a given year

or how much copper and other raw materials you're able to produce in a given year, then you could obviously have a much harder time getting out of that type of tailspin than you would if you didn't have those issues. Tough question. From a biophysical perspective, meaning that money is a technology that greases the economy globally and allows commerce, but money is spent on things that require energy and natural resources. from that perspective, isn't the Federal Reserve itself functioning as a highly leveraged hedge fund, given the amount of paid in capital they have and how much bonds they have in their balance sheet relative to the biophysical story? Essentially, yeah.

And as long as you have inflating money supplies against a backdrop of scarce resources, in a finite world, you have that inherent mismatch. Whereas when you have that, if instead you had a scarcer or more rules-based money system that kind of match the more scarcer rules-based kind of natural system, you probably would have more equilibrium there. You know, one of my kind of friends, Jeff Booth, the way he likes to describe it, is that, and I think others have put in a similar way, that if you have abundance of money, you have scarcity of other things.

And if you have scarcity of money, you're more likely to have abundance of other things up to a point, obviously. Because if you end up monetizing other things, you end up using those things in a way that makes their utility value less affordable for the people. So if our money is weak, like we talked about before, we go out and buy extra properties and leave them empty, we go monetize the S&P 500. We kind of go and to save our value,

things that are not necessarily, you know, avoid of having kind of those negative externalities. But if you had a money system that kind of matched more of the ecological system, you could arguably have more equilibrium there. So you have a popular newsletter, provide investment advice to clients. Most people watching financial podcasts care about making money now or in the next week or or quarter based on market moves, if I relieved you, Lynn, of that pressure and I asked you to forecast things

for the U.S. global economy, interest rates, the whole system for 10 years from now without the noise of the intervening years, would that be easier to do? What would you opine the world looks like in the early 2030s? So there's a lot of, obviously, decision points that can affect that path.

We don't know what's going to happen with certain geopolitical conflicts along the way that could drastically change the end state of where those head up. But I think one of my higher conviction views is that within the next 10 years, energy is going to be a lot more of a concern than it is now. And so that right now we're in one of those cycles where energy seems abundant and therefore we can bid up all these other financial assets very high, but that we've found. But when you fast forward and kind of look back at this environment, I think it's highly likely that people are going to say, wasn't it crazy that, you know, a couple tech stocks were valued more than the entire energy sector, for example, or that people thought that that a way, that they kind of extrapolated certain things in the future and assumed certain trends that didn't necessarily materialize, that would be my kind of higher conviction view that owning those things that are inexpensive and that people kind of take for granted that they're going to. continue to be as abundant or as inexpensive or as accessible as they are now in the future.

That's both for the U.S. economy and then kind of, you know, obviously, you know, a lot of these markets are globally interconnected. And so I think that's likely going to be a theme. I'd be very surprised if we make it another decade without having another need for at least a big energy cap-back cycle to kind of sustain what we currently have. So I don't have clients, but you might think that the future is my client, and I'm trying to educate and inspire humans around the world to play a role in what's coming. How can we just taking finance and making money off the table, how can we navigate what's coming in a more benign way than the default? because the default to me is continuing every few years economic problems that are papered over by more and more debt at the same time that energy is depleting and becoming less available or more costly or both. And there's a real, you know, explosive potential there where society doesn't make it through that bottleneck.

So how can we take this discussion in a in a proactive way, not to make money, but to make better decisions as a culture on what's ahead. Do you have any thoughts on that? So I think part of it, I mean, there's obviously start from what you do in your own life before it goes up to the kind of the global level. So basically, you know, in their own lives, people can determine where they want to live in the world, where they want to kind of have balance with the, you know, the people around. them, the environment around them, and to kind of focus their energies and their attention, less on consumption and more on, you know, other types of things. One of the, when I first started writing online, even though I eventually started writing more and more about investments, I would write occasionally about personal finance.

And a lot of it was about minimalism. A lot of it was about decluttering. A lot of it was about not trying to, you know, keep up with the Joneses, not trying to just continue the trend of more and more energy consumption. And I think there's a mix where some people, you know, they look at the kind of global energy landscape and they don't realize how even just basic things require a lot of energy. So, for example, you know, hospitals functioning, running water, electricity, just basic things that we take for granted that in many parts the world or many parts of the world, even

just a few decades ago, we're not really present. But then they kind of have so much energy abundance, and then their happiness doesn't really increase in line with that anymore, because instead it's actually going back to Devin's paradox. It's kind of like they have all this extra energy, and they don't really know what to do with it, so they kind of fill it up with the kind of other things that are not necessarily increasing their happiness.

So I generally find that using money and resources to just kind of solve friction points in your life, that actually make yourself happier is worth pursuing, but that the kind of the consumption pattern that we're going on now is obviously not long-term sustainable. And the smoother way to get ahead of it is to not be shocked out of it, not to kind of be going along that the whole way until you can't, but rather ahead of time say, is this ideal?

Is this the happiest I could be? Is this the most sustainable I could be? Or should I try to focus on things that are, you know, less materially intensive that I can get value out of things by human connections, by other things I can do that are kind of less reliant on those material aspects. Simplifying first and beating the rush. So let me ask you this. Is there a certain inevitability to what's coming financially with the fiscal dominance and the inflation and some of the things you've discussed, a path dependence of sorts. And if so, do all these podcasts,

and not mine per se, but there's a ton of financial podcasts and talk shows out there, do those podcasts that highlight you and Luke and Jeff Booth and others, do they just gradually converge on this biophysical reality that is looming and make it happen faster as people understand and connect these dots? Or can disqualify. discussions like these actually alter the dynamics themselves with investors, decision makers, policy makers so that better outcomes arrive. So I, for the most part, look at things as relatively deterministic, which is that certain technologies lead to very, very high probability of certain outcomes occurring because they change

the incentive structures, but not up to the point where I think it's completely deterministic, which is to say that obviously certain impacts can change. the course of things. You obviously can see in history certain countries, you know, can have a century of, you know, misery or a century of abundance based on what people did in a certain era and human decisions that were made and who they elected as leaders and what those leaders decided to do and how people push back or didn't push back on those leaders. So there's certain, there are long things and major things that can happen based on human decisions and based on having these discussions and having things spread.

And everybody kind of has the tools that are available to them. I mean, the reason I wrote a book, for example, it's not the best ROI thing that someone can do with their time if they're running a business or they're working in finance. Writing a book is not going to be something you do for the ROI. It's something you do because, you know, you don't go into that unless you feel like you can in some tiny way shift the discussion or bring things to people. awareness that they might not be aware of or, or, you know, slightly tweak the probability is something happening versus another thing. So I think we can all, we kind of have to act as though

we can change certain things or that we can shift the probabilities. But that I think a lot of things, you know, I think that people on average don't really change until they have to. Great. But that if you can help it, it's always softer if you can change ahead of time and front run the need to change. So I'm really going to put you on the spot here. This was not on the outline I sent you, but you've looked at history. You understand the importance of energy and finance and debt.

If there were no risk to life or limb or status, what would you do, Lynn Alden, if you ran the Federal Reserve of the United States, to not just get us through the next crisis, but maybe lay the groundwork for some, something longer lasting and sustainable, or a subset of that question is avoiding the next crisis the main and continual goal these days?

So I think it kind of is like a side step to the question, but the funny thing is I don't think the Federal Reserve is anywhere near the center of things that are going to happen in the future. I think that almost regards to what they do, because of fiscal dominance, they're going to kind of get shunted into doing things to support. the fiscal situation. So for example, if the deficits are very large and the treasury market gets a liquid, the Federal Reserve really has no mandate other than to relinquify the market and kind of get captured by the market. So I think... So like yield curve control. Something like that. Yeah,

kind of like how Bank of Japan doesn't have a lot of options given the fiscal and demographic situation in Japan today. Now, there are certain periods in history where that could have been different that the Federal Reserve, say, for example, had more power to prevent things from materializing, but because that they have materialized the way they have, I kind of view that ship has sailed. So I think that one thing you can do is be transparent about it and kind of explain the problem as you see it. But I think that they're still kind of pretending that this is totally normal. This is how it's been the past several cycles. And so I think a key thing is, you know, that transparency is a key thing. Instead, you know, what I choose to focus on is technology and

information. And so, for example, if someone said, what is one of the more impactful things people could do to, you know, kind of improve things for the next 10, 20 years, I think that, you know, small modular nuclear reactors, things like that, basically advancing technology in certain directions more so than other directions. That's probably a much bigger impact than anything a central bank is going to do. And that is, you know, another step along the way to then figure out what we can do. One thing I try to avoid doing is shorting human ingenuity. So on average, human ingenuity tends to surprise to the upside that things more... While energy is growing. Exactly. While energy is growing. But that even includes our ability to get more energy.

So, for example, people thought that we run into peak energy or peak oil before we did because they underestimated our ability to extract kind of unconventional sources. And, you know, I think a mistake that people make kind of like the debt thing is they say, okay, well, we did that before. It means we'll be able to do that forever. And I don't take that view. I don't think that we're always going to be able to kind of, you know, ingenue ourselves out of a situation.

but I do think that over the next couple decades, if cards are played right, there are ways to make energy systems more sustainable, get some of these dense sources of energy, and have more time to kind of realign things to be a little bit more economically sustainable and ecologically sustainable. So I have so many more questions for you,

and I want to be respectful of your time. But one thing I definitely want to ask you, is I know that you've been bullish on a certain monetary technology, Bitcoin. And at the core of the money versus energy discussion, Bitcoin is right there. Personally, I'm quite bullish on the price of Bitcoin because of fiscal dominance, because of central banks around the world are going to print money and treasuries are going to deficit spend and people are going to want to hang on to something that holds its value. But in not too long of a time span, what is the strongest case that you can make for Bitcoin?

And then could you also steal man the opposite argument while you're at it? So I think the strongest case for Bitcoin is that it's the first credible way to decentralize money. So as we talked about before, we've had centuries where almost every monetary friction was solved by another layer of centralization. And what's interesting about Bitcoin is that now we have enough bandwidth and technology where you can run a ledger in a decentralized way and back it by a credible method that's not based on human decisions that's instead tied to distributed code and ultimately tied to energy itself. And I think that's a really valuable thing. I think that it's a tool that can pierce all those different currency monopolies that exist and give people optionality. to kind of opt out of whatever kind of local currency bubble they're in and have more options to bring their wealth with them globally, transact across borders, and have tools that are against

a basement. I think that's all valuable. And I think that network effects tend to accumulate. So, for example, you know, Ethernet's been around for like 50 years. USB's been around for 25 years. Internet Protocols been around for however many decades. And These are going very strong because once you get to a critical mass, as long as you're in a pretty well-constructed design space, it's very hard for the network effect to be disrupted. And so I generally think that Bitcoin has reached that critical mass and that it exists in a fairly narrow design space

where most attempts to make it better in some aspect, more programmable, more higher throughput on the base layer, for example, most things that you could do to it make it worse than some other, area and that it exists in that kind of narrow design space that it already has kind of the leading market cap leading liquidity and so given the current trends i think that it's likely to keep doing well and that the energy side of it is a lot more optimistic than people think because it's optimized to soak up stranded energy so people often view any sort of energy consumption is as as bad in and of itself but having a particularly flexible source of energy consumption is useful

because it can soak up wasted energy. So anybody that's familiar with how we produce and transport energy, we waste a lot of the energy that we produce. And it's because energy is not globally fungible. You know, there's a cost to transport it. And there's a friction of transporting it. And having kind of, you know, an energy source that you can turn on or turn off in response to fluctuating supply and demand

and ways to use the waste heat, generated by the Bitcoin miners. I think over time, we're already seeing this, but it's only, you know, when we fast forward five, 10 years, I think that, you know, if the network continues to be successful, that's going to be more and more integrated

into our energy systems. The steel made against it, I would say, is that at the end of the day, Bitcoin is human written code. And it's purposely designed to be simple and robust. But it's not, you know,

it's not invulnerable to bugs or hacks and things like that. And so should there be something that disrupts the core operation of the network? And there have been kind of near misses. In 2013, there was an unintended chain split. They fixed it by rolling back to the prior client. In 2018, there was an inflation bug that was fixed by the developers before anyone kind of negatively exploited it. There are some of these things that while they might not be unrecoverable, they can damage confidence in the network enough. and kind of destabilize the bootstrapping network effect over time.

So I would say any sort of bug or hack is a key risk vector, you know, having to navigate long arc of time, maybe quantum computing. There could be certain changes that have to be made to the code, for example. That could be a very vulnerable period. And then three, any sort of, you have to kind of be wary of the fact that the network could be centralized in some way,

either through supply chain capture with the processes themselves or with kind of where the mining hash rate is located. If the network ever does get centralized and captured and kind of lose that permissionless aspect to it, the ability to send kind of without any sort of centralized permission, then a lot of the value proposition's law. So I would kind of remind people that just like, just like how finance at the end of the day is tied into raw materials

and kind of the real world and real kind of ecology, Bitcoin functionality at the end of the day is code written by humans running in a distributed network, and it has to work properly in order to provide the value that it has. So any sort of threat that either destabilizes the number of tokens in the system or destabilizes the ability to freely send those around without any sort of centralized entity permission would invalidate the prior bullish case I made that network affects kind of escape velocity the technology is good, that it's solving problems, that only continues to be the case, should it not be disrupted in some way.

There's so many questions I have here. I may have to ask you to come back maybe with Alex Gladstein or Jeff Booth and do a roundtable on Bitcoin and sustainability in the broader picture. Two follow-ups, though, to what you just said. In the coming decade with yield curve control and larger government deficits and fiscal dominance, as you say, are central bank digital currencies almost a foregone conclusion that those are going to come hand in hand in that environment? So I think it'll depend on the jurisdiction. So for example, I certainly think they're coming in China. They're already there in China. An interesting case study

has been Nigeria, in my opinion, because over the past three years, they've gone on a bit of a journey there, which is they, their central bank banned banks from sending money to crypto exchanges. It's not illegal to own it because they couldn't really enforce it anyway, but they can say, okay, banks can't send money to known crypto entities. So all the off-frames are now kind of more tightly controlled. They introduced the E-Naira, Central Bank digital currency. And for years, they had very low adoption of the E-Naira. and Nigeria by most measures like chain analysis and others show that at among the highest crypto adoption rates in the world.

So Bitcoin, stable coins, things like that, very prevalent in the country. And specifically that their peer-to-peer trading was very high because that's how they got around all those bank blockages. And then the central bank and the government tried to say, okay, we're going to reduce cash in economy to kind of force people into mobile payments, force people more towards the Enaira. but they did it in kind of a clumsy way, and then there were protests against it. And then in recent months, the central bank even kind of backpedaled and said, okay, instead of outright banning funds flowing into crypto exchanges, we're going to try to regulate this more. And it's just, it's one of those things that kind of shows that just because the government

wants to introduce the CBDC, it's, you know, in a country, in that case, 200 million people, it's competing with all these other alternatives. They can get, you know, privately issued stable coins. get Bitcoin. They can get physical currents in the market, including foreign currencies like dollars. And so it's not a foregone conclusion that just because they want an issue one that it will be, obviously a region like China has more resources at their disposal to try to make that happen, they're probably going to have a longer lifetime of making that work. But I think that in a number of jurisdictions will see them. It's unclear what the adoption will be. And in

some countries like the United States, there might even be intra-government or legal challenges to these things forming, right? So, for example, the government can get sued by another entity saying that's, you know, that's unconstitutional, for example, or that's not within the law, or that's, you know, not kind of allowed. Or you can have a very polarized Congress or a very kind of kind of a sort of a lockup between what say the banking sector wants because they're large donors to a lot of politicians versus what could potentially disrupt them

from the government itself. If things seize up in certain jurisdictions that are very polarized, then you might not get the CBDCs or might not get as complete of a CBDCs as one might expect. I mean, a lot of people think that governments are monolithic entities.

But, you know, especially outside of authoritarian ones, there's different opinions within government and different ways to challenge the government. And so I really kind of don't view CBDCs as necessarily foregone conclusions. And to the extent that they are, to the extent that they're emerging, I think it's really important to have these kind of open source alternatives so that people have tools to go around them, opt out of them. Because any kind of tool we can picture, say, in the United States or in a certain country, just picture that same tool held by someone you don't like.

Maybe it's a more authoritarian country. Maybe it's the political leader that you don't like. You have to picture those tools in the hands of someone that you don't agree with and see how powerful they can be. And so I think we have to kind of be mindful, I think in a good way, of the limits of just because they want something, doesn't mean they get it. And two, the importance of keep having alternatives so that that continues to be the case. I mean, if stable coins and Bitcoin and things like that didn't exist, then maybe in Nigeria,

the E Naira would have been kind of a complete lock. But because there's other things existed and because those peer-to-peer market places existed and because there's educational resources existed, people had ways to go around it. Okay, let me ask you this because I've always wanted to ask someone that knew what they were talking about this question. So I understand the reasons why Bitcoin could go up substantially. I tell my friends and my family that I think there's a 50% chance Bitcoin goes to 300,000, 400,000 and a 50% chance it goes to zero.

So it's because of what governments are likely to do that I think Bitcoin probably goes up and goes up substantially. However, if that, happens, which I expect it will, won't there be an absolutely gargantuan wealth and income inequality that results from that where most people who don't own any crypto, and then there's current whales and dolphins will effectively be trillionaires or de facto in today's dollars? Is there a way to circumvent that outcome or what do I have wrong about that prediction? Right. So if you go up to several hundred thousand dollars per coin, say, an equivalent of today's dollars, you're looking at a market

capitalization. It's in the many trillion, several trillions for the asset. And if you look at, for example, the rise of big tech over the past decade or 15 years, that's a similar level of growth you've seen. If you add a bunch of those kind of trillion or two trillion or three trillion dollar companies together, you can quickly get to high single digit trillions just from a handful of those big tech companies. And so you could phrase it as the people that owned those certainly gained wealth compared to people that, for example, did not have tech in their portfolio or that were invested in other country's stock markets. So I do think, yeah, there would be a shift from people that, you know, there'd be a greater wealth appreciation,

obviously, in people that own the asset versus don't. But that's in the context of a world that has over $500 trillion in kind of wealth, right? So if you look at... So Bitcoin right now today is about $1 trillion at $50-some thousand. So $300,000, it would be $6 trillion at that point. Yeah. And so, for example, it used to be Credit Suisse. Now it's UBS.

That division does a global wealth report. So they kind of look and see how much wealth is out there. And estimates range from $500 trillion to a quadrillion. So $1,000 trillion dollars of wealth when you include real estate, bonds, things like that. Now, obviously, we can get into a discussion about whether or not that's real wealth. Like how could that translate into ecological realities? But basically, that's the kind of the total financial universe, somewhere north of 500 trillion. And so at 6 trillion, Bitcoin's a little over 1% of global wealth.

And, you know, obviously, if someone bought it and held for the beginning, they'd be quite wealthy. one thing we tend to see through these cycles is that during major bull markets, you tend to see people that have been holding coins for a number of years sell their coins into that strength. You know, if you bought Bitcoin at $5 and it goes up to $50, a lot of people sell a lot of their position because they say, well, now I can buy a house. Or if they bought it at $100 and it goes up to $10,000, they sell out of it or at least some of the position.

I bought it at $70 and sold it at $50. Yeah, and that happens to a lot of people. They either buy high and then trim out of it when they think it's not going well, or they have the good problem. They say, oh, this thing tripled, and then they get out and they, you know, and so the percentage of people that have generally held just for nonstop for 10, 15 years has actually been fairly small. But you know my point, right? It's just another way to create massive wealth inequality, which is, I think, kind of a fatal flaw to it,

but I don't know how it's avoided. Let me ask you this because you live in Egypt part of the year. Are the percentage of people in countries like Egypt or Latin America that own crypto higher or lower than in the U.S.? So according to the most of the data we have, like so for example, if you look at chain analysis and, you know, there's some controversy there because they, they're the firm that also serves like law enforcement. When law enforcement wants to track things on chain, they'll go to like chain aliasis, for example. but their data, you know, they kind of estimate where, you know, where is crypto being used or what types of crypto assets being used in for what purpose? Out of the top 20 countries on their crypto adoption index, like 16 of those are developing

countries. Now, the caveat is that's generally on a relative basis. So, for example, you know, a greater percentage of Nigerians, you know, use Bitcoin by most estimates than, for example, Americans, right? But because there's so much wealth in America that the actual, you know, the absolute dollar amounts is still higher in wealthy countries. And then among developing countries, it's very heterogeneous. So, for example, Nigeria is a kind of a hot spot where there's quite a bit of usage, whereas Egypt is a cold spot. There's not a lot of even stable coin usage.

You'll see a lot of people, they want physical dollars on the gray market, the black market. You don't see a lot of stable coin usage. You don't see a lot of Bitcoin usage. Part of it is they actually, in Egypt, just kind of technically illegal to have it. That's an old ruling. It's not really enforced significantly. But that's not really the underlying reason. It's more just like for whatever reason it's not really spread there in a way that it has

spread in Argentina, Nigeria, El Salvador. There are certain hotspots where it has. And so you have that pretty significant heterogeneous mix. And China used to be kind of at the forefront of Bitcoin. They had, you know, 70% or so of the mining was happening in China. And that was in large part because, one, they have access to cheap electronics and all kind of the, you know, that's where they manufactured a lot of the chips. That's where they made a lot of the rigs.

They could easily get repairs. It was a very good environment for that. But two, because they built so much unused hydroelectric capacity, during the wet season, they'd have basically free electricity. And then during the dry season, they'd use coal. And so that was like a really significant part of the network for a long time. And by extension, you'd have a good amount of the holders there as well. When China banned Bitcoin mining in 2021, you know,

they had previously banned it multiple times. They didn't really stick. If you ban Google or Twitter, you only have to do it once. But Bitcoin, they kind of keep banning and keep kind of trying. Eventually, it stuck a little bit. And so you had about half the network, leave China, go elsewhere. It's still the second or third biggest mining jurisdiction. But you kind of had that diffusion of some of the machines and then some of the wealth to other parts of the world.

So it's kind of been this rotating center of where Bitcoin has the most critical mass. So I have so many more questions for you, but I think I better reserve those for a round two. But let me, before I get to the final questions that I ask, all my guess, let me ask you a personal question. What's your routine, Lynn? You sound like a library on these topics. Do you wake up and have coffee and consume news from around the world? Or how do you stay on top of all this stuff? That's a lot of what I do.

Yeah, I basically, I start with news. consumption and also not just news, but like just contacts. There's different. There's certain types of activities on social media, other types of activities on kind of traditional journalism, other types contacts in various industries, kind of see what's happening. And then there's just independent research, check what's going on. For the macro environment, it's obviously I'm very reliant on public data that's available. Whereas, for example, in the Bitcoin space, I'm active in the venture side, and so I talked to what founders, what developers are doing, what capital allocators are doing, what institutions are doing.

So that tends to be more kind of a mix of public available information and then just kind of collecting information from what I know is happening in industry. And the other factors, I tend to work in parallel. So instead of working on one thing that I could get stuck on for a period of time, maybe it's interesting, maybe it's not. I tend to have three or four articles or subjects that. I'm kind of advancing on. And whatever kind of grabs me that day, I'll advance that and kind of make progress on that. And then eventually, if I'm stuck on something else, eventually something will hit

me and I'll kind of get unstuck on that thing I've been working on a parallel. So that kind of parallel effort for having always kind of three or four topics that I'm trying to advance on, seems to be kind of an optimal point for productivity at my end. I'm trying to do the opposite. I used to do it that way and I'm trying to focus on one thing at a time until it's done. So a few more questions if you have a few minutes, Lynn. Sure. So you've thought about it or working on, you know, the global macro situation as a career choice. Do you have any personal advice to listeners who might not have followed all the financial

jargon of this conversation, but just broad brush, you know, you see inflation and yield curve control and kind of the Treasury and the government having a bigger role in maintaining our financial situation and there may be giant risks in coming decade. What kind of advice do you have for listeners given this kind of risk of economic upheaval in the coming decade or so? I think a preemptive shift towards kind of disconnecting. useful. So we've had this kind of multi-decade trend of more and more reliance on technology, more and more getting connected, sometimes for our benefit, sometimes to our detriment.

And I think kind of selectively disconnecting yourself from time to time and kind of returning back to basics. You know, a lot of people, they don't know their neighbors. They are always online. They aren't getting sun. They aren't getting fresh air. They aren't, you know, focusing on eating whole food. They aren't getting exercise. And that's, seems super obvious, but that's, it's what the majority of people are kind of the loop that they're stuck in, including myself sometimes. Like, I find myself just, you know, people say, okay, you've written the book, what do you want to do next year? My answer is always, I want to consolidate. I want to, like, I want to less of like the grind and more of the work-life balance, more of like, what location

do I want to be in? What people do I want in my life? Am I getting sufficient exercise and good food and sunlight and nature and family connections and all that. That's what I'm trying to focus on and I would kind of recommend that other people, there's a time in your life maybe to grind really hard. Like when you're trying, like sometimes in order to be good at something, you have to go through a period where you get obsessed with it. And that can be healthy for a period of time. Like you kind of sacrifice one thing, but you get to the other side and now you're kind of

in a different position. But it's not something you want to get stuck in forever. you want to be able to pull back. And especially if we just run into more frictions globally, you know, not being so reliant on technology and not being so kind of caught up in things while not being consciously aware of them, I think is really important.

And kind of always reminding yourself that you can pull back. You can pull back out of the digital world, at least partially, and pull back out of the grind and try to focus on what, you know, have made people happy and healthy for thousands of years. well we just met so you won't know that but i fully agree with you on everything you just said how would you change that advice for a young human listening to this podcast who's

learning about limits on all these different things in their early 20s do you have any advice for young humans young americans um so i would say kind of what i just said that there might be a season where it makes sense to kind of obsess yourself with something but try to put limits on it ahead of time. Like, don't, don't, don't let yourself get so caught into it that years and decades later never really took a time to stop and smell the roses. It's kind of the main thing I would say is that, you know, that there are, you can kind of recognize that there's different seasons of life.

Another thing is just that we've had, especially in the United States, decades of, you know, kind of pushing down on any sort of physical work. And the things that have been rewarded has been like tech, Wall Street, you know, government or kind of lobbying like that kind of anything in kind of DC New York or or California that that's kind of the places that have been kind of optimized and any sort of like physical work has has kind of been de-emphasized and I think the ironic thing with AI and things like that is that we might get a little bit of a pendulum shift and so if I was younger and entering what kind of career choices I want to go into I think things that

more physical are worth emphasizing, especially if some of the things we talked about, kind of the reality of the physical world versus the heavily financialized and technologicalized world come to a head, a lot of the paper stuff, the tech stuff, the financial stuff, a lot of that can be automated, a lot of that can run into issues. But the physical world is the physical world. And having skills that allow you to navigate that are, I think, going to be economically important for a long time. what do you care most about in the world, Lynn?

So a lot of things, but the way that I try to, to answer that question, I think it's what I can impact in any way. So for example, I care about cancer, but there's absolutely nothing. I'm not, you know, it's not my area. So what I tend to do is care about the things that I build up some degree of research on are interested in. So for me, it's money, energy, and the kind of intersections between them, whereas there's other areas that I might, you know, I would say they're maybe just as important, but it's just that, you know, I have to kind of have, I have to kind of draw a line somewhere and

have a niche. So for me, the things I tend to care about are, you know, energy security, uh, financial freedom, you know, the ability to have money, transact, move money, across borders, have tools against financial repression in countries around the world. Those are the things that I feel in some small way, either through capital allocations or the written word or the spoken word, I can influence in some tiny way, whereas there's other areas that I think might be just as important, but there's no impact I can have on them. And so for me, it's that combination of what's important, but also what you can actually, what is worthwhile to spend your time and attention on.

If you could wave a magic wand and there was no personal recourse to your decision, can you suggest one thing that you might do to improve the future? I think would be to improve knowledge of some of these decentralized or open source things that can get people out of their echo chambers and their capital controls and kind of accelerate some of those trends. because I think that accelerating some of those trends can push back on other more unsustainable trends. Even simple things like, for example, in social media, people get locked into an algorithm, and then that algorithm kind of further pushes them into an echo chamber. And there's like open source technologies, like say Nostor, for example, you have interconnected social media, and you can choose your own client that you want to interact with this. So, for example, imagine if Twitter and Facebook users could talk to each other,

kind of a, that they were built on like an open protocol. Now it's just kind of like that where you can have different clients that attach to it. And each, you know, you could have, you could choose your own algorithm or choose not to have an algorithm and have more visibility and transparency over your data. And I think that if that kind of thing, whether it's open source money or open source information, if that was more widely understood, more distributed, I think it could push back on some of these more other problematic trends we see in multiple different parts of society.

I will have to check that out. I don't know about Noster. This has been great. It was very nice to meet you. Usually I have like a first umbrella overview of someone's work. If you were to come back in the future, is there one esoteric specific topic that you are passionate about that's relevant to the future that you would be willing to take a deep dive on?

So for me, it's anything open source money related. There are, I happen to go into details of how Bitcoin intersects with energy, how it enables certain energy that's not otherwise accessible, how it kind of shifts. how we use energy. I think that'd be a pretty fascinating topic. There's multiple kind of niches I'd be happy to go into. Awesome. So how do people find more about you and your work? So I'm at Lindaldon.com on Twitter at Lindaldon Contact or where they can check out broken money. That's my recent book. Thanks so much for your time, Lynn. I really appreciate it. Thank you. If you enjoyed or learned from this episode of The Great Simplification, please follow us on

your favorite podcast platform and visit the great simplification.com for more information on future releases. This show is hosted by Nate Hagan's edited by No Troublemakers Media and curated by Leslie Batlutes and Lizzie Siriani.