The Pomp Podcast - #241 Caitlin Long - Coronavirus: The Pin that Popped the Credit Bubble

Episode Date: March 16, 2020

Caitlin Long is the Founder of Avanti Bank, a new US bank based in Wyoming that intends to serve the digital asset industry with new products and services that are not currently available in US dollar markets. In this conversation, Anthony and Caitlin discuss the structural issues in the legacy finance world, why coronavirus is the pin that popped the credit bubble, what is happening in the repo market, why banks should immediately go raise equity capital, how the government is forced to respond with monetary stimulus, and what this all means for Bitcoin. =============================== BLOCKFI-----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. ~If you enjoyed this episode and want to stay updated on everything Bitcoin, blockchain, and crypto. Check out Off the Chain newsletter by visiting offthechain.substack.com and join 35,000+ other investors currently subscribed to my daily investor letter.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Caitlin Long is the founder of Avanti Bank, a new U.S. bank based in Wyoming that intends to serve the digital asset industry with new products and services that are not currently available in U.S. dollar markets. Previously, Caitlin spent 22 years on Wall Street, including successfully running the Morgan Stanley Pension Solutions business. In this conversation, we discussed the structural issues in the legacy finance world, why coronavirus is the pin that popped the credit bubble, what is happening in the repo market, why banks should immediately

go raise equity capital, how the government is forced to respond with monetary stimulus to a liquidity crisis, and what this all means for Bitcoin. I really enjoyed this conversation and Caitlin didn't disappoint. But before we get into it, don't forget that this podcast is sponsored by BlockFi. BlockFi currently offers three separate products. You can deposit your crypto and get a US dollar loan. You can deposit crypto and earn very high rates of interest, or you can go on and buy and sell crypto through their crypto exchange. BlockFi also will be announcing a Bitcoin credit card in the coming months, which will allow you to use a regular credit card but receive, rather than cashback or loyalty points, Bitcoin. Obviously pretty cool.

Right now, the rates are super high on the crypto deposits. So go to BlockFi.com slash Pomp. Again, BlockFi.com slash Pomp. I'm a huge fan. They've been big supporters of the podcast. I'm an investor, a user, and generally a big proponent of this type of business. So BlockFi.com slash Pomp. Go check them out and let me know what you think. Also, there's lots of stuff going on in the financial markets today. I'm sure many of you have tons of questions. You can subscribe to a letter I write every single morning at pomp.substack.com. Again, pomp.substack.com, and you can read what I'm thinking in terms of what's happening in the markets, how it's happening, and how you should be thinking about it. Pomp.substack.com. Now, let's get into the episode with Caitlin.

Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right. I think we are going live now. Hey, everybody. So guys, I am in New York City and Caitlin is in Wyoming. Normally, I only do the podcast live and in person, but Caitlin has been kind enough to

on a Sunday, jump on this live stream and we're going to try to figure this out because we may be doing more remote live cast for a while now. Okay, so I think that, all right, Caitlin, let's jump right in. For those that don't know you, the small few, maybe just give us kind of a quick two minutes on your background and what you've done previously in terms of career-wise before getting into a Bitcoin. Sure. Grew up in Wyoming, trained lawyer, spent 22 years on Wall Street working in the traditional

financial services industry, managing director at a couple of different places, end of my career, my Wall Street career at Morgan Stanley, where I was running the pension solutions business and got into Bitcoin in 2012, which was before I left Morgan Stanley in 2016. And I spotted it as something that would actually help solve some of the issues that I've identified in the traditional financial services industry and left in 2016 to work on blockchain technology full time, I did a detour through an enterprise blockchain technology company before coming back to the decentralized protocols and worked as a volunteer for the last two years unpaid, helping in my native state of Wyoming, where I just returned to after 29 years, to create a legal and regulatory regime to welcome the digital asset industry. And I just announced last month, I'm going to start a new type of special purpose depository institution here in Wyoming to help provide 100% reserved, no rehypothecation, full strong balance sheet financial services to the digital asset industry. I love it.

So before we get into what we're doing now, let's start from the beginning. you mentioned that you had identified a bunch of issues that were kind of persisting in the legacy world. Maybe walk us through what those issues were and how they kind of led into what we've seen over the last two weeks or so. Yeah. In 2008, during the financial crisis, I got very curious because the mainstream explanation for things stopped making sense. And frankly, I think a lot more people are figuring out in the last couple of weeks that that same thing is true and arriving at the same conclusion. Probably that's why a lot of people are here. They want to hear a different view and understand that maybe the mainstream explanation doesn't quite make sense anymore.

And I think that's right. I had that experience in 2008. A lot of people who taught me had that experience in 1999 or even before. So what it was in 2008 that didn't make sense is Treasury Secretary Tim Geithner at the time said interest rates were too low. He acknowledged on Charlie Rose's show, I think, that that was what caused the mortgage crisis. And then a couple of days later, I heard him give an interview where he was jawboning the Fed to lower interest rates even still. And obviously, that was a logical disconnect that I just got very curious about and started digging and intuitively knew something was wrong. And it really, I dug deep. I actually, and went broad at the same time. I read a lot of alternative schools of economic thought, read a lot of history, and started putting puzzle pieces together that what I had learned in school and what I paid a fortune for my education for wasn't really the way the world worked.

And the way the world worked is actually something that falls squarely in the school of common sense, but not squarely in the school of what most mainstream economists think about the world. And so, again, I think that's probably why a lot of folks are here, because there's an understanding that something's wrong and they're not getting the real story. Yeah, I think it's a great way to put it. And so this past week, we've seen what I'll call very high levels of volatility across a number of different markets. We've seen what I've categorized as kind of this liquidity crisis where everyone's running to the door and selling as much of these liquid assets as they can to try to get dollars. And then we saw, obviously, over the last couple of weeks, the emergency interest rate cut, and then this monetary stimulus announcement this past week, maybe kind of help us make sense of what is happening, and then we can tie it through to how we've gotten here. But just in your sense, what is actually happening right now? Well, we're having some pretty severe dislocations in financial markets.

The so-called risk-free asset, which is the U.S. Treasury, has had a pretty crazy week. There were bid-offer spreads of as wide as 100 basis points in the 30-year Treasury this past week, which is really scary, right? Because that's how the U.S. government funds itself. And that's how the big banks also increasingly fund themselves for the last, when I say increasingly, for the last 15 years, that's how the big banks have funded themselves is through what's called the repo market. it. And repo is essentially you're just posting collateral, typically a U.S. Treasury, in return

for cash financing. And so when the U.S. Treasury market starts to have some pretty severe dislocations, you know that something's really wrong. And in fact, actually, the Fed's bazooka that was introduced, the $1.5 trillion stimulus, came right before a troubled 30-year Treasury auction. I've said for years, for those of you who've been following me, that that's the thing that I'm most worried about is a failed treasury auction. And, you know, if we have challenges with that, that starts to, basically, that's how the U.S. government funds its deficits by issuing treasury bonds. You know, that is how, if God forbid, there are problems with the FDIC and the FDIC insurance fund, which I would invite you to go and look at how big that is relative to

the size of the banking sector. Hint, hint, it's very small. And if the FDIC needs more money, they have to go to the U.S. Treasury, which would have to issue Treasury bonds. We start having problems with Treasury bond issuance. It's a challenge. Now, that said, they did get the auction off, and the Fed clearly helped. But it's the kind of thing that the stock market gets the headlines, but the real action is in the fixed income market. And I've been watching indicators in the fixed income market, which have been flashing really loud red sirens, if you knew where to look, since last fall. And even, frankly, for the last couple of years, it's been obvious that we're in the fourth such financial system disruption since 2008. And this is definitely

the worst one since 2008, if not worse than 2008. We don't know yet. Okay. So let's kind of take this one piece at a time, because I think there's a lot of people who have no clue about the treasury markets, about how the auctions work and why that's so important. Maybe explain how do these auctions work and then also why they're so crucial. We talk about kind of funding for the government, et cetera. If you can explain both how the auctions work and then why that's the thing to pay attention to, I think a lot of people kind of get it a little bit better. Yeah, the auctions are really the nerve center of capital markets. And like I said, the U.S. Treasury is considered so-called risk-free asset. I put that deliberately in air quotes. But there are a number of so-called primary dealers that are required to step up and bid on those auctions, and then they turn around and resell the treasuries.

But effectively, they're guaranteeing that the treasuries get sold. But to the extent that the banks have challenges with their own funding, keep in mind, it's sort of a loop, right? Because the banks actually need those treasuries at the same time for them to get funding in the repo market. So I probably won't go into more details than that. But let's step back and understand about the auctions specifically. But the big picture is, what does it mean?

The U.S. Treasury is essentially the reserve asset of the securities industry, just like the so-called monetary base is the reserve asset of the traditional banking industry. And what happens is that a huge amount of debt gets piled on on top of those so-called reserve assets. Again, treasuries in the securities industry and monetary base in the banking sector. Most of you, if you studied economics in school, understand how fractional reserve banking works, that you take a dollar of so-called monetary base, and then typically the banks issue out $10 worth of loans through fractional reserve multipliers that you turn $1 of monetary base into $10 of credit. That's the way the traditional banking system works, but that's not where most of the credit has been issued in the economy or in the financial system in the last couple of decades. Most of it has been issued in the so-called shadow banking system, which is really the securities markets, where treasury bonds, which are IOUs of the U.S. government, just like or analogous to the monetary base being an IOU of the Federal Reserve, again, both of these IOUs, a really important point, we're going to pile even more IOUs on top of that. And there's actually a lot more leverage than 10 to 1 in the securities industry. And so when you think about the fact that a lot more leverage got piled on those treasuries, the next question is, all right, what happens if we get into a deleveraging environment? You usually see a run to safety. And again, the risk-free, risk-free, in air quotes, asset is the treasury bond.

And we see the rush to safety. We certainly saw that. Treasury yields collapsed, which meant that the price went up because yield and the price moved in opposite directions. You saw them hit record lows across the entire U.S. Treasury interest rate curve this past week. And so there was a rush to quality. But then you start to get the reality that, in fact, actually liquidity has kind of disappeared from these markets. And it took a Fed bazooka to get a 30-year Treasury auction done. The auction was done at a relatively good yield. It was only a couple of basis points wide. But what's called the bid to cover, the internals of that auction were really challenging. So it's indicative that we're in a pretty severe dislocation in the financial markets, even more so in fixed income than in equities. Got it. And so when you say that that auction was in trouble and the Fed steps in with the $1.5

trillion announcement, explain kind of the mechanisms of, they say, hey, we're going to inject this liquidity, but what exactly is happening there from a mechanism standpoint so that people understand kind of how they, quote, save? Yeah. So the injection of liquidity is literally injecting reserves into the banking system, injecting cash into the banking system. The Fed's balance sheet increases. Some people call that printing money. That's an outdated term, but it's still a term that describes what's going on. You're literally creating, the Fed's writing a check on itself. They're creating assets out of thin air and expanding their balance sheet. And in the last crisis in 2008, the Fed's balance

sheet was about $800 million. And then it swelled up to well over $4 trillion. And then the Fed started to reduce its balance sheet as it was raising interest rates and letting some of the assets that it had purchased run off. But now that's reverse course. And now the Fed's increasing its balance sheet again. And so from the Fed perspective, we're north of $4 trillion, I think around $4.2, $4.3 trillion of Fed balance sheet right now, again, up from $800 million in the last financial crisis. One of the analysts who I must take my hat off to, Doug Nolan, who really got this whole thing right and has been chronicling what was coming in the credit markets, he predicted that the Fed's balance sheet would swell to $10 trillion in this next crisis,

which I think is here. He predicted that, by the way. He's been predicting that all along. so that's not a new prediction uh and and at the time in 2000 last fall when he uh published it most recently it struck me as way too low and in fact actually i think it's going to turn out to be way too low so everyone from my perspective and again i should i should step back and say none of this is advice you're getting what you're paying for here um this is just one person's perspective and you can't rely on it but um hopefully it'll just help make you think that's the only thing I would like for you all to take away from this is just one person's perspective to help make you think. It's just a different perspective than you're going to read in the

mainstream press. But anyway, coming back to that, is the $10 trillion number that much? Back last fall, I think a lot of people were shocked by that prediction. And at the time, I said, no way, that's way too low. The Fed's balance sheet is actually going to end up being a lot bigger than that. Now, what's the impact? It means that the banking system is very liquid from the traditional banking system. They've got all kinds of cash. The problem is that cash is in the wrong place. It doesn't help the securities markets because the banking industry and the securities industry are really pretty separate. There are a few of the gigantic banks, the money center banks that are in both sides. There are traditional banks and their securities dealers,

primary dealers that handle treasury auctions for the U.S. Treasury. But even there, actually, the balance sheets are typically not even in the same legal entity. So the cash is going into the traditional banking industry, but not into the securities industry. And that's part of the reason why you see these dislocations that don't totally make sense. But in fact, if you understand the plumbing, it does make sense. Yeah. And so help us understand, right, when we talk about this kind of expansion of the balance sheet, one of the things that I saw on Twitter recently is, I think it's Ben Bernanke on a 60 Minutes episode, somebody said to him, you know, what exactly, like, where's this money coming from? Are you using taxpayer money?

And he, you know, kind of nonchalantly said, no, we just go in and we just edit the account number. So maybe talk a little bit about that expansion of balance sheets and the fact that the number really is backed by nothing and is kind of at will, can be expanded without any kind of logic behind it. Well, you just laid out exactly the way it works. The Fed is literally writing a check on itself. It's the only institution, only bank. It's legally a bank. It's the only bank that's allowed to do that, to literally create money out of thin air. and then its monetary base, like I said,

gets multiplied by other banks who are allowed to create a different type of money out of thin air. But all this is coming out of thin air. Now, what's the real impact of it? It's all debt, right? It's all an IOU. Actually, in fact, even the dollar is an IOU.

Everything's an IOU. Go look at the dollar in your wallet if you have one. It says Federal Reserve note, pay to the order of. It is a debt instrument. The dollar itself is a debt instrument. So everything is an IOU piled on top of an IOU piled on top of an IOU. That's a really important point. I think for some listeners, that's going to be news. most of you probably understand that the the banking system is an iou we don't legally own the deposits in our bank account that's a promise to pay from our bank so effectively we've lent them the dollars we've deposited in the bank the the piece that very few people understand in my experience though is that the same is true in the securities industry we think we own the shares in

our brokerage account in fact we don't they are ious the same way that the deposits in our bank account, our IOUs. We're actually taking an obligation from our counterparty to deliver us the asset. And they have an obligation from a different counterparty to deliver them the asset. And they have an obligation from a different counterparty to deliver them the asset. And there's a huge daisy chain of IOUs in the securities and banking industries, respectively. They both work the same way. But at the end of the day, the bottom, you remember I talked about the base asset in each of the two types of financial industries, the banking industry and the securities industry, the base asset in and of itself is an IOU, to your point.

Yeah. And so let's talk a little bit about kind of how we've gotten here, right? Because this is not something where nobody saw it coming. There's actually quite a few people who've been publicly saying there's issues, there's issues. And I don't want to say that anybody was like, you know, it's going to happen in January or February or March 2020. I think it was more of just these problems can't persist forever. And I think one of the first things is the coronavirus or COVID-19. There's a lot of people who are saying, oh, this is all because of the virus. I think you and I are in the boat of these were going to happen anyways. The virus is likely the accelerant, the thing that causes an economic slowdown and exposes these structural

flaws. Maybe talk a little bit about the relationship to the virus and then also what those structural flaws are. Yeah, the virus is just the pin that's pricking the bubble, and the credit bubble is by far the bigger issue. The virus will definitely be a problem for everybody, right? Everybody's holed up at home, or if you're not, you should be to try to reduce the spread, voluntarily you should be, to try to protect the elderly and the folks that are more susceptible to it, because it is so contagious. And we can come back and talk about that. I've actually worked on pandemic bonds earlier in my career. So I was pretty sensitive to this. And to your point that not a lot of people predicted the timing, something like this,

you couldn't predict, right, a virus coming out. But I will say, those of us who were worried about, who were looking for what would be the catalyst of a problem in the financial industry. We were pretty focused on this pretty early on. And again, I got to give Doug Nolan credit. And it was his credit bubble bulletin on Saturday, January 25th. I started tweeting out about it and said, oh my gosh, this might be the thing that pricks the credit bubble. And maybe that's part of the lens I was looking through because I was worried that there will be eventually something that will prick that credit bubble. But I also understood viruses. Having worked for my full 22 years on Wall Street with the life insurance and pensions industries, they're very focused on

mortality statistics. And if you talk to the life insurance actuaries who spend their lives studying these sorts of things, what are the things they were worried about? The number one Now, calamities would, of course, be, you know, a nuclear war or a super volcano going off. But, you know, a sustained power grid downtime is also right up there in terms of severity of a disaster. But the next one on that list is a pandemic. It always was. and this was always one of the things that the life insurance actuaries have been worried about is a flu because it's so contagious. And by the way, I did post on my Twitter account a couple of days ago, there's a prospectus from the World Bank's pandemic bond, which is the most recent one. The ones I worked on paid off a long time ago and they didn't trigger, but this World Bank pandemic bond did trigger. If you're interested in the history, you should go take a look at that

because that's based on hard math, it's actuarial science, and a lot of study of exactly what happened in the 1918 Spanish flu, which is still to this day the worst flu that has hit in recorded times. It was actually, even though it was called the Spanish flu, Spain got a bad rap because they were just the first one to step up and admit that it was happening. It does. The actuaries do do accept the the the alternative story, which is that it actually started in the United States, started, it looks like, on pig farms in the Oklahoma-Colorado border in 1918. It went all throughout the world. It was extremely contagious.

In fact, it looks like this coronavirus we're facing now is even more contagious than that was. But luckily, the death rate from the coronavirus is a lot lower than the death rate from the 1918 flu. And the 1918 flu is also interesting as well, because it killed disproportionately in the 25 to 45-year-old age group. This one is not. This one is disproportionately hitting the elderly. So I went off topic and completely forgot the question you asked me. Sorry about that. But I just wanted to let folks know that you should read about that.

Yeah. I think one of the key pieces to this whole thing is when you talk about popping this credit bubble, what essentially happens here is the virus starts to spread. There is very serious health concerns with that. So whether it is fear-induced or actually the true health concerns, what eventually occurs is everyone has to stay inside, right? And so you get a complete drop off in travel. We're seeing across the United States, these reservation apps are reporting 50% or more, in some cases, drops in restaurant visits. The airline industry is completely being decimated. They're losing hundreds of millions of dollars, cruise lines, hotels, Airbnbs, etc. And that slow trickle across the economy is not just on the consumer side. It also happens on the corporate side. And so in a world where everyone has been levering up with debt for years now, all of a sudden, they get a slowdown in revenue and EBITDA in true cash flow, they can't pay the interest on that debt. And you get this kind

of trickle effect across the economy, where you just kind of see these mini blow ups of that debt. And I think that's really what you're talking about here in terms of as that domino effect starts, we don't know how big it is and how long it will last. And that's kind of the big concern, if I understand where you're coming from. Is that? Bingo. Yeah, you phrased it so well. Yeah, I'd forgotten to come back around to,

you know, those of us who were looking for the, who realized we were in an incredible debt bubble, saw a blow off top. I was tweeting out yesterday, looking at the updating the Fed numbers in my own spreadsheet, but we had a 10% increase in the total amount of debt outstanding

in just the last two years in the United States. that's a huge acceleration and increase in debt. We certainly didn't grow GDP 10% over the last two years. Let's put it that way. So we just levered up. We were in a drunken stupor. And so those of us who were looking at those kind of statistics were sensitive to what could pop the credit bubble. And then when the coronavirus came around, again, Doug Nolan was the first person that I saw who called it back on January 25th. And he wasn't sure back then, none of us were, how big of an issue this was going to be. But let me make this clear. The coronavirus is going to blow over. Flues blow over. The 1918 flu, it had three different waves, but it only lasted 15

months. And it killed several hundred million people in the world, but it burned itself out in 15 months. This too shall pass. The bigger issue is exactly what you talk about, which is that there are a lot of leveraged businesses who were not set up to withstand a shock like this. And it turns out with the debt bubble that we've had in the U.S. economy, that the U.S. economy is actually really vulnerable to this. And as I was tweeting out back in January after reading Doug's post, I'm worried about China's economy as well, because China has accumulated debt. It only took them 15 years to accumulate the same amount of debt that it took the United States more than 50 years to accumulate. So the acceleration of debt

in China has also been something that a lot of us have been watching as well. And so you've got certainly the Western world, the Americas and Europe having been heavily leveraged going into this coronavirus event, but you also have China heavily leveraged as well. So what's interesting is that it really is global, with the exception of a couple of countries that have effectively been shut out of the financial system and couldn't lever up. They might have wanted to if they had access to the financial system. But ironically, they're coming into the coronavirus with stronger balance sheets. And as a result, I think they'll bounce back quicker because they just don't have all these debt defaults that are going to be triggered because we were operating at the edge

from a leverage perspective in these leveraged economies, including that of the US. Yeah. So there's this weird dynamic of like, there's a bunch of people right now that are like, holy shit, I can't believe that we've gotten ourselves in this position. At the same time, there's a bunch of other people that are like, hello, welcome to market cycles, right? 2008 occurs, everyone gets kind of super, everyone talks about cash flow and strong balance sheets and all of this stuff. Over time, we get access to cheap capital. People start to take on a little bit more risk and a little bit more risk and a little bit more debt. And it kind of balloons into you go through that bear market and now you get into the raging bull market, the longest in

history. And where you end up is basically right back where you were. Maybe it's shifted a little bit in terms of the industries it's affecting, et cetera, but it's still just classic market cycle stuff. So one of the things you've talked a lot about is kind of the debt that the banks have taken on and the lack of the strong balance sheets and maybe even the need for them to go raise equity capital. Kind of give us an understanding of the banks specifically. How do they fit into this? How should they be thinking about the debt? And why are you so adamant about them going to raise equity capital? Yeah, I started really banging this drum in June of last year because I was watching the repo market signals, making it clear that something

was really wrong in the market that the big banks rely upon in order to fund themselves. And we saw in 2008, the repo market totally seized up, and then the banks needed a bailout. And look, I think we're headed for a similar situation now. And the thing that shocked me was that when the Fed did its stress tests for the big banks, it said everybody passed and allowed them to go start buying back stock well boy does that in history look like it it was a decision that didn't age very well shall we say and then things got a lot worse in um in in the fall and uh i wasn't alone in at that point really screaming that look you raise capital if you're a bank when you can and when it's abundant and you don't wait until um things the wheels start coming

off, because then you're going to dilute your shareholders so massively when you do. But actually, probably the skeptic in me says, they've been bailed out so many times, why would they dilute their own equity? They'll just wait for either the Fed to bail them out indirectly, or in the case of 2008, the US government directly bailed them out by investing in them. And the skeptic in me says, maybe that's what they were thinking. I don't know. Needless to say, the banks are way too leveraged. That was a very contrarian view. I remember a lot of people calling me nuts for saying that. But I was watching what was going on in the fixed income markets. And it was very clear that the situation was really getting to be unstable. And then we saw the Fed reverse its interest rate increases, and now we've seen them even start to cut rates again.

And it was just obvious to those who were looking at the fixed income indicators, in particular, the liquidity in the repo market. It was just obvious that this was a problem. And now, that said, if the banks are overleveraged, what does that mean? It means the economy is overleveraged. plain and simple. We'd like to blame the banks, but the banks are just pass-throughs. The financial industry is just a pass-through of debt to the real economy. When I talked about the 10% increase in debt in the last two years, between end 2017 and end 2019, that was households, businesses, and government. And just to be clear that I'm not being political here, boy, the government debt has

ballooned a lot since 2008. It's been both political parties. There doesn't seem to be anybody who is concerned about this. Both political parties are pedal to the metal on borrowing, but it's not just the government sector. It's been the corporate sector and the household sector as well. So the financial sector is literally just a mirror of what's going on in the real economy, the households, businesses, and government sectors. And all three of those have been paddles of the metal on borrowing really for the last 50 years. This is, just to be clear, I'm talking a lot about 2008, but we've had so many attempts by the free market to assert itself and prick this debt bubble since the early 1970s. The last time the US

had a year in which we saved more than we borrowed was 1968. We did have one year during the financial crisis during which we saved more than we borrowed. But every other year since then, we've borrowed more than we saved. What does that mean? It means that we're consuming more than we produced. It's pretty simple. And so if you go back in history, why did we become the strongest economy in the world, especially coming off World War II? And the answer is we had the strongest balance sheet. We were an equity-financed economy. What I mean by that is, if you looked at the amount of money saved every year and the amount of money borrowed every year, it was essentially equal, year in, year out. The borrowing that people did in the United States was from

somebody else's savings within the United States. We were what I would call an equity-financed economy. We were not borrowing against our future in order to consume more today. And we started doing exactly that in 1968. That's when the guns and butter programs, so to speak, were taking effect. And so a lot of people point to 1971 as the problem. I actually point to 1968. That's the year in which we started really outliving our means. And every year since then, except for 2009, the United States has outlived our means. And so how were we able to sustain it for 50 years? I think a lot of people are saying, well, gosh, we don't have to care about the debt. This is something you'll read in mainstream media. We don't have to care about the debt because we owe

it to ourselves, or we can just print money. And therefore, we can just push pedal to the metal and keep printing money and borrowing and to respond to these crises with monetary and fiscal policy respectively. It used to be one or the other. Now it's both. And now neither one of them seems to be working very well. The quantity of stimulus that we're having to throw at this most recent crisis is staggering because the size of the bubble is that much more staggering because we've had so much debt issued that's nonproductive, especially the last decade, but even especially the last two years. And so what I would say to those folks is you got lucky. The ones who think that debt doesn't matter.

You got lucky because for 50 years, we were able to do this in the United States because our parents and grandparents and their parents and grandparents bequeathed us with an unbelievable balance sheet. We had no debt, net debt on our balance sheet up until 1968 in the United States. We were, we were, we were, all the borrowing that people did in the United States was out of somebody's savings. And so that net debt was zero. for decades. Then we started going to town in 1968. Unfortunately, I think if you look at the

balance sheet of the United States right now, it's kind of an ugly situation. We have $83.3 trillion of non-financial sector debt outstanding. Again, that's households, businesses, and governments together. I would also add the Fed's balance sheet should be added to that as well. So we're really north of 87 trillion of debt. And I looked it up last night. The net wealth of the United States is 104 trillion as of year end 2019. So we've got 87 trillion of real debt. Right. And that's that's not fleeting. The debt is contractual. That's that's somebody's debt. You know, real obligation. That's real. whereas some of the assets backing that 104 trillion dollar number are not real they're fleeting right we just saw 20 trillion come off the stock market so if we've got 80 87 trillion of debt and 104 trillion of net wealth to satisfy that and we just took 20 trillion of value off financial assets last week you do the math this is why people i think are not on um are not

irrational to be to be nervous about the situation and start questioning whether the things they've been taught are really right yeah so you bring up a great point about this idea of uh kind of the net debt right i always think of it as uh just your your local uh your family household is if you save more than you spend then you're usually in a good spot and you've got kind of a strong balance sheet uh and you can continue forever right if you start to get in a little bit of debt, well, you can kind of catch back up. You can pay it off if you make a little bit more money or put together a plan, right? We see that with student loans, for example, et cetera, that, yeah, it's a big number for a lot of people, but they eventually pay it off over time.

But if you keep increasing the debt and you don't necessarily match that with growth and GDP, et cetera, it's a little bit harder to kind of catch up. So it feels like you're always kind of falling farther and farther behind where do we end right like what is the the point at which either the debt can't be paid back uh there's some other solution maybe there's not a solution and you need a massive correction like how do you think about where this all ends whether that happens you know in 2020 or in 2050 whenever it actually happens don't worry about the timing but like, what is that end point that this all kind of is? Yeah, that I've spent the last since 2008 reading about this and thinking about this and debating about it in my own head. Are we going

to end in a deflationary crash? Are we going to end in a hyperinflationary melt up? And the answer is, we'll probably have a little bit of both in sequence. Yeah. Yeah. But just explain what both of those are for those that don't know the deflationary and also the hyperinflation explain those before you kind of get into what what you think will happen yeah wow sorry about that and power went off and uh sorry about that no you're all we're all gonna be engineering glitches in the in the next couple weeks that hasn't happened before so uh sorry about that but now the lights are not on behind me anyway no you're all good maybe let's just jump into the repo markets you can kind of explain what the issues are there and what you've seen and kind of why that's important

for people to continue paying attention to? Yeah, well, as I mentioned, the repo market is essentially how the big banks fund themselves these days. When we had traditional banks, it was literally yours and my deposits at our corner bank that funded the banks. And then, of course, the monetary base, when the Fed either expanded or reduced its balance sheet, respectively, would add or reduce funding for the banks. But that's the way the traditional banking system works. Increasingly in the last, especially the last 20 years, the repo market is how the big banks fund themselves. I make a big distinction between the big banks and the regular community banks on the corner. They're actually really well-funded. Not 100%, but they're much

better funded than they were in 2008. The big banks are where the problems are, in my humble opinion, because they're so reliant on what's called wholesale funding, which is the repo market. And what that is, is basically they're just posting securities as collateral for financing, typically overnight. But you've noticed that the Fed has started to actually expand to what's called term repo, which is something longer than overnight loans. but there's an enormous amount of leverage in the repo market. There's a mainstream economist whose work I have tremendous respect for, who's been doing a lot of work on just how leveraged the securities industry is. And he uses the year-end financial statement filings, which actually are, shall we say, window dressed because everybody at quarterly financial period reporting or year-end financial period reporting brings their leverage down. It's really

obvious in the market that this happens. So take these numbers with a grain of salt. But he estimated basically what he called collateral velocity, which is how much collateral there is that the big banks can use to fund themselves, and then reuse and reuse and reuse and reuse that collateral. And it turns out that the average piece of collateral is reused three times at year end, down from four times before the financial crisis. So we have deleveraged since the financial crisis, but there's still a tremendous amount of leverage. And again, these are the year end numbers. From my experience, and I did do some work in the repo market earlier in my career, from my experience that the intra period repo is probably

two to three times that size. So what does that mean? That means then if we have a sort of a run on the bank, you typically think of runs on the bank as being like in the movie, It's a Wonderful Life. That's the traditional banking system where everybody goes and wants to withdraw their deposits. We can have runs on the bank in the wholesale financial system that the securities or shadow banking system, that's all different terms for the same thing, which is basically it's secured financing where people are posting securities as collateral for secured loans. And that's the way that those firms finance themselves. And so when you get a run on the shadow system, the challenge is that nobody's printing any more treasury bonds out of thin air,

right? They have to be issued. The Fed can always print more money out of thin air, but treasury bonds have to be issued by the U.S. Treasury. And of course, we have debt ceiling limits and things like that. So that's kind of a fly in the ointment of that system. It's much more leveraged and it's actually much more unstable at any given moment of time than the traditional banking system is. And that's partly what you're seeing here. Now, we saw this past week some very interesting announcements, Boeing and Wynn Resorts and a couple of other big name companies did something called drawing on their revolvers. The revolving loans are issued by these big banks to the big companies, and they provide backup liquidity. And nobody ever draws on these revolvers. They're not

meant to be drawn upon. But Boeing drew $13.5 billion on its revolver this past week. That is a staggering number. And the banks don't keep that kind of liquidity around. So what that does is basically kind of trigger a run on the shadow financing system, because the banks then have to go and find the liquidity to do that, which means they have to post more collateral in order to get more repo financing. And it just causes the market to seize up. This isn't Boeing's fault. What I'm laying out here is that the market was inherently unstable to begin with, and if you understood this, you would have understood why giving the green light to the big banks to buy back their stock, which is reducing their equity, was the exact opposite last June of what regulators should have been doing. They should have been actually making them increase their equity, and that's the drum that a very small number of us have been beating for a while, but it's definitely falling on deaf ears. Yeah, so I recently had Raul Paul come on, and one of the things that he really highlighted was kind of this twofold problem that is part A, the debt-fueled stock buybacks that are happening across the market.

So the whole idea is a corporation is issuing debt. They're then getting that cash. They're doing stock buybacks. They increase their earnings per share because they're literally changing the denominator there. And what it really is doing is it's enriching the shareholders to some degree, but it's also really enriching the executive teams who a lot of their compensation is tied to stock price and options, et cetera. Part of that is, one, if they can't issue the debt anymore, then they can't buy back their stock. And if they can't buy back their stock, then it can't be propped up the way that it has been over the last few years. But that's all centered on part two, which is, well, who's buying that corporate debt or that credit?

And right now, it's a lot of the pensions across the United States have been buying that. And so if all of a sudden they're left holding credit that may or may not be good, do you actually have a two-part problem, which is one, stock buybacks no longer work and can't prop up prices. But then two, now you have a bunch of pensions that are holding stuff that ends up being worth less than they bought and they get themselves in trouble. So how do you think about the stock buybacks and that pension problem? There, you're good. We left off, I was asking you about kind of the debt-fueled stock buybacks and how a lot of people that are buying that debt from corporations is the pension funds and kind of pension crisis. Maybe talk a little bit about how you think through

that situation and what people should be paying attention to? Well, I ran the pension solutions business and helped create the business of corporate pension funds, purchasing annuities to settle their pension obligations. So transferring the risk to the insurance industry, which is really where pension risk belongs because they can manage it a lot better than a corporation can. And by the way, the companies that actually did settle their pension obligations, a lot of them got done in the 2012 to 2016, 2017 period. A lot of smart companies did that and just literally paid their pensioners. They funded their pensions and paid off the obligations. The one that I would highlight, I'll just name one, is Bristol-Myers Squibb.

Go look at the evolution of Bristol-Myers balance sheet and hats off to them. They understood that the risk of a big decline in interest rates was potentially going to balloon their balance sheet, balloon that on their balance sheet. And so it was better for them to pay off that obligation when they did. And so a lot of other companies did partial transactions, GM, Motorola, Verizon, et cetera, a lot of others. But anyway, those finance officers of those companies look smart. But they did issue debt because they had the ability to finance that debt cheaply, as we've alluded to but haven't really dug into yet. Interest rates have been held artificially low. And that has caused all kinds of massive misallocation of capital.

You were alluding to what you talked about with Raul on companies issuing debt at artificially low rates to buy back their stock at high stock prices. Boy, history is not going to view those decisions very well at all. In fact, a lot of that debt that got issued is literally capital that was destroyed, right? Because what did it get invested in? It got invested in stocks at the peak of the stock market. and companies would have been better off in retrospect not having done it at all and instead just either paying out dividends or holding on to their own cash. And I put the fault for a lot of this actually squarely in Congress's doorstep

because they created a situation that made it easy or that favored stock purchase, stock buybacks over dividends because dividends are ordinary income tax at higher income tax rates and stock buybacks are capital gains tax rates which have been lower. So this is Congress's fault that it happened. And again, it all goes part and parcel

with the whole notion of just basically encouraging America to lever up for the last 50 years we've been doing this. But the bigger picture aspect of what happened here is that when the debt is invested in something productive, something that earns a real return over the real cost of that debt, I'm not talking about the market subsidized cost of that debt. We all acknowledge that interest rates were held too low. And so people thought their cost of capital was a lot lower than it really was. And now it's whipsawing and the cost of capital is being revealed to be a lot higher than it really was. And projects that they did invest in, they should not have invested in and would not have invested in had they known that the real cost of capital was a lot higher than what the market is telling them. And that's the big picture takeaway here, is that the real problem of the debt bubble is that it kept interest rates artificially low and caused a ton of misallocation of capital. And as I noted in the tweet storm yesterday, that $7.5 trillion of total debt that got added to the United States balance sheet collectively in the last two years between the households, governments, and businesses, probably most of that debt represents destroyed capital. There's probably not much of that debt where the investment is actually going to pay off in terms of real economic returns. And so now here we are seeing the banks, which is where you always see the default probability problem arise.

now we're seeing the banks having to deal with the fact that there are going to be mass defaults in entire industries, the biggest example of which is the shale industry, where you've seen just a real collapse in stock prices in the last week. Yeah. And so I guess what that really leads us to is this liquidity crisis over the last week, where people literally just look around the room and say, what do I own that's got a liquid market attached to it? And how can I sell it immediately. I want that liquidity. And we see all of these assets, whether it's gold, treasury, stock, Bitcoin, anything, correlation starts trending towards one, everything goes down because of the liquidity crisis. Maybe kind of talk through how that works. And then we can get

into how governments have to respond or the Fed has to respond to those types of situations. Yeah. So the leveraged players always, the lenders always want collateral in the financial markets when they're making loans. I guess technically not always, but the vast, vast majority of leverage in the financial markets is secured by financial assets. And so what happens in these situations is that when you have an investor who has to deleverage, they're getting a margin call. They have to post more collateral because the value of the assets securing their loan just went down. So they're just getting a giant margin call. And they're going to sell whatever's easy to sell. Now, I talked about how there were dislocations in the U.S. Treasury bond markets

of all markets last week, which says those weren't even liquid. And so people were selling whatever was liquid and whatever hadn't been nailed down yet. And when you see gold go down, and I learned this from watching the 2008 financial crisis, gold also plunged in 2008. A lot of people would have said, oh, that's not a safe haven asset because it plunged. Well, oftentimes, the safe haven assets are the first ones that are actually sold, precisely because they aren't somebody else's IOU, and they're not tied up in some of these crazy leveraged financial structures always. Leverage has definitely got an impact on them. Right. We can talk about the gold ETFs or talk about all the leverage in the Bitcoin market. But at the at the bottom, those assets are nobody's IOU. They are assets that if you own the real thing, if you own the physical gold or you own your your private keys for your crypto assets, they're they're yours. You have outright title to those assets. They're nobody's IOUs.

And so oftentimes because of that, those assets are the first ones that get sold. And we certainly saw that in 2008. We certainly saw that last week. We saw a huge correction in Bitcoin, a much lower correction in gold. But gold didn't exactly act like a supposed safe haven either. Now, all that said, I don't think that one week matters for either one of those assets. And in fact, actually, we just flushed out a lot of the leverage, I think, in the crypto market. I wouldn't be shocked if some of the crypto financial institutions didn't survive last week and we just don't know it yet. And by the way, good riddance. The amount of speculative leverage that was taking place on an asset that shouldn't be leveraged has been staggering. And the faster we can clear out that cruft from the market, the better off the market is. I think those safe haven assets are true safe havens, but that doesn't mean they're going to be safe havens every day.

And like I said, they were the easiest thing to sell last week. When you see gold go down, it means that we're really having serious liquidations. Yeah, and I think what you alluded to in 2008, I wrote this piece this past week that a lot of people don't know. in 2008, kind of the mid-six-month liquidity crisis period, kind of over the summer, gold actually went down 30% during that time period. But if you then zoom out to the entire crisis, kind of end of 2006 to end of 2011, it was up 3x. So in those shorter time frames where there is that liquidity crisis, you draw down pretty substantially for the quote-unquote safe haven asset. If you look at treasuries, for example, the markets are seizing up.

Again, that doesn't mean that it's not a safe haven type asset or not something that people want to get. I think Bitcoin, same thing, right? You see this massive volatility. The other thing that people have to understand is the market cap of an asset like Bitcoin, it plays into this. It's a smaller market cap. It's going to be much more volatile. But the one data point I saw was Hunter Horsey from Bitwise was tweeting this. I thought it was really interesting.

If you look at the historical volatility of Bitcoin and let's say the S&P, the S&P going down 9.5% on a relative basis is the equivalent of Bitcoin going down 51%. And so what you saw last week was the S&P went down 9.5%, Bitcoin went down 50%. So on a relative volatility basis, they actually were just as volatile as each one of them, which I thought was super interesting. Now, that leads us to, okay, we get the liquidity crisis. Every asset trends towards one on the correlation. They all go down. Obviously, we're going to see monetary stimulus step in. We saw some of that last week. The market's pricing in 100% likelihood of a rate cut coming up here. I think it's this week. Talk to us about how does the government and the Fed respond to all of this? And then we can talk about kind of the impact that will have on these safe haven assets or kind of sound money properties. Yeah. Before we talk about how the government is going to respond, what you said prompted a really important thought.

Again, this is not advice, but it's just a lens through which everybody should think about their own financial situation. I would really encourage everyone to start thinking not in nominal terms, but in real terms. What do I mean by that? If we're in a deflationary environment and your assets are going down by less than the index is going down, or more importantly, going down by less than your cost of living, then you come out ahead. Same thing if we're in an inflationary environment and your personal inflation rate is less than the inflation rate of the economy or your assets are going up by more than that, you come out ahead. So we've been in the U.S. really lulled into complacency because we don't have to think about foreign exchange rate risk since oil is priced in dollars, commodities are priced in dollars, right? The rest of the world has to think about exchange rate risk all the time. It's their norm.

And so this whole notion of just because the numerator is going up, the nominal price is changing, that means that my personal situation follows that? Uh-uh. We need to start realizing that. And I've been thinking about that for years, that the stock market going up just meant the dollar's value was actually going down. You need to start thinking about that. And so, you know, literally the best stock market in the last few years has been Venezuela. Well, that's because the denominator was going down. Just think about the algebra, right? If all you're paying attention to is the numerator, you're missing the point. You've got to pay attention to the denominator and whether the denominator is changing value or not. So now let me get to answering your question about what policymakers are going to do.

What they should do is what policymakers did in 1920, which is nothing. There was a depression in 1920, and most of you are probably surprised to hear me talk about it, because most of you, if you haven't read economic history, didn't know it happened, because it didn't get all the attention. Why? Because it was really short. But it turns out it was as nasty as the Great Depression from 1929 to 1936. uh and and so the 19 the depression of 1920 was literally one year um and it was as extreme we

saw unemployment go to 12 we saw gdp go down almost 20 and you know what president harding did he overruled herbert hoover who was his treasury secretary who wanted to intervene and try to prop up industries and try to keep companies in business. And you know what he did? He overruled Hoover and said, let's pay down the U.S. debt. We've just been coming off World War I. And by the way, the Spanish flu of 1918 is an interesting parallel, right? We had a global pandemic, the war was over, and the U.S. president was confronted with a depression where unemployment spiked from 4% to 12% in a very short period of time. GDP contracted almost 20%. And you know what he did? He paid down one third of the U.S. government's debt and the Fed did nothing. And

the reason why none of us have ever heard of the depression of 1920 is precisely because it was only one year. And what gets all the attention was the terrible experience of the greater depression in 1929. Well, what happened then? The government tried to prop up industries with fiscal policy and the Fed got actively involved and it just extended the duration of the pain. The balance sheet reconstruction wasn't allowed to happen fast. And so this is the one that we all think about and we've read about in history books, but the one we really ought to be reading about is the Great Depression of 1920. Anybody who's interested in reading some history, I would really encourage you to start there. So back now, Pomp, again, to your question,

what are governments going to do? They're going to make the same mistake they made in 1929, 1930, which is pedal to the metal on the debt and actually make the balance sheet in even worse condition than it is today and prolong the pain as opposed to just backing off. If I were a policymaker, I would do nothing. I would let the chips fall where they may. I would tell the banks, get out there and raise equity capital. You're on your own. I'm not going to force you to do it, but you're on your own. Boy, they would rush to the market to raise equity capital like that if they knew they were really truly on their own. And by the way, their stock prices would go up if they did. Very counterintuitive. Typically, when you raise equity

capital, you're diluting the existing shareholders, except when the reason for the stocks being down is default risk concern. You take some of that default risk concern off the table and the stock prices go up. This is the way bank management should be thinking. But because they know that governments are going to bail them out, they're not thinking that way. But again, what policymakers should be doing is massively ripping up regulations, taking tariffs off, and just getting out of the way and letting markets, letting the chips fall where they may and letting markets restructure quickly. We'd get the supply chains fixed very quickly if we did that. And, you know, people would have their medicines again. I fear what's going to happen, though,

is that we're just going to do these half measures, which actually make the problem worse and prolong the pain. And so when they do this, I guess there's two repercussions to that. The first is, do you think that it will actually work? And then two is, what will that do or what will the response with gold, Bitcoin, other kind of safe haven or sound money property type assets, What is the response from those assets in your opinion? Well, actually, they'd probably go down if the policymakers did what they should do. But because they probably won't, because politicians always want to seem like they're in control and always want to promise less pain. They're going to try to prop up industries.

I turned on CNBC for the first time in quite a while last week, just because they've got really good, you know, minute to minute coverage of what's going on with market circuit breakers and things like that. And I was listening to Jim Cramer say, we got to figure out which industries we're going to save. That is exactly the opposite thinking that we should be having right now. But unfortunately, you know, he's indicative of how the powers that be think. And again, I'm not making a political point. We have had a string of bad presidents and bad economic decision makers for 50 years in the United States, most of our natural lives. And so he's just reflecting that way of thinking of the world, which is we've got to figure out which industries to save. No, we shouldn't.

We should be letting markets allocate capital to those that will produce new capital from it as opposed to those that will actually consume the capital and make us all worse off. And by saving industries that need to be saved, we're just throwing good money after bad. Yeah, I think this is a really important point because there's two components, and I'm generally aligned with you on this, which is, one, the whole idea of what a lot of people now are calling kind of corporate socialism, right? I wrote about Kramers on television literally begging the Fed to step in, begging for this stuff. And, you know, I joked, I said, it's hilarious. It would be hilarious if it wasn't so sad to see the quote unquote capitalist begging for the bailouts. Right. And what ends up happening is nobody wants to have the hard conversation. Right. David Sachs actually just wrote about this from Kraft Ventures. He wrote about happy talk versus hard talk. And happy talk is basically everyone saying, you know, hey, it's going to be OK. It's going to be OK. It's going great. whatever at a company. And then only at the last second, all of a sudden the founder moves to hard talk with the board and says, Hey, we're running out of money. We got to make hard decisions and we need to do it fast. But the whole idea is the companies that end up being the most resilient,

they have the hard talk from day one. They're always super honest, super transparent. They're constantly questioning. And I think that's what needs to happen in the financial system. Now, your point is if there are things that are going to fail, it's probably because they are bad structure they don't have sound balance to begin with yes there's all exactly the whole idea is if you take a non-emotional non-political view that would make sense let the bad companies fail let the bad industries fail let all of this occur now the the um kind of social aspect of this i think is where people get really uncomfortable right because logically that makes sense if it's a bad company if it's not profitable if the economics don't make sense

they're over leveraged, whatever, let that all fail. People get really hurt. And when that happens though, right? And I think that where the trade-off comes in is people are going to lose their jobs, their short-term pain, but what it does is it builds a healthier system over a long period of time. Kind of your point about that 1920 depression, there is the short-term pain, but that's the cleaning out of the market of the bad things. Instead, what ends up happening is we try to prevent short-term pain, but we actually end up building a bigger and bigger bubble. And so 2008 was painful. But wait till you see what happens next. If they can't come over the top with this monetary stimulus, and to your point, going from a $4 trillion balance sheet

to $10 trillion, people think that's a crazy idea. I don't think it's crazy. They just announced $1.5 trillion in one day. And it did nothing, pushing on a string. Yeah, no, exactly. Well, that is corporate welfare right there. But to your point, back in 1920, the unemployment rate was, I think, 2%, and then it jumped to 12. And within one year, it was back down to 6. And then within another year, it was back down to 2. So it was a painful couple of years. But I think everyone steeled themselves. We're going to have a painful couple of years, at least a painful six months anyway, just simply because of the virus. Leaving all the economics aside, the virus is definitely going to cause a lot of disruption. We know that. And a lot of pain. Restaurants are going to close.

You know, a lot of people who are in the service industry are going to, are really going to have a lot of pain. This is where you have to have your local communities and families take care of each other. It's local charities, it's families, it's your own personal circle. If you've got an elderly neighbor, check in on them. They might not want to go right now when tensions are high in the grocery stores. They might need and really appreciate you helping them to make sure their refrigerator's full. So I think this is where local help is really going to matter. And because frankly, unfortunately, I just don't think people are going to be able to rely on the government for help. And is that going to be awful at some point? Yeah, it's going to be painful. But the

people, to your point, I think there's a psychological aspect of all this. Those of us who've unfortunately understood all this and been waiting for the credit bubble to finally be pricked and a paradigm shift to come, we're over the shock of it. I think the vast majority of Americans are in that shock phase right now of, oh my God, something's really wrong. Now, what do I do? There's a good story that I can relay from someone who worked in the airline industry, who investigated airline crashes. And he told me once that, you know, when he gets to the crash site, inevitably, he starts crying when he sees the carnage, kneels down, says a prayer, throws up, and then gets to work, you know, pulls out his folding table and chair and sits down and starts

working. And I think that's what people need to do. That's sort of the shock phase, which is where a lot of folks are. Those of us who have read the history and expected this to come maybe are not as shocked. Maybe we did start hunkering down a little bit sooner. I did start telling my family, I know you guys think I'm crazy, but get to the grocery store. I really started pounding on that a few weeks ago. And we can think more clearly. There are going to be huge opportunities. The world is not going to end. This is just a restructuring. And whether the Fed is able to reinflate the system or whether we really are in a paradigm shift, in either case, whenever that paradigm shift comes, because I'm pretty confident that it is going to come during my lifetime,

especially seeing what's happening now, I know that I can start thinking about what the world that emerges on the other side is going to look like. And don't shoot the messenger, right? None of the people involved today, none of the policymakers created this situation. We really have to go back to the late 60s and early 70s. That was the seeds of the problems that we're seeing today. Every single politician, every single president, every single banker, every single monetary policymaker is in part responsible for perpetuating the system, but none of them created it because the people who created it are long dead. But all that said, if we can actually just be resilient, somebody actually, I have notes here, somebody actually gave a great tweet

response when I checked my Twitter this morning. Opportunity favors the prepared mind. To the person who said that, thank you. That is such a positive way of thinking about the situation that we're here facing now. If you prepare yourselves for it, that's how you spot opportunities. There's going to be so many opportunities for entrepreneurs to make money in the new economy. And I'm actually really optimistic that once we get through this short-term horrible situation, which is going to be awful. And it's going to affect everybody. I think everybody's family is going to be affected by this virus. It is that contagious. But more importantly, everybody's livelihood is going to be impacted by what's going to happen in the financial system, what's already happening.

Once we get through the other side of that, man, hard work is again going to truly be rewarded. The system is going to be a lot more fair. It's going to be a lot more stable. We're going to have a lot better visibility into it. The elites who have let us down are not going to be in power to the same extent that they are today. This is actually a better world. We've just got to get from here to there and take care of our families and our neighbors in the meantime. Yeah. And before we close, I want to just touch on the idea that a lot of people who are begging for the monetary stimulus, these are people who already are rich. They own real assets. They are

part of the elite. And the reason that they want the monetary stimulus is because the downside of the quantitative easing, the Fed expansion of their balance sheet, et cetera, is it devalues the currency. But if you don't hold the currency, you don't care about that. But the kind of counter argument to those who say, oh, the people are going to be hurt when their company goes out of business, et cetera, there are many, many more people that end up getting hurt from a wealth inequality standpoint when we then go and just print trillions of dollars. And I don't think that people really understand that, right? It's more of a, hey, on the ground, somebody lost their job, I can measure that. I can't really see the systematic damage that's done or the rotting.

And if you go back and you look at the wealth inequality from 2008 to today, it's just an ever-expanding gap. And I think that that's part of this, is that people are saying, oh, here comes all this monetary stimulus. All I hear is the 50-plus percent of Americans that can't make a $400 emergency payment are about to get even more of their wealth stolen. There's about to be an acceleration of the theft of their wealth by simply devaluing that currency that they all hold. And what it does is it's going to shift even more wealth and eventually power into the hands of the elite. We should be yelling and screaming from the rooftop. If you do this, you're actually hurting majority of the people rather than helping them. I just don't think

people see that yet. Oh, I think the vast majority of people do. That's the silent majority that's out there, the so-called Forgotten Man of Amity Shlaes. Her book, by the way, by that name, The Forgotten Man, is a wonderful historical work. Another one is When Money Dies by Adam Ferguson. These are historians, so you're not going to get the political lens as much as you would by reading an economist's view. A lot of folks are looking for books to read. I would encourage you to read both of those. That said, if you're anxious, don't read those right now, Cause you're, you know, those are stories about, um, about very difficult times. If you want to be a prepared mind, they're probably good stories to read, but, um, if

you're anxious, they'll just make you even more anxious. Cause they're, you know, it, it shows you the range of the, of the possible outcome we may be facing here. Uh, but that said, um, you know, I've, I've actually had this conversation of, was it better to have anticipated this going back to 2008, um, or in some of my friends' cases going back even longer, um, and lived with that weight on your shoulders over that whole period of time, um, knowing that this was potentially coming or was it better to actually not to, to, to, to believe that we really were as wealthy as we thought we were, uh, and, um, and, and to, uh,

you know, live in blissful ignorance of how unstable the situation was. I can see both sides of it, but personally, I'm glad I'm in that camp of people who understood it. Um, cause it helped me prepare my family, help me prepare mentally for what's happening, helps me think more clearly through the situation. And I was pretty negative about the world coming off the financial crisis for those few years. As I was reading all those books, it did definitely bring me down. Again, that's my warning to you. Don't read them if it's going to bring you down. But then came along Bitcoin in 2012, and I spotted the impact of that. That's not a speculative asset. Back when we were talking about earlier in the interview about the price of Bitcoin, I really don't care about the

price of Bitcoin. I care about one thing and one thing only. Is the network working? Is it stable? And you know what? That network stability this week was stunning. In the face of all this price volatility and huge increase in volume, every 10 minutes, the Bitcoin blockchain added a new block. And it's not price stable. It never has been. But it's systemically stable. And that's not to say that it's not going to continue to be. I am not giving anybody advice here. I'm just saying that this is one of the alternatives. One of the ways you can empower yourself is to educate yourself. We're all going to be stuck in our homes for the next at least couple weeks, read books, read the history if you're curious about the history. And again, you can

steel yourself for the anxiety. If you are anxious and would rather turn to, instead of understanding the past, what might come in the future, teach yourself how to control your own private keys. If there's one thing you take away from this conversation, it's I hope an understanding that some assets are IOUs and others are not. And I have a feeling that that's going to turn out to be a pretty important distinction. All financial assets, stocks, bonds, your ETFs, your bank deposits, all financial assets are IOUs of leveraged financial institutions who have been given corporate welfare in spades and levered themselves up and made themselves not very sustainable, the big banks especially. But on the flip side, there are all kinds of

assets that you can own where you can control it yourself and you own it outright. Land, your house, your car, your orange groves if you invest in that, agricultural property, jewelry, precious metals, and cryptocurrencies. And I would just encourage you to start reading about all those. Because think about your wealth differently. A lot of people, there's an ad on TV where there's an older couple that talks about, oh, we hand it off to our financial advisor. He knows about that stuff. Well, your financial advisor lives in the traditional financial system and isn't really thinking about wealth preservation the way that I've been thinking about it since 2008. It's definitely not too late. And there's no substitute for educating yourself. That's the

most empowering thing uh that uh that i can advise folks to do take these next couple weeks when you're with your families hug them close uh and and take care of them take care of your neighbors and then spend the time educating yourselves about the what what might actually be coming here opportunity um it comes to those who are prepared it's a great thought i i couldn't agree with you more and it's actually uh i don't think i've ever said this publicly but one of the ways that i think about Bitcoin and allocating it personally, and again, not financial advice, just how I personally think about it, is what percentage of my portfolio and wealth do I want protected from the quantitative easing and the monetary stimulus, et cetera. And I think that over time,

as people educate themselves, like you said, I think that becomes much more obvious to them. But again, your point this week, and I saw you say it in a couple of different places, of the Bitcoin network is still operational, still strong. It's still kind of doing exactly what it's supposed to do. If you compare that to the legacy world, right? I think I saw you say somewhere that the legacy world foundation is unstable and everyone is focused on getting price stability. So the underlying fundamentals almost don't matter as long as they have price stability. If you flip that in Bitcoin, everyone is focused on the foundation being stable and they don't care as much about the price stability.

Those things, one of them is optimizing for the Bitcoin, right, is obviously optimizing for the long term. And I think that's a very interesting kind of perspective when you compare those two things. So, you know, we'll kind of see how that plays out. But listen, I appreciate you taking so much time to do this, especially sticking through it with the two power outages. Logistical, sorry about that.

yeah no i'm mostly what i'm using right now hey everybody's gonna be dealing with this in the next two weeks yeah um i'm mostly using my twitter account these days uh um so at caitlyn long underscore c-a-i-t-l-i-n l-o-n-g underscore um i also do have a a blog caitlyn hyphen long.com um and post on linkedin and stay tuned. We haven't talked about the bank that I'm starting. Wyoming has an interesting place in history because we're the place that fought a mini civil war over clarity of property rights. It's the Johnson County cattle war in the late 1890s over whether landowners were allowed to fence out trespassers in the form of cattlemen who were driving their cattle up from the

South? Could they go over private property? And we came down as a state definitively after that experience on the side of private property. And there's no accident that the banking laws in Wyoming allow for a special purpose depository institution that is 100% reserved, in other words, not leveraged on the cash side, but also in Wyoming, rehypothecation of assets is actually a felony. And literally, people have gone to jail. This has been litigated up to the Supreme Court in Wyoming and upheld that if you own an asset and you pledge it as collateral for a loan,

and then you take that same asset and then you re-pledge it as collateral for a different loan, that's a felony. It's fraud. And boy, that exact experience happens every single day in the financial industry. And in the state of Wyoming, it's a felony. So where I'm going is there are places in this country that have it right. And Wyoming is one of those. And so I'm working on that. And stay tuned. We will have a big announcement coming out about Avanti Bank this week. We won't have it open until early 2021. We're not technically a bank until we get a charter and we're aiming for early 2021. But I can't see an even bigger need than I see today for a bank like that to come in and help the digital asset industry. So we're working hard at it. Thanks,

everyone. You have one of your biggest fans here. I think what you're doing is incredible. And for those that don't know how hard you've been working to kind of make all this possible, for everyone else, just thank you. Because I think you're right that people are going to how important that work is coming up here. So we'll have to do this again as things kind of transpire. But thanks so much for taking two hours of your day to come do this, Caitlin. Thanks, everyone. Stay safe out there.

Hey, everyone. Pop here. If you like this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us

take the entire crypto ecosystem to the top of the charts i appreciate you listening and see you next time on off the chain