The Pomp Podcast - 294: Cullen Roche Explains The Ultimate Breakdown Of The Federal Reserve

Episode Date: May 14, 2020

Cullen Roche is the Founder at Orcam Financial Group, a financial services firm offering research, personal advisory, institutional consulting and educational services. In this conversation, we discuss how the Fed works, what is the most common misconceptions, whether we will see deflation or inflation in the future, the consequences of not having recessions, how markets would look with no QE, and what he thinks about Bitcoin & gold. =============================== Blockset by BRD is your hosted blockchain infrastructure. Blockset enables enterprises and developers around the globe to deliver high-quality blockchain-based applications in a fraction of the time, at a fraction of the cost. Using the services provided by Blockset, businesses can build professional custody solutions, accurate and near real-time portfolio management solutions, auditing platforms, commercial block explorers, and much more: blockset.com  ===============================  Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link http://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. =============================== Pomp writes a daily letter to over 45,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at www.pompletter.com

This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast. Simply the best podcast out there. Let's kick this thing off. Cullen Roche is the founder at Orcom Financial Group, a financial services firm offering research, personal advisory, institutional consulting, and educational services. In this conversation, we discuss how the Fed works, what is the most common misconceptions, options whether we will see deflation or inflation in the future the consequences of not having recessions how markets would look with no qe and what he thinks about bitcoin and gold i really enjoyed this conversation with colin and i think you guys will as well before we get to the episode

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launching new product after new product so do yourself a favor and go to crypto.com to check them out again crypto.com the place where mass adoption is occurring lastly don't forget I write a daily letter to over 50,000 investors about business, technology, and finance. I break down the complex topics of the day into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at Pompletter.com, Pompletter.com, or go click the link in the description. All right, guys, let's get into this episode with Cullen. I hope you guys enjoy this one.

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 guys bang bang i'm super excited about this uh i feel like we are going to uh one explain what the hell the federal reserve is and why it's important and then we can get into all the nuances of this crazy chaotic economic time that we're in

uh so thanks so much for doing this man hey anthony how's it going i'm doing all right how are you you're in san diego right i am doing great it's uh it's getting beautiful here again so i'm hoping that uh i'm hoping what they say about this weather thing is true this stupid virus that uh you know the nicer weather kind of has at least a little bit of a positive impact on everything so absolutely so for those that don't know who you are let's start with background uh and kind of what you've done in your career and then we can get to a lot of the stuff that's happening now yeah gosh I mean I started my career at Merrill so kind of started a big uh big brokerage firm um managed a lot of money on a big team there um left the firm I just I didn't agree with you know

a lot of the philosophy of the big firms and uh ran a hedge fund basically for like six years during the financial crisis and um and in the last like I mean really what happened with my career was odd in that coming out of the financial crisis, I wrote a lot of research about what the Fed was doing and basically mostly what quantitative easing was, what all these big programs were and the impact they might have on the bond markets primarily. And I ended up doing a lot of like non-discretionary portfolio management for big banks and portfolio managers who were trying to basically navigate the interest rate environment. Cause back then a lot of the work that I was doing, a lot of the research I was doing was kind of counterintuitive to the, a lot of the

mainstream narratives. I was basically saying back then that QE would actually cause a little bit of deflation that it would make interest rates go down. Um, so it was, a lot of it was kind of counterintuitive and luckily ended up being, you know, mostly right. But, um, my whole career kind of transformed coming out of the financial crisis because of that. And so my focus now is mainly conservative sort of fixed income based portfolios, really still focused on trying to help people navigate the interest rate environment going forward, which has only gotten, you know, more and more difficult. So yeah, so let's talk about 2008-09 crisis first, and then we'll get to kind of what's going on now. So in 2008, obviously there was the housing

crisis. The government stepped in, created a ton of monetary stimulus. Every single person who's ever read any economics book immediately says, if they print a bunch of money, we're going to go to inflation, maybe even hyperinflation. Why did you think that QE potentially could cause deflation? and how does that actually work from a mechanism standpoint well it was interesting back then I actually knew a bunch of guys that worked friends of mine family friends and a couple of other friends that worked in Nomura in Japan and it was interesting when they first started ramping up all these big programs I started talking to these guys in Japan because they had been doing QE for like 15 years at this point. So kind of trying to go back through history and

trying to understand it at sort of an operational level, I talked to these guys and they're basically like, look, this thing doesn't do any of the stuff that a lot of the mainstream narratives imply. It doesn't, it's not like printing money. It doesn't make inflation go up. It won't necessarily make the stock market go up. Their argument basically was that it is marginally deflationary because what they're basically doing, the Fed is creating money. So they're creating central bank reserves and basically swapping, they're purchasing a treasury bond or a mortgage-backed security from the private sector. And what that basically is, is it's a clean asset swap, basically. The Fed prints a reserve, swaps it for a treasury bond. But the

crucial thing is that they take the treasury bond out of the private sector economy. So it's almost as if the treasury bond has been unprinted to some degree. It's the Fed takes it and puts it on their balance sheet. And the Fed's balance sheet is, it's like a black hole. It's just this nebulous thing that doesn't exist in the real economy. I mean, we could see the accounting of it. It's there, but it's not like the Fed isn't going to Walmart and buying things with their balance sheet so it's like it's almost like they take the money out of the or the treasury bonds out of the private sector and they bury them in the backyard or something but the the kicker with it was that what they're really doing when they do this is they're taking interest income out of

the private sector and so the private sector's incomes actually go down so in a sense it's kind of like it's like they've swapped a checking account for a savings account expecting there to be like some sort of big rush to go you know now use your your new checking account to go buy goods and services so the whole the whole program in my view is sort of misguided and I'm you know it's funny I I know you're a critic of the Fed and but I'm I'm weirdly also a critic of the Fed in the sense that I basically think that the Fed and a lot of what it does is not nearly as impactful or important as a lot of the mainstream narratives make it seem. So the Fed, to me, it engages in a lot of this funny business with the economy that doesn't really do all of the

things that a lot of people seem to think it does. So, okay, this is interesting, right? Because I actually think that we may agree on the funny business. My perspective is just like, they shouldn't do it. I think your perspective is like, hey, they're doing it, but it doesn't have the impact everyone thinks it has would it be fair to say that you agree they should do it or you're in the camp of they should not be doing that stuff it does depend i think but like i would have said in um in 2008 i actually thought that qe1 was somewhat important and that what they were doing was they were really trying to shore up the banking system and the banking system was such a cluster at that point that you needed to do something because the, I mean, that's the Fed's

primary purpose. And I think this is another thing that some people, I think, misunderstand about the Fed is that the Fed is basically just clearing house. So they clear payments for banks. They're the banker for the banking system, basically. And in periods like 2008, the banking system starts to shut down. And that becomes problematic because if me and you can't clear a payment because JP Morgan and Bank of America are scared of each other, then it causes all these negative knock-on effects that, you know, like your business could start to fail or, you know, potentially shut down for periods of time just because the banks are scared of each other. And that's, it's idiotic the way that, you know, that can even happen. So the Fed is just basically a

public clearinghouse that is, it's always open, they never shut down. So when JP Morgan and Bank of America get scared of each other, the Fed comes in and says, don't worry about it, we're going to clear payments. And we're going to make sure that Anthony and Cullen don't go out of business just because Bank of America and JP Morgan are idiots and scared of each other. So that's the Fed's primary role and they do all this other stuff that is sort of tangentially uh supportive of the banking system but isn't really always necessary like i would say that qe2 qe3 all the other iterations i would say even though the version they're doing now probably a big waste of time um probably not having a very big impact on anything really um and probably to some degree

not necessarily a waste of money, but sort of an unimportant or, yeah, a waste of energy to some degree, just because there are things that they can do to support the economy. And QE just isn't one of the things that's very effective. So I think that a lot of people understand, you know, central banks basically have these two tools, right? They can manipulate interest rates, and they can print money or quantitative easing. And it feels like over the last, you know, really kind of 12 years or so, but even a little bit before that,

the idea of quantitative easing has not only become accepted, we went from emergency measures to now it's, hey, this is part of what they're going to do at certain times. And I guess the big question most people have, right? So some of the listeners have zero clue how the Fed actually, quote unquote, prints money and then injects it into the economy.

You talked a little bit about that. Maybe just explain the actual mechanism of injecting that liquidity. And then we can get to the impact of what that does to an economy in times of recessionary periods. Yeah. Well, the Fed in its simplest manner is just a really big bank. And banks have the ability to create money from thin air literally so if you and i go into a bank and we get a loan that bank doesn't it they don't create the new loan by having deposits necessarily or multiplying their deposits or anything like that they're literally creating a new loan agreement from thin air and so that deposit alone creates a deposit from thin air and it's only backed by whatever the agreement underlying that is, that we have some income and maybe some assets

that are backing the loan or whatever it is. But the loan itself and the deposit, the new deposit that is created is created from thin air. It is a new financial asset and a new financial liability for each of us. And so the entire sheet of the entire economy grows a little bit when that loan is made. The Fed does the same basic thing there. They basically just create these these financial agreements from thin air, wherein the kicker with the Fed is they have all these private banks that are basically required to make markets for them. So when the when the New York Fed goes out and they start implementing quantitative easing, they go in and they basically order the primary dealers who are the big banks that basically make markets for the Fed, they're basically ordering them to

go out and purchase bonds. And the Fed is giving them reserve deposits, creating reserve deposits within the banking system. And the banks are basically going in and buying the bonds and swapping those bonds with the new deposits that the reserves resulted. So the Fed sort of forces the private banking system to be its market maker. And that's how they create all this new money that ends up basically being swapped for the treasury bonds. Got it. And so I think that right now, the general idea that people have in their mind, whether they're right or not, is, okay, we had the coronavirus, which is a health crisis, that then led to a lot of fear uncertainty and uh kind of this liquidity crisis everyone sold

off assets because they wanted dollars right so you get a strengthening dollar you get asset prices that fall the fed then has to step in and try to stabilize markets and drive a recovery right and the way that they've done that is obviously they dropped interest rates and then they basically came in with these monetary you know really bazookas if you will where they just started to say, hey, we're going to print trillions of dollars, right? And there's two schools of thought. One is in the short to medium term, we're going to stay in a deflationary environment and that deflationary environment will suck up all the liquidity and there's no chance of hyperinflation or really any inflation. The second school of thought is you can't print

trillions of dollars without causing inflation. How do you evaluate the merits of those two arguments. And do you agree or disagree that that is kind of the number one debate in finance right now? Oh, for sure. I think the impact of all of this is the most hotly debated thing going on. Weirdly, I increasingly find that people seem to have this view that it's virtually impossible for the government to create inflation. I think that we sort of have it burned in our brains after, you know, the impact of the financial crisis and just falling interest rates in general for 30 years and, you know, ever rising national debt that the everyone sort of seems to be in this mindset that we we somehow can't create inflation. And I think there's kind of two things going on

here. There's the Fed's programs and then there's the Treasury programs. And they're in my mind, they're distinctly different things, because I think a lot of people think that they have this view of the Fed where they think the Fed has to finance the Treasury spending. And I just don't, I don't really think that that's very accurate. The Treasury, the way that the Treasury decides to finance its spending, it doesn't really matter in my view whether they took, the Treasury could literally, if they wanted to change some rules in Congress, the Treasury could go out and print all the money they wanted to. I mean, the actual printing press is in the treasury. It's part of the Bureau of Engraving. So it's not even part of the Federal Reserve to begin with. The Fed just

kind of distributes the money that treasury creates. So if the treasury wanted to just go out and dump a trillion dollars in the middle of Constitution Avenue, they could go do that. They don't have to sell bonds. Under the current existing structure of the way that the legality of the institutions were, we technically have to finance it by selling bonds. But to me, in this environment, there's no lack of demand for bonds in this environment, especially the way that they're financed, because most of the bonds are basically bills. So you're basically, in my mind, the difference between a treasury bill and a US dollar is very, very minimal. There's no signs of a lack of demand for treasury bills. If anything, I think that

given that the U.S. dollar is the reserve currency, there's an extremely high demand for liquidity and bills and currency in general. So the whole financing narrative to me is kind of incorrect. And it's important, I think, to understand that because what the Treasury is doing is humongous and potentially inflationary. The way that they're running their spending programs with a $4 trillion deficit. Pelosi introduced a new $3 trillion bill today. I mean, you could be talking about $7 or $6, $7 trillion deficit this year. Those are huge, huge numbers. And so I think over the course of the last six weeks or so, a lot of people have been focused on the Fed's lending programs, which are, they're mostly trying to support the banking system for

the most part. And I think a lot of people missed the fact that while the Fed was doing some big stuff, the Treasury was doing arguably even bigger stuff. And that's where I think the risk of inflation, if there's going to be a risk of inflation going forward, that's where it's going to come from. It's going to come from the Treasury, not the Fed. So if I remember the numbers correctly, I think that we were targeting like a trillion and a half dollar deficit going into the year. That was kind of the general thought. Then once you get all the stimulus, now it's like, oh, we might get three and a half to four trillion.

If they do more stimulus, that could run up, as you said, to six or seven trillion dollars. One of the big questions is just like, is it actually debt if you don't have a plan or an intention to pay it off? like how do you think about that deficit and the national debt well that's one of the weird things i mean the so you have two sides of a balance sheet here and in a healthy normal economy the private sector's balance sheet is always growing so the assets are always growing and the liabilities are growing there's nothing inherently bad about debt in and of itself i I mean, if you're out there borrowing and you're investing it in things that are productive and innovative and, you know, really useful sources of production, then there's nothing inherently wrong with creating debt to do that.

I think the thing that people tend to sort of generalize about is that things like a high credit card debt, a revolving type of debt like that is terrible in the long run because it just suffocates you. There's no way anybody can invent anything really that, or certainly an aggregate, that is going to be able to consistently pay off like a 20% credit card bill. So I think a lot of consumers have it in their mind that debt is always bad. And the reality is that a lot of debt is actually very productive, that a lot of debt is used for good purposes, and it helps create the assets that make the whole economy basically functioning and sustainable in the long run. I mean, the whole reason the dollar is the reserve currency is because for the most part, U.S. businesses and U.S. consumers and households have been incredibly innovative and productive over the history of the United States. And so we've used money in a very innovative and resourceful way that has created the most output of any country in the entire global economy ever. And so that's the main reason why the dollar is the reserve currency. And it's why there's so much demand for dollars, especially in times like right now, because it's backed by, you know, $25 trillion of output that is relatively safe compared to everybody else's resources. And so it's all kind of intertwined in this sort of complex way. And what's weird about what the government does that is so different from what the private

sector does is that the government debt also grows in aggregate over time. You look at a trend of household debt, it never goes down, really. In the long run, it should always go up. I mean, household debt should basically always go up because the household's assets will also go up in the long run. So in the long run, the economy's total financial assets and total financial liabilities will basically be ever increasing. The big kicker with the difference between private sector debt and government debt is that private sector debt can sort of be creatively destroyed at times, like during the financial crisis. you had a lot of you basically had a big debt boom so you had this sort of big real estate inflation and in the reactor because in to large degree banks created too much money

it chased too few homes you had this big boom but then the kicker is that thing deflates over time that doesn't always happen with the government because the government oftentimes isn't actually allowing any sort of market mechanism. There's no competitive force that forces the government to like pay down its debts over time. So that's why this is such a weird environment in my mind is because the government is basically going to print, you know, create four, five, six trillion dollars of new financial assets and liabilities that aren't necessarily supported by anything new there aren't even new houses being supported by all of this so this money is being created out of thin air and being spent and financed and it's basically we're basically

just paying people to sit around and do nothing for the most part to stay home literally so So it's a really weird environment to think about just because the, you have all these supply chains that are being cut off. And the basic, you know, math of like, you know, any basic monetarist view of supply and demand here is that you inevitably there, I don't see how there can't be some inflation that comes out of this. I'm not, you know, I'm not like transitioning into like a hyperinflation sort of mentality, but I don't see how there's any chance that coming out of like, say, 2021 or 2022, that if the economy is really rebounding, that we don't have three, four, 5% inflation. I think you could have the Federal Reserve chasing their own tail, raising rates and trying to catch up with all this stuff way after the fact. so yeah what's interesting I guess is so if we go back to the deficit for a second there's almost this element of like at the same time that they're going to drastically increase the national debt they're also going to lose on revenue as well so you see this much more at the state and local level obviously but even at the federal level there is some lost revenue there

because just commerce has stopped right and so it almost exasperates the debt that is being issued because you're just adding to a deficit by simply on just a P&L standpoint, you're literally taking off one side and while raising the other side to some degree, right? Totally. I mean, so that's weirdly, it's actually a big part of, economists would call it automatic stabilizers. What happens as the business cycle kind of ebbs and flows over time is a big part of government support during downturns is that governments run bigger deficits in part because their tax revenues decline. So their revenues decline and their spending increases at the same time. So you see this in a huge way right now, especially with the way that the CARES Act was structured, that

the government's running these $2,400 a month of extra uninsurance benefits or unemployment benefits. And so what's happened now is that not only, yeah, the government's tax revenue is falling, but the spending is going way up because it sort of naturally does because more people just demand unemployment benefits and things like that. So, you know, over the course of a natural business cycle, you typically will get the government's deficit will shrink over time because tax revenues rise. Even if spending stays stagnant, the tax revenues rising alone will create a smaller and smaller deficit and then you get this explosion in an event like this and so there's sort of a natural ebb and flow and and i would argue that you know to a large degree

you know i don't want to give people the impression that i think that all of this is bad i mean i think i actually think that when the government imposes a lockdown on most of the private sector economy i think they have a responsibility to to pay people to some degree um to continue to be able to survive and you can't you can't tell everybody that the economy is now closed and locked down you're not allowed to go do all this stuff and oh yeah and your economy is effed also um so i think the government has some responsibility the really interesting thing with this is and this is the thing that i think nobody really can answer at this point is how long will this thing last how so and the kicker there is how deflationary is this thing going to be because if this thing

lasts for like six more months or 12 more months and everyone's sort of locked down for that period you're going to have a really devastating economic impact because the whole financial system it's just not designed for people to, for instance, not be able to pay their rents for like three or four months in a row. And you start having this big knock-on effect over time where you're not just going to see the banking system start to kind of buckle. You're going to see almost everything start to buckle to some degree because the whole financial system is based on, to a large degree, these short-term financial contracts, these short-term debt contracts, that they need to be serviced. You can't go three, four, five, six months without servicing these

things without big knock-on effects. And so I think the whole inflation deflation debate still comes down to how long does this thing last? If the lockdown is really over and this thing is really starting to go away as it kind of looks like it might be at this point, then I think you have a serious chance of three, four, 5% inflation in the next few years that the Fed is going to be chasing to grapple with. Whereas if this thing lasts for another six to 12 months, all inflation bets are off. The government won't be able to spend enough money to offset the hugely deflationary effect of all the defaults. Yeah. So there's a number of things there that I think are super interesting. The first

is there's this, I'll call it a theory or just a framework that I used to think about that I call the economic circle of life, right? It's the whole idea of like, you know, take manufacturing, somebody creates the raw goods, they then put it to a supplier that supplies the goods to a business, the business sells it to an individual or a customer, they're able to then pay their rent to a bank and kind of the financing of the raw goods. And you just have this circular kind of component to the economy. And when the government steps in and mandates a shutdown of the business, what a lot of people understand is, hey, there is a downstream effect, right? All of a sudden, I can't sell goods to a customer, right?

And I can't pay my rent and kind of all of those issues that go downstream. But also, there's also an upstream effect. It's almost like a dam in a river, right? Because now all of a sudden, your supplier's got nobody to sell to. They can't go actually buy the raw goods anymore. And you get kind of a bi-directional impact by simply shutting down or breaking that chain of that circle. and so to me it feels like that's what the government is trying to solve for right they're

stepping in and they're saying look i'm going to give you ppp loans so you can pay some employees and try to save jobs i'm also going to give stimulus checks i'm going to beef up unemployment like they're trying to almost triage the problem where it happens but if they don't do that successfully in the short term the problem then spreads across the entire financial system and they'll never be able to kind of fix the problem, right? Yeah, I mean, I, that's where this all starts to get really interesting is I think as a, as a sort of like short term, almost a bridge loan, there was a lot of there's, it makes a lot of sense for the government to be, I think, highly involved in the short term, they shut down the economy, they basically tell everybody they can't

operate and they say look we're going to create a bridge basically here so that people will at least be able to sort of get by in this short term but the longer this thing goes on the just more and more damaging it all becomes for the the aggregate economy and the less and less effective the government response is going to become um i mean they can't you just you cannot prop up the entire economy just by paying people not to do anything because again you get back to that fundamental problem of you have to have resources and output that supports any monetary system and if you don't have that then you know you operate in a lot of ways like a third world economy does where a lot of third world economies have problems with high inflation not just because they have

sort of corrupt governments, but in large part because they just don't have the underlying productive base to support the increases in the finances that you often see in these countries. And so the longer and longer that this thing goes on and you're just sort of not producing the same quantity of stuff, but you're just sort of trying to, I mean, to some degree, fictitiously prop everything up i just i don't see how that doesn't have an inflationary impact in the long run um so i but it's funny i i think we're getting to that point where people i think we're starting to realize that maybe there isn't ever going to be a vaccine for this thing or maybe this thing is just going to be part of our lives for the rest of our lives i don't

don't know if it's going to maybe be some sort of seasonal thing or are these sorts of viruses going to be something that you know occur more more often i think people are starting to kind of consider that and say look to some degree we we're at the point where we now start to we need to start weighing the economic impact of all of this which is very very real and very very hurtful to millions and millions of people versus the reality that having any sort of functioning economy is going to have trade-offs and some of those trade-offs are that people die in car accidents driving to work and you know people get injured at work and things like that and if you have a monetary economy like we do that is the center of all of our lives if you start to get

to the point where we're all sort of thinking you know okay this thing might be around for a lot longer than any of us are comfortable with then it starts to become pretty reasonable for people to start saying, okay, we can do this methodically and reasonably, but a lot of us need to start getting back to life and producing stuff. How do you think about, and I'll caveat this, I know that this is highly controversial for a lot of people, right? But I do think it's an important conversation. How do you think about almost like the math equation between the loss of life and the economic impact. And I've seen people do everything from, you know, Hey, there's a equation of how many jobs lost in exchange for, you know, the save, uh, saving of one potential

life. I've seen things around GDP. I've seen people try to say, well, if you have X number of people unemployed, we know numbers around suicide and drug abuse and, and all that kind of stuff. Just how do you think about that? And, and fully understanding like this is a moving target because the information every day feels like we're getting new information yeah i don't know man i mean that is i can get in trouble in a lot of ways answering this question and i'm cap and i'm completely caveating the conversation because i actually don't think that there's a right answer it's more of like don't i'm not looking for an answer more of like what is the mental uh yeah yeah no no no i i i get it i um it's funny i've been trying to work through

a way to write about that without i mean because here's the thing i mean when someone dies i mean it's just it's obviously it's so tangible and it's real and there's you know when someone is depressed or just you know down on life you know it's harder to quantify what is the the impact of that to society and all so it's in a weird way the this question is kind of like asking you know have living standards increased in the last 50 years you know i would argue that in a lot of quantifiable ways they've they've surged but in a lot of other quantifiable ways or non-quantifiable ways they've they've gone down um so it's to a lot of people it just depends on your perspective I think that we're getting to a point, I think, in this whole crisis where the economic impact so far has not been that great in that I think that the government has been able to build this bridge so far.

Goldman Sachs put out a real, I tweeted this out the other day, that Goldman Sachs says disposable income in Q2 and Q3 is going to be positive. So the government's aggregate impact so far, they've floated most of the economy so far, and they will through Q3. So in the short term, the economic impact isn't that enormous, but I think the longer and longer this goes the more and more this is going to start and feel like an actual depression and the more and more it starts to feel like that the more and more people are going to start to realize that yeah 50 100 million people out of work is that is a quantifiable hugely disastrous

multi-decade damaging type of event that will have a meaningful impact that is maybe not the equivalent of people dying, but is at least very, very comparable to the way that we're all going to perceive our living standards going forward. Yeah. Now I want to clarify one thing. Basically what you're arguing is the economic impact. Yes, there's 30 plus million people who lost their jobs and kind of all of those quantifiable things. But the government basically stepped in with like a life raft, right? And they said, hey, look, we're going to mitigate the actual impact on you. Yes, you lost your job, but here is unemployment plus an extra $600. Here's a stimulus check. You know, here's the PPP loan. These various kind of programs that they're

putting in place for an individual, it may not completely mitigate it, but it at least allows them not to go from I was employed to now I have zero income, right? And that's where you're getting some of that blunting of the economic impact. Exactly. Yeah. So they're, you know, they're providing, I mean, in a lot of ways, it's sort of like a temporary universal basic income is what they're doing. So they're, I mean, again, they're, they're telling people to stay home, they're giving people a paycheck, a lot of people are going to make more money on the unemployment benefits than they were before. So, yeah, they're kind of floating the economy in the short term with the hope that this thing subsides and that we can kind of get

back to living lives by Q4 and the early part of next year. Well, let's talk about that a little bit, right? Because I've heard this a number of times and the math that I've seen at least definitely checks out that there is a a good portion of unemployed that are now making more unemployment than they would have if they had kept their job and how do you think about one the ability for the government basically to say okay go back to your job where you make less money and two how does that change the incentive structure because to me it's almost like does that say more about our unemployment benefits or more about you know the the compensation that people received before they were unemployed? Right. Well, this thing only lasts till July 31st,

the extra, the federal, the $2,400 that they're giving in extra unemployment benefits per month. So I don't know. I think it was like the Hoover Institution or somebody, I can't remember who, Brookings or somebody wrote a piece saying that this was going to have a hugely negative impact on the economy and i don't know i honestly i kind of think that's bogus in that the i don't think there's a lot of people who are who are going to quit their jobs to get 2400 until july 31st with the certainty that when august 1st rolls around they're not going to have any money coming in um so but the there is a weird thing where the longer and longer the government you know sort of guarantees everything. If I find it hard to believe that the incentive structure doesn't

change, assuming they do this for the long term. But so as long as the as long as the programs are short term, I don't think that there is a huge change in the incentive structure just because I don't think any rational person is quitting their job just to get, you know, 600 bucks a week from the government for two or three months. Where is that line? Right. So like one of the things I've thought a lot about is if they had, I think it was a proposal at some point to pay $2,000 a month, every month until we got back to GDP levels that were pre-pandemic level. And so that could be literally two or three years of every single American getting basically a UBI check, right? They can call it whatever they want, but very much down the path of UBI.

Is that a three months? And if they have a kind of a hard stop date, we're still okay. Six months, 12 months, like how far can they go before they kind of run off the cliff? And then it becomes a thing that you can't take back. I don't know. I mean, that's, it's funny. You know, I get in a of arguments with people like MMT people who are job guarantee advocates and you know Andrew Yang advocates who were UBI defenders and I think what's so weird about a lot of these programs is that we don't really have any evidence to support you know the long-term impact of all this stuff Me personally, I find it hard to believe that you could implement something like a job guarantee or a UBI and have no inflationary impact or no change in incentive structures. I just don't see how that makes sense.

I mean, if you could make a living wage and you could earn something, you know, like median income or 60, 70, 80 grand a year with, you know, like government health care packages and stuff like that, I don't see how that doesn't change the long-term incentive structure and meaningfully alter the potential course of inflation. And that's the that's the big kicker. I think, you know, a lot of people we didn't touch on this earlier, but one of my big views is that governments don't run out of money, especially big governments that have big underlying productive economies like the United States. The United States is not going to run out of money. So the whole idea of the government sort of financing its spending through bonds is sort of misleading. The government finances its spending by having non-government creditors. And we finance the government basically at the rate of inflation. The rate of inflation is the cost of the government doing its own business. And so that's the important factor going forward. It's not, can the government afford to spend $6 trillion this year? Of course the government can afford to spend. I mean, they can afford it in the sense that they can create the money.

You know, you and I can't just go out and create $6 trillion tomorrow. There's no bank that's going to take the other side of that trade. the government has its own bank that's going to take the other side of that trade and so financing it from a you know do they have the money perspective is obviously true i mean they can finance they could finance a hundred trillion dollars tomorrow if they wanted to treasury could print it up and dump it on the on the street the the kicker is what is the cost of that in real terms what is going to be the inflationary impact of that and that's the that's the thing that is really hard to wrap your head around because it's it's funny especially in the last like 10 20 years

you know especially mainstream econ we used to sort of have this view that like oh you create more money it creates more inflation and you know more money chases you know more goods or fewer goods or whatever and you get inflation and that's the basic gist of it in the last 20 years 30 years, the government has run ever perpetually higher deficits and debt. The Japanese government is spending, you know, colossal amounts of money trying to offset their deflation and disinflation, and they haven't been able to do it to a large degree. And so I think the weird thing is, I don't think anybody really knows what causes inflation or inflation is just so much more complex than a lot of people seem to make it out to be. And it's not just this simple mechanism

where the Fed creates some money through QE or the Treasury runs a deficit and you automatically get inflation. So I want to talk about a couple of very extreme examples, right? And I'll start kind of on two different ends of the spectrum. There's a lot of people that would say, great the federal government can print as much money as they want they should do that they're kind of centrally planned type economy print as much as you need spend it how you see fit and help us be economically stable but if you can print your own money why do I pay taxes right it's kind of like remove one side of the balance sheet if you will or your P&L and on the other side just like go at it i'm assuming that you disagree one with that and also two it's the

long-term effect but just kind of how do you think about that extreme argument and then we'll flip around and talk about the other side of it yes so this is like one of the big pieces of like the mmt narrative that i think is very very wrong this idea that they they like to claim that taxes don't fund spending um that because the government has a printing press that they they don't need underlying revenue sources. And I just think they're kind of playing word games with a lot of this. I think the tax revenue that a government generates is a function of its output. Okay. And any underlying economy needs output in order to have viable money. The only reason people want money is because they really want the stuff that they can get with money. They don't really want

the money. They really want the stuff that money gives them access to. And so you need the stuff to make the money valuable. You can't, it's putting the cart before the horse to get that backwards. And so in terms of the government and its tax revenues, the government needs tax revenues because it needs underlying output that generates the income that makes everything valuable. So it's like, you know, I like to think of the government basically like a big bank. The government can create money from thin air, just like a regular bank can. But the bank needs underlying assets and income in order to be viable. Otherwise, nobody would trust that bank. That bank would have no creditors. And the government is really similar in that the

government needs to have underlying resources and income to some degree that make everything viable, that makes everything work and supports the underlying credit issuance. Because that's what the government really does. The government is just a big issuer of credit. And the essential aspect of credit is that people need to, to some degree, believe that that credit is valuable in long term. Otherwise, there's no reason for them to want to hold it. And when you have an economy that starts to produce less or just over time starts to sort of stagnate and doesn't have the underlying productive resources, the credit system becomes inherently less valuable to the people who are using it. And what happens is you get a lower demand for money, which results in an increase in

the rate of inflation. So if we then flip to the other side, there's a bunch of people who would argue the government is full of people who have no clue what they're doing and they should allow the free market to reign. Don't step in, don't intervene, let boom and bust cycles occur and your intervention is actually causing bigger problems. And so quantitative easing is not needed and kind of all of the other programs how do you think through that argument i there's some truth to that and it's probably there's probably too many generalizations like going back to the earlier example of why the uh why the fed is a thing capitalist economies with private banking systems are for the most part over the course of an entire business cycle very efficient

I mean, banks are much, much better issuers of credit and they have to compete and they have to be, you know, diligent about how they issue money because it has to be profitable in the long run and they have, you know, constraints that they have to be able to meet. And so private banks are, for the most part, very, very good things because they oversee the credit issuance in the economy in a competitive manner, in a way that the government doesn't or would not do if the government was running the whole banking system. So the problem with private banking is that during periods like 2008 or, you know, the thing that really kicked off the Fed's creation was the panic of 1907 when the whole banking system crashed and the interbank system really crashed. The clearinghouses crashed and that created this big knock on effect that created a great big depression, basically because, again, the banks were scared of each other and it had all these knock on effects that were were super negative. And that just doesn't make any sense. So banks in these very acute situations are bad at operating a banking system, basically. And it doesn't make sense to allow that banking system to exacerbate everything into a depression just because they get scared of each other. So the Fed's core operational reason for existing, to me, makes a lot of sense that in a period like 2008, the Fed did basically its core job really well. All the tangential stuff, the changing interest rates and the QE stuff, that was all tangential to the fact that they actually kept the banking system really liquid. So they made sure that me and your businesses didn't fail because JP Morgan and Bank of America couldn't clear a payment. So that core function is really essential. And I think that the government has a lot of very operations that it does well because capitalists aren't willing to do everything all the time.

Like we're not, capitalists aren't willing to necessarily put out fires because putting out fires isn't very profitable. It's hard to make money, you know, putting your employees at risk in that way and getting people to collectively pay insurance to pay for a fire department and stuff like that. War is the same sort of thing. War has an inherently negative net present value because it's expensive to build things that get blown up and, you know, go out and kill your workforce. It's hard to make money running an operation like that. So capitalists don't want to do these things that have a sort of negative net present value. And I think those are the instances where government makes a lot of sense. The government can do these things that

a free market economy just, it doesn't have the incentive structure to do it because it's just too damn hard to make money doing those things. But where I think the government sometimes oversteps its boundaries is where it tries to you know start to do things that start to sort of impact the positive net present value business structure of of the real economy in a way that starts to alter it to a degree that has a negative long-term impact and i think that you know it's it's funny like going back to interest rates like i think that for the most part, the way the Fed changes interest rates, in my view, is, is for the most part, misguided. I mean, I think that the Fed should basically if I had it my way, I would take the Federal Reserve

and I would basically I would peg the overnight rate at like the core inflation rate. And I would say that that's just what it is. No more Jerome Powell saying, you know, what do I think the future of the world is going to look like. It would just be something automated. The BLS would come out with the CPI number and the overnight interest rate would change. People would earn a real interest rate, a real savings rate on something like treasury bills. And the whole thing would kind of be automated. So there's merit to these arguments where people say that the Fed is sort of, you know, sticking their finger in the air and kind of trying to predict things that they're not very good at predicting. And in a lot of ways, probably, you know, if

they're not making things worse, they're not necessarily making things any better. I believe it to be true that the Fed has never successfully predicted the GDP of the next quarter. They've come close, but I don't think they've ever actually in like, you know, more than 100 times that they've done this they've never actually successfully nailed it yeah i mean i i don't know i predicting predicting the future of the economy or the stock market or any of this stuff is super hard so i don't want to be it's impossible these guys but it's but yeah to some degree at some point though you would think that um you know you look at some of this stuff and you see how bad some of these people are predicting these things you say well maybe we just shouldn't

be trying to predict these things maybe we should maybe it does actually make sense to automate some of these things or you know take them out of the hands of people who you know just are never going to be capable of predicting these things in the first place for sure and so if we keep going down this thread a little bit like how do you think about the world if we didn't have qe in 0809 if we didn't have qe now like what would the world look like if the government hadn't stepped in these recessionary periods and interfered? It depends. I think if the Fed had done nothing in 2008, I think that the banking system probably would have undergone a colossally huge collapse that it would have had knock-on effects that would have caused, I mean, I remember talking to

one of my best friends in DC, who is an attorney, runs a big practice out there. And he said that he almost lost his revolving line of credit. He has a revolving line of credit that he pays most of his employees with. He said he almost lost his revolving line of credit because Washington Mutual started going through all their turbulence. And he said, luckily, that the government stepped in and sort of kept everything afloat. But this is a business that, I mean, his revenues were probably up during the financial crisis, I bet, because he runs a practice that is mostly injury related. So I suspect his business was probably more than fine. And so you have this solvent business that potentially becomes insolvent just because the banking system is in bad shape. And so

I think the economy would have been in a lot worse shape the the hard thing to quantify is with all this stuff is the counterfactual I mean what is the are you are you better off in the long run by supporting these things and not letting things kind of you know get worse when they're when you think they're going to get worse or when they are getting worse versus if you if you actually you know support everything does it does it actually pay off more in the long run to to help people a little bit get through tough times but does it does it end up in like are we exaggerating the the boom bust cycle in the long run by supporting things when we they should be going down and not letting the you know the creative destruction kind of occur that makes

the economy to a large degree function. And I think there's merit to a lot of those arguments. I really think there is. I think that there's also merit to the idea that the government should support certain things, that the government, there's a rational argument for the government to support the banking system when JP Morgan and Bank of America just don't trust each other. You know, that shouldn't, you know, my friend shouldn't go out of business because JP Morgan is a bad business. So it's hard. It's, I don't really know. I don't really have a great answer for it because I, I don't know what the counterfactual would look like. And there's no way to prove it. My, my inkling is that there, a lot of it is good. A lot of it has good intentions

And that in weird sort of knock on effect ways, there probably are a lot of negative impacts in the long run that make things worse off and have a negative impact that makes the economy less efficient. And I mean, you see this regulations are probably the best example of things like that, that have good intentions and probably hurt aggregate economic performance meaningfully in the long run. And a lot of government policy is like that. So it's, again, kind of going back to trying to quantify the, you know, the, the impact of all this. It's hard. It depends on what your, your value judgment is of a lot of this stuff. And so I guess when they do step in, right, because I tend to think that what you're saying around like, there's no black and white world, it's just gray, right? So like, they're not doing anything at all is probably an extreme answer, them doing everything and just giving money to anybody and everybody who wants it is probably an extreme example. So the truth somewhere in between, how do you then think about who do they bail out? Who do they provide funding to? And like,

is that process that they're currently going through and have gone through does it make sense or is it just you know kind of like the fed they're just guessing as to what they think will work yeah i mean god i this particular environment to me is just so unusual because i there's no the thing to me is that there's no one to blame for this thing so i think it's hard to look at people even businesses that you might hate like airlines i think it's hard to even look at an airline and be like you deserve to go out of business because of this thing um or you know any business that i mean like for instance firms that did lots of buybacks i think it's easy to look back at these firms in retrospect and say you should have been more prudent you know the average

American doesn't have more than two months of emergency funds in their bank account. Is it fair to look at everybody and be like, you should have saved more money in case a meteor hit the economy? And I think to some degree, it's a little unfair, I think, to look back with hindsight and say that. But at the same time, I mean, this environment is just so unique that I think the bridge loan type of structure that the government is trying to put together, I think it makes sense. I think that the government is basically making a bet that they hope this thing will be short term and that, you know, they can provide this bridge so that people, you know, don't all collapse into the river here and die economically because they mandated a shutdown from a virus that nobody

caused um the but again going back to the duration of this thing the longer and longer this goes on the less impactful the government is going to be in being able to support this being the whole economy because you're at some point you're going to start losing the underlying resources that make everything work yeah and i guess part of it to me like as i think through the bailouts it's like look why are most companies immediately run to the government it's because the government's kind of the idiot in the room right they're going to give better terms than anyone else uh it's going to be a sweetheart deal and when you look at the bailout structure at least for like airlines for example it was like 65 percent of the money uh somewhere on average actually was a grant and

then there was the low interest uh rate loans and things like that and to me i guess part of it is like again you're changing the incentive and the risk reward structures in a what is supposed to be a capitalistic society by having the government step in in general but even if they did step in and they said hey we're going to lend money or we're going to take an equity position uh and it's going to be on terms that are competitive in the market like i still could swallow that right okay you know what like that that's fine the part that just like they step over the line is when they just say hey you know what we're going to give you three billion dollars and get nothing in return right and then it kind of just feels like oh okay like what like that one where's the

line two how'd you come up with three billion dollars you know and three like you're basically taking quote-unquote taxpayer money debatable right but you're you're basically taking government money and just handing it away and getting nothing in return like how do you think through that i i think the criticisms of the airline bailout are really fair mainly because i think that that was a bridge loan that was probably just a bad bet i mean how many of these airlines are really going to survive this i mean let's be honest about this like how many people are really going to be flying in six maybe even 12 months these got these entities they're not going to be back at full operations for i bet years and years coming out of this thing so

i think in terms of the the government choosing you know picking and choosing who to bail out the airlines were probably one of the worst places to try to allocate funds just because i mean i would not be remotely surprised if in like six to twelve months united airlines is coming back to the government and saying hey we need your help again and then the government's going to take an equity stake. And then the government's going to get the terms that they can get from a GM. The GM bailout, it made sense to some degree just because you got terms that were so good that even the government can make money when you're going in and buying a decent business with a lot of underlying assets for pennies on the dollar. This obviously wasn't

that the airline bailout was again they were trying to provide a bridge loan to an entity that is probably it probably just can't be helped by a bridge you know they need they need their own like golden gate i mean this is something totally different just because the industry i think is so screwed well here's my favorite thing and and uh i've almost tweeted this like five times and then deleted it just because i don't want to deal with all the uh the the um trolls but at the same time at the best investor in the world and warren buffett's selling the airlines we literally have the government rushing in to give them money right like it's a great point it's i mean it's so absurd i mean i think buffett was saying in like january he'll never sell his airline stocks um and then

he unloads all of it so so yeah i mean look i although i think that i think the one thing that a lot of people missed about the bailouts is that I think a lot more of the money is actually going to individuals than people have given it credit for. And it wasn't just a big bailout of like the S&P 500 and the biggest companies in the country. A lot of this money is going to individuals. And you know, I think I started calculating it out, like the average unemployed person is going to get like, like 13 to $16,000 over the next three, four months. I mean, it's, it's not just they didn't just send a $1,200 check to people and say, Hey, good luck with that. I mean, they, they're sending 2400 bucks a month to individuals who are unemployed, plus the $1,200 check plus

like 400 bucks from state unemployment. So it's a meaningful amount of money. And I think it's going to be really helpful. And then, you know, you had some of these, these, the allocations that went to like airlines and parts of the PPP obviously were, were messy and disastrous and went to the firms that never, you know, needed the funding or shouldn't have gotten the funding in the first place. So it's imperfect. I keep saying that perfect is the enemy of the good during this whole thing. And I think there's some truth to that, just because it's such a, it's such an unusual environment that I think that, you know, it being compassionate about the degree of pain that a lot of people are in during this thing, I think is, is the right default view, in my

opinion, in the short term, even if there are some mistakes, there's always going to be mistakes in government programs and i don't want to like you know gloss over it and be like oh yeah you know we shouldn't you know be more judgmental and you know mindful of the way our government spends money but um it's hard to pick winners and losers in an event like this for sure if you had to give the fed a grade like a b c or d in the 2008 2009 crisis what would you give them and then what would you give them so far in 2020 um see this is the thing I just don't think the Fed is as impactful in terms of like the Fed tried to create basically growth and inflation coming out of the financial crisis so if you're

gonna grade them on that scale you gotta give them like a D or something I mean it's not a good grade the growth coming out of the financial crisis was not good They, you know, they create all these big programs that everyone thinks is going to create inflation. And what happens in the rate of inflation is like one and a half percent on average coming out of the financial crisis. Like, you know, they didn't they did not succeed by any meaningful degree, I don't think, in terms of of helping the broader economy. And here's the thing about the financial crisis that I thought was so, so bad in terms of the way they implemented all the policy was that I kept saying coming out of the financial crisis, if you're going to do something, you've got to fix the consumer debt problem. Because that was the thing that really torpedoed the U.S. economy in 2008 and 2009. It wasn't the banking crisis was tangential to the consumer debt crisis.

So consumers took on all this debt. They bought all these overpriced homes. And then when it collapsed, the consumer's balance sheet was destroyed. And to some degree, it's still destroyed. It never really, we never really got a big boom in household credit. In fact, I think I can't remember, but if you pull up like go on Fred and pull up CM debt, you look at household debt, that number year over year going into like last year, I think it was lower than like any recession prior. So we were still at like recessionary levels in terms of household borrowing coming out of 10 years after this thing. And so I think they helped. They helped the entities that they're designed to help, because that's what the Fed does. The Fed, the Fed is structured to help the banking system. And they, I guess, in terms of doing what they are designed to do, they did that well. But it had all these sort of negative knock on effects that were bad in the long run. And so in terms of, you know, did they help avoid a Great Depression or like a financial panic that resulted in, you know, like my friends going out of business because of no fault of their own?

Yeah, they probably had a beneficial impact in the aggregate because of that. But in terms of helping the aggregate economy, I think the U.S. government failed pretty massively coming out of the financial crisis. And I think they probably made inequality worse, or almost definitely made inequality worse. They didn't get money to the right people, the people who needed it. And so yeah, I mean, on the whole, I mean, the Fed probably gets a D and the US government probably gets, who knows, maybe like a C minus, because they did at least a few things that helped infrastructure a little bit. And a few of these small programs that, you know, got money, at least to people who who needed it more than bankers did. And then what about so far this year? I think it's yet to be seen that this test is going to be a long one, I think, in that, you know, we have yet to see how long the virus is going to last. I think so far, the government's gotten a lot more money to people who really needed it. So this hasn't been, we haven't just bailed out banks or anything like that. The Fed's programs have

been humongous. But I think, again, the thing that a lot of people have missed is that, I mean, the CARES Act was huge. The deficit this year is going to be $4 trillion. That's money that's going primarily to individuals. It's going to boost disposable income and it's going to float people for a pretty decent amount of time here. So again, I think that in the short term, probably the right move and probably beneficial to some degree, depending on you know the inflationary impact that's the kicker is in the long run you know let's say Pelosi passes her three trillion dollar bill and um you end up running like a seven trillion dollar deficit this year and we end up with five percent inflation in 2022 um then the whole thing

yeah we saved uh probably staved off a depression and we we created a you know a stagflationary environment that's probably going to last for for a pretty long time um so pick your poison they're both neither one is a great great outcome yeah how do you think gold and bitcoin do through all of this like where do you kind of put them in in this model i'll be honest i have no way of being able to value either of those assets. I think my, sometimes I sound really critical of Bitcoin and gold. I'm not so much a critic of them, just that I don't know how to quantify where their future value would ever be. Like I can look at a 10 year treasury bond and, you know, as crappy as that asset is right now, I can at least look at it and I can tell you,

well in 10 years you're going to have x amount of dollars almost with near certainty even with the stock market you can look at the stock market and say okay you know i like to think of the stock market like it's a 30-year high yield bond basically and so and it yields like six percent or so per year something like that if you hold that thing for 30 years the odds of you earning your five six percent coupon from that thing are probably pretty high so again even with that thing I can look at it and say, you know, corporations are probably going to earn, you know, a certain degree of profit, and they'll pay out a certain portion of that profit to shareholders. And so stocks will do, you know, fairly well over the course of a long term time period. You can't do

that with gold or Bitcoin. So I just, I mean, my gut tells me that anything that is sort of viewed as a hedge against government is likely to perform pretty well, but I'm not going to, you know, blow smoke up anyone's ass. I really don't know. I don't have like a high degree of confidence in that bet, even though if I were building a really diversified portfolio, I would certainly feel, you know, more comfortable owning some things like commodities and inflation hedges, just because if this thing does last for, you know, even a little bit longer than people expect, there's the real meaningful risk of inflation coming out of this. Yeah. And I guess how much of those assets doing well is dependent on inflation actually occurring

versus just the fear of inflation, right? Like, is the fear more important than actual inflation? Or do you have to have the inflation to get those assets to really perform? Not really. I mean, look, gold has done just as well as stocks have over the last 20 years, basically. So, you know, and inflation has basically been going down over that whole period so um you know i don't even think you you necessarily need inflation as much as you need um you do need a belief set to support these things more than else if people believe that bitcoin is going to become a really viable form of money in the future then yeah people will bid it up um so there's they're interesting assets to me in large part because they're

they're almost more belief-based to some degree than they are at least at this point than they are fundamentally based i mean bitcoin's a good example because bitcoin you know bitcoin doesn't have a lot of use cases yet it's not really hugely widely adopted as a form of money or anything um but if you believe that it will be and it slowly does evolve into that thing that you believe it will become it will become more valuable over that time period um the question is is you know will will those things actually unfold i mean at some point the rubber meets the road right i I mean, at some point, if you don't get inflation, then, you know, gold should not be viewed as a as the hedge that a lot of people are expecting it to become. Or if you view Bitcoin as a as a viable form of money and it just never really takes off as a widely used form of money, then, you know, the use case obviously has failed.

So, but yeah, it's super interesting, too, because you see central banks around the world really going after gold. Right. And they've been doing that for the last couple of years. And one of the questions I have, and I don't know the answer, is at what point, if at all, do they say, hey, we should put some Bitcoin in here with our gold? Right. Or do they just never get to that point? But those central bank reserves, it's really interesting to see who's stockpiling gold and who's not. Yeah. You know, the whole Fed coin thing and the Bitcoin aspect of the Federal Reserve seems kind of, I don't know, it's almost antithetical to me that for a central bank to start trying to use a sort of decentralized payment system like that. it just, the whole basis of, of like the Fed and, and really government issued money of any type is that there's a central authority. There's a, you know, there are institutions underlying it that

they give it a certain degree of credibility. There's a court system that supports it. There's a payment system that supports it. And these things are run by, things are run by people. They're run by centralized institutions that, you know, people impose their opinions and views on and they can manipulate them and they can alter them in meaningful ways that, you know, could have both good and disastrous impacts in the long run. So I don't know. I don't think that. I think the two systems in the long run, they they're they're likely to to exist in the same way that kind of gold runs as a monetary system that's parallel to like a government run system right now where you're not going to have one or the other necessarily win in the long run. um i mean you're always going to have governments you're always going to have court systems people need to be able to enforce their payments they do that by you know suing people in a certain denomination of of currency or whatever um so you're always going to have these systems um to some degree so i think they kind of run parallel and you know i i don't i wouldn't be shocked if

these decentralized systems you know gain more and more in popularity i don't know what the value was going to be of that, but certainly the popularity of them will increase just because there does seem to be this trend, this growing trend towards the growth in the way that the government is increasingly involved in sort of everything that people are uncomfortable with. Yeah. The one thing you said earlier that it took me a long time to kind of wrap my head around this, but when you were talking about the programmatic interest rates and kind of the lack of having to predict what happens in the future, one of the things that to me, as I understood it better, made me even more interested in Bitcoin is this idea of kind of

programmatic monetary policy. Now, the difference between what you described and what Bitcoin does is Bitcoin's not having that programmatic or kind of automatic decision made tied to anything in the economy, right? It kind of is just operating on its own. But the idea that it's got this disinflationary monetary schedule every four years and kind of all of these elements. I always go back to this idea that I do think a major trend in our lives is that people will trust algorithms over other humans, right? And you see that with like, I trust Google Maps. I don't ask somebody when I'm lost in a city anymore, right? I trust Google will tell me the answer to a question, whatever the question is does that ever penetrate into money right and kind of monetary policy and

then what are the ramifications of that but it just feels like that's where kind of the puck is going the big question is just is money you know along for the ride or is money so sacred and so much of a belief system that you need the full faith and credit of a government behind it god i mean the trillion dollar question you know it's to me the um the big thing about a government-based money that i think is really the most crucial aspect of it is that there is a court system behind it that people feel they feel trusting in a in a government issued form of money to a large degree because they can sue somebody if somebody screws them over and that gives people confidence in i mean at the end of the day a lot of this stuff is most

of it is just contracts we're you know like a debt agreement a debt agreement is just a contract between two parties to you know pay someone x amount of dollars now with the expectation to pay them back at some point in the future and that that contract is enforceable in a u.s court And so the money, to some degree, has value because the contract is enforceable. And that sort of central mechanism gives money, government money, value to some degree, just because people have confidence in the enforceability of the contracts that they're using. um and that's what you know i think the thing that makes bitcoin really interesting and potentially i think difficult to adopt as a form of money in the future is that you really need

you really need stable money to be able to to transact in the short term that to be able to get people to transact, for instance, in an overnight market, they need to know that one Bitcoin is going to be worth one Bitcoin tomorrow. And you've seen this with a lot of the stable coins that have come and gone over time, that it's really hard to create a stable coin. It's really hard to create parity basically in a monetary unit and as as screwed up as the the government systems might be the governments just have in a lot of ways they have such huge economies of scale that they're able to create parity in a currency in a way that a lot of private entities just have trouble doing i mean a lot of i mean a money market fund for for instance

is is a stable coin to some degree or a stable monetary unit to some degree and private entities run these things all the time and they try to they try to stabilize them and they they for the most part do a pretty good job but they they don't ever do quite as good as the government does because they just don't have the same economies of scale because they just don't have the same income streams they don't have the same cash flows and governments are just such big colossal entities especially one like the united states that they're able to create parity in a currency in a very very liquid and somewhat easy manner that um gives people confidence that one dollar is worth one dollar i mean in nominal terms i mean one dollar is always going to be worth one dollar

tomorrow and you don't really have to worry about that and that's what makes it's what makes the the decentralized aspect really fascinating to me from sort of a nerdy monetary aspect is like, can a decentralized entity ever actually achieve that? Because I think it's such a crucial aspect of, of people having the confidence to utilize any form of money in the short term. Yeah. My, uh, my, my favorite chart that I've seen in, in, uh, it is definitely a little bit of a troll magnet, if you will, on Twitter, I saw somebody sharing the S&P denominated in Bitcoin over the last couple of years. And it's basically, you know, down into the right at a 45 degree angle for the most part, right? But being denominated in Bitcoin, obviously does that

when you then flip it around into an inflationary currency, right? It's obviously up into the right at a 45 degree angle. And the question then becomes, you know, the ramifications of an inflationary versus deflationary type currency what is right can people survive you know can you have an economy that thrives on a deflationary currency like all of these things i think uh there's lots of theories and people have their personal opinions but at the end of the day we actually don't know right totally i mean that's one thing yeah i always wonder about that with bitcoin so like if um let's say bitcoin became really widely adopted i i wonder sometimes would it would it have an inherently deflationary underlying basis to it still or would it

you know if you reach sort of an equilibrium where it was really widely adopted and let's say it's some you know value of like a million dollars or whatever it is and um you know you reach some sort of stability point with bitcoin as a as a form of money um would it continue to be an inflation hedge or would people utilize it then in the same way that they utilize a dollar and that it would be viewed as a you know almost a stable monetary unit that you just exchange goods and services for and that's the i mean that's the kicker why is like why is government money inherently inflationary because it's fixed at par i mean the government doesn't provide an inflation hedge they basically say one dollar is worth one dollar and the trade-off is you know

you have to produce things in the short term that you have liquidity for so we have a stable monetary unit that people can use in the short term and in the long term we hope to produce things that will will basically protect us from some form of inflation in the long run we have the underlying resources using these short-term contracts to protect us in the long run and that's basically like a stock certificate is basically an inflation protection hedge because it's its cash flows are connected to the underlying resources that make the short-term money viable so you like a basic premise of asset allocation is you want to own inflation hedges because you always need the short-term liquidity component of a portfolio everyone needs to hold

cash to some degree whether it's just for emergency purposes or um you know stock buybacks or whatever um but everyone needs a short-term part of their portfolio and you need to hedge that with the part that is going to have an inherent inflation hedge, which is the part that's attached to real resources to some degree. Yeah. Well, and here's the part to me that, again, this is an evolving kind of train of thought for me as I think about Bitcoin and kind of where it could go and what the ramifications of that are. But if you do have a deflationary type asset, not only do you get a stable value, you actually get a value that has an opportunity cost of spending it, right? Because it's going to get more valuable over time. And so

what you do is you have the exact opposite effect of an inflationary asset, right? Currency, the whole point of spending the cash is because it's going to be worth less in the future on a purchasing power basis, although it doesn't happen quickly. Well, if you reverse that and you say, actually, this thing you're about to spend is going to be worth more, then you really change this from a consumption type economy to something else, right? And I think that that's where a lot of people point to something like the great depression and and kind of all of these different times where we've had deflationary periods and and you know it it ultimately comes down to uh i think money's a belief system and it is going to be what do you believe in right do you believe in

a government the full faith and credit of it and the military power and kind of that that par value and all that stuff or you end up believing in this kind of programmatic transparent monetary policy uh it is a wild and uh somewhat out of uh left field or off the fairway type idea today i think a lot of people in bitcoin think hey that's going to become more consensus over time but that's the risk you're taking right is that it may never do that and therefore you end up in left field and everyone's like hey man the rest of the financial system kind of continued on its way like what are you guys doing yeah uh listen before we before we wrap up um what is the most important book you've ever read the most important book i've ever read that's a big question

um gosh financial or non-financial i mean i would say non-financial um god i mean my favorite book just from a personal perspective is um is probably the man's search for meaning i just to me um the whole victor frankl story in in auschwitz and the the thing that really i think had a big impact on me from that book was um this whole idea that no one else can really determine your mindset about things that no matter what your circumstances are you can you still have the ability to choose to have a certain perspective about you know how good things are how bad things are um and i don't know for me i think especially being in um in like the financial arena um you know you have so many conflicts of interest and so many people that are sort of trying to create

competing narratives and perspectives that it's it's important to sort of be a really independent thinker and not necessarily get too attached to like any type of mentality and not be not be really impacted or biased by other people's opinions too much and not let them steer the way you believe and view the world you know you could say that 10 times more so people hear you because i couldn't agree more and and and it's look it's funny right i mean look i've had the pleasure of interviewing uh an incredible number of people on here a lot of you know macro investors and things like that and i tell people all the time that uh my two biggest takeaways are one obviously these people are intelligent um but but also how clear-headed they are how much uh

in control of their emotions and psychology um and and when you talk to somebody who has that ability uh what you realize is that's what ultimately gets them to original thought right and kind of independent thought well that's one of the things that's interesting with people who really at least i find people who really understand money and finance they they have a good perspective of of how money is sort of tangential to the real world and the things that really are important in life and because a lot of people you know weirdly think that money is the end and that the the money is the thing that makes everything better and a lot of people you know it's funny just going through a whole you know career in finance and stuff you just sort of realize that

the the money is just sort of a means to an end and it's not necessarily the you know the the end all that you know I it's funny I got into finance because my I'll never forget it I was at my brother's graduation and I hadn't picked my major yet and he said what are you going to major And I was like, I don't know. I might do like marketing or something. He was like, go into finance. It's where the money is. And I was like, okay. And then I get, so then I get into this business, like, you know, just greedy and expecting to get rich and all this stuff. And slowly over time, you sort of, the more you start to learn about it, you're like, wait a minute, you know, like, it's not necessarily completely wrong, but it's a little bit backwards. I couldn't agree more, man. Where can we send people to learn more about you and kind of what you guys are doing? So my company site is OrCam Group. That's my asset management firm. And I write usually once or twice a week on the Pragmatic Capitalism blog. It's pragcap.com. And my Twitter is just Cullen Roach.

awesome man well listen i i appreciate you being so gracious with your time i think people are going to learn a lot from this and uh i'm glad that adam singer uh suggested we do this because i learned a lot and it's one of these things where uh this system is so complex that every single time um i speak with somebody you learn more and also uh it forces you to kind of question and every belief that you held before, right? Oh, yeah. I mean, that's the crazy thing about it. The whole business humbles you in the long run.

I mean, you get into this whole business arrogant and thinking you know everything. And then the deeper and deeper you get into it, the more and more you realize you don't know anything. That could not be more true. All right, my friend, thank you very much. We'll do this again in the future. Yeah.

Thanks a lot, Anthony. All right, guys. I really appreciate you listening to that episode. I loved it. Hopefully you found it valuable. Before I let you go, don't forget to go and subscribe on your favorite podcast channel to this podcast.

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I'm loving making it. And so we will see you on the next episode.