The Pomp Podcast - 321: Parker Lewis Gives An Overview Of The Federal Reserve

Episode Date: June 24, 2020

Parker Lewis is the Head of Business Development at Unchained Capital.  In this conversation, we discuss the Federal Reserve, their mandate, what actions they have recently taken, how the economy has been impacted, and why Bitcoin continues to be an obvious solution to the structural issues presented by fiat currencies.  =============================== Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp  =============================== Pomp writes a daily letter to over 50,000 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 https://www.pompletter.com

What's up, everyone? 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. Parker Lewis is the head of business development at Unchained Capital. In this conversation, we discuss the Federal Reserve, their mandate, what actions they have recently taken, how the economy has been impacted, and why Bitcoin continues to be an obvious solution to the structural issues presented by fiat currencies. I really enjoyed this conversation with Parker, and I hope you do as well. Before we get into the episode, though, I want to quickly talk about our sponsors. Choice. They're a new self-directed IRA product that I'm super excited

about. If you're listening to this, you're likely part of the 7.1 million Bitcoin owners who have retirement accounts with dollars in them, but not Bitcoin. I was in that situation too. But now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax advantage dollars to do it too it's an absolute game changer retire with choice.com slash pomp again a self-directed ira product that allows you to buy real bitcoin and hold your private keys using tax advantage dollars retire with choice.com slash pomp also don't forget that i write a daily letter to over 50 000 investors about business technology and finance i break down complex topics into easy to understand language while sharing opinions

on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. You can go in the description and click on either of the links. All right, let's get into this episode with Parker. I hope you guys enjoy it. 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. Parker's back for

round two. Thanks for doing this, man. Absolutely. Good to be back. Thanks for having me on. For sure. So for anyone who didn't listen to the first episode we recorded, maybe let's just start with kind of a two minutes on your background and what you've done before you got to Unchained. Yeah, absolutely. So historically, my background is in traditional financial services. I started out working for Deutsche Bank in and around the financial crisis, then went and did a stint in restructuring, creditor side restructuring, workout type work, helping them manage companies through bankruptcies and then coming out of bankruptcy. Then ended up going and working for a hedge fund in Dallas, Texas called Hayman Capital run by

an investor by the name of Kyle Bass. And it was really there when I started to dig in on the Fed, understand global macro. And independent from that, I was also doing work on Bitcoin. And through the course of 2016, 2017, really doing a deep dive on the Fed and understanding, I was attempting to understand what would happen when the Fed began to unwind its balance sheet. And where that logically brought me back to was the financial crisis and understanding QE, How could you understand what would happen when the Fed unwound its balance sheet if you didn't know what QE actually was? And through that process, I was also learning about Bitcoin and ultimately came to the conclusion that Bitcoin was the solution to global QE, or at least that's kind of one of the contexts through which to think about it. And as soon as I connected those dots or as soon as those two roads converged to one, ultimately decided to leave Hayman, wanted to get involved full time in Bitcoin, and ended up joining Unchained Capital.

I lead their business development efforts or our business development efforts. But a lot of what I do is write about Bitcoin. In addition to what I consider my day job at Unchained, I write about Bitcoin. I write about helping people understand how Bitcoin works, how to think about it in the context of monetary economics. But then a lot of that ultimately feeds back into what the Fed's doing. And it becomes very topical given the last three months. You are by far one of the more prolific writers when it comes to this stuff. And you've got a way to boil down what seemingly is highly complex and almost unconceivable concepts into things that everyday people can understand.

So we'll give it a go on the audio side. Maybe start to just explain, like, what exactly is the Federal Reserve's mandate? Because I think starting there is important for people who don't really understand this. Like, why does the Fed exist? Yeah, so the Fed has a – formally, the Fed has a dual mandate. One is price stability, and two is full employment. And in the world of the Fed, they manage the money supply of the dollar to attempt to achieve both of those two goals. Essentially, I think there's probably some discussion to be had around what exactly price stability means, but thinking about it as – they think about it as both price stability of the dollar as well as the purchasing power of the dollar.

But then they also look at output volatility, basically that the economy is consistently growing or seeing growth as they measure it. And then ultimately trying to achieve a level, and I think it's a little bit of a setting up for failure, but trying to maximize employment in the United States via active management of the money supply. Got it. And so as part of that, obviously we saw in 2008, 2009, they got heavily involved and started to make a number of decisions that feels like they went back in this most recent economic crisis to the 2008-2009 playbook. So maybe just give us kind of the two minutes on what did they do in 08-09, and then that'll kind of set us up to understand what they did here over the last 12 weeks or so. Okay. Maybe to go back even further, and then we'll quickly come back

to the crisis because the crisis is really where the term QE was spawned. It really started as large-scale asset purchases. One of the ways that I frame it is the Fed has always been doing QE, at least since the 1970s. So if you go back and look at the base monetary supply of the U.S. dollar in the mid to early 1970s, it was approximately $100 billion. And there was just a steady slope, almost mechanical or linear from that period of time, mid-1970s to 2007, where the Fed had effectively increased the money supply by 700%. So effectively from $100 billion to $800 billion, just on a very linear gradual slope. And then during the financial crisis, or really what started as a housing crisis or subprime crisis that then bled into a banking

crisis, the Fed, you know, if I was to term, you know, to define quantitative easing, it's just increasing the supply of dollars. That's a more technical term. And what happened in 2008 was that effectively what was a housing crisis morphed into a banking crisis that required a much more aggressive injection of dollars into the system in the way that I would frame it is in order effectively to save the banking system that once the once the crisis bled from housing to really the bleeding heart of the u.s financial system then it was banks causing other banks to fail and you know runs on weaker banks causing you know kind of effectively a knock-on effect and so if you if you were to think about over the course of 35 years or so the fed had increased the base money

supply by $700 billion from mid-1970s to 2007, early 1970s. Then QE and really the height of the liquidity crisis was September 2008 when Lehman Brothers failed. In the two months after that period of time, the Fed injected $1.3 trillion. So context, 30 years, $700 billion, And then two-month period, $1.3 trillion. Then that turned out to not be enough. And this is one of my critiques of quantitative easing is that if quantitative easing worked after the financial crisis, why did they need three rounds? And we can talk a little bit about kind of the answer, but that's in many ways just a rhetorical question. But kind of period of 2008, $1.3 trillion added to the system. The economy was still relatively weak in 2010 and 2011. They then did quantitative easing 2 or QE2.

They added $600 billion new dollars to the system. They branched out rather than just buying treasuries to buying treasuries and mortgage-backed securities to support the housing market. But that really is an interesting hallmark period of time because, you know, kind of as QE2 was ending, the European debt crisis was beginning. And the Fed really at the time thought that they would be unwinding QE2 in early 2012, which we all now know in hindsight, you know, I think people who understood what was happening knew that that was never realistic. But then later in 2012, they then began what is referred to as QE3 or QE infinity, basically a QE program that started in the fall of 2012 and effectively went on until the end of 2014. And so $700 billion being added over the course of 30-plus years to $1.3 trillion added in the immediate aftermath of Lehman and the height of the liquidity crisis to a $600 billion QE injection over 2010 and 2011, and then about $1.7 trillion in QE3. So all of it can be simplified down to the Fed inserting dollars into the system to help prevent a liquidity crisis and ultimately to help sustain an over-leveraged credit system. Got it. And so how does that playbook and kind of the effects of it or the results lead them to over the last 12 weeks when we get this economic kind of shock due to the coronavirus and the government mandated shutdown for them to step in so quickly?

It feels like this time was much more firepower, much quicker. Any thoughts there as to kind of like what they did and why it felt like it was just kind of much more urgent than we saw in 2008, 2009? Yeah, I think I would probably contribute it to three things. One, they had the experience of 2008 and 2009. And so there's obviously voices within the Fed that are not just cognizant of the financial crisis but were active participants in helping to in their eyes create a solution in my eyes it's not it just kicks the can down the road and creates a larger problem uh so that i think

that's the first piece that they they lived that world before and if you um you know in 2008 effectively the fed cut interest rates seven times and then we had a liquidity crisis and they injected 1.3 trillion so first and foremost i think they were seeing a similar type setup And rather than take the more measured approach that they had before, they said, we have a liquidity problem. This is 2008. We need to do this now because we can wait, but then the problem is only going to get larger for ourselves. But the other thing is that it's important, and we can talk about mechanically how QE works. The reason why the problem, I think, is as large and as cute as it is today is very much related to what happened in 2008. So in the lead up to the financial crisis, there was approximately $52.5 trillion of debt in the United States. And that's not derivatives. That's just, as reported by the Fed, fixed liability, fixed maturity debt. The amount of cash in the banking system was only $350 billion. The total amount of the dollar-based money supply was $800 billion.

So it was a massively leveraged financial system. And any time as a system kind of wide event, if that system begins to contract, it starts to feed on itself because it is so leveraged so that the U.S. financial system can withstand individual companies restructuring. can withstand individual industries restructuring like we saw in 2015 with the oil market it can't sustain a system-wide deleveraging event because it effectively just starts to implode on itself there's no way to reverse course unless you know things like the whole system would effectively blow up and that's just the scenario that that that the fed is unwilling to to at least you know contemplate in the immediate term to just let let the the system deliver and so um but then the The third thing is when the Fed added $3.6 trillion of new dollars to the financial system through quantitative easing, that induced a massive credit expansion. So Fed, over the course of 2008 to 2014, added $3.6 trillion new dollars.

That induced an expansion of the credit system by $23 trillion. So kind of going into this year, there was $75 trillion of debt in the United States system. And in the banking system, there was just north of $2 trillion. So each dollar had been lent 35 times approximately. And so kind of on the heels of really, I would say three different, you know, they're probably all interrelated, but three different events. The repo market breaking in September of 2019, the oil market being in material imbalance. Again, two things that are completely independent of COVID and a pandemic. And then layering on mass economic shutdown, the Fed was staring at a larger problem than 2008, saying 2008 was a credit crisis, too much debt, not enough dollars.

Their actions specifically create a system that had even more debt, and then they're reasonably looking down the pipe or the barrel of an even larger problem than what set off 2008 in the combination of those three things with the accelerant really being the pandemic and saying, okay, well, if the size and scope of QE after the financial crisis, given it started with something as small as subprime required as much as we had to do, these are three things that are all happening at the same time that are going to cause the system as a whole to de-lever. And as soon as that happens, it's going to bleed into the banks and we have to get ahead of it, and we got to get ahead of it quickly. And that's why to this point from essentially the end of February to this point in time, the Fed has added approximately $3 trillion. So not quite the full extent of five or six years worth of QE after the financial crisis, but in 13 weeks. And the Fed,

when the repo market broke in September of 2019, they'd already added $500 billion. So when you account for all the money that the Fed's added to the system since last September, it effectively equates to roughly the same as everything they did in QE1, QE2, and QE3, just in an accelerated timeframe. Yeah, it's absolutely wild to think about this. And so I want to break down kind of the impact of these actions, right? And so maybe we can break it into short-term and long-term. I recently tweeted and said, while it's a somewhat unpopular opinion in the Bitcoin world, if you do break it between short-term and long-term, the short-term impact seems to be doing what they're optimizing for, seems to be working in their eyes, right? So you see savings

rate up 33%. You see personal income rate up 10.5%. And some of this is not just Fed action, right? Some of it's also beefing up of unemployment. You see also all the fiscal stuff that they're doing as well from the government angle. But just maybe talk through, how do you view or how would you grade the short-term impact of the Fed's actions so far in this kind of economic shock? Yeah, so I think that you have to evaluate it two ways. You have to evaluate it from the perspective of what are their goals and what are they attempting to achieve and are they being successful as defined by those measures? And then I think You have to look at it from kind of the long-term consequences of what is this fundamentally doing to the economy, and is it actually creating larger problems?

And so the first, I would say, what they ultimately are trying to do – so if we go back to the very first question, what is the Fed's mandate? Price stability and full employment. in order for them to maintain as best they can short-term employment levels they must sustain the size of the credit system like that's what that is what qe is about because if you live in a world where there's 75 trillion of credit and only two trillion dollars in the banking system the credit system is the marginal price set so as a function of achieving the price stability mandate, which also has a knock-on effect to the full employment mandate, that there is an implicit mandate to maintain the size of the credit system.

Otherwise, they couldn't maintain, in their definition, price stability or near-term employment, because if people start to default on credit and the credit system starts to collapse upon itself, then there's going to be massive displacement of the workforce. So everything that the – all the actions that the Fed is taking right now are first to stabilize the credit system, inherently supporting asset price levels because they can't support the credit system or stabilize the credit system if they don't stabilize the price of financial assets. So while the Fed doesn't have an explicit mandate to price target the S&P 500 or the Dow Jones, they have an implicit responsibility or mandate to do that via their price stability mandate, because they couldn't achieve both if they didn't. So I would say, at least to this point, you could say they're being successful in achieving the goals that they set out to achieve, which are stabilize the credit system. Now, if we took one step back, even not towards the long-term consequences, but the way that QE works is you get into a system or you have a system in which the problem is fundamentally the degree of leverage in the system. And that's why, and I won't go into too much detail now, we can talk about it later, but in a world that doesn't have such high degrees of leverage, we wouldn't ultimately see the type of economic disruption, or at least not near the extent of it, should the economy need to shut down for a month or two.

It's a function of, like you said, very few people having savings. Maybe that's improving margin. I'll touch on that. But then ultimately, the leverage in times of economic disturbance create greater problems. The economy shuts down in a way that it can't quickly turn back on as a function of that leverage. But if you start in a world where there's too much debt and not enough dollars, and that's a key source of the problem, QE can provide more.

There's two ways to solve a credit crisis or a credit problem. You can either let credit restructure. Basically, okay, there's too much debt, not enough dollars. Let's get rid of debt. Let's de-lever. Or you can add more dollars so that existing debt levels can be sustained. The Fed chooses the latter every single time. The consequence, though, is that there's nothing changing about the market structure. So when you put in those new dollars, when I say first the Fed wants to stabilize the credit system, ultimately, this credit system has to be growing. Otherwise, it's either growing or contracting, and if it begins to contract, then it begins to feed on itself, and it will ultimately collapse. So first stabilize, then grow. So as we look at what happened after 2008, it was they put $3.6 trillion new dollars in the system, and that generated $23 trillion in new credit, so a credit system that went from $52.5 trillion to $75, $75.5 trillion. So you have a debt problem, too much debt, not enough dollars. You put more dollars in, but then in order for that to, quote, work, the only way it can is to expand the credit system. So you just get in this vicious loop of, you know, you are solving the most immediate problem, which is the credit market was collapsing in March. And by stepping in in the way that they did, they did things that were more extreme that they'd even done during post-2008 crisis.

2008 crisis, they bought treasuries and they bought MBS. This time they're buying treasuries, MBS, and everything under the sun. They're buying corporate bonds directly. They're buying corporate bond ETFs. They're providing asset facilities for municipal bonds or municipal money market funds. And so when you look at the theme, it is everything that they're doing is trying to stabilize the credit system because it is so large. And so when I then look at that and say, yes, you are stabilizing the credit system, but then what are the longer-term consequences of that? It's like another way to look at it is by putting more dollars in the system, you are, in a sense, deleveraging the system, but only temporarily because then the wheel starts growing again and more debt starts to form, and that was the source of the problem in the first place.

Now, if I was to come back and look at the savings rate and personal income, the personal savings rate is a rabbit hole to go down because – and it's almost easier to think about in a Bitcoin world, but I'll start with dollars. where you think like well there's a certain number of dollars that exist at the beginning of a year like like how are you quantifying what the savings rate is um like how are you determining how what dollars never actually move because we know each dollar that's you know saved is lent out many times over so kind of like as a definition what is it and ultimately it's like what dollars aren't spent in a year or at least the way that they quantify it i'm dusting off some of the research that I did kind of three years ago, but it effectively equates or is very close to the amount of credit expansion that happens in a year. Because those are the new

dollars that if you start January and you end December, the amount of dollars that weren't spent are basically the new dollars that are entered into the system. And then the question is, well, is that really savings? Or what is savings in the first place? Because in this period of time, the Fed's putting more dollars in the system. So are people actually saving at higher rates? Or do they now just have more dollars relative to how you're looking at a savings rate, whether it's the dollars divided by GDP? And so ultimately, GDP is a function of the expansion of the credit system as is the savings rate. So if you're essentially massively expanding, like the private sector credit system is attempting to contract right now. The Fed is

resisting that by working with the treasury and congress to run massive fiscal deficits such that in aggregate the credit system's still expanding well in that world you're basically manufacturing a higher savings rate and so it's really difficult and then at the same time 40 million people are unemployed there's a lot of uncertainty so natural the natural inclination is to spend less and save save more so is that healthy it's like yes but if the overall system is actually becoming less healthy as a function of it then you know kind of it may feel good in a month or two months but it's going to feel really terrible in six months 12 months five years down the line and so i think that you know another way that i frame that like if you think

about the world of bitcoin because you know living in a world of a fixed money supply it's a little bit easier to conceptualize um that if that if there were 21 million bitcoin and that number wasn't changing what's the savings rate because everybody's always saving everyone's always holding that money um and so is it just the just the amount of bitcoin that never moves in a given year is the savings rate um because you know again if money is just intermediating a series of transactions 100 of all money is always being saved it's just by being saved by a different person. So then you're starting to look at time horizons. And I think, you know, you mentioned before that we'd get into the velocity of money, but I think it's really difficult to look at

savings rate and velocity when a lot of it's being manufactured by the very action that the Fed's taking. You can't really use it as a metric to ascertain the overall health of the economy. Yeah, this is super interesting because I jokingly said this at first, but as we know, every great joke's got a hint of truth in it, which was, is it really debt if they have no plan to ever pay it back, right? And kind of what we've seen is just an absolute expansion. I think we're at 75% expansion of the Fed's balance sheet over the last kind of three, three and a half months. And if they were to put it through this latest rumor proposal of another trillion dollar kind of infrastructure package or whatever it is, we'd essentially see 100% growth in a 12-month

period of the Fed's balance sheet. So is it actually dead? Or how do you think about that balance sheet and the deficit that just seems to literally just in 2020, every time I see an estimation as to what the final deficit for the year is going to be, it's just getting bigger and bigger. And literally, in some cases, has already doubled from where they thought they were going to be at the beginning of the year to now, where they think they're going to end up. Yeah. So first, every time that I hear a new trillion dollar stimulus be announced, i immediately buy bitcoin uh that's my new trigger and i seemingly get to buy bitcoin every week so um no i i do think so you know realistically and i think i think you keyed in on something

really important because if i had the opportunity to if i was sitting before congress or a member of congress and i had chairman powell sitting in front of me i would ask him one question and it is But did you or did you not monetize the debt of the United States? Because the answer is clearly yes. And this is something that in my work going back and reading the transcripts from past Fed meetings from after the financial crisis in and around 2011, I believe it was Richard Fisher, who is the Dallas Fed president. He basically, again, I can't quote it verbatim, but he made a comment that was long lines of, we need to take the key, lock the door, and throw it away on the idea that we will ever again monetize the debt of our federal government. And there were a lot of responses that basically said, we're not monetizing the debt. This is just temporary. Of course, Ben Bernanke's gotten on 60 minutes and said, and we can remove the accommodation when we need to. And

I think there's two problems with it. The first fact is that it's just not true. It's false. They may believe it to be true, but if they believe it to be true, then they don't understand the consequences of their action. And what I mean by that is, if I have my very simplistic wheel, It's there's too much debt, not enough dollars through QE. The Fed adds more dollars that creates more debt. And then you get into a world where you have too much debt again. And that's why each time we look at one of these crises, the Fed is going to have to put more dollars in to sustain the credit system because the credit system is now larger as a function of QE. It's a vicious cycle. And so I think the short answer is, yes, we are monetizing debt. The longer term question or consequence is, how long can that continue? Because you have a bunch of children who are modern monetary theorists that have begun to think that something that doesn't make any fundamental economic sense can go on forever. and rather than spend the time to actually understand a fundamental economic first principle to say, okay, if money doesn't grow on trees and that you can't just print money, then just because I create more degrees of separation and put it at the Federal Reserve level that it suddenly makes

sense. Or if that doesn't make sense on an individual level, on an individual balance sheet level, on a company's balance sheet level, then, oh, it makes sense at a federal level because the Fed has this magic power. And you say, is it really a magic power? Or is there something else that I'm missing that is causing this system to continue to be stood up in the interim? But maybe, just maybe, there's something very naturally that causes that to break. And so when I think about debt monetization, the answer is yes, they're monetizing debt. I define that as after the end of QE3, the Fed's balance sheet was $4.5 trillion. And I wrote about this in Ender's Game, which said then, again, could have been COVID, could have been the next crisis-inducing financial collapse, but that future QE was an inevitability because of the degree of system leverage.

And so when the Fed began to unwind the balance sheet in 2017, in the fall of 2017, they basically slowly took out $700 billion. So they had added $3.6 trillion through the process of QE1, 2, and 3. And the definition of if it were truly just temporary would have been that they had taken out all of the $3.6 trillion. They didn't even get halfway through QE3 before the repo market broke in September. And then even before COVID, they added $500 billion. So they basically put back in approximately 75% to 80% of what they had taken out. And now that we're elevated well above $4.5 trillion, which is where the balance sheet stood after QE3, it is, yes, they monetize the debt. They can never get their balance sheet below $4.5 trillion again because those dollars are all needed to support an even more levered financial system. And so if I describe putting dollars in in one sense as deleveraging the system, basically you've got debt as the numerator and dollars as the denominator.

If you put more dollars in the denominator, you're deleveraging. But if you're taking those dollars back out and essentially reversing the fact that you've monetized debt, then you have the exact same amount of debt in the world and you have fewer dollars to service them. So you're actually re-levering the economy as a function of that operation, and eventually it breaks and you have to put them back in. So I think that there's a reality that while that is true, the amount of debt in the system and the degree of leverage actually keeps the system – it's a precarious balance, but it actually keeps the system together and causes it to break at the same time. And what I mean by that is that it's actually the high degrees of leverage that create demand for dollars, so that you can put $3.6 trillion in after QE and still have a world where the dollar generally holds its purchasing power because so many people are short them. And in many respects, the same dynamic exists today. You know, before March came around, there was $75 trillion of debt, $2 trillion of dollars. So if you put $3 trillion in the system from March to today, you're still at a position where each dollar is owed 15 times. and people are constantly having to demand dollars and that's keeping that that's allowing

the dollar despite the fact that a massive amount of dollars are being created that is what causes the dollar to hold its value because so many people are short of them and so many people need them now effectively and ultimately over time you will get into a situation where that the amount of dollars that they have to continue to supply into the system becomes less and less scarce relative to the amount of debt, and all while people are opting out and going to Bitcoin, and as people are opting over to Bitcoin, the marginal demand for dollars becomes weakened or lesser and lesser over time, and once a critical mass of people, or once the density gets high enough in the Bitcoin world of people holding Bitcoin, and you don't have as many people constantly demanding dollars,

that's when this cycle of QE ultimately breaks down, where they can't continue to do it, because the dollar, while they're doing it, doesn't maintain its value. Yeah. And so I guess like over that long period of time, historically, we've seen them kind of play this high wire act, right, which is essentially look at what the debt levels are and either add or subtract dollars and try to maintain some level of stability kind of as their mandate states. But really what you're talking about here is now the swings or kind of the volatility of the problem that they're dealing with is getting bigger and bigger because there's more and more leverage, right? So you go from kind of, hey, each dollar is levered three times, five times, 10 times, 50 times, you know, to whatever it is now. And so when you see that happening, is there a point in time where the kind of barrel of the gun they're facing is such a massive problem that they literally hit the print button and they create all of these dollars and they inject them into the system and they actually overshoot the target, right? Or they end up getting into a place where they've created so much dollars and put it in a system that that demand can't actually soak it up, right? And we end up getting to kind of high levels of inflation?

Or is that something that is more of what I would consider there's a theoretical argument around high levels of inflation, and then there is the applications that we've seen in reality in multiple countries around the world where similar things have happened? How do you think about that long-term impact, and what is the likelihood of us getting to kind of the doomsday scenario from their perspective? Yeah, so I think that – I believe that day is inevitable. I think that when I think about system leverage, I think about it on a nominal basis and on a basis that's relative to the amount of dollars that exist. So, you know, thinking about it, because they are two different problems. It's like $75 trillion of debt is a lot of debt. Now, by the function of QE, they're effectively just over time actually reducing the amount of debt to dollars, but there's also at that same time, the problem is larger. So, you know, in the future, you're going to need to insert more dollars to support a larger credit system.

I think that that's fairly intuitive. But through the course of that, I think the problem is twofold. And we're already seeing it with a guy like Paul Tudor Jones beginning to allocate Bitcoin, right? You can put dollars in the system, but you can't make people value them. And the more, you know, kind of if I was to... summarize the problem that they're having even in this period is it's the largest it's ever been it's the quickest it's ever been and the breadth of it is as wide as it's ever been they're buying everything under the sun and the combination of those three things is causing people to wake up

and say this doesn't make any sense and more people obviously not directly it doesn't happen overnight, but marginally in an accelerated way, people are connecting the dots between that and Bitcoin. And that over time, as people see the charade going on, that they would say, okay, I see that more and more dollars are being added to the system, but you can't make me value them the same as I would have yesterday. And I'm going to increasingly convert those to the bitcoin or some other monetary medium and and i think that over you know in part that with each passing one of these crises and we don't know you know come the end of 2021 the fed's balance sheet very possibly could be 10 trillion dollars um you know there's no way for the federal government to

run three trillion dollar deficits without the fed financing it in some way or the other and And so kind of part of it is just the deterioration of the dollar through kind of just effectively the distribution of that through the financial system. But then the other part of it is that while the financial system as a whole is massively levered, there's people within the financial system that aren't. And it's the people that aren't that are generally more productive and that are generally going to get ahead of this sooner than others. And those people, as they see this, effectively just basically exit onto Bitcoin and increasingly will. And those people are people that the Fed system and the credit system are held together because people have to demand dollars. As that becomes less and less true, the efficacy of QE becomes weaker and weaker. Their ability to both prop up the credit system while maintaining the stability of the dollar will become less and less probable and less and less effective. Now, I think the bigger – the most problematic or the longer-term consequence of this whole thing is that the action that the Fed has taken today are materially accelerating the destabilization of the dollar as a function of that. Again, it's not, you know, again, it will happen at some point suddenly. But what I mean by that, and really the economic principle behind it isn't just that the Fed's printing more dollars, the dollars are becoming weaker. It's that the process of QE and changing the money supply, you know, again, it would be less impactful if it was a lower percentage change.

it would still distort the activity to some extent, but that QE, it actually fundamentally changes the economy. Like if you imagined there's a certain set of people that held dollars in March and the people that held those dollars essentially set market prices, not just in terms of the stocks and the bonds, but in terms of communicating preferences through price levels, in terms of any consumer good or housing, whatever it may be. The Fed comes in and they double the money supply. The distribution of those dollars is now significantly different, and it consistently advantages industries that rely on cheap access to credit.

So by putting more money into the system and distorting the price of money, prices don't change radibly, and the money didn't just get into the hands of people on a perfectly ratable basis. And so now you have a different distribution of people that are pricing and communicating preferences. And that causes ultimately supply and demand structures first to change. And this is something that Hayek writes about where he says that it basically manipulates some supply and demand structures in such a way that can only be maintained so long as more amounts of money are being injected into those points of the economy. And that once the

rate of that increase stops or even slows then then everybody figures out and you have a you have more acute unemployment that that high degrees and rapid rates of unemployment are actually a function of distorting and manipulating the money supply and that we are again short term it may feel good like people's 401ks are you know back up to close to all-time highs it doesn't make any sense everybody connects that but they're there and people are feeling better in this point in time but if the consequence of that is you're distorting the entire economic structure of the country and you're inherently accelerating the path towards destabilization of the dollar then what is the cost of that can't be worth the the short-term trade-off and and so like i think

about it through that lens and and people oftentimes think about hyperinflation as They just printed too much money, and it's not really that. It's more so that the printing of the money distorted the pricing mechanism, and the pricing mechanism distorted the economic structures, and then eventually you get into a point where the things that people actually need stop showing up on shelves, and then people – the whole function or viability of a monetary medium falls apart. And so that's where I think, I mean, yeah, I don't, I'm not like a doom and gloom person. That's why I focus on Bitcoin. But that I think is the longer term consequence. And each passing episode of this will require a bigger boat, which only accelerates the end game. Yeah, one of the things I've been thinking about, I do not know the answer to this, but is an interesting kind of framework, is right at the same time that you have kind of this masking of some of those pricing functions that you're talking about, you're also going to get a refocus on kind of resilience in the economy rather than efficiency. And so you're going to get a lot of kind of supply chains, manufacturing facilities, etc. Right now it's talk, but I think over the next kind of three to five years, we'll sort of see more action of people trying to bring that stuff back to the United States. And some of it will be under the name of national security. Some of it will just be under resilience in general. When they do that, obviously it will be less efficient, right? So there's actually a higher cost that will be accrued for sure in the short term.

Over the long term, maybe they can replace some of the costs with technology or something like that. But what feels interesting to me is you've got the printing of money that masks the pricing mechanism. And at the same time, you're actually going to end up having a higher cost of producing certain goods and services. And therefore, you almost have like this perfect storm to some degree that is likely to lead to it just being more difficult or being more friction to getting some of those goods on the shelves like you talked about. um and because they're printing money it sounds like you would make the argument that like it's just harder to see what's actually happening because there's so much liquidity in the market is that fair yeah well i would i would say that um you know and it's easier it's easier to think about the consequences in micro examples um so and i'm not i'm not trying to also then translate this to every sector of the economy but you know i go to my local barbecue joint and the price of beef is now 33% more expensive, or brisket 33% more expensive than it was, you know, three months

ago. And I'm looking at that and being like, hmm, I'm going to now change my behavior, they had to change their behavior. But yeah, I'm not going to go get $50 lunches, you know, so the everybody has to respond. And they're not just responding to changes in core underlying economic preferences, they're having to figure out what the change in preferences actually are of market participants versus what is just a function of more dollars being in the system. And in a perfect world, and that's why Bitcoin is the perfection of a monetary medium, there is no change in the money supply. So any change in price is more clearly a direct communication of a change in preference. And so I think what you're speaking to, and I do think that this will be a healthy outcome

of the pandemic, it might not be a healthy outcome of the Fed's response to it, but that it is that people will look to make their supply chains more redundant. They'll move to localize more things that are critical to say, can we be exposed to a world where pharmaceuticals are you know, overwhelmingly, like, regardless of the fact that it's China, just on, on any trading partner. And it could be if you looked at it on a hyper localized way, it's not just like, you know, it may be kind of build more globally in the interest of national, you know, national interest. But more realistically, when I'm thinking about, you know, when I was reading about the Tyco, or Tyson Foods plant being shut down, I've got a local food supplier that has

local farms in texas you know making sure you know it's like so people are going to people are going to change things in ways that just create greater resilience i think that's positive i think that there's also a question as to if there wasn't um price manipulation in the market to create an appearance that we have a lot of time or that you know we're solving the short-term problem and we can kick off dealing with the problem so to the future that what what what system heals faster the one where people kind of feel the pain immediately and then have to actively work to to you know pull themselves up by the bootstraps or one where they can then be the boiling frog because you know in my world and i think this is the problem that the fed has

yeah and i wish i had the quote in front of me so that i could read it verbatim but But Bernanke in 2011 had a quote when they were kind of coming to the tail end of QE2 and the European debt crisis was ensuing, where he basically admitted, like, I know I can't solve this problem through monetary policy and that there are fiscal and structural problems that can't be solved by the Fed, but we have to do something to be palliative. Like, the Fed, single-handedly, not single-handedly, the Fed almost uniformly has an idea that we have to do something rather than nothing. And again, it feels like it's okay in the context when you remove several degrees of separation from actual economic reality. But imagine that was a company that was just bleeding cash and you were an individual and you were like, oh, okay, I'm going to give you another $100 million. And they didn't change anything. And you're like, oh, they just lost another $100 million. I'm going to give them another $100 million. Eventually, you'd stop doing that because there was a real economic consequence to it. In the Fed's world, they're doing things in a reactive way because they ultimately only have one tool, and that's increasing the money supply. And I would say that actually an action that they could take is not doing anything, and that would actually result in – it may result in greater short-term pain. But just speaking to some of the ideas that you were talking about that may change as a function of the pandemic, it would cause people to react in a much quicker way. That they likely would have done that anyways. But when it becomes a shorter leash or a shorter fuse, then they actually, the survival instincts have to kick in quicker. And then, you know, so it's not necessarily a matter of, you know, are there some positives to come? I believe that there will be. But it's like, well, wouldn't there have been positives to come if the Fed didn't do this too? And maybe they would have happened in a more accelerated timeframe.

I mean, basically, your example of like, hey, companies losing $100 million, why would we give them more, right? And if they don't change anything, I think you could also say it's like, where are they putting the money is a huge piece of this as well. So one, creating the money is a problem, because you're giving it kind of the entire economy. But two, also, if you look just at the bailouts, right, just those specifically, I mean, quite literally, in some cases, that's what they were doing. They were finding companies that had previously been bad capital allocators, and they gave them more money, right? And in many cases, didn't change the executive team, didn't do anything. And so I think that this framework of kind of like, if it's not working, money, just throwing money at the problem may not solve it, can be applied both on an economy level, but also in a number of cases where they chose to actually put the money, right? And it feels like, at least my perspective has been like, I don't want you to print the money, but if you're going to print it, are we actually better off just giving it right to the people? Like, forget buying all these assets, forget, you know, giving it to corporations and stuff like, why not just go and take $3 trillion and just hand it right to people? Right? Does that actually solve some of the problems? Or does that make it worse? Well, I think, you know, two things I would say there. First, I think if you pulled it back up to thinking about the Fed as a company, it would be like, you guys keep doing this, and it doesn't solve the problem. So why do you keep doing it? You know, like if you were, if you did have the temperament of a board member for a Fortune 500 company, you looking at your own actions would have some introspection and say, okay, maybe there's a different approach to this whole thing.

And they just can't get there. But then I think the second question is, I would say that the problem is more directly all of the allocation starts with the Fed. So think about a $20 trillion economy in the United States with $2 trillion in the banking system and $2 trillion are being held by, depending on how you look at it, 250 million people, excluding people who are under 16 or so. and and then suddenly you have 12 people sitting around a room saying okay this is how we're going to spend three trillion dollars in the course of three months right those people even if they're even if they were each individually and i hate using the example because warren buffett doesn't understand bitcoin but even if they were even if warren buffett was each person sitting at the fed and you suddenly said, hey, dude, here's $3 trillion, figure out the best way to divvy that

out, that would ultimately be a very bad outcome because Warren Buffett, as revered and smart as he is, again, despite the fact that he doesn't get Bitcoin, the people that actually make up an economy possess knowledge that individual actors never could. And they understand not only what their preferences are, but then they also understand what their customers' preferences are. Somebody sitting in a room at the Fed allocating that much capital can't possibly have near perfect information or near as much information as the market does. And so it doesn't matter how you're allocating it or who's allocating it or to whom, it's that you're fundamentally distorting the entire purpose of money in communicating prices and communicating information

through price signals by the fact that a very few number of people are categorically changing the game. I think in one of my posts I equated to, it's not like moving the goalpost. It's basically like building the football field on a 1980 style waterbed and then shifting the goalpost. The ground underneath everybody just shook. And in many ways, it paralyzes the entire market. Right now, there is no market function of price and risk. Everybody who and again there's always exceptions to rules but anybody who's buying the stock market right now is not doing it because they're underwriting risk and pricing the risk of an asset they're doing it because they believe that the fed is going to cause asset prices to go up and and what does

that do that inherently introduces moral hazard and and when you have high degrees of moral hazard in markets then you're and a big function of it is bailouts from the fed then you know you just you can't harmonize an economic structure so long as that's going on. So I think to certain ways, you could say, you know, if you put a better group of people together that were allocating the money, like maybe you get marginally better outcomes, but there's a problem fundamentally with the operation itself. And it can't be solved by, you know, changing the people that you give it to or changing the people who are doling the money out. It's actually the fact that, you know, a small number of people just don't possess information and the fundamental consequences is distorting

the underlying pricing mechanism of an economy. Yeah. So you've written an entire series basically gradually and then suddenly. And you were specifically speaking, I think, about Bitcoin. But do the issues that the Fed continues to kind of expand, do those happen in the same manner? Like, is there almost a correlation between these two assets, between Bitcoin and the dollar, where we have a kind of gradually then suddenly collapse of the dollar at some point? And that coincides with a gradually and then suddenly rise of Bitcoin to some global reserve status? Yeah. So I think that, I think the first thing to recognize is that the two stories are inherently intertwined. They are two competing forms of money. They're two competing, ultimately, economic systems. One's spawning, one's redlining. in that, in a simplified way,

one way that I describe it is when a Bitcoin is traded for dollars, the exact same amount of Bitcoin exists and the exact same amount of dollars exists. The market is just communicating a preference as to which form of currency it would rather hold. And a price of Bitcoin going up over time is more and more people signaling

that they would rather hold Bitcoin than dollars. And that what that effectively represents is more and more people on the margin opting out in an increasing way from the dollar system. And that's a problem for the dollar system because it reduces the marginal demand for dollars. And again, the Fed and any government, they can control the supply of their money, but they can't make people value. And so I think that also, if you think about Bitcoin adoption and how is it that today at least and i think the space is going to evolve over time naturally as more and more people hold it there'll be more direct commerce in bitcoin but today the principal way that people

get bitcoin is trading it for some amount of fiat well how do you get fiat you generally sell financial assets you know when someone's thinking about buying a bitcoin maybe they're going to sell their worst stock or maybe they're going to sell their worst bond and so the actual transition over to Bitcoin will induce, in my view, it will accelerate essentially the propensity of the credit system to want to contract a collapse, which will induce the rate at which the Fed has to do QE, and will also reduce the effectiveness of that QE. So I think that it's kind of two sides of the same coin, and Bitcoin, at least in my view is and there's a market signal that's telling us this it you know in its price being that that

it's winning uh and it's going to continue to win as a function of a fixed 21 million supply on one side and qe endlessly or at least intermittently in an increasing fashion on the other side um but that you know when the when the question is well does the dollar collapse gradually or suddenly it's collapsing gradually right now um i think you know you know it's also one of those ideas where people key in on Bitcoin's volatility and they say it's not a bad store value, but then they look at the chart of the purchasing power of a dollar and it's just a gradual demise. And so I think, and just, you know, it's impossible to predict because confidence is a very fragile thing. The dollar is a system that's based on trust. Bitcoin is not. And so

there's a question as to when the confidence in the dollar really breaks. And I think that you will know that when it happens. And when it happens, it doesn't go back in the back, you know, like the cat's out of the bag, doesn't go back in. And I would point to an example of like Argentina, someplace that's not quite at hyperinflation. But if you go back, I think 12 to 24 months ago, you can look at the point on the chart when confidence was broken in the argentine peso and you know if the currency basically collapsed 50 in you know a very short period of time and now it's collapsed 90 you know effectively or somewhere there around where it's like you will know when it happens and it will happen quickly but you don't go from you know trust or confidence

and a currency being lost to overnight hyperinflation, that even beyond there, there is a process, but the breaking point, it should be able to be kind of readily known. Now, again, not everybody's going to know it, right? Most people don't know the fact that the Fed's printed $3 trillion. The vast majority of people, and this is one of the reasons why what the Fed's doing is so pervasive is that most people don't ever learn about the feds actions until they show up at the grocery store and their meat is more expensive or they go to the bar and their beer is more expensive or they're taking health care and the health care is more expensive they're like the way that most everyone including myself it's like not like i'm you know just because i know

about what's happening at the fed that i have a perfect prediction of knowing what my food is going to cost at the grocery store. I have a general idea that it's going to cost more in dollar terms, but that the way that most people learn of information is through pricing. And so in reality, we'll look at a time where the price of Bitcoin will just break the dollar at some point in the future. And the people that are paying attention to Bitcoin, they'll see it and they'll know it. The people that are not yet moved over to the new economic system, they're going to figure it out because their dollars that they still hold purchase less in terms of real goods um and i do think that that that does at some point happen in a very

in a way that is identifiable but it also isn't you know going from we're something to zero yeah and it feels like uh as this is happening um some of my favorite charts to look at are like the stock market denominated in dollars and the performance. And then if you denominate the same thing in Bitcoin, right? I mean, literally it's the exact opposite direction than it was nominated in dollars. If you look at other assets, same thing. And so it feels as if there is a marketing campaign, right? In an indirect way that the Federal Reserve is really running because you're able to highlight kind of a very separate approach to the world. One is, you said, is kind of unlimited QE-based inflation-driven dollars. The other is this fixed limited supply. I guess the

question then becomes, at what point does a government reach kind of the game theory moment of the people are already moving, they're opting into this fixed supply asset. How did they navigate that? Is that just one day that they all get together in a meeting and they're like, look, let's move off the inflation system into a Bitcoin system? Is it something that looks more like, hey, hey, why don't we actually take some of this Bitcoin stuff and put it into our treasury? Like, how do you think about the nation states as this kind of moves from a gradual thing

to a suddenly thing and how they kind of have to navigate that transition? Yeah, so I think that, you know, one of the first signals, I think that certain, you know, we've already seen members of Congress call for people to ban Bitcoin because they're already connecting the dots

that bitcoin challenges the dollar um and i think the vast majority of people think that that's still crazy um that you know bitcoin's a 180 billion dollar asset or i think that's purchasing power but it's still kind of the cute shiny object that's just a toy and it's so volatile but you know the tunes clearly changed in just the last couple of years um for for central bankers Specifically, Chairman Powell made a comment to say, I can see how private money could have a role in the future. But I think that, you know, the first clear market that is becoming a real, I think there's probably a psychological impact. That's just the value of Bitcoin. And it's impossible to predict where that is, but it's probably when Bitcoin is north of a trillion dollars, that that creates a psychological,

this is not something that we can just continue to ignore and then i think on the other side there there is a reality that that the mere existence of bitcoin will make the operation of qe less and less effective and and both of those two factors will cause people to have to deal with bitcoin in some form or fashion i think that there's one camp of people that say well they'll just ban Bitcoin, and we can go back and we promise we'll stop printing dollars or go back to a gold-backed monetary system. And I don't think that that's realistic. I think it's less realistic because it doesn't give them enough credit. I think that people at the Fed will look at Bitcoin, they will get smarter on it, people in Congress will get smarter on it, many people

in congress will own bitcoin um and what they'll ultimately try to do is try they'll try to in in more ways than one probably co-opt the network which again i don't think will be successful but they'll they'll create tighter restrictions on their visibility into the network of you know kind of how how bitcoin's being traded or moved kind of increased reporting requirements i think i do think at some point at you know the they'll basically change the tax rules and yeah they'll say okay everybody who's in the united states again this is specific to the united states but it's probably a playbook for for any government they'll say we're going to accelerate your cap gains taxes on bitcoin pay that into the treasury and we're going to capitalize the government via

that mechanism and thereafter any bitcoin transactions not taxable like that seems like a realistic and plausible you know at least thinking in their mind solving two birds in one stone i have this thing that's actually functional as money now people demand it i need some of that to be able to fund my government and how do i you know i could either do the 6102 gold ban which again i think would be infinitely harder to enact or or operationalize in in you know the context of bitcoin and so as they're thinking about those 4g chess moves where they're like okay if i do this if i come out and i just try to ban bitcoin does that just fuel the fire and cause it cause my system to collapse more quickly and cause that system to become less

controllable and that once they you know kind of continue to to work through all the different scenarios where they're like, well, maybe I should just accelerate cap gains taxes, capitalize myself, and then say the trade-off that you get for that is that I'm basically just pulling forward your taxes, but thereafter, all your Bitcoin transactions are not taxed. So I think that they're going to increasingly have to deal with that, but I think it will principally be a function of Bitcoin's price. And Bitcoin's price is a function of adoption, which is also a positive side that more people will have it at that point in time.

So it will be harder and harder to, you know, regulate away and that people within Congress or legislators all over the world will take the route of taxing and reporting rather than causing their problem to become larger by resisting it. Last question for you is around gold. How does gold play into all of this? oh man i i don't like go out of my way to to diss gold but i can just tell i can speak from my own experience i think that bitcoin is an order of magnitude better as a monetary medium than gold i think that the current disaster that is our fiat system is the manifestation of gold's failure basically the the fiat system was built on top of gold and then was ultimately able to be detached from gold and the only reason that was possible to happen

was because there was a limitation in gold as a monetary medium and that prior to bitcoin existing gold was still a better form of money than the dollar but then in certain ways now that bitcoin exists it's almost the worst form of money than the dollar because it's easier to convert dollars into bitcoin and i think that i think that there will be some period of time obviously the market is the market people have their own perspectives and there's there will be asymmetry of information and it's not suddenly that that that gold has the same or that the the implications for gold are not necessarily in the same time horizon the same uh or the or Bitcoin are not the same for gold as they are for fiat. But the long term, I believe that that

is to be true. There is some kind of floor value of gold in an industrial production. But I think what will happen is that Bitcoin will demonetize gold and that the monetary premium that exists in gold, which is its primary reason for holding it, will go away. And I think the difficult thing for people that own gold is that they were 100% right on the problem of the fiat system. But I think what they missed was that there was a limitation of gold that allowed it to exist and that Bitcoin came along and solved those limitations. And that the people that own gold are the type of people that are looking for hard money and that they're the people that are most likely on the early curve of probably the next wave of people to connect and get over the fact

that Bitcoin isn't physical and recognize that the properties that they actually bought gold for are in Bitcoin, but they're improved on a number of accounts. And I would say that in the terms of Bitcoin has perfected scarcity. So there is some marginal inflation of the supply of gold and that Bitcoin is basically combining scarcity with the ability to teleport over a communication channel, which is an inherent limitation of gold, which caused it to naturally be central audit, which created risk for it that led to the fiat monetary system. So I think in the short period of time, people are going to buy gold because it's the default flight to safety.

But over any longer time horizon, or even if I was looking at a year or two years or three years, the value of gold and Bitcoin terms, as with other assets, will continue to decline but there will be more of a direct demonetization that occurs between gold and bitcoin just as will occur between dollars or any fiat and bitcoin tend to think you're right tend to think you're very very right where uh where can people go find uh you on the internet or find out more about unchained capital yeah so that's two places to find me are on twitter parker a lewis or at parker a lewis and then on uh on our website the people can go learn about unchained at unchained-capitals.com any needs that they have around bitcoin we can help

and i release all the the things that i write and use about on the unchained capital block so unchained-capital.com and twitter parker a lewis and uh yeah easy to find awesome uh before i forget is there was there a tv show parker lewis can't lose is out there all tweeting about there there was a tv show called parker lewis can't lose i think i would i think he came out i think he came out in 1990 it was basically a knockoff of ferris bueller's day off um so i often used to get you know i was named after the show but i did predate the show so yeah the show was named after me whether it knows it or not when uh when i saw a bunch of people tweet about that i was what the hell is this thing and then uh i saw somebody said something about ask him uh some

you know about the show or whatever i was like i guess there was something so i uh i didn't pay attention to that but awesome man listen i appreciate you doing this like i said uh you by far one of the most prolific writers around uh bitcoin and uh what's going on in the world so just keep it up you're uh you're educating a lot of people and uh we'll link to everything and we'll do this again yeah pop no i really appreciate you having me on i always enjoy the conversation and hopefully once things open back up, we'll get you back down to Texas or I'll get up to New York

or we can go out to Wyoming.