We Study Billionaires - The Investor’s Podcast Network - Classic 21: Inflation or Deflation w/ Jeff Booth

Starting point is 00:00:00 You're listening to TIP. In today's classic episode that aired back in April 2020 during the first COVID lockdown, Preston and I talked with Jeff Booth about his now legendary book, The Price of Tomorrow. It seems like one of the most important yet misunderstood concepts in today's financial markets is inflation and the coming deflationary pressures. This might surprise you in a time where deflation seems to be the least of our worries. As you tune into this episode, you'll quickly realize that understanding deflation is as relevant as ever. Let's hop to it.

Starting point is 00:00:33 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone. Welcome to The Investors Podcast. I'm your host, Preston Pish, and as always, I'm accompanied by my co-host, Stig Broderson. And my gosh, am I excited to have this conversation right now because, you know, we read a lot of books between Stig and I. and it's rare that I just, I'm literally jumping out of my seat to talk to Jeff Booth, who's here with us right now for his new book, The Price of Tomorrow.

Starting point is 00:01:16 My gosh, Jeff, welcome. And I have to tell you, I'm a bit of a fanboy at this point from this book. It has just been so good. Welcome to the show. So excited to have you here. Thanks so much. I'm a fanboy right back. I'm humbled to hear that.

Starting point is 00:01:34 Well, Jeff, I want to start off because, you have a ridiculous background, like a super ridiculously strong background. And I just want to highlight that to the audience because for me, whenever I first heard your background, I was like, this guy gets it. He is somebody who's been in the trenches of building a business, not just a medium-sized business, but we're talking a large-cap business from ground up. So what I want you to do is to tell people your background, your experience, the size of the company that you have built, all that kind of stuff, just to give them a little bit of context of your background. I've generally been in technology most of my life after I started a building company out of school or real estate and then building company.

Starting point is 00:02:16 Out of that problem, I started a company called Build Direct. At first, it was a e-commerce company, and we went through multiple cycles, the dot-com crash, 2008 and everything else. And we turned that into a platform type of company. At one time, over half a billion dollars, a market cap. And that path took me into the realm of technology, where I've sat on many different boards, investor and portfolio of different companies and technologies. Right now, I'm co-founder of four different technology companies and sit on boards of about 10 different companies.

Starting point is 00:02:51 Where did you start off at at, like, what level and then what market cap did it arise to? Zero out of my house, and I went to over a half a billion dollars of market cap. In my opinion, and I'm kind of curious if you've seen this as well, very few people understand the definition of inflation and deflation. First of all, would you agree with that? Yes, I would agree with that. I would agree with very few people understand how economies work and are constructed, and part of that is an inflation deflation for sure.

Starting point is 00:03:25 So I think it's vital that we talk about the definition of those terms. we talk a little bit about if you were going to put them into an application for somebody to understand the terminology, describe that. So which one would you like to talk about first? Inflation or deflation? I try to simplify really complex topics to try to make them broadly understood. So I'm going to do that. If you really understand a topic well, you can explain it to a five-year-old.

Starting point is 00:03:52 So if you just take inflation and deflation, I would say one seems like a bad word. Most people would say deflation is a bad word, right? We don't even want to look deeper into the conversation of what it is. So I'm glad you asked the question. Inflation is when the value of your money goes down and goods and services cost more. And deflation is the opposite of that. The value of your currency goes up and goods and services cost less. It's as simple as that there's different winners and losers, depending if you have inflation or deflation.

Starting point is 00:04:25 But in principle, that's all it is. So let's just say that we're dealing with a deflationary currency and I can buy a chocolate bar for a dollar. Tomorrow might only need 90 cents to buy the same chocolate bar, but you can also have the opposite, inflation. For instance, due to an inflationary monetary policy, and then the chocolate bar could cost me, say, a dollar and 10 cents tomorrow. And let's just isolate that in both cases, right?

Starting point is 00:04:52 Because then the solutions outside of that, you can design different solutions. But that is true. I think people assume if you have deflation, that's a bad thing and they go to consequences of the bad thing. It is true. It's a bad thing for debt. If you have too much debt, deflation, you can't pay back that debt. The debt explodes in real terms and value.

Starting point is 00:05:14 So holders of debt moves in a deflationary environment because it has to be written off. I'll go one further on inflation to try to get your listeners to really look at this at a different level. What if a government, instead of saying we had inflation targets, said, we are going to try our best to destroy the value of your currency, because it's the same thing. And I think for everyone hearing this, whenever you heard that you could buy a chocolate bar from 90 cents, you're thinking, yeah, that's the world I want to live in. I want deflation.

Starting point is 00:05:48 My cash is more valuable. But if you're a government entity and you have to pay back debt, you don't want deflation. So let's talk about the incentive structure that effectively occurs after a government, or really at this point, we're talking about world governments that have implemented inflationary monetary policies for decades, that they've lived by the policy of inflationary monetary policy. So if a country does this for a year, the impact. Tax are not going to be all that noticeable.

Starting point is 00:06:22 But when they do it for decades on end, talk to us about what happens in that incentive structure, particularly after they do it for so long. If you can grow your real economy faster, then maybe it's okay, right? If you didn't have to stimulate, so maybe it's not a bad thing. I would argue the way that the world has worked since World War II has lifted the world out of poverty, has done a lot of good things and everything else. What's happening though today is the same amount of debt to create growth, it's exploding. Every time you're creating more and more debt to pretend to drive growth and you're debasing currency every time.

Starting point is 00:07:01 You're holding asset prices up. And so we get stuck on this merry go-round. I don't think it's good or bad people. I think we're stuck in a system that we don't see we're stuck in it. And without a bridge to how do we change that system, we're dealing with, really profound consequences of having too much debt in the world and not enough growth. So let's talk about a concept called price deflation, which is tied to technology and related to death growth. Could you please elaborate on that?

Starting point is 00:07:32 Price deflation, if prices fall, then the whole premise of my book is technology is creating falling prices. So you can see it everywhere where technology lives. In fact, if you look at the consumer price index, where technology is, where it is not, you can see it really clearly. So you have technology overdriving price deflation and really where you get more for less. The byproduct of that more for less also takes jobs. And for technology companies, it creates a whole bunch of jobs, but not as many as the jobs that it displaces in the non-technology business. So overall economies are finding less jobs.

Starting point is 00:08:15 if you let deflation happen. So you have governments that have too much debt and businesses that have too much debt and the corporates that have too much debt and people who have too much debt. If that happens, the debt's wiped up. How do you press reset on that debt? If the prices fall that you don't have a growth rate to support the debt, then the debt explodes in value. So a person who's listening to this who's very skeptical that this time is not different,

Starting point is 00:08:45 They're saying, this is no different than what happened in 2008, no different than what happened in 2000 or 1987 or early 90s. They're looking at this event right now and saying, these policies aren't going to change. This is just more of the same of what happens during business cycles. How do you respond to that person? I think they're totally missing the point. I like to go to first principles. And technology is moving so fast.

Starting point is 00:09:11 It's exponential across industries. but we've constructed economies in a different time. Technologies mean the same thing, how fast it's moving today, and how fast it's giving benefits. If the people listening to your show look to be their phone, right? The iPhone is only 13 years old. It's not quite 13 years old. So the smartphone, the whole industry is 13 years old.

Starting point is 00:09:34 Look at your phone and look at the home screen and look at all the apps. And ask yourself how many of them you pay for, and you'll see it. And that power is moving into every. industry at learning speed. In other words, your phone gives you abundance at a way lower price than what was previously possible. Your Way's app is free. Your Google searches are free.

Starting point is 00:09:55 It's all abundance. And that is exploding across our society. And our policies aren't keeping up. So in your book, there's a great example of where we are whenever it comes to the speed of which things are taking off right now. And you use the example of a piece of paper that you continue to fold 50. 50 times. Let's hear the question and how people typically respond. And I've asked this question to thousands of people around the world, tens of thousands of people,

Starting point is 00:10:24 and very rarely do I get anywhere close to the right answer. So if I fold a piece of paper on itself 50 times, you can only fold it seven times. But if you imagine you could continue to fold it, how thick would that piece of paper be on fold 50? And the answer is to the sun. From here to the sun. And what happens generally when people hear that, they don't believe it, they go Google it, or you can see the shock on their face. And I don't say that to say, I'm smarter than anybody, because I would have missed the answer too. Most people answer about two inches. What it shows is we're terrible at understanding exponential patterns. COVID right now is why people misjudge how fast it's moving, is it's just an exponential pattern. Exponential patterns are really hard for human minds to

Starting point is 00:11:11 understand, and technology is moving exponentially. Back by Moore's Law, I go through that in detail. Yes, Moore's Law will end. But the next curve, whether it's quantum computers or the digitization of societies, it doesn't matter. I think what's happening with AI technology in general, whether it's quantum, AI, everything else, it will feel exponential to us. And so if we can't understand that fold 33 is from Detroit to Boston, and fold 34 is double that going to the sun. And we're on fold 33 and Moore's Law is right. Moore's Law right now. Full 34, we're in this steep step. So people think it's moving faster. It's moving exponentially faster. And I think it surprises people because they're not looking at the numbers, but it took $185 trillion of debt over the last 20 years

Starting point is 00:12:03 or monetization of debt, overall global debt has increased $185 trillion to produce $46 trillion per year of economic return. Those are the stats. It's crazy. Those are the stats before the crisis. I wrote the book before the crisis. If you think about the exponential deflation that we'll see, that's going to take exponentially more debt. If it took $185 trillion over the last 20 years, and that's only driven marginal growth. Then to get the same amount of growth over the next four years, it's going to take that debt again because technology is moving so fast the other way. So to pretend we have a society that's going to create that much debt.

Starting point is 00:12:50 And then at what debt I see all the news reports and the Fed printing, which is completely logical. They have to based on where they don't have to, which is completely logical what they're trying to do to save the existing system. If they did nothing, we would enter a depression. In fact, in 2008, doing nothing, that's what caused people to respectively abandon capitalism. They allow the same people who created the crisis because doing nothing means depression.

Starting point is 00:13:20 And all that happened is you kick the can down the road and it's a way bigger can. And so trying to escape this crisis by doing the same thing. creates a way bigger problem. And here's the thing, I don't know if we're going to escape this crisis, right, with how much more printing is going to be required. If you think about this from a policy standpoint, if we've talked about first principles and what has to happen anyways and how we have to raise the intelligence level of the conversations coming out a lot.

Starting point is 00:13:51 But if you think about how this whole system is interconnected, so today the Fed had another $2.3 trillion and high-yield debt. And that high-heeled debt is the really subprime of 2008. And why they're doing it and taking that under the balance sheet, next they're going to take baseball cards, is because if they don't, the unwind of the system, the assets unwind and then the banks fail to. And it's just a domino effect, just like subprime.

Starting point is 00:14:19 Remember in 2008, everybody said, oh, some prime is isolated, but the interconnections are not. And the whole system is tied to that amount of debt. And so if it starts unwinding, you start to see who has it and the system fails. So the Fed is boxed and they're trying it all cases to stop that asset price unwind no matter what because then the banking system fails. And I understand that. It is a very real problem and that very real problem could create a depression so severe. But just papering it over is a very real issue too.

Starting point is 00:14:53 And I'm going to go a little deeper on it. Think about what's happening, papering it over. So technology is wanting to keep creating everything cheaper. By manipulating the markets, we're holding asset prices higher, and then a whole bunch of people who can't pay the rents on those asset prices that are artificially held higher because we created money to keep them high, we have to bail out the people who can't keep up the cost of living rise to pay for the prices that we artificially created.

Starting point is 00:15:21 It's the most insane system. And we call that capitalism. We call it, oh, it's working fine, right? If you dig into this from a first principle at the standpoint, there's nothing in this. It's fine. If I was going to summarize what you were saying there and kind of relate to the example of folding the paper, I'm kind of curious if I'm capturing this correctly. So you've got an inflationary monetary policy that's been in effect for a long time, right?

Starting point is 00:15:50 the longer that that inflationary policy is in effect, the more that all the people that are sitting there on this money are saying, I've got to invest this money or else it's going to go down in value. That incentive structure that exists for decades, it compounds on itself. And using the piece of paper that you fold it 50 times and it goes to the sun and you were saying we're on fold 34, you were referencing where we're at on Moore's law. But if you would also equate that to inflationary monetary policy that's been in effect for decades, we're at some fold there that on the next fold, you're literally jumping from mercury to the sun

Starting point is 00:16:29 on that fold. It's almost a mirror image, right? You can see if you look at technology and the deflationary trend of technology and how fast that's moving and you look at how much debt is traded in the world to be able to stop that, it's almost a mirror image. and if you add the unfunded liabilities and what's really happening, it is a mirror image. One of the questions that I immediately thought of whenever I was, because everything that you're talking about here just makes total sense in such a simple and elegant way that you describe it.

Starting point is 00:17:02 One of the things that popped out of it, though, whenever I was looking at the deflationary impact on prices that inflationary monetary policy has, I'm looking at a chart and I got this I have no idea where I found this thing. It was on Twitter somewhere, and it was showing about how there's this giant separation between various items since 1997. And one of them, you've got the price of a TV has literally gone down 90% since 1997 to buy a TV of similar size, and it's gotten way better. Quality's gone up, and the price has gone down that much. But then there's a counter argument to that where you can look at the price of medical care, and it's gone up significantly since 1997. How do you describe that in this deflationary price argument

Starting point is 00:17:48 due to inflationary monetary policy? Let's start with education, because education has gone straight through the roof. So does anybody believe that the amount of debt created for education and student loans can be repaid? If all you've done is created an artificial market that's screamed higher because you threw a bunch of debt at it and without any fiscal discipline, why do you think houses rose so fast before? Why do you think dot-coms did before that into 2000? When you have free money chasing things, they go up and price. And the question is, if you never have to pay back that money,

Starting point is 00:18:26 maybe they go up and price forever. The only way to never have to pay back that money is to debase your currency, right, to essentially make the currency worth way less. And so you have a bunch of incentive structures that aren't right, It don't work. If you actually take into what's going to happen with technology and medical care, you're going to see if you let natural forces happen, the cost of medical care would come way down through technology as well. It's just starting. So technology is creeping into every sector is being digitized. My Apple Watch knows more about me than my doctor. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You got long days. of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have

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Starting point is 00:22:52 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. So let's talk about your thesis, and I love this because it's so contrarian, and you have so many interesting arguments. Your thesis is that we need deflation, and not when it comes to conventional price deflation,

Starting point is 00:23:25 because we do have that in many areas, but starting another place, namely with deflationary monetary policy on a global scale. Could you please explain your thesis, Yeah. Economics is driven from scarcity, right? It's not from value. And the air you breathe is free.

Starting point is 00:23:44 Why is that? Because it's abundant. In a lot of places, the water is free because it's abundant. In Africa, the water isn't free because it's not abundant. And so you can see through that, pulling that economics into it. So it's not about value. It's about scarcity. It might be about perceived value if you can create scarcity out of perceived value like a brand

Starting point is 00:24:05 would do. It's really about scarcity. I argue in the book that the real scarcity going forward is high-paying jobs because of what's happening in technology. Technology is making more and more jobs, and I go through countless examples of where you're going to see job destruction out of technology. Google, well, they created a monopoly business, destroyed way more jobs than they created in that monopoly business. And you see that technology landscape. I saw it in my own companies, what I can see it in companies today.

Starting point is 00:24:42 And I can see the next steps. I can see what's happening because these things are getting digitized. Some of the companies I'm involved with, they're exploding in value right now. COVID is actually an accelerator to robotics, an accelerator to technology adoption. It moves things fast.

Starting point is 00:24:59 You look at Zoom going from 10 million users to 200 million users, users. How many of those businesses that are working from home right now will say, I need four floors of a building. Maybe they want only one floor of a building and they can get through their work with more efficiently. Technology does that. So if high paying jobs scarce, and every single government around the world is trying to essentially play game theory to protect their highest paying jobs. what they're doing is what Blockbuster did when Netflix was obviously a death threat. And if you look at Blockbuster through that lens, people look at it today and say,

Starting point is 00:25:39 why didn't they buy Netflix for $50 million? And hindsight is 2020. The Blockbuster management had 9,000 stores, right? It looked like their business was perfect. And it looked like in the future their business was perfect. All they missed is how fast technology was moving. And it made their business redundant overnight. The entire thing that drove their success drove their failure overnight when digital

Starting point is 00:26:03 wind downloads fees went faster. And what did they do? They added candy aisles to the stores. And we laugh at that, right? Now we laugh at that. Like, are those crazy people? If you look at monetary policy today, what all the solutions are, we're adding candy aisles to the stores.

Starting point is 00:26:21 That's what we're doing. It's driving off a cliff the other way. It's so evident in everything. And all of the money is going into protecting the status quo, just like Blockbuster trying to protect their 9,000 stores. And it's not just a CEO and a small staff that's adding candy to the aisle. It's like almost every academic on the face of the planet that's trying to add candy to the aisle. When you're talking about monetary policy, this is such a massive global groupthink situation that it's almost unfaithful. that so many people are trying to add candy to the aisle.

Starting point is 00:26:59 But again, it's logical when you think, I explain it in the book, but when the top businesses in the world and Blockbuster was a really top business in North America, and I'm assuming it's not just a bunch of dummies running the company, right? If they can't see it because they're in the system, and those are top CEOs, top people around executive teams trying to protect the status quo of the system, if they can't see it, if it takes somebody outside of a system to see it. Who is outside of the system that we've created for all of us enjoy our economic benefits and everything else? And so we're all caught in the same system. And that radical idea I had, it was really looking at it from ground up first principles and saying,

Starting point is 00:27:42 I understand the dilemma of central banks. I understand what it looks like. How do you bridge from blockbuster to Netflix in a global economy? How do you do that? Right. And so I think that that's the conversation we should have. How do we transition to something that looks way more digital in nature, way more technology in nature, and as a byproduct of that is going to have less jobs? And the thing is important to understand that the decision makers are not incentivized to want the deflationary monetary policy. For instance, if interest rates go up, the value of all assets go down because everything is based on the cost of money. Then elected officials around the globe want to have funding into the district.

Starting point is 00:28:23 they can get re-elected, that is their incentive structure. So they want a lower interest rate because that would be good for the lobbyists that support them. And then if you add into this that fiat currencies are not packed, elected officials might make the wrong decision for the population, but they're actually very rational whenever you consider the own incentives to not having a deflationary monetary policy. Yeah, and what is it, we have a transition coming one way or the other. It might be too late to do an orderly transition from blockbuster to Netflix. I suspect it's too late because we haven't done the right things before. But what that transition looks like, it could be a reset and go through a depression and the debt wipes out. It could be

Starting point is 00:29:06 center banks getting together around the world and pegging to it at common currency, like gold of before 71, right? But the facts are inescapable. We're breaking society by doing what we were doing. We're driving wealth into the hands of very few, and we're socializing the losses. Let me ask you this, and this is a super hypothetical question, which I usually don't like, but I'm just kind of curious to hear your thoughts on it. Let's say I could snap my fingers, and poof, we would have a monetary policy that was deflationary? Would that slow down this breakneck speed of innovation that we're seeing today? Would you see that start to subside? I don't think so. I think that will still move just as fast.

Starting point is 00:29:49 Let's say you could start over right now. You had no debt in the world. You had global world order tied to a unit that made sense that you couldn't manipulate, and you allowed capitalism to take place. And innovators would move faster to make things that are more efficient. And technology would be a byproduct of that and the benefit of society. And those people would still create value. It just wouldn't be manipulated value if you own a house and that you make the currency worthless.

Starting point is 00:30:16 The house goes up by that value. All right, so let's talk through the entire array of how this could play out moving forward based on what we know today. The first one you said was, could this be another Britain-Wood system? I suspect that won't happen because we're already past the point of governments trusting each other. And what is the value of a currency? It's just an exchange rate of trust, right?

Starting point is 00:30:40 So if you lend me money, you lose your utility of money today and I gain more utility of money. And if you lend me more money the next week and more money, and I keep gaining and you keep losing, my internal economy will look way better than yours, because I can hire gardeners, I can go vacation. And if you just look at that, I look rich to everybody. And it's coming from me pulling forward demand with your money and then having to pay you back later on. And one day I have to pay the pipe. If what I do, instead of paying you back with a unit in exchange we agreed on, is I changed the underlying currency to pretend I paid you back

Starting point is 00:31:21 with a different base, you lose trust in a currency, right? You wouldn't do that trade again. And so if every government is doing this exact same thing, you very quickly lose trust in global trade and any sort of rational trade,

Starting point is 00:31:37 exchange rates, debt, there's mispricing everywhere because of that, especially if you've done it for decades. And again, just like you can't see the paper folding going, to the sun, it's such a small amount early on that you miss it. So nobody sees it. It's a tiny little bit. Oh, okay, let's keep going. And then it gets bigger. And we're in a spot right now that it's such a big problem. At some point, the numbers are just so insane that the whole system breaks because

Starting point is 00:32:04 you'd lose trust in currencies. Well, Jeff, I want to hear your opinion on this. So I'm of the opinion, even under a gold standard, that you have inflation in a monetary policy. Because when you go back to Bretton Woods in 1944, and we come off the gold standard in 71. Why did we come off the gold standard in 71? Well, it's as you manipulated the money multiplier for 30 plus years between those two periods of time, which is effectively an inflation-based monetary policy. Yeah, and I think I look at it through the lens of game theory. So if I think about, So if everybody cooperates, incentives accrue to the person who cheats. That fair? Game theory.

Starting point is 00:32:46 And then as more people cheat and don't trust each other, incentives accrue to cooperation. So you see this cycle throughout history that works like this. If you look at that lens, so Bretton Woods was gold, pegged, and the U.S. currency. And with Vietnam not being able to be paid for, so what that says in game theory is your own person, personal needs always take precedence of international. Your own family matters more than everyone else, then your friends, then your country, then everyone else. So it always goes to, I've got to protect me first. But overall incentives are better when everybody cooperates. Through the lens of game theory, then in 1971, but when Vietnam War couldn't be paid for, it makes sense

Starting point is 00:33:33 for the U.S. to abandon the cold standard. Export the problem to other countries. And that that time and then we have a fiat currency. But yeah, it became the functioning global currency. And then for a long time, that still worked, right? It's in these bigger steps that it's starting to lose trust across the world. Every other country needs their own currency because if you have your debt denominated in US dollars and the US dollar does what it's doing right now, you just exploded your debt. Of other countries, gaming currencies and balance of trade, all the trade wars are really currency wars. The U.S. wants China's dollar to go higher, so more product is produced in the U.S. and less than China without understanding the interconnections of what that looks like.

Starting point is 00:34:24 And China wants their dollar lower, so they have more labor, so they can sell more goods. But yeah, if you have a fiat currency that the world order sits on and you manipulate the underlying currency, you have a whole bunch of problems. So to summarize what you're effectively saying is that as you transition from a trust-based system to a system without trust, whenever you're working in a global inflationary monetary monetary system, whenever you consider the game theory and there's no trust, the devaluation becomes competitive on a global scale. And that's the thing I think people miss when Japan got away with it for 20, 30 years,

Starting point is 00:35:03 right? Deflation and they kept on printing. They missed a couple things. Japan's, most of the debt was owned by the business that was their own, and one country might be able to get away with something all that. If every country does the same thing, it doesn't look the same. I'm kind of speechless. I'm just sitting here just shaking my head. It's almost, I don't even have words to describe how mind-blowing some of this is. Let's transition a little bit here to artificial intelligence. What is something that you see coming in the next 10 years that will make the audience's mouth just drop to the floor? Most of artificial intelligence today is dominated by deep learning or machine learning. But it's doing things today that would blow people's mind.

Starting point is 00:35:49 I use an example of the game of go in the book. And the game of go is a Chinese game. It's thousands of years old. I can't remember the exact number of combinations. of moves, but it's a staggering combination of moves. And even the top AI researchers didn't think it could be solved by AI for another five years. But a couple of years back, AlphaGo beat Lee Siddol in the game at a game ago who was a top human player. But it was the way that it beat Lysidol in, and I think it was game five.

Starting point is 00:36:24 The AI put a chip in the middle of the board and all the commentators in China and who were following it said the AI made a mistake. And it wasn't until after the AI destroyed Lisa Dole, and they said that was the most creative move we've ever seen. It was kind of the first time that AIs were deemed to be creative. And if you look at what's happening in AI, if your creativity comes from pattern recognition, artificial intelligence is moving first,

Starting point is 00:36:51 machine learning, deep learning, and now into artificial general intelligence, where computers are smarter than all of us, That is in our future. What you could say is 10 years in our future, 30 years in our future, 5 years in our future, 50 years in our future, I would ask you to think about this. We know a day will come when artificial intelligence is smarter than every one of us. Not just smarter, but more creative too.

Starting point is 00:37:16 I know people will fight it, but it's already happening. And if that happens or when that happens, every single job is a function of our intelligence. Everyone. So how could you say artificial intelligence doesn't do. change the rules. If artificial intelligence is going to be smarter than us, you can say that's not going to change the rules to how we construct societies around jobs. Deep learning itself won't get all the way there. It needs massive data sets and compute power on deep learning itself. Now, it'll do some things that people that have no idea how powerful that is, right? You think about

Starting point is 00:37:55 connecting datasets and what that can do and what that can do and way better class and learn better than us. It's super powerful. I am working with a researcher out of the University of British Columbia right now. He's a top researcher and a subset of AI called probabilistic programming. It might be the next piece of artificial general intelligence and everything else. So this is moving that fast. And I suspect it's not going to slow down. So billionaire Peter Thiel is famous for asking a really important question doing his job interviews. And I think I might see you working because you might already know where I'm going with this question. I love the question.

Starting point is 00:38:37 Yes. So he asked, which important truth do very few people agree with you on? So I propose the same question to you, Jeff. I think when I wrote the book, I've launched the book, I think very few people would have agreed the impact of technological deflation. And the reason I wrote the book is, if you see it, you can't unsee it. And so if I think about my kids, the world they're going to grow up in, I couldn't stand by and see that and not say something about it. Today, I think a lot more people are starting to see it.

Starting point is 00:39:12 So when you have this conversation with the typical person, what's their common argument or what do they usually fight back with? You know, I talk to people about X, Y, and Z, and you always kind of hear the typical flow of arguments or the typical feedback. And I know there's people that are listening to this that are skeptical of what we're talking about. And they probably have the question that you're going to say. Here's the thing.

Starting point is 00:39:35 I don't know if somebody actually goes through the book and actually quite, so you could credit this piece of it, but you know I've gone through it in a balanced approach on the entire thing. And I don't see this is a fact. We have technological deflation, period, and that is likely to move into various society and move faster. So what I get typically is not questioning that, but I can't do anything about it. Let's just do the old way. But that's not a solve either.

Starting point is 00:40:09 And so what I ask, I know what I would ask audience that is pushing this way back, defend why the existing system works and why it will continue to work. defend that. Like imagine we started today with no debt, no anything else, and how do we want to construct a society? And we had a fresh start. Would we rebuild what we have and why? Because I think that allows people to step out of the existing framework of,

Starting point is 00:40:38 I can't do this because of my personal wealth gets destroyed, or I can't do this because I'm going to lose my job. I can't pay my bill tomorrow and I can't do it. It allows you to step out of the fray. and have an intelligent conversation of what things could look like going forward. So a person listening to this might be thinking, I believe everything I just heard, it all makes sense. But what do I do? How do I find the right investments?

Starting point is 00:41:03 What is your response to that? About 70% of the value of technology companies comes from network effects. So in fact, the entire internet itself is built on the network effect. And a network effect is an easy way to see a network effect is a telephemy, phone. If I'm the only one with the phone, it has zero value. And one more person adds, one more person adds. And each time the value of the underlying network increases. The technology companies are built today. Most of the platforms, especially the monopolies, are all built really understanding network effects and how to construct them to be able to exploit network effects. The entire internet

Starting point is 00:41:41 is based on a network effect, many of the top companies on top. From Amazon, most people wouldn't realize that Amazon has over 500 million skews, all competing for your attention. That competition for your attention means you can go there and get everything you want, and it keeps getting better and better out of the competition to try to get your attention. Same thing works the same way Google works with over 130 trillion websites competing to try to get to number one in each different category. So companies that can exploit network effects, build products around technology that can enable network effects have more enduring. They can create monopoly businesses.

Starting point is 00:42:22 Constructing businesses that way is one way to looking for investment opportunities in companies that have network effects is one powerful way. So you asked the question, what do I do personally? And I think that what you mean personally is, how do I protect my own wealth with what's coming? And so that would be one way to look for companies like that. One way that I have a portion of my portfolio in Bitcoin, and I think, and in every dip, I'll buy more, because I think the chances, the asymmetric bet on Bitcoin of what it's valued at today

Starting point is 00:43:00 and what likely will happen as governments can't stop gravity from happening by printing money, the likely beneficiary is something like Bitcoin. There needs to be a new standard going forward. And I think the most probable right now is Bitcoin. But gold's running high right now. Gold is also a decent investment, but in a land where everybody is destroying currency value. But why is gold, what is it, a $7.5 trillion market cap? I would argue the only reason that gold is a $7.5 trillion market cap is it used to be

Starting point is 00:43:35 pegged currency. But it's no longer pegged currency. There's just a hope that one day it will be again. by a whole bunch of people who own gold, and that's why they own gold. It's not that the underlying brick of gold has any value other than it was pegged currency. And if Bitcoin has a market cap of $120 billion, I think it's highly likely that the new peg to currency regimes is something like Bitcoin. And if it doesn't happen first by governments, it's going to happen by institutional players

Starting point is 00:44:06 who drive a network effect, who drive it higher and higher in price. If I was a government right now, what I would do is I would be buying it in the back. I wouldn't be telling anybody. I'd be buying it in the background because it's far more likely something like that with a network effect around trust. It turns into something that is kind of a store of value for world currencies. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business.

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Starting point is 00:47:48 All right. Back to the show. My concern with gold in the coming four to five years, especially as you now have digital scarce tokens that have been invented is the speed at which you can clear a transaction for the gold market. So I think gold's going to do very well in the coming months, but I think once you have Bitcoin in particular go through its next halving cycle and everything that's going to kind of play out based on the incentive structure and the scarcity and some of those ideas that you talked about earlier, and the fact that it has such a small market cap relative to

Starting point is 00:48:26 gold and you start to see these players come in. If the price of gold's going up a couple percent, call it, and I'll use a high percentage, two or three percent a day in the gold market, and you have something like Bitcoin that's going 10 percent, and you can literally conduct the transaction immediately versus something that I need to send you a gold bar in the mail for you to take possession of, and it might take a couple weeks to get it there, or if I'm trying to buy it from an entity or a business that's then going to tell me it's three months in order to receive it. I think that's a major, major concern. And I also have a concern with this getting into the technical stuff of Bitcoin, but I think you're going to have this halving event in May,

Starting point is 00:49:10 and historically the price really hasn't caught on for a couple months until after the halving event just because of how the miners execute the Fiat, right? Well, if that plays out, let's say that you don't start to see the price acceleration on Bitcoin until call it the fall time frame. And now you have a lot of people concerned about a currency peg today, right now. You're seeing the technicals on gold that look like they're ready to explode to the upside. So I'm concerned that you're going to see the market chase just fly in the gold. You're going to continue to see Bitcoin sit a little bit dormant because of how the incentive structure is set up and where it's at in the current halving cycle.

Starting point is 00:49:49 only to find that there's this rocket ship that blows past it six months later after you had everybody go in there. They don't want paper gold. You were seeing the separation in the paper gold market relative to the physical market. They're going to get their gold bars three or four months later, only to find out that this rocket ship just zoom past them and they're stuck in this cage of slow transaction times and nobody who wants to buy it because it's going 3% when Bitcoin's going 15% at that point. and its network effect and incentive structure based on how the protocol executes Fiat. A lot of these time-put things need to investigate what you believe in the second order and third-order consequences of that, and then do that for the other side of the argument. And so what you just did is that it's one of the things I really like following you and everything else.

Starting point is 00:50:39 I think you're measured approaching to you put things into concepts and you'll look at both sides. So what you just did with cold is that, and I agree with you. I use that example in Venezuela, so people say, well, it can't be a peg to a currency because it moves around too much. In Venezuela, there was 1.8 million percent inflation last year, right? And the holders of Bitcoin lost 30 percent of their value. Well, if you were a holder of Bitcoin last year and lost 30 percent of your value when that was happening, you would be happy because you could still heat. You could move it across borders seamlessly. You could go anywhere you wanted and you still had wealth.

Starting point is 00:51:17 You think about all those users who have it and it's done that for, it builds on the network effect of trust. And so every single person into this that's experiencing this as you have fiat currency is exploding, country after country builds faster and faster trust to a network. And at some point, I think you're right, it explodes in value. So a few years from now, one of the major changes that we may see is the concept of decentralized applications. You sometimes hear them refer to as DAPS. Could you please explain what it is and please explain how you see that type of technology integrate into our existing ecosystem

Starting point is 00:51:56 of technology? Let's use blockchain as an example. The internet had the promise of distributing small companies could make money and everything else and it took the giant monopolies and it's going to redistribute. What it actually did is concentrated power and fewer hands faster. And that's not an internet problem or protocol problem. It's a human being time problem. So when you say DAPs, it's going to do the same thing, or blockchain is going to allow this wave to decentralize again. I don't buy it because the power aggregates really fast because we need to go to one place or something that we can trust faster. That's why we go to Google.

Starting point is 00:52:38 That's why we go to Amazon. So it's hard to see our time being able to look at your phone and how many apps you're actually on, versus the 50 million that are available. We don't have the time to think like that. So if you could create that, that it comes to you, maybe? This is interesting because I think I have a different take on this. So hear me out and shoot holes through my opinion here. So Jack Dorsey, I want to say this was probably, oh my goodness, four or five months ago,

Starting point is 00:53:09 announced that he is effectively going to try and stand up a protocol. that he would run the Twitter client through that would be a DAP of Twitter, would be a decentralized application or decentralized protocol of Twitter, and he would try to set up a baseline that any other social platform could use as well. So the way I guess I envision these DAPs working is you're effectively removing the middleman between a transaction of an advertiser and the end user. So if I go on, let's just say that we remove Jack Dorsey's overhead and he's no longer there anymore. And I'm still using my Twitter platform and advertisers want to advertise on any of my posts. Well, anytime that that post

Starting point is 00:54:03 that goes up and it advertises against somebody else and they like the post or whatever, I'm effectively paid that reward directly from that advertiser and Twitter is basically removed out of that loop. Now, where Twitter has an incentive to do this is they're going to create an index of tokens, decentralized tokens that run on this protocol that have to be swapped into from whatever currency, it doesn't matter what it is, but those tokens by the advertiser, they have to be, if I'm advertising on Twitter, I have to basically buy those protocol tokens that are in the Twitter protocol. And when I do that swap, then now I'm incentivized as a user to post more to do things

Starting point is 00:54:43 on Twitter because I'm being directly paid for my contributions opposed to Twitter, basically sucking all of my data out of me and I'm getting nothing in return as a person who's making posts on the platform. So where I see that this would be interesting if this could be done, and it appears that Jack is trying to do this, is you'd have all these users that are now, instead of being a victim of the application that they're using on top of a protocol, they're actually benefiting and receiving rewards for the use of their data and the use of their interactions on that platform? Yeah, potentially, but I think the same thing.

Starting point is 00:55:18 Could that start and could that work as well? From there, aggregate into something. Here's what would likely happen. If you were the best, you would aggregate other people into yours. And if you didn't do that, you wouldn't be found anymore. Because there's a billion people doing this same thing. So we don't have the time to go through all of that. It could start, but it's really hard to scale that.

Starting point is 00:55:40 And it would be good for the people that came out on top early on. It would just aggregate again. No, you're exactly right, because then you'd have all these people that would then start to effectively build their own social networks of particular topics. Instagram stars. New technology comes out. A whole bunch of new stars, they aggregate up. Do you see this playing out?

Starting point is 00:56:01 Do you think Jack's going to be able to successfully implement something like this? I think he could make that work because of who Jack is, and I have tons of respect for who he is what he does. So I think he could make that work in the beginning, but I don't think it would solve the problem that you're talking about. One of the things that fascinates me so much about this is you look at something like Facebook and you say, oh, my God, there's no way that that company could ever fail. And these are the things that we say about Sears.

Starting point is 00:56:27 And these are the things we said about all these massive companies that don't look like they could ever have a competitor step into the marketplace. But from Jack's standpoint, if he cannibalizes his application platform that runs on top of the internet protocol, and he turns his application Twitter into a decentralized protocol with tokens associated with it, and he basically cannibalizes that, but he onboards all of his users, his clients, into that protocol, why can't he do that with Facebook? Why can't he create a Facebook protocol that devours them? or a LinkedIn protocol that devours them because it's completely decentralized. The winners of the aggregation will just remove up the channel, right?

Starting point is 00:57:11 Otherwise, the audience is a really tiny audience. And think about the cost that you load on to advertisers to find all of these little audiences. So the costs explode. So not that it wouldn't work, but it would aggregate back up. All right. So, Jeff, talk to us about the book, actionable gamification. I really like this. So it came across this book written by Yu Kai Chow.

Starting point is 00:57:36 And it was one of those books that I like you, Preston, I read about 50 books a year. And it was one of those books that stood out in a way that others haven't. And I'd already read a lot on social psychology. I think that if you think about behavior, group behavior, how we make decisions, everything else, if you really understand how we make decisions and some of the biases in our decision-making process, I think you can both invest better. I think you make better businesses. You understand human nature a lot better.

Starting point is 00:58:05 And he said there's eight different triggers that you can drive human behavior, that human beings, all behavior comes from these eight different triggers and using them together. And he used it. I won't go deep into the book or any of the triggers. I'll use a game as an example. So we believe that we play a game, whether it's Candy Crush or something. else. We believe we'd play it because we want to. That's not the way it looks like from a game designer's standpoint. And if the game is too hard to win at first, you bounce from the game.

Starting point is 00:58:41 So they design the rewards that are easy to win at first, and it gives you a feeling of accomplishment. But if the game is always easy that when our brain gets bored and we don't stay with a game, those triggers get longer and longer spar, the game gets harder, When we work and we put more energy into that game. And I think about it. We think we're doing it for our pleasure and we're putting more and more energy into that game. And then they combine that trigger with kind of superpowers in the game that make us better than other people. And that gives us kind of a fear of loss because we don't want to lose our superpowers if we don't come back to the game.

Starting point is 00:59:21 So it gives us a fear of loss that triggers us to stay with the game. All games are designed that way. And when I thought about that on a more broad spectrum, I thought about that, I thought that this book is a really important framework for life and how I raise my kids and what they are triggered on. The things that you think versus what is actually happening, like if you think most of the sports that you would be good at are because you were better at them earlier than friends and people reinforced you positively and you wanted to do them more so you practiced more. and that practice made you better, and the practice made you better and better. And the sports that you're not good at, you might have been laughed at early on or what you're not good or you might have been laughed at. You never did it again and you never practice. So designing behavior hooks and everything else into technology products is the core of all technology products.

Starting point is 01:00:14 It's what I do in a lot of the different technology companies. And I try to do it in a positive for humanity way instead of because it has negative consequences. If you look at Facebook, all of those triggers are designed out of the same kind of function. And it can be manipulated badly. So it's easy manipulate us. But I'd say the book gave me a new framework for thinking about motivation, why we do the things we do, what things I might want to question a little deeper. So, Jeff, we covered a lot of ground here today.

Starting point is 01:00:47 A question that we really like to ask our guests, especially whenever they are as ultra-stop. successful as you is that we'd like for them to give a piece of advice to the audience, whether it's about business or in life. And I know that you define success very differently than most conventional metrics. So please tell us about how you define success and then which type of advice you would leave our audience with here today. So when you say ultra successful, I actually measure this success very different than probably most people. I measure the success by the positive of impact I have on other people. By that measure, I am the luckiest person around.

Starting point is 01:01:26 I have so much abundance, friends, family. So those are the important things for me. And if I said that, those things can't be taken away for me no matter what. Money could be, this could be. But actually, the most important things in my life couldn't be taken away from me. It's because it's how I think about people generally. and that seems to feed back on itself. I believe all of us and me too

Starting point is 01:01:52 through kind of learning, evolving, thinking things I didn't know come into view how to get better. But I think every person I meet as having a sign on their forehead pointed outwards, the sign on the forehead tells everybody around what's stopping them from what they really want. And what we do when we come into contact with that person, let's call it a friend.

Starting point is 01:02:13 What most people do is they won't tell them what's written on the sign. So most people can't see the thing that's written on the sign is stopping them from everything they want. And their friends won't tell them. And their friends tell themselves a story that goes something like this. I don't want to hurt your feelings. But if you actually investigate that, it's actually not that. What you're really saying to yourself is, I care more about what you think of me than you.

Starting point is 01:02:40 Because if you invert that and you say the two or three most important person people in your life, the people that made all change in your life, that you had a zero to one type of change, they did the opposite of what that person did. They would never tell anybody else. They would turn the sign around so you could read it in a way that came from the heart. And in doing so, they say this. I care so much about you, I have to tell you this. I'll never tell anyone else, but that you need to know.

Starting point is 01:03:07 If you actually invite people like that in your life and you only have people like that in your life, it's staggering how much better you get and how much better. better the people around you get because you really care about them. We all make mistakes and how fast you can accelerate your growth by inviting that. In fact, if you just think through a timelines, why doesn't everybody do that? I think most people don't do it is because when they have done it in their past, a lot of the times the person receiving that can't handle it, right? So my co-founder, Bill Direct said to me, you make everybody cry and they love you for it.

Starting point is 01:03:42 And here's, I think, the thing, it's not about me. So when the person doesn't receive it well, it's because you've said it about you. I don't care if the person changes at all. It's a thing I would never tell to anybody else that I need them to know it because otherwise I feel disingenuous in the relationship. Think about this in your own and everything else. And you'll go to, if you have that thought with somebody that you spend a lot of time with that person, and you'll tell everybody in their network except for them about that. You go tell all their friends about what's on their sign, and they have no idea.

Starting point is 01:04:14 I don't think I could possibly ask another question after that. Well, no, because it's just such a profound piece of advice, and I think something that is not evident at face value. And when you explain it to somebody and they hear that, you can't help but intuitively know that it's just total truth. And it's something that everyone can work on and think about. Jeff, the name of the book is The Price of Tomorrow, Why Deflation is the key to an abundant future. Where can people learn more about you? Give them a handoff.

Starting point is 01:04:46 I know you're active on Twitter. Yeah, Twitter at Jeff Booth. My personal website is Jeffreybooth.com. Well, Jeff, I really thoroughly enjoyed this. I want to do it again. We'll have to do this again in the future. And your expertise in so many different areas are just such a breath of fresh air. to listen to and to learn from.

Starting point is 01:05:08 And thank you for making time out of your very busy day. I know your time is valuable to come on the show and spread your knowledge. Thanks so much for having me. All right. So at this part and time in the show, we'll play question from the audience. And this question comes from Manish. Hi, Stig and Preston. Thank you for taking my question.

Starting point is 01:05:28 I was wondering if you could talk a little bit more about the interest rates. What does it mean when interest rates are down to zero or negative interest rate? What does it mean for average consumer? Can I get a home loan for negative interest rates or can I get a home mortgage for 0%? Can you elaborate a little bit more on that? Thank you. So, Manis, I absolutely love that question and I think it ties perfectly into our discussion about inflation and deflation that we're having here today.

Starting point is 01:05:59 Another reason why I love this question is because, as you might know, I'm living in Denmark where the interest rate has been not just zero but negative for years. And we have this discussion a long time about how this negative interest rate environment, or zero if you want, what does that mean as consumers? And especially if we want to have a mortgage. So I'm really happy that you raise that question. And the first thing I have to say is that, unfortunately, you don't get paid to take a mortgage. However, you're sort of doing theory.

Starting point is 01:06:35 So please allow for me to explain what I mean by that. So right now, you'll be paying a negative 0.11% interest on your mortgage. And this is just an example. I'm actually taking from the biggest bank here in Denmark. Negative interest rate effectively means that a bank pays a borrower to take money off their hands, meaning that you would have to pay back less. than what you borrowed in the first place. I know that sounds ridiculous. Now, in reality, you will still be paying your bank for your markets. Now, it won't be called interest rate,

Starting point is 01:07:13 so whenever you look at that statement, it would still say negative interest rate, but there will still be a handful of different costs that the bank has added into the final calculation of that monthly installment. So please don't be fooled if anyone is telling you that you won't be paying interest on your loan. It might not be called interest, but I don't think you really care because it's still real dollars flowing out of your bank account, and that part hasn't changed. It might be called handling fees, processing fees, whatever you want to call it. You're still paying your bank for that service. The other thing is that you have to consider what is the real interest rate, and that is calculated as the normal interest rate minus inflation.

Starting point is 01:07:57 If the interest rate is 0% and inflation is minus 2, meaning you have a deflation, your real interest rate is still similar to an interest rate of 2 if there is no inflation. If you had debt, you would rather have inflation than deflation since it makes the future payments smaller in real terms. The other thing to consider is that you might not be deemed credit worthy for a loan, especially in times like this. For instance, JP Morgan recently tightened their lending standards. tighten here, meaning that you would need more taxable income, perhaps you would also need other

Starting point is 01:08:31 assets. There are different ways that the banks can tighten and say, hey, you used to be eligible for a loan, but you're not anymore. And what you see now in the world economy is that we as consumers can't service our debt, for instance due to job loss or loss in our portfolio. So banks are much less inclined to grant us any loans. And that's also why you see central banks globally do everything they can to pump out as much liquidity to make sure that credit doesn't freeze or at least mitigate some

Starting point is 01:09:01 of that contractions that we see. And keep in mind that as crazy as it sounds, that trillions are pumped into our system. Trillions are also being taken out of our system. And huge debt amounts are being defaulted on at a rapid rate. Now, looking away from mortgages and more what it means in general for consumers, it has the interesting effect that the Fed and you as a consumer do not have the same goals. Because the intention of a low interest rate is to make it as cheap to borrow as possible and encourage people to invest and to consume.

Starting point is 01:09:38 That method worked temporarily before the corona crisis, but now that we are in a depression, perhaps you can't even borrow if you wanted to, and perhaps even if you could, you don't want to because you're just looking for safety more than anything else. So you just want that, for instance, to be in cash. You don't want to invest in bonds since you can't get any yields. You might also be uncomfortable investing in stocks. You know, you can not always like you might be losing your job, whatever the reason is that you might be holding on to your money. As much money that's being pumped out there, we are still going to be in this vicious downward spiral. Perhaps not for you as a consumer, but for the economy. But for the economy,

Starting point is 01:10:19 economy as a whole, which the second order derivative of that is also on you as a consumer. So manage to sum up in many ways a low interest rate is good for you as an individual. However, you need to look at the real interest rate first, and while it may appear to be attractive, for instance, when taking out a loan, given that we're in a depression, the low interest rate environment or even negative interest rate environment is not as attractive as it looks at face value. For asking such a great question, we're going to give you free access to our intrinsic value course for anyone wanting to check out the course. Go to tipintrinsicvalue.com. That's tip intrinsic

Starting point is 01:11:01 value.com. The course also comes with access to our TIP finance tool, which helps you find and filter undervalued stock picks. If anyone else wants to get a question played on the show, go to Ask the Investors.com and you can record your question there. If it gets played on the show, you get a bunch of free and valuable stuff. for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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We Study Billionaires - The Investor’s Podcast Network - Classic 21: Inflation or Deflation w/ Jeff Booth

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