We Study Billionaires - The Investor’s Podcast Network - TIP311: Macro Mastermind w/ Lyn Alden, Luke Gromen, & Jeff Booth (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. I can honestly say, out of all the years doing this show, this has to be one of my favorite recordings. We have a cast of macro thinkers that really don't need any kind of introduction, but here they are. Lynn Alden, Luke Roman, and Jeff Booth are clearly some of the best economic thinkers in the world right now. This is one of those conversations you need to share with your family and friends if they have questions or concerns as to what's happening in the world right now. So without further delay, we bring you our macro mastermind discussion for the third quarter of 2020. 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.

Starting point is 00:00:50 Hey, everyone, welcome to The Investors podcast. I'm your host, Preston Pishon, as always. I'm accompanied by my co-host, Stig Broderson, and, you know, and I'm accompanied by my co-host, Stig Broderson, and boy, oh boy, we got quite a mix of all-stars here tonight talking macro. Lynn Alden, Luke Roman, Jeff Booth. Guys, thank you for taking time to synchronize calendars to pull this off. This is very exciting. And we have a ton of questions.

Starting point is 00:01:19 So welcome to the Investors podcast. Awesome. Thanks for having us. Thanks, Jimnasat. Thanks. All right. So I want to start this conversation off with a question. that I've been getting a lot lately, and I'm kind of curious if you guys have been hearing the same

Starting point is 00:01:36 from some of the folks in your audience, but everyone keeps asking me, are we going to see another liquidity shock like we saw there at the end of the first quarter into the second quarter of 2020? And of course, there's no way to predict something like that or to be able to say it's going to happen in the next quarter or whatever. But I'm kind of curious your thoughts on the likelihood of something like that playing out based on everything that we're seeing in the marketplace right now. What would cause something like that? Why would something like that not happen? I'm just kind of curious to hear some thoughts.

Starting point is 00:02:04 And I'm going to open it up to the group. And something else I want to tell you guys is I have a bunch of questions. We had 240 odd questions that were submitted on Twitter with only a couple hours of notice for this interview. But I want you guys to be able to ask each other questions. So, like, Luke, if you saw something that Lynn posted or vice versa or Jeff or whatever, feel free to just make it a topic if we do. So with that, back to the question was this liquidity crunch. Are we going to see more volatility, more spikes like the one that we saw earlier in the year?

Starting point is 00:02:38 I can jump on it. So my view is that if there is, it's mainly a political outcome because I just did a report the other day showing that we've had such a big employment shock happen. And of course, there's this lost income. But if the government's come in and basically replace all that lost income with transfer payments, we've had the unemployment benefits, we've had the one-time stimulus checks. and ever since the end of July, that's basically tapered off now because there's political gridlock. So they're currently negotiating a fiscal bill that's somewhere between $1 and $3 trillion,

Starting point is 00:03:07 and they have differences and they're on recess. And so if that stay shut off for a pretty good a period of time, we're going to see more insolvencies because a lot of people are only paying their rent, only paying their mortgage, only kind of doing necessary shopping because of the transfer payments that have kind of filled that gap. And that's why we haven't really seen some of the traditional recession. shocks we've seen yet is because so far the median consumer hasn't fully felt the impact. Whether or not we have kind of another big liquidity shock like that, in part, comes down to fiscal decisions. And then international is another story. So March had that big global dollar

Starting point is 00:03:41 shortage that the Fed provided swap lines for. And those are still open, even though they're being drawn down. So unless something kind of overrides that, there is that kind of ongoing liquidity tap available to them if they need it. You have been posting in Chandlin showing that the swap lines redrentling down. Is that an issue or would the Fed just go in and replenish those lines? Well, those are maturing essentially. So they were loaned out on short-term loans and they paid them back. Most of the loans went to Japan and Europe. So it's not really like, say, emerging markets. No country hit the absolute limit of how much they can borrow and they pay them back pretty quickly. So they borrowed up to about 450 billion. The recent numbers is down to

Starting point is 00:04:21 about $100 billion just under. So they've already paid down most of them. So actually it's good news. basically means that the foreign dollar shortage currently isn't that bad. And that's kind of being shown other indicators, too, like say the head spread and other ways to kind of measure global dollar shortages. So that's actually, so far it's good news. There's no kind of current signs that another one's brewing yet. So do you think that internationally there could be an event, say from the ECB or another larger entity that would throw the liquidity squeeze back on? If you look at Europe, the European Union, again, it really comes down to political outcomes. because you have that kind of age-old battle between the northern countries and the southern

Starting point is 00:04:59 countries and the European Union. So some of those places like Italy and Spain, their potential kind of like powder kegs that if there's kind of a solvency event there, it can be really systemic. And then here in the U.S. as well, we kind of have a similar issue with the states. So many of the states are going to have a tough time coming out of this solvent. And unlike, say, the U.S. government, they can't print money. So they're not monetary sovereign. They can actually have kind of outright shortages of them going to pay the money. their bills. And that's actually holding up this current, well, part of what's holding up this current kind of fiscal thing. There's also the voting things, but the Democrats say want more

Starting point is 00:05:34 of the aid to go to states, Republicans are not in favor of that. So there's kind of this political issue playing out between, you know, state solvency in the U.S. and then in Europe, it's country solvency. Lynn, that's a really interesting dynamic that you're talking about between Europe and the U.S., where all the countries over in Europe are in different situations from an indebtedness standpoint. point. And I think what else is interesting is you have some countries over there like the UK that have their own currency. And so they're kind of separated but intertwined. And it's a different dynamic here in the U.S. When you look at Europe versus the U.S., which one has a more favorable

Starting point is 00:06:11 advantage when you look at that structure moving forward in this environment that we both know, I don't want to speak for you, but my expectation is we're going to print a whole lot more. And this is only going to accelerate moving forward. Who's better positioned, based on on that architecture that you're describing? I think it depends on which metric you look at. So my base case, and it has been for a while, is that U.S. is going to have to print a lot more money than Europe in this crisis. On the other hand, the political challenges in Europe are a little bit worse because in the

Starting point is 00:06:41 U.S. we have somewhat unified fiscal situation. For example, their retirement system is essentially out of the state's hands, some of the Medicare and everything, whereas in Europe, there's more different systems that they have to contend with. So it's a similar issue, but that kind of political issue is potentially harder to do in Europe. On the other hand, you know, they're going into this. They had smaller fiscal deficits. Even some of the trouble, like Italy had a smaller deficit as a percentage of GDP going into this crisis than the United States had. And Germany had a surplus. So those countries as a block are going into this with a less extreme in many cases, fiscal situation. Many of them have trade surpluses or current account surpluses. And the block as a whole as a current account surplus. So there's some of those. advantages, but their political situation is harder to sort out. And I think from there, I'll leave it to the other two. Jeff, it seems like you have a point? I think in general, globally, we have, and deficits do matter, as well and correctly points out, the overall debt

Starting point is 00:07:42 matters to the society has. And globally, there's just, there's a reset coming. Every single country is playing their currencies now. So the fiscal stimulus right now in the U.S. causes essentially labor to be cheap relative to the world. What is a knock-on effect of that is Europe is going to have to stimulate like crazy to lower their currency value, as is Japan, as is China. You're having a race of monetary easing everywhere. And I think this is important. All COVID did was accelerate this path. It was unstable long before COVID, and COVID was just accelerating the path. So I think you're going to see, I'm actually, I believe the U.S. dollar will actually get stronger before it gets weaker.

Starting point is 00:08:27 And it might get weaker first and then get stronger. Because what's happening, other governments will print and turn on the taps as well. So your base case is the dollar is just going to get so strong until it basically locks itself in a box. And the U.S. government, because the cause of a strong dollar makes everybody else, they have to print more to take it. So the printing press is going to be on forever. We will never be able to remove it. To me, all governments.

Starting point is 00:08:54 And what that means is that you're just constantly going to drive the inequality higher and higher and higher. Luke, do you agree with that? I would agree with the point of, I think, as you look at the structure of the existing system in terms of the net international investment positions, where the U.S. has a massive negative net international investment position is a percentage of GDP, whereas Japan and Europe, China are at the opposite. end of that spectrum. If you look at the current account, the U.S.'s deficit against the other

Starting point is 00:09:24 surpluses. And then you just look at the U.S.'s aggregate debt outstanding relative to the others. All of this is sort of, my view is that these are all symptoms of basically the way this system has worked over the last 50 years. And so I would say that the end game to me is extremely clear, which is the U.S. is going to have to print more than anybody because of the way this system is set up. At any given point in time, I have less conviction who's going to print more or less. And the U.S. has just had a stretch of, to both Linden and Jeff's point, of since March, you know, we had that dollar crunch. And since then, you know, the ensuing two months, we had the Fed, brother balance sheet of whatever, $20 trillion annual rate for two or three months.

Starting point is 00:10:07 And that seemed to sort of take the froth out of the wind out of the dollar shortage. And it's been interesting to me, if you would have said to me, call it three months ago, So, Luke, the Treasury is going to run the Treasury General account up to a trillion eight, and the swap lines are going to come down, and the Fed's going to go from $600 billion, I think it was a week at one point, down whatever they're doing now, which is something much less than that. What's the dollar do? And I would have guessed that the dollar would have been meaningfully higher, and instead the dollars kind of bled down a bit.

Starting point is 00:10:41 And so that's a bit relative to the structure as we understood things coming into this. It's a bit of a non-sequit tour in my view. And so what I've been trying to figure out is, okay, you know, to Lynn's point before, the dollar liquidity problem overseas has been largely mitigated as evidenced by the swap usage and her point in the Ted spread and the DXY itself. And I'm wondering and scratching my head a little bit, where is it coming from? Is it the, just that we've passed the point of maximum pressure? Is it what we've done in the regulatory side, which I think is a really big deal with

Starting point is 00:11:18 the SLR changes or the supplementary leverage ratio changes that the Fed implemented in April where you basically have created a QE forever with a wave of a wand by making treasuries on banks, books equivalent to cash? They're doing a number of different things. But I guess that's sort of a very wishy-washy answer. I don't have a very strong opinion on the dollar one way or another right now in the short run, but I do have a very strong opinion that over the next call it 12 months, the U.S. has five trillion and T-bill is outstanding.

Starting point is 00:11:48 Those are going to have to get refinanced. And I don't see where the private sector balance sheet capacity is. So my view is that either the Fed helps with that or the bank, U.S. banking system as Fed proxy helps with that, or that could conceivably, if mismanaged from a political standpoint, like Lynn said, create a bit of a liquidity problem for a brief period of time. I wasn't approaching it necessarily from the policy failure, although I think that that's obviously a very real reason of why that would happen. I guess I was just looking at it from the third quarters here.

Starting point is 00:12:23 The companies that are driving the indexes are just the few that are sitting at the top of each of the indexes. Everybody else is suffering in a major way. And so when do those earnings calls start to matter? When does all these bankruptcies start to matter in the market? Is that something that you think is a potential for driving the liquidity crunch? Or are these companies sitting at the top so massive and so large that it just drowns out the squeals and the cries of all these companies that are failing in the middle and at the bottom? So I do think that's something we have to basically look forward to quarter by quarter. The reason I bring up policy is because that's essentially what's holding them back from insolvency right now. Because the Federal Reserve can't fix a solvency event. They can only fix a liquidity event. The fiscal authority has some power to fix a solvency event if they literally just throw free money

Starting point is 00:13:15 of things. But it depends on magnitude and timing. And that creates, of course, all sorts of consequences downstream. You have moral hazard. You have currency devaluation. You have cronyism. All sorts of ramifications from that. It's both consumer and business. So there was corporate bailouts. We gave money to things like airlines and stuff. And then we had the half a trillion dollars in PPP loans, most of which turned into grants. And so it's mostly free money. And then you have the $1,200 stimulus checks. And then you have the $600 a week and extra federal unemployment benefits on top of the normal state benefits.

Starting point is 00:13:47 So if you look at, for example, personal income is higher now than it was at the start of the year. The average person has more money. Not everyone. Like say you're a doctor and you lost your job or an executive and you lost your job. That wasn't replaced. but many kind of middle class people, they didn't lose their job, but then they got a $1,200 check, so they're just, they're up $1,200. Or they lost their job, and if they're in kind of the lower half of the income spectrum, they actually made as much or more than they were making when they were

Starting point is 00:14:13 working. So we have not seen a decrease in personal income, and also we've seen a rebound in retail sales. So, of course, a lot of that shifted online. Retail sales are up year to date, not down. So it's actually an all-time highs. So we've seen, for example, GDP down, employment down, exports down, imports down, kind of across the board. But construction spending is kind of mediocre and then sales are up, retail sales. So basically what it comes down to is the solvency event is, yeah, if we go a couple quarters and we don't have another kind of multi-chillion dollar give out, that's when we start to see solvency events. Or we get another multi-trillion dollar give out and then we have to look a couple quarters ahead from there and kind of keep playing

Starting point is 00:14:52 that game. That's actually the point. No matter what Luke, I think, said this too, it's really clear what's going to happen. In the short term, it's going to move all across the world. Currency, it's stronger, weaker. It's really hard to tell in the short term. But in a long term, removal of fiscal stimulus, or removal of stimulus, short everything. There is a repricing event coming on everything. Everything will be repriced. Whether it comes through a policy error, or whether it comes from continually printing and then people lose faith in currencies, one way or another, we're going to have a repricing event of every. So if you're looking at the global aggregated monetary baseline money that's being added

Starting point is 00:15:34 into the system, that graph does not look linear. It's parabolic. So my question to you is, is this parabolic shift we're seeing a one-off or will we continue to be on this slope? It's parabolic. It's something I talked to someone earlier today and I use an example from your book, Jeff, of basically you have this deflationary push in terms of what I said using Moore's law as the proxy for deflationary pressures driven by technology. You've got that increasing exponentially this way. And you've got the debt underlying the currency and the system increasing exponentially this way. And so policymakers were having this problem of basically trying to ride two horses with a single rear end in two opposite directions before this happened.

Starting point is 00:16:22 And the COVID crisis, as Jeff noted, simply pulled forward all of these things probably by multiple years in terms of the fiscal problems around the world. As best we could tell from what we were thinking the problem was really going to hit to it's here now. The question was opposed to me was, can the policymakers catch up to the deflation enough basically prevent the system from the deflationary pressures from breaking the debt from breaking the system? And to me, I think it ties in to Lynn's point of it. It's really a political question. The answer is absolutely, theoretically, yes, they can. What they, in my view, cannot do is do so without destroying the currency relative to real goods and services. And that's the problem they face. And so when you say, is it a parabolic curve or a linear curve? I think it's a parabolic curve, but I think it's going to be in fits and starts. So this, you know, the Fed was at $3.7 trillion a year ago on the balance sheet and they're whatever they are now, six, point eight, six point nine, they're down a little from seven, I think last time I checked. That's a down payment. To me, what's happening with, you've either got to reset the system, reform the system politically, but ultimately what you're going to have to do is, I think you're going to see, and I use the Fed balance sheet as just the proxy, but basically the Fed's balance sheet is going to have to move in a nonlinear fashion, in my opinion,

Starting point is 00:17:42 towards total credit market debt outstanding, or fully reserving total credit market debt outstanding, the longer these deflationary pressures continue. And then it's a question of, okay, well, when do they start dispersing this money? Do we have political processes that hold these up? And that's much more difficult timing to gauge in terms of just the political process of that. And then within those, what causes that? Is that simply Washington decides to finally get together or do we need a city to riot, more cities to riot until they decide they want to stop that, etc.? Do you see any government in the world with a currency reserve being able to politically stop printing? Possibly Russia, but there's not many countries. It depends how long this goes on.

Starting point is 00:18:27 Russia came into this with very low debt levels and a lot of currency reserves, and their stimulus has been somewhat smaller. So they actually still have positive real yields. But there are not many countries like that, and even they're pressured if oil stays quite low. The irony I talked about this in the book is the policy in 2008 essentially pushed oil prices up in real terms and actually made some of those governments way stronger as a result because if your raw materials or oil is your primary and it doesn't change in real term and it moves up. So you're going to have a positive surplus. So the irony of some of these war policies is they drive some of the same geopolitical risks around the world that we see. Lynn, how does Russia continue to compete if every other person that's playing the game is cheating? One of the funny things about Russia is their currency by many metrics is undervalued. Ever since there were sanctions on them, they actually had a very weak currency.

Starting point is 00:19:23 And it's one of those things. If you looked at it on paper, it should be stronger. You look at the debt levels. You look at the current account balance. They went into this, say, with a fiscal surplus, low debt levels, positive trade balance, positive current account balance, positive debt international investment position, and positive real yields. So, of course, the oil price crash blew that out.

Starting point is 00:19:41 We've since got a partial recovery. While the currency is so weak, they were kind of benefiting from that because their, for example, their wheat exports were more competitive than many other countries. So they were actually kind of gaining market share in wheat of all things. And of course, their arms and energy and also other commodities like nickel and things like that. So if there's kind of major currency devaluation, I think they're going to have to some degree of currency devaluation, but because their currency is already quite cheap, they actually

Starting point is 00:20:08 kind of have some advantages there. And that gives them, even compared to, say, Saudi Arabia, it technically has, say, lower oil production costs. Saudi Arabia has a peg currency, and also they're heavily reliant. Their entire, like, they don't really do a lot of taxes and everything, so their fiscal situation is more reliant on oil, whereas Russia has, they have an actual economy there in addition to the oil. So they can actually withstand some pretty severe shocks for quite a while. When you think about it, it's pretty ironic that the market is putting a discount on Russian assets because they're concerned that the Russians will nationalize them when the rest of the world is effectively doing the same thing through a million paper cuts. Very much so. And it's interesting too, Lynn, you were a great point on Russia. There was a great chart, I think on Bloomberg the other day, showing that in this last oil price down, you have seen a divergence between Russia's FX Resort.

Starting point is 00:21:03 which have risen the whole time since March and the price of oil. And that had never happened going back. I think the chart was a 10 or 15. Might have even been a 20 year chart. But the point is is Putin's basic transition from into a much greater share of gold reserves is paying off now as well because it's doing what it's supposed to do. And so ironically, with oil four months ago, having gone negative briefly, his FX reserves actually just hit all-time highs, even with the price of oil at 40 and him saying, well, maybe we'll just hedge it out here like Mexico, which to me was indicative potentially that there might not be, in his view, a whole lot more upside when he floats that kind of a trial balloon out there. It's a great point, Lin, that, yeah,

Starting point is 00:21:45 Russia is in enviable position relative to a lot of other people. So do any of you guys read into the trade talks with China, which were scheduled for August 15th? These have gotten delayed. It seems like the narrative's changing. What are some of your thoughts on that? big game in China is the geopolitical, to me, the tech industry. Obviously, China is IP, stealing IP. So the big thing, the WeChat, the shutting them, which I agree with, actually. So US companies can't have even access to China, but we expect Chinese companies to have even access to the US. At the same time, they're collecting the most important information on all of us into an AI, into artificial intelligence. So there is some of that that I agree with. But again, coming back

Starting point is 00:22:35 to currencies and fair trade, what is the black box of China? No country in the world has ever created as much debt to GDP as China. How much it is there? So when you look at manipulation of currencies and then the bigger geopolitical risk of artificial intelligence and everything else, No wonder you're starting to trade barriers, you're trying to shutting out industries, and I think you could expect a lot more of that. Let's talk about the special drawing rights. They're typically referred to as SDRs. SDRs are an international type of monetary reserve currency that was created by the International Monetary Fund,

Starting point is 00:23:14 and they work as a supplement to the existing money reserves of member countries. So, Luke, what are your thoughts on the future role of SDRs and what type of role do you think, if at all, it will play on the global scene? I've watched the price of the SDRs. I've watched gold priced in SDRs and it broke out, gold broke out in SDRs earlier this year, which to me was a signal that gold was destined to probably set new highs this year in dollar terms before too long. Beyond that, to me, the SDR as a neutral. settlement asset or SDR bonds, I think the odds of that are probably waning, in my view, simply as a result of the geopolitical situation, the tensions that we're seeing with the U.S. and China in particular.

Starting point is 00:24:03 In May, you had the U.S. come out with their new views on China or their updated plan, I guess, if you will. Preston, you and I and Grant talked about that back in June, where we said we're in a new great power competition with China. And like I said at the time, one of my best relationships on Wall Street said that the document read like a war scroll. So the point being that to get an SDR type of multilateral neutral reserve asset via monetary conference really requires some level of cooperation and the two biggest stakeholders in the system, certainly to be able to sit down and talk about it. And it just doesn't seem like that's happening right now in terms of, it seems like there's more fragmentation going on. than any sort of agreement. I don't know how much role the SDR has to play, at least in the

Starting point is 00:24:54 intermediate term, to resolving or being a pivot to execute a reset of some sort, a reform of the system of some sort. I agree with that. And so something I've been covering, and I know Luke covers it even more, is basically more trade happening outside of the dollar system, particularly with energy and other things. And so the world's moving in a more multipolar currency direction. Now, the question is, what form does that take? So for the SDR is one possible form. It's basically a packaged multiple currency solution if you price, say, commodities in SDRs. And we have SDRs take a larger market share of reserves and kind of international trade. But that, to Luke's point, that requires a lot of coordination, which I don't think is likely. So I've been looking more at essentially

Starting point is 00:25:38 just regional reserve currencies. So if Europe can price energy more in euros and China as the largest commodity importer, if they can price some of their energy in yuan, then you have kind of three or more major currencies that can kind of price oil, and you have kind of dollar take a slightly smaller market share of that. I think that's a more likely outcome than SDR. So then you have things like gold and other assets that central banks can hold on their balance sheet that don't have any counterparty risk. And I think in de facto you're seeing that where, like you said, You've seen some more oil priced in euro. There was an article last week on Bloomberg noting that for half of what China buys from Russia,

Starting point is 00:26:17 excuse me, is being bought in euros, actually not in yuan, but not dollars. And you obviously, given that it's Russia, you can presume a lot of that is energy-related. And they thought a lot of it had to do with Rossnapp last year switching to invoicing all exports in euros. The de facto, it looks like the share gains since 2013 have been notably gold has gained share. of Epex reserves. And the amounts in aggregate are still relatively small, but you can see clearly there's been basically no growth to a slight decline in dollar apex reserves since in particular 3Q14 and de minimis growth in other currencies, but a notable trend of growth in central bank gold reserves over that time. And I think that's part and parcel to this. What's really driving

Starting point is 00:27:01 that is the multi-currency energy pricing in particular. 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've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses,

Starting point is 00:27:47 and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to, end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedomforum.com, with patron passes

Starting point is 00:28:33 offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI Cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while

Starting point is 00:29:21 making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some out on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at netsuite.com slash study. The guide is free to you at netsuite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also

Starting point is 00:30:07 incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify,

Starting point is 00:30:55 and start hearing... Sign up for your $1 per month trial today at Shopify.com. slash WSB. Go to Shopify.com slash WSB. That's Shopify. dot com slash WSB. All right. Back to the show. So let's talk gold,

Starting point is 00:31:17 which is probably the hottest investment of 2020. This is my concern with gold moving forward. Is everyone's looking at gold as a store of value, everyone has currency concern because we've seen massive printing this year. My concern, though, is if people think we're going to return to a gold standard. How does that play out from a game theory standpoint when it's almost like everyone is holding a gun to the other party? Like you're in a circle with 10 other

Starting point is 00:31:43 parties and everyone's got a gun and they're pointing it at each other, right? So like, how do we possibly think that all these countries are going to come back to the drawing board and say, all right, let's stop the madness. Everyone's going to be responsible here and we're all going to gold. That's where the SDR argument comes in there. For me, when I think of that, and I'm not trying to anchor your opinions, why is that opinion that I have wrong, I guess, is what I'm trying to ask. It just seems so improbable to me. So Preston, I look at this from a business standpoint, from a macro, very rarely does a business do what it has to do to change. It protects its status quo. And all of the people inside that business are protecting the status

Starting point is 00:32:26 quo why Kodak doesn't do. They invent the digital camera. We see more pictures today than anything. They have none of the gain of it. And you see this time and time again for that very, it's highly improbable that the system comes back together through SDR, gold, anything else, for exactly what you said, highly improbable. Because before the system to come back together like that and accept that where technology is going and it's ever deflationary, What they would have to say is we're going to increase taxes a whole bunch because we're going to be living in a deflationary world. And we won't be able to hide it in inflation. We won't be able to pick people's pockets slowly.

Starting point is 00:33:05 We won't be able to have governments as big as they are. It has to be politically achievable to be able to charge taxes for our services. I don't think there's any possible, we're way too far past the point of rescue of the existing system. If you're going to where Bitcoin is and everything else, I believe that that's why Bitcoin is where it is kind of a once-in-a-lifetime asset type of value creation or asymmetric debt. It's so improbable that the governments come together on any terms that could fix this problem. So I think, I agree, people in the status quo aren't going to change anything. And so to me, it's interesting then when you hear the United States accuse Russia,

Starting point is 00:33:48 accused China of trying to break or change the rules-based global order. They're acting outside of the rules-based global order. And I think it's, when I think of gold, I don't think anybody's going to voluntarily peg their currency to it at any point. But what I think it's important to look at is we talked about that the fiscal situation is irrecoverable, particularly after COVID. We don't know the exact path of who's going to win the race, but we think the Americans are going to have to print the most, but there may be times when they're behind, but there's going to be a lot of via monetary creation. And then you look at geological reality of the Russians, of the Saudis, of the Iranians, of the raw material producers. And we know that oil fields deplete and

Starting point is 00:34:34 go 100% watercut. And individual fields do all decline. And so if you're Russia, you're looking at a situation where you're going to be swapping your oil, your finite oil, for rapid year oil is doing this, and the fiat currency quantity you're pricing it in is, and the bonds that yearling zero, negative real rates for decades to come in all likelihood, and the quantity is doing this. And so to me, when I think about gold and the role it has to play in the system, I don't think it will be pegged any fiat currency. I think where this system is going is it'll be pegged to oil. And it will be that peg will be decided. and managed by either the biggest producers and or the biggest users. In other words,

Starting point is 00:35:23 if Russia decides that it is a better value for it to sell gold at 100 barrels an ounce, 200 barrels an ounce, 500 barrels an ounce, 100 barrels an ounce, than the fiat currency, then for dollars at the current prices, then you're going to see basically oil re-value gold. And this is precisely what we've seen since 3-214 when China began reopening the gold window effectively, right, with the Shanghai Gold Exchange International Board and Russia began selling oil in Yuan terms on the margin. When that announcement was made, it took 13 barrels of oil to buy one ounce of gold. Today, we're at 41 and close to 2000. So in oil terms, and ultimately, that's real money terms, that's gold and oil have been the only two things

Starting point is 00:36:13 that have backed currencies going back 350 years, that's where I think you are seeing in real time the commodity producers of the world saying, we are not going to sell our finite resources for that fiat money. When Russia buys gold within its FX reserves, that's what it's saying. When I look at Kazakhstan as an interesting one, I was looking the other day at uranium prices because I noted that the U.S. production had fallen way off, and you see uranium prices have bounced up a bit recently. So you say, okay, wow, who's the biggest producer of uranium in the world? And it's Kazakhstan. They produce 43% of the world's uranium. You look at Kazakhstan's gold reserves. They've been rising steadily for five or six, seven years, similar to Russia's. And so you say,

Starting point is 00:37:00 they're taking their dollar surpluses in uranium and they're rolling it into gold. Uranium's bidding for gold. Oil's bidding for gold. And when you look at the relative size of the physical gold market relative to the just oil alone, physical oil alone in annual production terms, is 10 times the size of the physical gold market. And so let alone you layer in uranium, you layer in nickel, you layer in copper, you layer in gas, etc. Basically, that's where I think gold has a role. Not that there is going to be the U.S. is going to get religion and say, you know what, we're going to pay gold. And if they were going to pay gold, it would have to be some extraordinary number, $10,000 now is $20,000 now. What I think is, half,

Starting point is 00:37:40 is gold is floating effectively in all currencies, and the commodity producers are saying, we are not going to store our reserves earned through selling commodities in negative real rate, sovereign debt. You're seeing basically the system, ironically, is organically changing, basically back to a version of the pre-71 system with wrinkles, which is pre-71. So, So, $1946, 71, dollar was the hegemonic currency. The dollar was a reserve, but gold was the primary reserve asset. And then 71, treasuries basically became gold. The U.S. government has effectively been emitting gold, you know, by emitting debt over the last 50 years.

Starting point is 00:38:21 Because the holeless of those instruments are now making money and before they didn't, adjusted for inflation. Real terms, yeah. And realistically, there was really only about a 10-year span of time where those were actually good, where treasuries were money. good on a real basis. And, you know, when they stopped making money on a real basis, 03 to 08, it didn't really matter because we were the only game in town. And then after 08, the world started shifting. And I think that's really where O'L has this role, which is we can't afford positive real rates. The West can't afford positive real rates more broadly. And the commodity producers in that case are probably looking at it. I know I'm looking

Starting point is 00:39:02 at it personally this way. If I'm going to have to buy a 0% yielding bond, I would rather have a 0% yielding bond of infinite duration and finite issuance, which is gold, than a 0% yielding bond of finite duration and infinite issuance. Like we said, the issuance is going to be infinite. And that's why I think we're gold as a role. Lynn has a great chart of what you were talking about there as far as the bonds up until 81. We'll have to somehow include that in the show notes or something. But Lynn, over to you. I want to hear your thoughts because we obviously know what Hugh Henry thought of your thoughts there, Luke. Over to Lynn. So I agree with what both Jeff E and Luke said. And just to add on to that, I agree with the sentiment that basically we're not going to just move orderly onto any sort of gold standard. I don't think we're going to see something like that like we saw in the past. Essentially, if we can kind of look at this as almost like a fourth turning event, that's how the demographer that coined that term would refer to it as. And basically, you don't really see a new system until this current system breaks and gets so bad that somewhere,

Starting point is 00:40:02 something else comes out of the ashes and they build a new system. Or there are ways that it can be mitigated, like shifting to more of that kind of gold as the central bank asset can kind of change the dynamic a little bit and you can get kind of that more gradual change depending on how bad things get. One example of a country using gold to some extent is India. They issued some sovereign bonds that were essentially gold backed. It's a small percentage of their issuance. And the incentive to doing that is that they get much lower yields on their bonds by doing that. For the similar the reason that a lot of emerging markets would have dollar-denominated debt, they get lower yields because the lender does not have to take that currency risk. So if you're concerned about the rupee,

Starting point is 00:40:41 basically instead of buying like a, you know, a treasury bond yielding nothing, you can lend to India and you can get kind of a lower rate than India's normal bonds, but then instead of being backed by the rupee, it's backed by gold, essentially. And you still have the counterparty risk of India that actually honors that agreement, but in exchange for that counterparty risk, you get that yield. So there are things like that where they've used gold to essentially demonstrate trust. So I think you could have, say, an extreme environment where currency breaks so bad and they go to something more physical like that, but that's more of a tail situation. And that's kind of a breakdown of the system. Or you can have these kind of more moderate cases where they just want to have,

Starting point is 00:41:20 they want to show trust and they want to basically get yield slower. Lynn, question for you, what we were, I think we all agree on, there has to be effectively infinite money printing globally in every single jurisdiction. Doesn't that eventually the reset button no matter what, then through revolution? Because what we're talking about is a new monetary system always comes out of revolution. It's a time to reset everything else and then everybody gets together because they have to. If we all agree that there has to be infinite money printing and the consequences are also infinitely bad across the world and it creates more polarization, more us versus them.

Starting point is 00:41:59 If we all agree with that, then don't we also, there has to be, there's a day of reckoning coming. Yeah, that's essentially what we saw back in the Great Depression in World War II,

Starting point is 00:42:09 unfortunately. So we had the tariff wars and then it evolved into hot wars, and then out of the ashes of that, we got the Breckwood system, and then that started to break down. So we got the Petrodollars system,

Starting point is 00:42:21 and now that's starting to break down. And then the question is, what's next? I think there's a big spectrum for how messy the next transition can be. It could be utterly devastating or it could be kind of a, you know, a more gradual pace. It could affect some countries more than others. I think there's a lot of variability, both in the timeline that it plays out and kind of what form it takes and how bad it gets

Starting point is 00:42:44 between now and that next form. I think there's a lot of kind of political things that I wouldn't even try to guess. Like this number of political variables from geopolitics, domestic politics, can make that path extraordinarily complex. Because I'd love to dig into one of the, because if we're talking about, okay, we know where we are, what are some of the probabilities and where does it look like? I would say that we all agree that the probabilities are very low, that the only thing that fixes us is austerity for a long time. And the probabilities are very low.

Starting point is 00:43:16 And the government's trying to do austerity. And if they do, it sets up a negative bias in their own currency and jobs. and everything else versus others who are printing. So you could, let's just assign a very low probability to that and say, so the probabilities are very high that the printing is going to continue unmitigated. It's unmitigated. In that world, I think it makes sense.

Starting point is 00:43:40 I'm not saying it makes sense from how an economy should look because government doesn't create jobs. If the government is 60, 70% of an economy, because you dismiss allocation of capital everywhere. But in that world, which we all agree with, that it's going to be, that government is going to take more and more share and every government is going to take more and more share to do that. Then it makes sense that MMT for people getting left out, why wouldn't they get money to?

Starting point is 00:44:09 I'm agreeing with MMT. I think it just takes us off the clip faster. But I understand the rationale behind people saying MMT. I agree. And it's a political question. And it ties back, Jeff, to the points you've made so eloquently. in terms of what the technology is doing is left to its own devices, you know, technology is going to be, you know, Jeff Bezos owns the world and the rest of us are all unemployed. And machines are doing

Starting point is 00:44:34 everything we're doing. I mean, that's sort of where this could go. But actually, ironically, this is making that happen faster. Correct. We're driving that faster. Yes. And so then the question becomes your outcomes are the other 299,999,000 people, you know, with 12 guns for every 10 people, eat each other, or does the government become the, you know, do we set up some sort of MMT system where the technology really, in theory, you can set up a technology-centric currency system, you know, where this can be managed, this process of allocating, you can manage a transition ideally. The optimistic situation is you can manage a transition through an application of MMT,

Starting point is 00:45:23 UBI and then we wake up in five to 10 years as a period of natural generational transfer, but then also retraining and basically a nation of shopkeepers again, you know, possibly where you get some money from the government and then you also, you like to make art, you like to make pottery, you like to sell that, you like to do fitness. There's a lot of, you know, you go back to this sort of, again, conceptually that might work. But I, to your point, the options on the path we're on is either the technology consolidates all the money and the power and amongst a very small number of people who then can't really go anywhere or they sort of hive off in gated communities or gated resorts while the rest of us have a very

Starting point is 00:46:12 bad political situation or the government gets involved at a much greater level in terms of the UBI and MMT that you were referring to is my view of the most likely. the option. I guess I agree with you the political option, the MMT. I suspect MMT is coming in some sort of form. I also suspect the Federal Reserve rules will be changed to do direct transfers to people and you could have hyperinflation at some point down the road. But it begs the next question, and this is where a lot of the MMT folks don't address. What gives you the right for a reserve currency and it's trust in the reserve currency. Let's just use an extreme example. I'm going to print a whole bunch of money. I have a reserve currency. Everybody else is using my currency. And I'm

Starting point is 00:47:00 going to trick the world. I'm going to buy the world. I'm going to buy the entire thing and then default. I think that's a crazy extreme example, but it shows kind of MMT where if you can't pay for it, how is that legal tender in other assets that you're buying going to be trusted? But I think that's actually the same reason that nobody's going to trust you one as a currency. And I think that's actually why we're way closer to the end game than people realize because this is happening at light speed all around the world. And then if you broker a new called the Brettonwood's 2.0 system, in that world you can make the argument that the world couldn't handle the pet currency because we would have an accelerate deflationary pressure from technology, which would be a unique

Starting point is 00:47:43 situation caused by the exponential growth in computing power. Back over to you, Len, I can see you have a point. One thing I was going to add is basically a theme I've been focusing on is the past 50 years have actually been somewhat unusual in terms of global reserve currencies. So a lot of people ask, okay, if the dollar is not going to be the global reserve currency as currently structured, then what currency is going to replace it? It's going to be the euro or yuan, like, of course not, right? They don't have this, they have the same problems that the dollar has.

Starting point is 00:48:10 So, but if you go back to state before the current system, essentially the neutral reserve sediment was gold. So even though there were global reserves or currencies for periods of time that were trusted in multiple countries because they were the dominant economic power, their paper was accepted, it was essentially gold that provided the background for it. And then we went in the Bretton Wood system, we had the dollar as that kind of paper asset, but really it was gold. I think Luke mentioned that earlier.

Starting point is 00:48:36 Then when you transition to the petrodollars system, that's the unusual period where the dollar itself was the center of the global financial system. So after World War II, the U.S. GDP was close to 40% of global GDP. And that has steadily declined as Europe and Japan recovered and that may have the rise of China and other emerging markets. So now the United States is in the lower 20s percent of global GDP in dollar terms. And it's even less. It's in the teens if you look at purchasing power parity. And back when it started, the petrodollary system, the U.S. was the biggest importer of energy. Now it's China. And so essentially we're at a stage now where there's no country, large in the country, large and

Starting point is 00:49:13 that their one fiat currency can be like the one ring to rule them all. There's no country whose money supply is sufficient to serve as the one currency that all like, say, global commodities are priced in. And we've seen essentially that whenever the dollar gets too strong in this 50-year system, something breaks. In the 80s, Latin American broke, in the late 90s, Southeast Asia broke, Russia broke. And then in this period, we had, of course, Argentina, Turkey, and several EMs, but then also we've had it. Each time that happens back at home, we have, for example, flat corporate profits for several years as that dollar gets really strong. Basically, the whole world slows down. Going back to the idea of like all the countries are like pointing guns at

Starting point is 00:49:53 each other, right? It's this big, like huge standoff. There's all these kind of like, say the dollar, if the dollar were to fall noticeably, on one hand, you want to have, say, Europe, like Europe and China wouldn't want to let that happen because they wouldn't want their exports to be less competitive. On the other hand, there are a lot of emerging markets that have a lot of dollar-dominated debt, and if that were to decrease, that would relieve some of their pressure. We have a situation that looks more like 2017, where we had this big kind of global rebound based on a 10% weaker dollar. And so Europe would be harmed in some ways because their exports would be, say, less competitive

Starting point is 00:50:27 to the U.S. On the other hand, their economic trade with some emerging markets could strengthen and offset part of that. And so whenever kind of looking at how different currency outcomes play out, the hard part is that there's always always so many variables that can kind of offset each other and go different directions. So guys, I want to talk about this one question that we had posted there on Twitter, Person Road. Federal Reserve in Boston has announced that they're working with MIT to test different ways of making central bank digital currency massively adopted. What are your thoughts? And I think that one of the most popular questions or complaints that I hear when I post anything about Bitcoin, people, their immediate responses, the government is never going to allow something that's completely decentralized, basically like the Napster of money going to just happen without a fight or they're going to create their own tokens and they're going to push those down the global economy's throat. And that's going to become what is widely adopted. So I'm kind of curious to hear your thoughts about this effort and the idea of,

Starting point is 00:51:30 of governments being able to step in and to compete with something like Bitcoin? From a mechanical standpoint, I don't really have the background to say, could they do it? From a monetary or from a structural, I guess, or top-down perspective, what I would say is, is that if they were to do that, that starts to break this system as it's currently structured, is if you take a step back to really see... You're cannibalizing yourself is what you're getting at, Luke. Yeah, you've extended this system. If you remember back in the 90s, there were things called bond vigilantes where, you know,

Starting point is 00:52:07 if the fiscal situation got out of control, people would start to get nervous. They would sell bonds, the interest rates would rise. And there was this market-based discipline enforced on the U.S. government. It served a little bit like a gold standard. I mean, if you go back as a famous quote from James Carville in 1993 saying, you know, I used to think if there's reincarnation, I'd want to come back as, the Pope or as a 400 baseball hitter, but now I want to come back as the bond market because you can intimidate everybody. And that was when the bond vigilantes enforce and discipline

Starting point is 00:52:39 on U.S. deficits back then. Well, you fast forward seven years from that, and you had the unregulated expansion of interest rate derivatives. So when you came into year 2000, and I want to say there were, I don't know, 50 trillion in gross notional interest rate derivatives. And by 2008 or 2009, it was 500 trillion or 600. And basically, you had the expansion of this market that derivative markets that basically neutered market signals, marked neutered monetary signals. And so the interest rate derivative market neuters the bond vigilantees. The massive expansion of the paper gold market, neuters gold market as a signal. We saw that happen with Bitcoin. Bitcoin futures are going to come out. And when they did, it neutered Bitcoin.

Starting point is 00:53:30 as a signal for a while in terms of what was happening. And my point is, is that this system has been under stress for a long period of time in a big part of the way monetary authorities and banking authorities have extended it is by creating these levered derivatives on top of derivatives. And so if the Fed comes in with their own sort of token, those edifices are going to either have to be, either collapse on themselves, massively deep. or the equity underlying them, so to speak, the Fed tokens are going to have to be created in amounts that are very inflationary. So I don't have any comment on will it be a Fed token or a Bitcoin or gold or however they do it. But to me, it's a little bit of six of one, half dozen

Starting point is 00:54:17 of the other in that, to me, could quite possibly be pretty inflationary in terms of just fiat creation. You know, Preston, I wrote about this and the IMF had a working paper where they said that in the next phase of this, interest rates might need to go down to negative five or negative six. And it's staggering to think about interest rates there. But because cash can be pulled out of the bank and put under your pillow, they have a lower bound interest rate that they can't go below because people pull it out of the systems think so. So all of this is perfectly predictable on a path towards where we're going. Interest rates have to go lower, more easing and everything else. And this is a way to essentially get people to use something that they could

Starting point is 00:55:05 take interest rates lower without them pulling it out of the bank. To me, that's the idea behind it. I think it's totally ill-informed. I think you come back to the first principles we're talking about. Technology is deflationary, period. It's almost nothing else needs to be said. And some of the Twitter feedback and everything else, we get some tremendous contributions. out of Twitter and some of the people around. But at the end of the day, if technology is deflationary and it's advancing everywhere, the existing system won't work no matter what. Nothing changes that.

Starting point is 00:55:40 It delays it. It causes more pain. There's a whole bunch of misallocation of pricing and everything else, misallocation, asset pricing across the spread everywhere in the world. There's a whole bunch of pain for a whole bunch of citizens. But nothing changes that fact. I agree. and there are a couple different angles because the original question also related to outlawing of Bitcoin, for example, if they want to have their own tokens.

Starting point is 00:56:05 It's kind of part of the initial question. One thing I highlighted is that there was close to a 40-year period where treasuries didn't pay positive yields in the United States. It was from about basically if you bought and it held a 10-year treasury to maturity. If you bought it, say, for the mid-30s to the mid-70s, you just didn't make your purchasing power back. You got paid back nominally, but you lost purchasing power compared to even compared to official CPI. Almost perfectly overlapping with that period is when gold was illegal to own for U.S. citizens because they basically outlawed one of the release valves that people could have used to escape that issue. And there are a lot of things different back then for gold was, you know, the currency was pegged on gold for a lot of that time.

Starting point is 00:56:45 So that opened up different incentives for them to want to do that. So there's that kind of historical background. Then touching on Jeff's comment about their incentives wanting to do it. So yes, they have more control if there's no paper currency. and no physical kind of commerce that can happen outside of their system. So that's their lower floor for interest rates. But they also have other incentives, for example, if they want to do a stimulus and so that they want to have people spend it rather than save it, for example,

Starting point is 00:57:12 because that's how a lot of the policymakers think. They want to keep the circle going over and over and over again quickly. Yeah, and they want to get that velocity up. So one thing they could do, if they had a more sophisticated system, they could send out those tokens that expire after, say, three months or six months. and it basically forces spending. They could program them so that they can only be spent, say, within the jurisdiction. They can't kind of escape the country or they can't have that sort of issue. So it gives them finer control. If you go into the darker side than that even, if you look at, say, China, they could shut off people's currency units that have a low social credit score, for example, that you get really Orwellian there. So there's unfortunate a lot of incentives to them to want to have, from their perspective, more power of the currency. Now, Bitcoin is tricky for them to ban. It's decent. and is technically impossible for them to confiscate, you know, physically, they can do things like ban the exchanges, ban the apps, things like that. They can make it harder. They can increase

Starting point is 00:58:08 the friction so that they can kind of do things like that that make the thing a lot more complicated. And that, of course, opens up game theory between countries and kind of which jurisdictions want to be seen as places where people have property rights, essentially. 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. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure

Starting point is 00:58:50 and keeps your deals moving. Instead of chasing spreadsheets and screenshots, Vanta gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at Vanta.com slash billionaires.

Starting point is 00:59:20 That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone.

Starting point is 00:59:54 Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity, you'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify.

Starting point is 01:00:32 Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors. private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the fundrise income fund in just minutes.

Starting point is 01:01:16 Fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. when you're describing all of those situations for a national token, which I completely agree with everything you just said, but what you were describing was something where it's not a

Starting point is 01:01:58 decentralized protocol. It's something that is still very much centralized and very much still inflationary in nature, which, you know, for anybody hearing that, that's a bull argument for Bitcoin, which has a fixed baseline of units. Exactly. Yeah. A lot of people think that it's a threat to Bitcoin if, say, the Federal Reserve comes out with a Fed coin, but as you point out, it wouldn't be scarce. Still, it would just be like a more complex dollar, essentially. We still have this kind of gold and Bitcoin are scarce compared to fiat currencies that can be, you know, expanded infinitely. So there's still, from a user perspective, there's still an incentive to want to own those scarce assets rather than buy into that sort of system. Because part of the question

Starting point is 01:02:39 related to would policymakers want to do that and then try to ban the exit points? It kind of depends on whether you look at it from a policymaker perspective, like what do they want to do, and then how do you view it as an investor or citizen perspective? Like, how do you want to, say, protect yourself against what they want to do? What kind of decisions you want to make compared to the different systems that can pop up? And that builds into Jeff's argument that he mentioned in the beginning of the discussion that this affords them the ability to implement the MMT here in the next quarter two years. Jeff?

Starting point is 01:03:09 I'm actually building on Lynn's comment. If you think about where Bitcoin is, it's really hard because of game theory. It's really hard to stop because if governments stop it, in one government, others will create an incentive to collect it. Let's just play that out a little bit. So today, if I want to move to Portugal, if I invest 350,000 in Portugal, I can get my entire family golden visas. So every country has something like this.

Starting point is 01:03:36 And what they're trying to do is bring in capital, jobs, everything else, into the country. And so that happens today in different countries, trying to attract best talent, capital, everything else to drive their economies. So let's say a government bans Bitcoin or something U.S. government bans that Bitcoin. It creates an incentive for other governments to do that. Now you pair that as well with in history, you asked, why didn't people who you could see the writing on the wall, you could see the kind of revolution coming, say let's use Weimar Republic, right, as an example there, because it's probably an illustrative. Why don't the people with money leave? And because most of their assets are priced in that currency, houses,

Starting point is 01:04:22 apartment buildings, currency and everything else. And a country can put capital controls on and make it really difficult to get out. And so a lot of people stay in what they know is going to be really terrible for their families in the future because they think it's going to go back to the old way. Bitcoin just alone with that allows a release valve that you can move anything. And so from a game theory, from why it should be in your portfolio from that, not just you can move it. It's very hard for governments to stop because of what we just talked about. And I would not want to have in a region, even though real estate will probably perform well for a while until it's taxed at a different rate, I wouldn't want to have 100% of my portfolio

Starting point is 01:05:10 in real estate in a given region for the very same things we're talking. You know, it's interesting because if they do go to a negative rate like that in the U.S., challenge for them doing that in the U.S. is my view is that would effectively end the dollars reserve status is structured, because basically you either need a two-tier system right, where you're going to pay Americans negative five, you know, The Fed funds rate for Americans will be negative five, and the Fed funds rate for Japan and Saudi Arabia will be one or something. And there's precedent for that, I'm told. I've been told that the Saudis and the Japanese at times get a higher yield on their bonds than what you see in the

Starting point is 01:05:50 market. There's been times in history that that's been the case. I've never seen that written anywhere, but people in a position to know have intimated that to me. But the point is that if you went to a negative rate worldwide, you would have $7 trillion in U.S. dollar FX reserves. that would be bidding for gold almost overnight, and that's a market that's tiny. Some would go into Bitcoin, perhaps, but ultimately, that would complete that reset in a very fast manner. And there's probably some positives to that, but that's, I think, a challenge for executing that globally. In the past, an example of that kind of food level system was actually the gold standard in the U.S. So the gold standard was canceled for U.S. citizens, like their

Starting point is 01:06:33 convertibility of gold, but it was still for a long time held for foreign, for international settlement. And then it was eventually they got even off of that after basically the foreigners started to call the bluff essentially and say we actually want the gold. We're not going to keep trusting the system. There's actually precedent for that kind of two-phase approach. And yeah, that go back on Jeff's point, the power of Bitcoin essentially is that you can, there is a news item just recently where a Chinese woman was, you know, stopped in airport trying to bring gold into the U.S., I think it was. And it wasn't even that much. It was like, add, you know, a few dozen gold coins. And it's easy to stop that now, whereas Bitcoin,

Starting point is 01:07:07 you can literally just, you can memorize 12 words and just go across the border with nothing. And that's a really powerful technology that does circumvent a lot of the issues that makes it hard for policymakers to deal with. Preston, for you, I think you were ahead of this in a long way in putting your reserves in your company into Bitcoin and talking about the reasons you did. And it was, it just This might be interesting since the micro strategy thing. I'm chairman of numerous boards and also chairman of two different audit committee boards. And in both of those boards, both of the audit committee boards, this is a very real conversation right now.

Starting point is 01:07:49 Really? So there's a lot of people on Twitter asking me that. And I don't have access like you do, Jeff. So let's first explain what's going on. So you're talking about micro strategy. The tickers, MSTR, Michael Saylor, and M. IT grad. This company has a market cap of $1.3 billion, has $500 million in equity, and Michael had a huge amount of voting rights for this company and went out and took $250 million and denominated

Starting point is 01:08:18 all of it into Bitcoin and just slapped it right on the balance sheet of the company. So literally half of the equity for the entire company is Bitcoin. And so you're saying that in boardrooms of major multibillion-dollar companies, this is becoming a talking point. This is a talking point. There's more than just a talking point. And I think this plays into your thesis and a whole bunch of it. So if you just go with what we all know, with what everybody knows and can feel, governments are forced to stay here and forced to devalue currencies and it's going to continue on. then people sitting on those currencies are looking for hedges against them.

Starting point is 01:09:01 And that's why gold's moving. That's why Bitcoin's moving. But it is a very real conversation in boardings. In the last week, I've had two product committee meetings about it. That CEO, if you look at the press release, he specifically cited all these macro factors as part of his reason to want to move into Bitcoin. He cited the massive fiscal stimulus, the debt monetization, the QE that was happening with the currency and cited that as his specific reason for wanting to shift into, you know,

Starting point is 01:09:30 first they described it as alternative assets and then they revealed that the alternative asset he was really pursuing his Bitcoin. And so, you know, it wasn't just like he had no reason for it. It was specifically because he was worried about having so much cash because as you point out, you know, it's, I think it's up to $1.4 billion now market cap. They've, they have, they like how you said now. Oh, yeah, yeah, because I was looking at the other day, they're up to like 500 million, 500 and some million dollars in cash, like not even just equity, like actual cash. They had no debt, tons of cash. This company, like, they've been having some growth issues lately, but their biggest asset is

Starting point is 01:10:05 they have a huge amount of cash relative to their market capitalization and just all this. So the last thing they want is for that to be devalued. And so he just took half of it and put it into something that he viewed as kind of hedging against that. And I think what's crazy for people that maybe don't play around with really big numbers like the ones we're talking about. So you're talking about a company that took $250 million and bought Bitcoin with it. But when you look at a company like Apple and you look at their balance sheet and their last year close out was around $100 billion in cash and cash equivalence,

Starting point is 01:10:38 $250 million is a total pittance when you compare to the ability to drop any amount percentage wise of $100 billion. And what that's going to do. And I mean, that's just one of many, many companies that have big positions on their balance sheet with marketable securities that they could just change 1%, 5%, whatever it might be. I think the biggest thing that surprised me about this micro strategy thing was my expectation for companies to start putting Bitcoin on their balance sheet as a marketable security was that it was going to be a 1 or 5% allocation, 10% at most, not literally the entire cash equivalents were turned into Bitcoin.

Starting point is 01:11:17 It was just crazy that that was the first thing that we've seen. So, Jeff, you're thinking that when we start seeing the third quarter reports coming out, that this is going to be more of a maybe common thing than what we're seeing today. I think it's just on the continuum. I would have bet against what Microstrategy did. It's a bigger piece. On an audit committee, I wouldn't say, okay, go do it all, right? So I would be, but as that happens, it forces other things.

Starting point is 01:11:50 It's just a knock on effect. It drives the network effect of Bitcoin, and it also drives more instability into the other system. You got all these investing podcasts. Everyone there is pretty much saying a lot of the same stuff. And it's stuff that comes out of the finance industry where you have a bunch of people that are managing other people's money. And so when you're managing other people's money, the name of the game is you don't want to have too much volatility in your portfolio at the expense of upside.

Starting point is 01:12:18 You just want to have just enough upside that maybe you're outperforming the index. But if you start going above that, you have too much volatility and you potentially lose clients, right? That's the name of the game for finance. That's what all these investing podcasts and people that are doing this, they manage other people's money. But what if you're already have a net worth of $100 million or you have a net worth of $500 million or a billion dollars like Michael Saylor?

Starting point is 01:12:41 Volatility does not scare him at all, at all. If he thinks he's right and he wants to, because guess what, he has another company that's worth $3 billion. So if he makes a mistake on this one, so what? I can handle the volatility, right? I'm not managing somebody else's money. So how many other private companies are out there that a person owns and they have the ability to put a lot of marketable securities on it? And they can handle the volatility because they have free cash flows and they're not going to blow up and lose all their clients, their index of clients because they're managing other people's money. Well, think about it too, if you're a billionaire, there's only two ways you lose in this life.

Starting point is 01:13:17 You can't spend a billion dollars. There's two ways you lose. You lose war slash revolution and you lose hyperinflation, rapid hyperinflation. That's it. That's the only way you ain't ever going to eat again or you ain't ever going to eat good again for every meal. And so what you're describing checks those boxes. You don't have to have a lot into a Bitcoin or a gold, but a Bitcoin in practical terms of what we're talking about here, where you just, you take that risk off the table. You have hedged that out now. And you're starting to see that. And to your point, when you don't have the career risk to be different, why wouldn't you? Given what we're seeing. Michael Saylor has no concern of losing clients. The business is still going to pump out a bottom line.

Starting point is 01:14:01 Now, if he's wrong, yeah, he might not have the ability to navigate storms in the future with that specific company. But like, I guess my point of saying this is, I think there's a lot more Michael sailors out there than people realize. I agree with that statement. Yeah, that he's not managing somebody else's money. He has created value in the marketplace and he's sitting on a couple hundred million dollars and he's got other billion dollar companies. I think it's more common than people realize.

Starting point is 01:14:28 So Preston, if you just kind of go back to the structural, how bad the system works today. So let's just take interest rates where they are negative real interest rates. What is that actually telling the market participants? your CEO, what does that say? Do not have cash on your balance sheet no matter what. Yeah. Leave her up. Leave her up because you can...

Starting point is 01:14:48 Because you'll pay it back with worthless money. With worthless money. But don't put it in capital. Don't put it in capital. Don't put it in capital for a rainy day. Yep. For a rainy day, don't put it in capital. Put it somewhere else or buy back your stock.

Starting point is 01:15:02 Yeah. Yeah, buy back your stock. I do you think, like you've created, you've created structural and imbalance in the system for everyone. right? Because once the Fed then says, oh, no, all those jobs go away if we don't save the company and they have no cash and they have to make it right because of the political, the political costs not to, you embed that into the system and you get more of it the next time. That's actually what we're saying 2008 to now. You just get more of it. There is nothing that's

Starting point is 01:15:32 going to change on the existing system. It's going to get worse and worse on that path. If that's the case, and globally, not just in the U.S., actually might be stronger than a whole bunch of regions, globally. That's going to happen. And that means that Michael Saylor and others who are saying, okay, there is an exit path here from this. I'm sure a lot of people in finance are looking at micro strategy and they're thinking that it's just a one-off.

Starting point is 01:16:01 But let's continue with this thought experiment where the micro strategy story is not unique. Q3 comes out and one of the biggest companies in the S&P 500, called it an apple, comes out and have converted 1% of their cash into Bitcoin. What does that do to the narrative to Bitcoin and will we see any fundamental change in the financial industry? I think you're seeing it in gold. Sam Zell, right?

Starting point is 01:16:27 There's a guy who's gotten the big things really right more consistently than Sam Zell. I mean, there can't be that many. He's been brilliant. And earlier this year, I'm buying physical gold for the first time in my career. Now, he says it's a supply demand dynamic that he's primarily focused on. But I think part of that, I refuse to believe that that's the only reason he's buying gold. I just think he's buying. I think that is the politically acceptable narrative for a Sam Zell to get on CNBC and say,

Starting point is 01:16:56 why I'm buying gold. You can't stand up there and say the things that Luke Gromond says, Warren Buffett. Warren Buffett. whole career. I hate gold. I hate gold. I hate gold. I hate gold. I hate gold. Now he owns gold. And, you know, something, it was interesting. We highlighted this last annual meeting he did in the annual letter. We highlighted two things. Number one, he made a, I don't know, a 90-second discussion where boy, I said, it sounds like he might be considering buying gold. Number one. But number two was, he did this highlight. One of the things he did, I think the two meetings ago was I bought my

Starting point is 01:17:34 first security in 1942 when I was 10 years old and gold's done nothing and stocks have done great and that's why gold is stupid. And you look at the chart and you go, all right, tell me about how gold did versus stocks from the time you were born in 1932 to 1942. Because ultimately, I agree most of the time gold, Bitcoin did. They're not useful. I just don't care. But for short stretches of the economic cycle, they're all you want to own. Like, that's it.

Starting point is 01:18:06 And, you know, the fact of the matter was, he just pointed out. I said, look, he's being a little disingenuous from 1932 to 42. You know, 1942 happened to be the all-time generalational low in stocks. And, you know, the Battle of Coral C, the stock's bottomed in a way they never went back. So you would counter your argument with saying, well, that's why I bought a gold company and not gold. but regard, right? That's what he would say. Because they're raising dividends.

Starting point is 01:18:33 No one else says that's all. Lynn, you had something you wanted to say. I want to hear what Lynn has here. Well, on that point, I was looking at the Buffett purchase because that,

Starting point is 01:18:42 I mean, that was about $500 million. So on his balance sheet, that's a small purchase. It's nothing, yeah. But it's also interesting because he spent like $10 billion getting an energy pipeline

Starting point is 01:18:52 in recent months as well. So he's actually got a little bit of a hard asset theme going on there. It'll be curious to see what he does for the rest of the year and next year. Going on the earlier point, I was just kind of holding the thing that Bitcoin is currently, the whole market capitalization is less than one-tenth of a percent of global assets. It's not even, it's like, it's like one-twentth of a percent of global assets. And you're going back to the point where why would every kind of multimillionaire

Starting point is 01:19:16 and I want to have one percent in Bitcoin, for example, which is technically overweight Bitcoin because you're 20 times overweighted compared to its just kind of market-cap-weighted asset percentage. But basically, it's such like an asymmetric bet at this point that that's one of my kind of bullish thesis on Bitcoin, especially at this phase in the halving cycle, is that there's so kind of so many strong reasons to have at least a small bit of like a non-zero Bitcoin position compared to the reasons to have literally zero Bitcoin. And just going back on that point where there are certain periods of time where you only want to own gold, you only want to own kind of these scarce assets.

Starting point is 01:19:50 And especially with Bitcoin because it's so asymmetric, you don't even have to make that all in bit, all in bet. It's just kind of like you can literally put even a small percentage of a portfolio in it and still benefit in some way if that plays out. And if it doesn't, then you didn't really risk a lot of capital. And so I think that's kind of something we could see going forward. I think it's going to be interesting when you look at what are the Warren Buffett types of the world buying through this? And then what are the top five to 10 tech companies buying through this? because my expectation is that in six months from now, the apples, you know, the Amazon's, the

Starting point is 01:20:28 Googles, they're going to have Bitcoin on their balance sheet. And I'm kind of curious what that exposure is going to be compared to call it gold, whereas the Berkshire Hathaway's and some of the older capital allocators are gravitating to what they know and what they understand. And I kind of suspect that that's going to be a real interesting dynamic as the way the market perceives that. Are we going with these companies that are literally eating the market cap of the entire world, or are we going to go back and do things the old way? And it's going to be interesting to see how it plays out. Jeff, you look like you have something you want to add there. I just say, I haven't thought about who does it first, but I think, Preston, that makes a lot of sense. Technology companies that

Starting point is 01:21:12 understand network effects, understand how to construct where value comes from. It makes a lot of sense that they would move first. I remember Facebook did the Instagram deal. And as a value, as a hardcore value investor at that point, I just remember looking at me like, these prices they're paying for this is totally nuts. This makes no sense whatsoever because I didn't understand why the network effect was so powerful in that platform. But I'll tell you, Mark Zuckerberg and others at Facebook clearly understood that.

Starting point is 01:21:43 Same thing with the YouTube deal. The amount that Google paid for that. And I was just like, this just doesn't make any sense. They have no earnings. Like, I'm sure they can bring it in, but even if they would, it would take so long. But what I wasn't accounting for is how they're piecing the data together in order to use that to their strategic advantage, right? And I think that that was a huge learning curve for me as an investor to understand that value proposition that just hadn't really occurred in the past. So I see the same thing with when you're talking about decentralized protocols and replacing money.

Starting point is 01:22:13 I see the same exact thing taking place. But, you know, that's me. You had something else there, Jeff? Yeah, I just, it would say, that's actually what makes you so valuable in this space, right? Because you actually started, you were a value investor, and you had enough learning, not being stuck in one mindset to look deeper at what was creating the value. And because you went through that, you're so valuable in this whole community to be able to tell others. Because that is what you just talked about.

Starting point is 01:22:45 Early on, I had a conversation with a very senior executive at Google on why Amazon was worth so much. And I said, are you kidding? I said, they collect more information than you. They have the weights dimensions of every product they sell. They have the two from information. And you have none of that. So you're sitting on top of the stack. And Amazon is collecting the information of all the, they're building a logistics network with this information.

Starting point is 01:23:11 because they can virtually bin-pack products and everything else and see flows of goods. And I said, as they do that, they become more valuable than you because now they have a better advertising vehicle too. But you have to be able to connect the dots kind of orthogonally and say, okay, where is this going from a data perspective to do it? And very few people caught in one narrow sense can do that in an old industry that creates its value differently. can do that. I think it'll be interesting, too, is where the views are, what the government's reaction will be. Because ultimately, now you're getting into a little bit of a delicate area.

Starting point is 01:23:52 If you're Apple, if you're Amazon, if you have these massive government contracts, and you start taking this cash and basically stop putting this in the treasury market and you start putting some of it into Bitcoin, too much of it. People have been known to get taps on the shoulder. And so all of a sudden, the regulators will show up and say, you know what, we hadn't minded your monopoly position, Mr. Amazon and Mr. Google, but now you're going to have to start spending some money on, you know, so it'll be interesting to see for two reasons. Number one, will they do that? Because under where we had been, I would think that the odds of that happening if they

Starting point is 01:24:29 went too far with moving away from dollars into Bitcoin, I think that would be a likelihood. knowing where we are and knowing that you need a reset, you need a catalyst, knowing that a Warren Buffett is buying gold, a consummate insider. I mean, you go back, Solomon Brothers needed a bailout. They called Warren Buffett. Long-term capital got me. When they blew up, Buffett got shown the book. Goldman, Bank of America.

Starting point is 01:24:52 But Buffett owned a bunch of silver in the late 90s and was, I think he got talked to and said, listen, this is not sort of how this is going to go. So my point is that if these tech companies start doing this and there's no reaction from the government in terms of these, of course they won't be connected to, well, we're investigating your monopoly position because you're buying Bitcoin, but that's what it'll be. If there's not that reaction, it could mark a starting gun for, okay, let's just get out of the currency and be quite inflationary in terms of our signal. Lynn's comment about the tokenization and basically putting restrictions on the tokens as to how

Starting point is 01:25:32 they could be utilized in the marketplace. If you start seeing what you were describing there, Luke, where these big companies are then taking some of their revenues or whatever and they're starting to drop them into crypto exchanges and buying Bitcoin and putting it on their balance sheet, if these tokens, the dollar token or the euro token or whatever could come with restrictions that would prevent it from putting it on to any type of crypto exchange and therefore leaving the ecosystem or being transmuted into some other type of token. I think my concern with that happening is they just don't have enough time left on their side

Starting point is 01:26:05 to develop something that complex. I mean, look at the challenges that they're having over on Ethereum right now as far as the complexity. I just don't know how you're going to get a state token to stand up that can perform with all of those complexities because we're really talking about smart contracts on a state token. We're having enough trouble doing that in the free and open market, let alone a state actor basically standing up a contractor to design something like that and then releasing it and actually working. But that's me just, I guess, brainstorming while I'm spewing ideas out. Go ahead, Lynn.

Starting point is 01:26:39 I agree. They actually, during the stimulus earlier this year, when they were kind of drafting that initial bill, they had that kind of a Fed coin idea pop up in one of the drafts. They were looking at kind of like a wallet distribution mechanism because one of the initial questions was how to get checks to so many people so quickly, especially because some of the most people that need it the most are in some cases unbanked, right? So it's actually, it gets to the people that don't need it first, and it gets to the people that need it the most last. That's kind of how the checks went out. And so they actually kind of, in one of their drafts, they floated an idea, but they ended pulling that away in a later draft. And I speculate that the technology's not placed for it yet.

Starting point is 01:27:14 So even if they wanted to do it, they just couldn't, they had to get that rolled out so quickly that they couldn't kind of move forward with that kind of more technological plan. All right, guys, I want to respect your time. This was amazing. I thoroughly, enjoyed this conversation. I want to go around the horn and let everyone kind of give a hand off to their site, their book, whatever it might be. So, Luke, go ahead. You can check out what we're doing, fFTT-lc.com and learn more about what we're up to, different research, product offerings, etc. Jeff. Just follow at Jeff Footh on Twitter. The book is called The Price of Tomorrow. It's excellent, by the way. I've thoroughly enjoyed it. It's amazing.

Starting point is 01:27:54 I'm at Lynn Alden.com. I have a free newsletter people can look into and I write articles and a lot of investment focus. Lynn, I was in an interview last week and the person made the comment to me that Lynn Alden is the macro analyst of 2020 and I said, I completely agree with you. You are crushing it this year. Well, I appreciate it. She's embarrassed. She's red in the face. No, here, I'll bounce it off. So last year, for example, Luke did an interview on Real Vision that I saw at the time, that kind of accelerated my own time frame for seeing certain things play out. So I have to give some of the credit back to Luke because so earlier in that year, I was kind of analyzing the deficit situation, kind of

Starting point is 01:28:39 bluning out. So in my base case, was that we're going to run into an issue in the next recession. So this whole like vertical balance sheet thing like that, that was all my radar. The thing that wasn't on my radar was that we'd actually run into that issue before the recession. So Luke, months before the repo spike, pointed out that the Fed, you know, by the end of the year, the Fed's going to have to control either the, you know, they're going to have to give up control of either the quantity of money or the price of money. And so we saw that play out with the repo spike and then the subsequent, first they had a gradual balance sheet expansion, then the sharp balance sheet expansion. And so it was part of Luke's research that literally the day that

Starting point is 01:29:12 happened, as soon as they got the spike, I already knew, I already knew what was happening. Like, there's so much confusion in the market. But because I had Luke kind of accelerated my timeline, and he kind of pointed in certain directions to look into, and I looked into it. And so I found that some of his interviews very useful. I know exactly which interview you're talking about. It was stellar. All right, guys. Now we're all embarrassed.

Starting point is 01:29:34 We all patted each other on the bag. All right. Well, hey, guys, really appreciate your time. This was a lot of fun. And I really hope to do this again, maybe next quarter or whenever. Anytime. Thanks for us. Anytime.

Starting point is 01:29:50 All right, guys. So this part of time the show, we'll play a question from your audience. And for this week's episode, we picked a question from Jennifer. Here we go. Hi, Preston and Stig. This is Jennifer from Vancouver, Canada. I have to start my question off with a thank you for all the time and effort you put into the podcast. I can't quantify how much I've learned from you and your guests, and I look forward to each episode.

Starting point is 01:30:13 My question is probably unsurprisingly related to the high amount of national debt levels across the world. I've read and heard that the only way out of this situation without a currency crisis is to inflate away the debt. Can you explain what this means and what is the likelihood of a strategy like this succeeding? Thanks. So, Jordan, let's talk about the scenario that you put up here considering an economy with a 0% inflation. The government would be selling long-term bonds for, say, $1,000 to the private sector.

Starting point is 01:30:47 And to attract people, the government would have to offer an interest rate, say, 1% a year. The government would then have to pay the full amount back of the bond, which is $1,000, plus the annual interest payment of these bonds, which would be an additional $10. So in this scenario, with a 0% inflation, the investor would collect $10 in profit, and thereby also increase his purchasing power. Going back to what you said there, what if we include inflation? inflation into the equation? What if the government insured a higher inflation? Now, so let's consider the situation where inflation was 10%. So that would be to the disadvantage of the investor who normally

Starting point is 01:31:29 would be able to buy for $10 more. But the goods and services he could buy for $1,000 before inflation, that would now be priced at $1,100 because you had that 10% inflation. So in that case, with a higher inflation, that would be advantageous for the government. And the reason for that is that because of the inflation, the government will get higher tax revenues as wages and prices increase too. It would be roughly 10%. So they would gain 9%. And the investor would lose 9%.

Starting point is 01:32:05 So in theory, this seems to be a perfect solution, at least for the government, right? And we've seen this implemented in the UK after the Second World War. and we also saw that happening in the US in the 1970s. There is, however, a lot of negative effects to this, if that is the route you want to pursue. First of all, if investors expect this to happen, they will require a higher yield on their bonds, which means higher interest payments.

Starting point is 01:32:34 It can also ultimately mean that investors lose trust in the currency and in the government, and for the US, it might mean that they would lose the privilege as being the global reserve currency, which would make a deleveraging extremely painful. And we also see that high inflation has repeatedly throughout history led to social unrest among the population because they do lose trust in the system. And then to your other point about inflation without a currency war, it's really two sides of the same coin.

Starting point is 01:33:07 Interest rates are determined by supply and demand. So if you print a lot more money causing inflation and consciously depreciation, your currency by adding a higher supply. It's really hard to have one without the other, and that's what you're seeing playing out right now, and you'll be seeing for quite some time. So your question might then be, and that was not your question, but I've already started rambling here, but your question might be, so how do we solve it? What's the best way?

Starting point is 01:33:36 And the cheeky answer is really not to get there in the first place. whenever you have a democracy, and I just love this quote by Churchill whenever he referred to it as the worst form of government except for all the other forms that have been tried. But whenever you have a democracy, you both have the implicit risk and a sense of having people in power or people who wants to be in power, spending more money or promising to spend more money that they have and then have the next generation pay for it. But really the optimal way would be to leverage having a higher normal growth rate than the normal interest rate you pay.

Starting point is 01:34:09 It's hard to do because the more debt you have, the harder it gets for the government to implement that. And there's really no easy answer right now to deliver it at the outrageous level that we're seeing. In theory, it's easy because you can just minus the size debt. But in practice, it is extremely hard because someone or some groups would have to pay for it, which is a political decision, and that makes it really, really difficult. So, Jennifer, what a great question. and it fits perfect for the episode that we just recorded. And I think for people that might have listened to the conversation we just had

Starting point is 01:34:46 with this all-star cast of folks, it can get a little overwhelming. It can sound like a bunch of just really crazy terminology. And then just none of it really makes a lot of sense because we're talking about a lot of different concepts and kind of mixing them all together. So I can understand. The simplicity in your question, but the answer to it is extremely complex as, you know, Stig found himself as he's there explaining his response to you. It gets really technical, really fast.

Starting point is 01:35:19 This would be my best attempt of trying to make it as simple as possible. The part that Stig was talking about there at the end, as far as about the people that are elected and how they have to guard against the incentive that they have to vote. themselves money into their district. Is it the heart of almost all of this? You have to have elected officials that greatly guard against that, that tendency and that urge and that incentive structure to do so. Because what happens in the long run is a country becomes further in debt. They can adjust or they can leverage the power of the currency in their favor.

Starting point is 01:36:05 and they can adjust interest rates in their favor to allow that to occur. And then the further that they go down that path of adjusting this, the money, the hard money versus the currency, which is what they're printing and putting into the population, the more that they adjust that, the more it's hard to go back to sound money. And so, you know, from the 1940s up until the 1980s, we had sound money, or at least the population believed we had sound money because we had a gold standard. And then in 71 we came off the gold standard. And then you had interest rates sky high because what we are effectively doing

Starting point is 01:36:46 where we were we were adjusting what's called the money multiplier. We were adjusting based on how much gold was sitting in reserves, right, versus how much currency was in the system. They kept adjusting how much reserves had to be sitting there and how much currency was added into the system. They did this since Bretton Woods up until 71 when they were forced to come off the gold standard because they had manipulated the money multiplier so much. Once, when, when you do that for so many decades, you create a vacuum of interest of foreign money to flow into this country. And that's why you saw interest rates going sky high and then you saw them really peeking out into the early

Starting point is 01:37:27 1980s. Well, the only way to then correct that was to then start adjusting interest rates lower and lower and lower. So now we're at this point where interest rates are at zero. We don't have sound money. We don't have anything. It's not backed by anything. And you have this tendency of elected officials to spend more than we take in. And I think that when you have those three variables at play, the only way that a country can kind of offset that is through the debasement of the currency. And so who is the entity, who's the party that eventually gets who's on the losing proposition of that deal. And for me, at least it's the people that own the debt.

Starting point is 01:38:12 If you own bonds, if you own those as an investment, and they continue to print at a pace that outstrips going back to Stiggs example that he provided, his very simple example of a thousand dollar bond, if inflation's 10% and the thing's only yielding 1%, you just lost 9% of your buying power on an annual basis. And then when you start annualizing that over, like, let's just say it's a 30-year bond, that compounding of a loss in buying power of 9% in that example is very detrimental over the long haul because it becomes exponential. Most people can only think in linear terms because exponentials are very difficult to

Starting point is 01:38:54 understand because our daily lives are not in linear terms. They're in very linear terms, not in exponential terms. But when you compound something like that over a day, decade or more, the impact is dramatic to what it does to society. And that's what, in my opinion, we see playing out. So a lot of what we were discussing in this episode revolves around these fundamental ideas that Stig and I just talked about here at the end of the show. And it can get very nuanced. It can get into, you know, we start talking about UBI versus universal basic income versus QE and how the Fed's inserting the money. And all these things are,

Starting point is 01:39:31 you're talking about a very complex system that can have many different outcomes. But I think the one key driving factor that we're facing today is the incentive structures that used to be favorable are now actually inverting themselves. And you're finding that a lot of the incentive structures that exist right now are not supportive for a conducive economy that works for everybody. It's only working for a few. and that's where it's getting very concerning. So outstanding question. For asking such a great question, what we're going to do is we're going to give you free access to our TIP finance tool. This allows you to do intrinsic value calculations.

Starting point is 01:40:14 It has a momentum tool in there to help you understand when something's outside of its statistical volatility range. I think it's a ton of value and I think you're really going to enjoy the tool. If anybody else wants to check it out, you can just go to Google, type in TIP finance or go to our website and click on the finance tab. And, you know, for asking such a great question, you get a free subscription to the website. If anyone else wants to ask a question, get a played on the show, go to Asktheinvestors.com. And if your question gets played, you get a free subscription to TIP finance. And so with that, that's all we had for everybody today. We look forward to seeing everybody again next week. Everyone have a safe and healthy week ahead.

Starting point is 01:40:52 Thank you for listening to TIP. To access our show notes, courses, or forums, go to the investorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP311: Macro Mastermind w/ Lyn Alden, Luke Gromen, & Jeff Booth (Business Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.