← Coin Stories with Natalie Brunell
Coin Stories with Natalie Brunell
Sam Callahan: Is U.S. in Fiscal Crisis? Crash Course on Debt, Deficit & DOGE's Efforts to Cut Spending
00:48:05
In this episode with analyst Sam Callahan we discuss: Will DOGE be effective in cutting government spending to shrink debt? Are we headed toward a deflationary crash or an inflationary crash? Fiscal policy vs monetary policy and what fiscal dominance...
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- [00:01]
A
I'm all for it. Like, I want to shrink the government. I think the government's the worst allocator of capital. I would love it if we shrunk the government and reduce the spending. But when you actually break down the numbers, it's going to be really hard for them to meet these goals that are getting thrown out there.
- [00:17]
B
Hey, everyone. Welcome back to the show. I'm excited to be doing more in person interviews in 2025, thanks to the support of my partners. And now I'm in Chicago this week with a very special guest. You all know him well. He's a bitcoin and financial markets analyst and advisor to several companies in the bitcoin space. And he's my husband, Sam Callahan.
- [00:39]
A
Yeah, thanks for having me. I'm a huge fan. The biggest fan, probably.
- [00:44]
B
Well, things with us kind of started with this show a couple years ago.
- [00:47]
A
So, yeah, I was a guest and shot my shot after the interview. Maybe you guys don't know that, but it worked. You got to shoot your shot. So have a pretty girl in front of you. Have your opportunity. You got to take it.
- [01:00]
B
Well, I'm so proud of you. I'm so proud of everything that you've done in the space. And where I want to start is your most recent report, commissioned by the one and only Lynn Alden. So brilliant. And you focused on fiscal dominance. I believe the title is Full Steam Ahead. All Aboard. Fiscal Dominance. So let's talk a little bit about that report and. And let's kind of set the tone and lay the landscape for. For people that are maybe not as familiar and following everything in the macro world. And can you explain what fiscal policy is and what the difference between fiscal dominance would be versus monetary dominance?
- [01:36]
A
Yeah, sure. Fiscal dominance is just government spending. Think of it like deficits and government spending. And also there's the other side of it, which is taxation. So tax policy. So that's fiscal policy, tax policy, government spending, kind of everything. You hear what's going on in Congress and what they're spending the money on. Okay, so that's fiscal monetary policy is what the Fed's doing. Central banks, so interest rate policy, they're doing quantitative easing, quantitative tightening, which is basically, are they buying securities on their balance sheet or letting them go off their balance sheet, providing or taking out liquidity into the system that way? Or they can do things like change the reserve requirements for banks so they can kind of tinker with these things that can kind of drive economic activity. So fiscal dominance is when fiscal policy. So deficits in the government spending become a larger driver of economic activity than, say, what the Fed's doing with interest rate policy. And monetary dominance, you could say, is when it usually happens, when there's really low debt to GDP ratios, there's really low deficits going on. And the Fed doesn't really have to worry if they raise interest rates to try to bring inflation down or cut interest rates to try to bring inflation up. They don't have to, like, look across the way at the treasury and say, oh, this is going to really put a lot of burden on them to try to service the debt. And so they can just be very independent with their decisions. And really what the Fed has in terms of their mandate, officially their mandates are price stability and full employment. So that should be what their focus is all the time. But when they have to start thinking about, well, if we raise interest rates, that's going to cause a lot of problems with the treasury because the debt's so high. That's when fiscal. Fiscal policy becomes more dominant, because they have to consider that, because we can get into those details, but that's kind of the difference, if that makes sense.
- [03:25]
B
Yeah. And as millennials, we've largely been accustomed to a world of qe, which is more of the monetary side. Right. Lower interest rates and, and money printing. But the fiscal side is a little bit different. And one of the key takeaways from your report is that private borrowing has been crowded out by government borrowing and spending. That's why interest rates are not a productive tool in bringing down inflation. And you said perpetually large fiscal deficits are driving today's inflation. And this limits rate hikes because making borrowing more expensive won't cool the economy. Can you break down what that means?
- [04:01]
A
Yeah. So, like, if you just think about in the past when we've had inflation. So let's like, go way back. Let's go 1940s, World War II. That would be an example of fiscal dominance. The last time we really saw that, and that was, like, very clear because we had to figure out how to, you know, afford the war. We had to pay for it. We had to do a lot of government spending to pay for the war efforts. And we needed, you know, even if inflation rose, that took priority. And so directly the government said to the Federal Reserve, you are going to cap interest rates on the long end of the yield curve. You're not going to let it go up. You're going to buy as much as you want to to keep it there, because we need to keep our interest expense low. So that we can continue to afford these things. Because you know, debt to GDP really grow, grew substantially during World War II. And so that was like direct fiscal dominance. Because like they didn't even hide it. They just said, no, the central bank, you're not going to worry about your mandates anymore. Like we need to focus on the war effort and we need to keep that interest expense low. And so you're going to cap the yields there. And so that drove the inflationary, you know, pressures of the time there because it was mostly government spending. Now if you fast forward to the 1970s, it's very different. And so there's different ways that money can get created in the economy. You kind of mentioned the private sector. So in our debt based system today, commercial bank lending. So every time a bank creates a loan, that creates money in the system. And typically that drives economic activity. And that's why monetary policy, the Fed reducing the rate of borrowing or increasing the rate of borrowing, that can kind of curb that activity happening at the commercial banks level. So if they raise interest rates, it's more expensive to borrow. Usually that results in less lending at the commercial banks layer. And then you have a decrease in economic activity and lower inflation. So that's kind of how that works. And so in the 1970s we saw a lot of inflation. That was the last time we saw inflation.
- [06:03]
B
And Volcker was able to raise rates and. Cool.
- [06:06]
A
Yeah, because it was the right tool. And so, and Lynn talks about this a lot and it's, it was really a demographics issue because that's when baby boomers were getting into their house buying years. They were kind of, they started to make some money and they were taking out a lot of loans and the banks were happy to service them. And so that led to a lot of money creation happening in the private sector. So in the 1970s, the private sector was probably the main driver of the inflation that we saw. So when Volcker spiked interest rates, it was the right tool for the job. And we saw inflation kind of come down. Now that's the big kind of difference there as well is the debt to GDP ratio then was 30%. Today it's a very different picture. We actually have the debt to GDP up about 120. And when, and the Fed's kind of using the same tools it did back then. Even though nowadays we have these huge fiscal deficits that are, you know, 1.5 trillion, 2 trillion over the last couple of years. And that's been the largest driver of inflationary pressures. And the problem, this is why it's fiscal dominance is the Fed jacked interest rates up, right? Everyone thought it was going to cause all this problems. And really what we saw was inflation came down. But it's now it's hovering, it's kind of staying elevated. It hasn't gone down all the way to 2%. And it's because it's the wrong tool for the job. And why it is is because the debt's so big. So, so when the Fed raises interest rates, it doesn't bring down inflation because it actually widens the deficit, so it increases the interest burden. And so last year was the first year in history where the interest expense was larger than Medicare as well as defense spending. So it was the second largest line item was just the interest paid on our existing debt. And it's because the Fed increased interest rates. And why, why the fiscal deficits, you know, know, leads to more economic activity. So every time we run a deficit, there's two sides of the. The coin, right? There's the revenues that we bring in through taxes, and there's what we're spending and the gap between that. We have to borrow money, right? So we have to issue new Treasuries. Now, who's buying those Treasuries? Like, it's households, it's pension funds, it's banks, it's foreign, you know, investors all over, there's foreign central banks. They're all buying our treasury bonds and now stable coins. Yeah, and stable coins. And we can get into that. But why, at least to economic activity? Just think about these bondholders. They, the government has to pay them a coupon. So like if it's 1%, you can think of it as their income. And so if it's, if they're making 5% on their treasury now because the Fed increased interest rates, that's more liquidity that comes in the system because those bondholders are getting income that 5%, and then they're going to turn that, and they're going to invest it, they're going to buy assets, they're going to, you know, it's a, it's a stimulus for the economy. And so when the Fed raises interest rates, it leads to higher interest expense for the government, which leads to, you know, more inflationary pressures because more of that money is finding its way into the economy through those bondholders. And that only happens and becomes a problem when the debt gets to $36 trillion and we're running $2 trillion deficits. And so that's fiscal dominance. And right now, the Fed's kind of using the same tools that worked in the past. And they're trying to basically use a tool for the wrong problem because it's a different era now. It's a different regime.
- [09:32]
B
Coin Stories is brought to you by BitDir, a global leader in disruptive technology for bitcoin mining and high performance computing for AI. Bittir trades under the stock ticker BTDR. As a publicly traded leader, Bittir boasts a massive 2.5 gigawatts of electrical capacity and infrastructure across three continents, possibly positioning Bit Deer as one of the most diversified and power dense computing companies in the world. Learn more@bitdyear.com all right, back to the show. Isn't the Federal Reserve system full of PhDs? Shouldn't, shouldn't they understand that this isn't working? I mean, is the solution then to lower interest rates, which is what Trump is essentially pressuring Powell to do?
- [10:09]
A
It's, well, it's interesting because that would solve some of the issues, right? And that would be fiscal dominance. So if the, if the Federal Reserve is reacting to the fiscal deficits by its interest rate policy, that means it's not as independent anymore because it's being influenced by that. But you're right, it would reduce that. It's a lever they can pull to reduce the deficits. Because right now the interest expense, as I said, is the second largest line item. I think it makes up 16% of the spending that we made last year in terms of our entire deficit or entire spending that we did. And they could do that and that would reduce that. But the problem is when going back to why they usually cut interest rates anyway, it happens during a recession. So they usually cut interest rates to try to stimulate the economy to get us out of a drawdown over a recessionary period. And so that could reignite inflation. So that's the problem because they make borrowing cheaper. When they cut interest rates, it leads to more of that private sector lending, the commercial bank lending that I mentioned. And so the Fed, yeah, the Fed could drop interest rates and help the situation in terms of the fiscal deficit, reducing that interest expense. But at the same time, they could just reignite inflation by just making it cheaper to borrow. And then people and businesses start to borrow more and then that leads to more money and suddenly inflation comes roaring back in that mechanism. And so that's why they're in a really tough spot. And it's, it's really a, it's not their problem to solve in a way, because really what needs to happen is we need to reduce the Spending on the government side, because that's been the driver of inflation. So it's not really, they're, they're not in control here. And that's, that's why, that's why it's fiscal, fiscal dominance. They're not in control.
- [11:54]
B
Okay, well, so this is the whole purpose of dosh, right, to reduce government spending. But isn't the spending kind of keeping our economy afloat right now? If, if all of a sudden we were to cut all the spending, wouldn't that be deflationary and collapse asset prices, which is what they do not want at all costs?
- [12:14]
A
Yeah, in a way. It's been a, it's a main driver of asset prices because I talked about those bondholders, the treasury holders, and there's like mutual money market funds. And you know, who, who holds those. It's usually more wealthy people. And, and so in a way, you know, these fiscal deficits and this period of fiscal dominance, the people that are benefiting are the ones that already own assets. Right. And so they're benefiting from the asset price inflation. And so you would think that if they, they tried to cut all this spending that you would see the opposite effect where you would see asset prices fall. Now, yes, I think that would be a temporary deflationary period and there would be some pain and panic. But, but really, I think what we all probably suspect is that the Fed would come in as the buyer, last resort and come in and, and save the day again. And so I think Lynn says something like, I'm so bearish, I'm bullish. And I think that's kind of what she means. Like, you know, eventually they'll have to come in and save the day, but the one component, and we can get into doge, because a lot of people are talking about it's, it's, it's a good, I'm all for it. Like, I want to shrink the, the government. I think the government's the worst allocator of capital. I, I would love it if we shrunk the government and reduce the spending and more of the activity came from the private sector. I think that's healthier and I think that's better and more sustainable. But when you actually break down the numbers, it's going to be really hard for them to meet these goals that are getting thrown out there. And I don't think people have ran the numbers in terms of where the spending is getting spent on what is actually available to cut. And, and that one other issue that I'll say is that the United States is unique because of how financialized our economy is. Okay? So like I said that the deficits have two sides of the coins. It's the revenues we bring in with taxes and then it's, it's what the government spends. And that's the difference between the two. And if it's negative, we run a deficit. If it's positive, we run a surplus. We, we're in the negative. We run deficits. We spend more than we bring in. Now, when I say our economy is financialized, it means that our tax receipts are super dependent on asset prices. It's like capital gains tax. And as asset prices go up, a lot of our tax revenue is tied to the stock market performance and housing performance and things like that. If they cut government spending, and like you said, it would be deflationary, what would happen is they would cut the one side of the equation, but then the revenues would also fall off a cliff.
- [14:45]
B
Right.
- [14:46]
A
So that, that would still widen those deficits and that's unique to the United States. So like, even if Doge was successful and was able to cut enough, you know, reach that 2 trillion target that Elon said, I don't think they're accounting for the fact that our tax receipts would then plunge and then the deficit would probably still remain. It might offset all the cuts that we made in the spending. And so we'd still have a huge gap. And, and so that's like Canada was able to be successful in its austerity measures. They cut spending successfully. I think it was a decade ago or two decades ago because they had a different, like, tax base. And then Germany was also successful as well because they had a different economy. It was like a manufacturing economy.
- [15:28]
B
They're net producers.
- [15:29]
A
Yeah, but like for us, we were so financialized and that's unique that it makes it very challenging. And so not only would we can get into like why Doge will have a hard time cutting the spending, but not only would they have to change some of these entitlement programs to be successful, you also somehow have to untangle the tax policy from asset price performance. And honestly, you've seen Trump kind of come out and say some kind of very new ideas around tax policy. So maybe, I don't know, but that's what would have to happen in order to have any kind of success.
- [16:06]
B
Well, let's talk about Doge, because to your earlier point, we're spending so much on interest expense, which we have to, and then we have these baked in obligations like Social Security and Medicare. And no politician wants to touch any of those because they fear they won't get reelected. So what is there to cut that would, would have actual meaning when it comes to reducing the deficit? Or, or is that the real issue, that we, we really can't reduce it meaningfully unless we start touching the entitlements?
- [16:33]
A
That is the issue. And I think maybe we could take a step back and just talk, because I think you hear people say the deficits are structural in nature. You hear that, and people might not know what that means. Typically, deficits are supposed to be countercyclical, meaning kind of what I said before. They were only supposed to be used when there's a recessionary downturn to kind of stimulate the economy. They only become a problem when we continue to run deficits in good periods. Right. We were supposed to balance the budget and run surpluses in good periods so that when the next downturn happens, we have some room to again run some deficits and stimulate the economy out of it. That was the idea. But then they became structural in nature. And what that means is, if you look at lately, we still run deficits, even right now. So right now is a perfect example where the unemployment rate's near historic lows, you know, but we're still running $2 trillion deficits. So we're not running it countercyclically anymore. It's structural in nature. And why it's structural is that it's based on our aging demographics, these entitlement programs. So every year people grow older, they become more eligible for these Medicare programs, Social Security, you know, we haven't really changed those funding or benefits or the eligibility requirements for any of those entitlement programs. So there's rising health care costs because of that. And then it's compounding interest expense from decades and decades of accumulated debt. And so that's why it's structural in nature. And so it's very difficult to change without any kind of legislation at the congressional level. And so Doge, when they come in and you know, Vivek left Doge, like we kind of joked, like he, like, looked at the numbers, said like, oh, like, we actually can't do this stuff. So you go into the numbers, though, and so last year, I think we, we spent somewhere on like six and a half trillion dollars or something. 61 of that was in mandatory programs. Yeah, meaning that they're baked in the cake. We already promised these entitlements years ago. Yeah, that's Medicare, Medicaid, Social Security, so that can't be touched unless. And like, plus the Republican platform promised not to touch it.
- [18:46]
B
Right?
- [18:46]
A
All right, so just take that out. They're not going to touch this unless they renege on their promises. And it would be very politically charged to change any of those eligible eligibility requirements. France recently did that, and there was riots on the street. We're just raising it, like, I think a year or something. And. And so 61%, that's gone. Okay. And then I think 16%, if I remember correctly, was the interest expense. And so Doge can't touch that. That's the Fed. And the Fed can decide if they're going to cut rates and ease that or not. And that's when we get into this independence thing. So just take that out. And so that leaves 26% of discretionary spending that can be changed, but about half of that is defense. And so defense spending, if you look out onto the world right now, a lot of tensions, a lot of rising geopolitical uncertainties. The CBO projects that defense spending is going to increase over the next couple of years. And I think it's very. It's very difficult to advocate for any kind of cuts to the defense spending in the United States. And I just look out on the world. I just. I just don't really see that happening. And then again, the GOP's platform, one of their promises is to strengthen and modern, modernize the military, which sounds expensive. So, like, I don't think they're going to cut that. So that leaves 13% of what we spent. That can even be a target for DOGE, or 900, I think $948 billion. So way less than the 2 trillion that's available. And even, like, people are like, right now, Trump is going out, and they're like, you know, we're going to shrink the workforce. He's really making moves. Even if I saw an estimate that even if he fired every single federal employee, it would be. It would save him about $200 billion. So that's when we say, like, nothing self strained because you would have to change, radical change to the entitlement programs. And, you know, the entitlement programs just. They got two major things wrong. When, I mean, it was. It was difficult. They started in like, the 1930s, right. And then they were finally implemented later. But the math that they. They did to calculate that, they missed two things, which is like declining birth rates. Right. And then longevity, people living longer.
- [21:08]
B
Right.
- [21:09]
A
And that's why the math doesn't make sense. So the CBO just put out, like a demographics report, and the ratio of like working people versus older people is shrinking. So there's more older people. All right, so they're going to keep sucking money. We're going to have to keep spending on them because of the rising health care costs and the entitlement programs. And then there's less people working to bring in the tax revenues.
- [21:32]
B
Yeah.
- [21:32]
A
And so that's the fundamental problem. And so without changing them, it's just going to be very difficult to shrink these deficits, structural deficits, meaningfully. And as we mentioned before, they're the main driver of inflation, asset price inflation.
- [21:48]
B
And the people who receive those benefits are largely the voting bloc who don't want to see those benefits going away. But we have to do something. I mean, it's crazy to think a lot of people would assume that Social Security is like a piggy bank where the money's there and then we take from it when it comes time for someone to retire. But know that money spent immediately and then later we're basically just printing money in order to finance all these programs. And I, the first person who received Social Security, I think she only paid in like you know, a couple of years or something and got all these benefits. And now here we are and we're just burdening future generations. So I mean, if you were in charge, what would you do? Like, what do you think the solution is? Obviously Bitcoin, I'm assuming could maybe help this. This episode is brought to you by casa, the leader in bitcoin self custody solutions. Helping people like me secure their wealth with simple powerful multi key vaults. And now CASA is here to help businesses and governments do the same. Introducing CASA Business, a secure easy to use three key vault designed specifically for small businesses with team signing capabilities and a web dashboard. Regardless of the size of your business, start your bitcoin treasury the secure way, take control and protect your assets. Get 10% off your CASA plan at Casa IO Natalie. Next up, speaker one speed. The fastest growing lightning wallet in the world and my preferred way to Send and receive SATs. You can use speed to buy bitcoin, swap with stablecoins like tether and snag gift cards to earn rewards all in seconds. Download speed via the QR code or the link in my show notes. Use code COINSTORIES10 for 5,000 free SATs. Next up, Coin Kite. The One Stop Shop for all your bitcoin self custody needs. Their flagship cold card wallet is the go to for cold storage. It's ultra secure, open source and beginner friendly. Protect your bitcoin like a pro. Visit their site and grab 5% off with promo code COIN STORIES. And finally, are you ready to take control of your wealth, your Bitcoin and your online privacy? The Bitcoin Way is here to empower you. Learn to take full self custody and eliminate all counterparty risk. Learn how to set up and run your own node and upgrade your cybersecurity and build a fortress of privacy around your online activities and your Bitcoin. The Bitcoin way specializes in personalized one on one training scale. Schedule your free consultation@thebitcoinway.com Natalie? All right, back to the show.
- [24:13]
A
Yeah, I mean honestly, you know, I would try to change some of the entitlement programs. I mean they just don't make sense. And like we're going to run into a real issue when Social Security runs out in 2034 and we're going to need to do something like we'll have to, so we might as well get in front of it now. The longer we wait, the worse it's going to be.
- [24:32]
B
That's what Stanley Druckenmiller talks about too. It's like maybe cut it for the people who don't necessarily need these benefits.
- [24:38]
A
There's something needs to happen. I mean to call Social Security a Ponzi scheme is not necessarily like sensational. Like young people paying into it literally mathematically, like aren't going to see if we don't change something. So I would, I would start there. I mean personally I, I do think we could. There's a lot of misallocation of capital in the, in the Defense Department. They haven't passed a single audit. Like the amount of just misallocation there and just like lack of oversight it seems like is extraordinary. So I would do something about that. You know, I'm not smart enough to say what. I'm not like a defense expert. But the real thing is the best scenario here is to grow your way out of this situation. Okay, so you know, debt to gdp, everyone focuses on the debt, the numerator. Not enough people focus on the denominator. And so if we grow, if we increase that number, we could grow our way out of that. That's the best case scenario. Now it's important to understand like how economic growth is measured and where it comes from because nominal GDP growth takes into account inflation as well as, you know, real productivity growth, like producing more goods and services in the economy. So that's the two factors of nominal GDP and real GDP growth just takes the inflation out of it. So it takes away like rising price levels and just looks at how much more are we is the economic producing in terms of good goods and services and nominal gdp. GDP is a. It can be a. It can mask a lot of things. And this is what Lynn and I talk about because, you know, I ran like an interest rate scenario of like, you know, what would happen if the Fed kip rates at 2%, 3%, 4%, 5% over the next 10 years. And if you look at debt to GDP, it doesn't really change that much, but if it gets to like 2%, you see it go down to like 96 and things seem good under a hundred.
- [26:44]
B
Inflate away the debt.
- [26:46]
A
Yeah, exactly. But like, if you look at Turkey and this was Lynn, Lynn was brilliant to show me this and like, explain this a little bit to me. But like, if you look at Turkey, for instance, and you look at the last couple of years, their deficits just blew out, just completely. And inflation just went up to like 80%. You know, Turkish figure just completely inflated. Nominal GDP growth just goes way up. And if you actually look at the Dutch gdp, it actually goes down. And so it looks like there have actually been really stable. If you look at the Dutch GDP of Turkey over the last couple of years, it went from like 50 to 20. And even really what that's showing you is that nominal GDP is being driven by inflation and fiscal deficits. And so it masks the health of the fiscal situation. So you can't just look at Dutch gdp. You have to consider the nominal GDP as two things, the real economy, but then also inflation driven by government spending, fiscal deficits. So all that's to say, if we can somehow have a productivity miracle, like real, like real growth, we could eat away at this in a healthy way. Because that means the economy's producing more, bringing in more tax revenues, and you're helping the equation there instead of having to like, cut a little bit here. But if you can have a more productive economy and bring in more tax revenue, that's how you actually do it. And I think bitcoin's a part of that. And we can get into that. And if I think that's possible or not, we can also get into that. I'll stop there.
- [28:27]
B
Yeah, I do want to get into that. Quick side note, and we don't have to go into this tangent, but I think the GDP metric is such a total scam. I hate it because the more that we spend on things like people being sick in this country, health care spending, because everyone's dying because of our food and pharma, and that increases our gdp. And so I, Yeah, it's just side note, I'm not a fan of that metric, and I think that we need to. We need to know.
- [28:54]
A
Neither am I.
- [28:55]
B
But. But to your point. Okay, so Bitcoin. How do we can Bitcoin help us have a productivity miracle in the sense that it empowers more people economically and would provide a strong asset for every corporation, for every bank, for our government, as opposed to all these liabilities that we have?
- [29:16]
A
Yeah, this is kind of a. It's kind of a long rabbit hole. It takes a little bit of thinking through this because like you said, I don't like GDP as a measure of economic growth. I think, like, saving is a better measure of economic growth. The ability to save both for businesses and households and, and why that is really gets down to what drives economic growth. And I went into this pretty deeply. Like, let's just, let's take GDP for a second. Because GDP looks at basically the size of the labor force and the productivity of the labor force. So how much, how many people there are, the quantity and the quality, how much is one person producing. Right. And the size of the labor force. You know, I talked a little bit about these demographic dynamics before. Now you can also have immigration policies that improve that, but lately that's not good. Right. Like, you have to think about the future birth rates. Those are crashing. And so we need to figure out how to make our existing labor force more efficient, more productive, the quality. And so like, that goes down to three things. That's how skilled and educated the workforce is. So, you know, I think about AI and its ability to be like a mentor, like a constant tutor that's very patient to improve the education levels of the workforce. So that's. That could improve the productivity. One is like capital investment. So like the ability to make investments. And so that's also important. And then the third one is a little bit hard to measure, and that's from innovation. And that's actually the biggest driver of productivity. It's almost like a. You, you cancel out everything else, you know, in terms of the capital investment and the education, the skills. And you're like, well, the only thing left is innovation that could drive the productivity gains. And so they almost like it's a metric that just like everything else just is attributed to innovation because they have nothing else to go to it. But innovation is the main driver of productivity growth. And, and innovation comes from the ability to save. Because if I'm a person who can save and start thinking Long term, say I'm an individual, I can say, hey, maybe I will. If I can save my money and it holds its value over time, I can start thinking long term. I'll start maybe taking some risks. As my wealth starts to increase in value over time, doesn't lose value, I can start to maybe think, maybe I'll fund that crazy invention idea. Yeah, maybe I'll. Maybe I'll do that crazy business. And those are the ones that actually make crazy leaps in society.
- [32:07]
B
You need the capital to have the entrepreneurship and the ideas come to.
- [32:11]
A
Yeah. So I consider Bitcoin, like a fundamental one of these technologies. And it's a. It's a savings technology that allows us to save over long periods of time. And I think it's going to be really important to create productivity growth in that way. Now it combines with other technologies like AI and, and all these ones. But Bitcoin is important. And I've studied productivity. I find this really interesting because everyone thought the Internet was a huge productivity boost, right?
- [32:41]
B
Yeah.
- [32:41]
A
Now average productivity is like 2.1% over the last 50 years or something. But around 2000, when the Internet was really blowing up worldwide Web, it allowed us all these wonderful things where there's, I think the economist Robert Sallow, he said, yeah, the computer age is everywhere except the productivity statistics. And it's like he saw this boost around the early 2000s in productivity. It went up to like 3.5 or percent or something, way above the average norm. But then it just crashed. And from like 2009 to 2019 or something, that decade, productivity was like 0.8%, and it just completely crashed. Well, so my thing, and this goes back to Jeff Booth, it's not that the productivity wasn't there, it's that it was stolen from us, you know.
- [33:31]
B
Oh, and that's QE too, right?
- [33:33]
A
Exactly.
- [33:34]
B
That's the response to the great financial crisis. That's like artificially low, low interest rates.
- [33:38]
A
Right.
- [33:39]
B
And the manipulation of our capital at the base layer.
- [33:42]
A
Right.
- [33:42]
B
That's really interesting. I really wanted to ask you about. I'm a big believer that if you lower taxes, you actually get more growth and productivity. That's just. That's just what I believe. So Trump is throwing out this idea of getting rid of the income tax, which, by the way, this country did actually pretty great with a policy of no income tax for a very long time until 1913, same year we established the Fed. Do you think it's actually possible, or would that just blow deficits out of the water?
- [34:15]
A
Look, I think I think short term it would widen the deficits. Right. Because it impacts that other, the revenue side.
- [34:21]
B
Yeah.
- [34:21]
A
You know, if you don't have taxes now, long term I completely agree with you. So like long term I think it's always better that less money is going to the government.
- [34:29]
B
Yeah.
- [34:30]
A
That's where you have complete waste and like misallocation of capital. It's better if that money stays in entrepreneurs hands and they keep reinvesting in their business, making other investments, innovation, all those things that I just talked about. But that's like long term and like unfortunately this thing, short term and like unfortunately we're in kind of a bit of a crisis right now. I would say fiscal crisis. I mean at least unless we do get these productivity miracles that come about because of all these other technologies. Yeah. I mean you look at the debt and at the math, then we're not maybe at a crisis now. But if we don't start thinking about solutions then we will a couple decades from now. And that's, you know, Lynn and I's kind of conclusion was that this is, it's not like things are going to blow up right now, but it's going to run structurally hotter and it's going to be really difficult to change and like eventually when Social Security runs out, that's when things might get really worrisome if we don't make any kind of meaningful dent in it. But yeah, in terms of the tax stuff, I completely agree. And what's interesting is his ideas around tariffs and external revenue services. Is that what he called it? Yeah, ers, look, I mean if he could figure out new novel ways to somehow bring in tax revenues to offset income tax and things like that. Yeah, you know, that's interesting but I don't know, like I'm not like an expert on tariffs necessarily. You know, he did do some tariffs in, in 2019. Everyone thought it was going to be inflationary but we didn't really see it. There's a really good paper by Stephen. Oh man, I'm forget his last name. Mirren, I think. Stephen Mirren. He was just elected as I think the head of his economic advisor council Trump and he's a smart guy. He works at Rubini's firm, Nouriel Roubini. So he's a bitcoin bear. But this guy's put out a couple good papers and one was on tariffs and it was just about how it could actually kind of help things and not be inflationary for certain reasons. So I recommend checking that out. But if Trump can Kind of figure out ways to bring in tax revenues and the world plays along with it and can reduce income tax. That's interesting, you know.
- [37:05]
B
Well, I think if you have a more productive society, then taking a little bit from everyone will actually do more than you have a small group of very wealthy people that you just want to confiscate all their wealth to the point of like, you know, tax the rich. But yet even if you took everything that they were making, it wouldn't really put a dent in our debt. And so it's just, it's just so lopsided right now, I think. And everyone wants to, wants to say that if we, if we just take from the wealthy, then we'll solve all these problems. But actually we should be doing anything possible to just boost the productivity of the private sector and the working class. And it's so difficult to do in a highly financialized economy where we've lost our entire industrial base. Like they're talking about bringing in and reshoring. But is that possible when being the global reserve currency? We have to run trade deficits and we have to have this financialized economy essentially to maintain the dollar's artificial strength.
- [38:02]
A
I think it's possible. But I think the important thing to remember is that it's highly inflationary over the last 30 years. The globalization, the access to cheap labor and very efficient supply chains, highly deflationary. And so the opposite is going to be true. If we try to reshore things, it's going to be inflationary. And right now you kind of look at the protective trade policies. I saw a chart from BlackRock that looked at trade restrictions that were been placed in the world and they've tripled since 2019. So that's inflationary. Like if you want things to run smoothly, you want trade relations to be good and that's how you get really cheap goods and access to cheap labor. That was a big part of things. So it's not just money printing that's inflationary. It's also risky. Geopolitics and the reshoring of supply chains is part of that and it's good. I think people are just starting to think about more like resiliency after, after the pandemic over efficiency. And I think it's good. I think it's very important for our, our country, you know, thinking about all the natural resources we have here and being more, you know, some of these critical industries being on our soil and not dependent on our adversaries on things like medicines and right. Rare earth material, all these things, it's really important. So, you know, even if it is inflationary, I think we have to start thinking more resilient and it's going to cost more. So.
- [39:45]
B
Okay, so if we zoom out, there are some people out there who believe that a recession is imminent. Recessionistas, we're going to have a crash, they're going to have to flood, flood the market with money printing. Others say we're just going to keep marching higher. Where are you at and how do you think it'll impact Bitcoin?
- [40:06]
A
Well, look, I guess I, I wouldn't be surprised if I just see some signs like more like behavioral economics of like very, some toppy behavior in some sectors. So don't be surprised if like some of these valuations seem a little high and there could be a little bit of a downturn. I mean it's been a really important, impressive bull market, like historically just, I'm talking about like the stock market in general in terms of like the length and number of all time highs and all that stuff. And so if that happens though, it's just from all these different reasons that we talked about today in terms of the financialization of the economy, how then the US Is on the, for their tax receipts on asset prices. I think we'll just see the Fed come in. I mean, Larry Lepard, I mean, I wasn't even paid to do this, but he has this book called the Big Print coming out and that's kind of what it's about. He's like, once that happens, then they're going to come up with even more money just like they did. You know, if you look at 2008 compared to the pandemic, right. It just gets bigger and bigger and bigger in terms of the response from the central banks and the government that's necessary to pick up, you know, the economy again, you know, pull it out of the mud and throw it up to the moon. You know, it's getting harder and harder. So they just need more and more of like a bigger bazooka. And so that's what I think will happen now at the same time, you know, these fiscal deficits and if we see tax cuts from, from Trump and a very, you know, we could see like GDP growth really start ripping. Right. And I think that could be really positive for, for asset prices. And if the fiscal deficit doesn't close and it's the main driver, we could just see things getting, just continuing to march higher if they don't really change anything. And so I'm cautiously bullish to be honest with you, I mean, I think yes, there's always a possibility that something could happen. And that's what we mentioned as well. Like, you know, there could be war, there could be some kind of crisis, credit crisis that nobody foresaw. And that could lead to, you know, a blowout, even a blowout, a bigger blowout of the deficits and things like that and huge things, but kind of impossible to predict. There's reasons to believe that the United States has certain factors in place that will allow it to continue this for longer, like the demand for US Dollars because there's so much dollar denominated debt. The fact that we have the debt in our own currency, we have a money printer and the fact that our economy, like I said, is financialized. But we have the, compared to other economies, very diverse economies in terms of our natural resources. For instance, Germany's just like manufacturing expert. That's their economy. United States is like, we have a tech sector. We have like all these different things that allows us to potentially grow our way out of it. I mean, it's just kind of a matter of, you know, deregulation. That's a big, big factor. Like if we deregulate a lot and really allow businesses to thrive and entrepreneurs to thrive. Yeah, I mean we could, we don't necessarily have to have a. This doesn't have to blow up. I guess you could say the train is running hot on the tracks, nothing stops it. But you know, it doesn't necessarily have to crash and blow up or fly off a cliff.
- [43:46]
B
Well, that's good.
- [43:48]
A
It's just, you know, as it's turned, making these turns, maybe the wheels are like coming off a little bit, but it's like staying on a little bit. But so like there's always a possibility of a black swan event. But I think those people tend to underperform people who are more optimistic and bullish in general.
- [44:08]
B
So that's true.
- [44:09]
A
Opt, you know, cautiously optimistic and bullish from some of these factors. I hope the new administration, I think think it, you know, pro business. It's just a matter of making sure that it's real capitalism and not crony capitalism. Yeah, you know, that's, that's kind of.
- [44:26]
B
Big key and the takeaways own assets. The best one being bitcoin.
- [44:31]
A
Yeah, I mean, so like, yeah, I mean as always. But it is, it's like. So what we're saying here is that inflation is going to remain hot. If the economy's running hot and inflation is running hot and the deficits are Going to change inflation. It might not get up to like hyperinflation, like that kind of stuff, but it's going to run 3%, 4%. It's going to be harder to get down and that compounds over time. So, like in a period of persistent inflation, you want to hold real hard assets, you want to heal. Alternative assets. And bonds perform. Don't perform well at all. Cash doesn't perform well at all. Like I'm. I look out at the portfolios of like, retirees and I'm like legitimately concerned with how much bond exposure they have if we are entering a period of persistently high inflation.
- [45:19]
B
Yeah.
- [45:19]
A
So you have to diversify into alternative assets. Now that could be. That could mean a lot of things. That could mean gold to some people, real estate, certain infrastructure, commodities. I happen to believe that bitcoin has the best risk return profile, asymmetric opportunity, given how young it is. It's so small. It's small market cap. It's got an absolute fixed supply that makes it extremely unique from every other commodity. And if you just look at the fixed supply versus the trends that we're seeing in terms of what we're seeing in terms on the regulatory front, just the adoption metrics, hash rate, these things, adoption is going one way and it has for a long time, and it seems like it's accelerating. And so I think bitcoin would be a great way for people to preserve their wealth in this era of fiscal dominance.
- [46:18]
B
And this is why you won't let us buy a house.
- [46:23]
A
Not yet. I mean, you need a house, we got.
- [46:26]
B
You gotta live in a house.
- [46:27]
A
You gotta live in a house.
- [46:29]
B
Well, Sam, this has been just a pleasure, people. This is what our dinners sound like, basically. Thank you so much. Where can people find you?
- [46:38]
A
Yes, I'm on X Amcala. S A M C A L L A H. We write the news block together. So. Yes, that's like a market update that we do.
- [46:50]
B
Yeah. The newsblock.substack.com thank you. Sam's brilliant mind is behind it.
- [46:55]
A
Yeah, well, Natalie reads it and she. She brings a lot to it too, in terms of the writing. And so I do that as well as, you know, some of the reports I've written with Lynn. I just want to thank Lynn. Lynn is somebody I look up to as a.
- [47:09]
B
The best.
- [47:09]
A
Yeah, she's the best. She's an amazing, brilliant person and analyst. And so you can find the last two reports that I wrote with her. One was on global liquidity and this one on fiscal dominance on. On our website. Lyn Alden I think it's linalden.com so.
- [47:24]
B
I will have all of that linked. Thank you so much, Sam. I'm so proud of you.
- [47:28]
A
Thank you. How do you do?
- [47:31]
B
Thank you so much for checking out this episode of Coin Stories. Make sure you're subscribed to the show. Also, check out our weekly free newsletter@the newsblock.com. this show is for entertainment and educational purposes only. Nothing should constitute as investment advice, and you should always do your own research. I'm always open to feedback and guest suggestions, so please feel free to reach out at info talking bitcoin.com I'll see you next time.