← THE Bitcoin Podcast
THE Bitcoin Podcast
NOTHING STOPS THIS TRAIN: FISCAL DOMINANCE & BITCOIN | Lyn Alden & Sam Callahan (THE Bitcoin Podcast)
01:40:54
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- [00:00]
Lyn Alden
Bitcoin's like a mirror for these reckless government spending programs and monetary properties kind of allow it to do that, given its scarcity and its fixed supply and all these things, that allows it to be really tied and correlated to the liquidity. And so I just think, and given the how young it is and how it's still growing and it's still early in its adoption cycle, that's why there's so much potential opportunity. Because not only do I feel like it's kind of built for these times and the value proposition is very strong, it's also very young. And so that, that allows it to have significant potential price appreciat as adoption continues to grow all around the globe. Because we mentioned the US a lot, but the US is like in a better position than all these other countries around the world. And so Bitcoin is needed even more so in these emerging markets with even more unstable fiscal situations and currencies. So yeah, I mean, obviously I'm bullish on bitcoin, but I really think that it's kind of a, like it's made for the times.
- [00:56]
Sam Callahan
Obviously there are multiple assets that can benefit. Bitcoin, I think we would generally agree is like the best way to do it because you know, you get the absolute scarcity mixed with the fact that it's a young asset. If it was just looking at relative scarcity, we would say, okay, Gold's growing by 1.5% a year, Bitcoin's growing at less than 1% and long term grows at zero. So should we expect Bitcoin to up from gold by you know, 1% a year? No, because we have a total adjustable market in mind for what Bitcoin could be or at least a range. And we think that a $2 trillion market cap is so small relative to what it reach. So in addition to merely protecting against debasement, which is kind of what gold's doing, it's actually growing into whatever it's going to become. So I think that's the bullish thesis I expect both from the scarcity dynamics and then the fact that it's the leading liquid secure cryptocurrency and better than gold in many ways. It's better than the bond market in many ways. It's as more people learn about it, the rational thing is for them, some subset of them to want to buy it that I generally view as, yes, that that's structurally bullish for bitcoin.
- [02:07]
Walker
Greetings and salutations, my fellow plebs. My name is Walker and this is the bitcoin podcast. The bitcoin time chain is 880410 and the value of one bitcoin is still one bitcoin. Today my guests are Lyn Alden and Sam Callahan. We discuss their latest report. Full steam ahead. All aboard. Fiscal dominance, Bitcoin strategic reserv, corporate bitcoin strategies, why it's also the best move for individuals and a whole lot more. This conversation was streamed live on nostr, which is the only place where I live stream the show. So if you want to watch the bitcoin podcast live, head over to primal.netwalker and primal.net titcoin and if you're not on Nostr yet, what the heck are you waiting for? Before we dive in, just one quick favor. Subscribe to the bitcoin podcast wherever you're listening. And make sure to subscribe on YouTube or rumble as well. Just search Walker America, and if you find this show valuable, consider giving value back by giving it a zap on Noster or a boost on Fountain. Without further ado, let's get into this bitcoin talk with Lynn Alden and Sam Callahan. Lynn, Sam, welcome. I'm glad to have you both on here at once. You've both been on here separately, but great to have you both for. For one big powwow here.
- [03:31]
Sam Callahan
Happy back?
- [03:33]
Lyn Alden
Yeah, same. Walker, Lynn, how's it going?
- [03:38]
Walker
Life's good and interesting. What a time to be alive. You know, Ross is free, as we were just saying. That was. I think that's one of the most wholesome and joyous pictures I've ever seen of him walking out of that prison holding that. The little plant that he was growing in his cell, like, it just like I had just struck right at the core of me. I don't know about you guys.
- [04:00]
Sam Callahan
Definitely positive to see. I think especially because there were concerns around it not coming from day one, technically. So the fact that it came so strongly the second day is a really positive sign.
- [04:12]
Lyn Alden
Yeah, I mean, it was just. It was. It brought a lot of hope. I was, like, pretty emotional when I saw it, honestly. I mean, I know that maybe if people are looking in on this and aren't familiar with the case, they're like, why is bitcoiners so excited about this guy who set up this marketplace and there was illicit activity and yada, yada, yada, like, why do they care so much? When you actually dig into the case about kind of the injustice that was done to him and the fact that he was serving double life sentences without the possibility of parole in a maximum security prison, like surrounded by really bad, bad criminals. I always just felt really bad for him. And so to see him free now, and I'm just kind of excited to see what he's going to do. You know, he's obviously a bright guy and now he has a second chance at life. So I think it's very hopeful. And it just made me think that bitcoiners can actually influence things and bring about change. So. Yeah, that was great.
- [05:07]
Sam Callahan
Yeah. I think a key thing that I, if anyone asked me is the, the injustice of it was the, the fact that they used it as an example. Basically the fact that the sentence was so disproportionate to comparable things. And the U.S. government kind of has that tendency, which is for the most part it's one of the better places in terms of rule of law. But occasionally when something spooks them in some way, they really go all out and kind of bypass certain things. You know, whether, whether it's Ross, whether it's how aggressive they were toward Assange, including with their other countries that they're ally with. There is a pretty good amount of injustices that happen and they're usually marginal cases, but those end up getting a lot of press because they're kind of pivotal issues. Yeah.
- [05:59]
Walker
I mean, saying they threw the book at him would I think be an understatement. And what still makes me sad, as I've seen you see so many people out there and perhaps this is just a, I don't know if it's a fault of the news or of people themselves not taking the time to actually look into the case. Excuse me, but just the classic like, well, he hired all these hitmen. Sorry, the frog is back. But like these things where you're like, well, did you look at the case? They didn't actually prosecute him for that. There were all these different layers of entrapment happening. Like you can guarantee that if that was a prosecutable charge, they would have prosecuted him for it. But you know, there's been so much over the years in the media, even the FBI tweeting like right before the new year. I think just some reminder to everybody that this drug, you know, we put away this drug kingpin who built this horrible marketplace. And it's like, it's just so sad to see, to see people take a knee jerk reaction to this specifically because they don't like Trump. And it's like, you're free to like Trump or not like Trump, but that shouldn't have any bearing on whether or not you view this case through an objective lens. And, you know, I guess there's. There's no fixing for that. I guess that's just human tribal nature. I don't know.
- [07:15]
Lyn Alden
It was a, a good sign, a good signal that he did follow through on a promise. Like he made a lot of promises to bitcoiners. So perhaps this means that he's pretty serious about some of these other ones that I know bitcoiners are focused on and excited about the potential of a strategic bitcoin stockpile or reserve or whatever he called it. He followed through with this promise. So I think there's some patience that's needed amongst bitcoiners. I think there's a lot of built in expectations right now that they want this to be done now, but there's going to be a lot of different areas that this administration needs to focus on. And we're going to be talking about the debt. I mean, the incoming treasury secretary, Scott Besant, has a lot on his plate right when he gets into office with the amount of debt that needs to be refinanced, I think it's $6.7 trillion, as well as there's a debt ceiling coming up again. So we got that whole fiasco hit headlines once again. I think the fact that he freed Ross shows that he followed through on a promise and there's potential that he'll follow through on these other promises that he made to bitcoiners. But we should maybe practice some patience because there's a lot that's about to hit the fan. So, yeah, I wanted to say that.
- [08:33]
Walker
Yeah, low time preference occasionally goes out the window when heightened emotions are involved, I think. But, you know, maybe that's a. Okay, so I want, I really want to get into, with both of you today is this awesome report that you put out and there's a ton of just really great information in there and kind of like our current trajectory, some, you know, discussion of whether anything stops this train. There's a lot of great information about Doge and all these other kind of things that are really in the news and being talked about constantly at the moment. Before we dive into that, though, just. Sam, because you brought it up on that kind of strategic bitcoin reserve side, I am curious of both of your thoughts at kind of a high level, and maybe this can sort of bleed into where we're at from a fiscal standpoint. But do you see this strategic reserve as being something that's ultimately a boon to the dollar, that it's something that gives somehow, let's say, more stability to the dollar. Obviously we're not talking about backing the dollar with bitcoin. This is a reserve. But I've been kind of going back and forth on this of whether this is something that ends up prolonging the dollar's life, ultimately strengthening the dollar, or if by the US government doing this, it's an implicit admission that even the government realizes that we need to do something drastic and that perhaps they don't even have that much faith in the dollar. How do you both think about that as we're kind of getting into this really wild new era of actually talking about this like it is, right in the middle of the Overton window, like this is part of the public discourse now.
- [10:19]
Lyn Alden
Ladies first.
- [10:22]
Sam Callahan
I think there's more layers to this than often gets talked about. So ironically, one of the ways that a country weakens its currency when they think it's too strong is to accumulate reserves which they can then use later to defend their currency should they consider it too weak. And I've written a lot about how the current structure of the dollar system, you know, prolonging the strength of the dollar actually has some disadvantages that the way that it currently works in order to maintain this big saleable currency the whole world uses, it means the whole world, they all, they all demand dollars, so they all have to get dollars. And how do they get dollars? For the most part, the US runs a structural trade deficit and pours dollars out into the world. And a lot of that is self correcting in the sense that because the whole world needs dollars, there's a lot of demand for dollars above and beyond normal things that currencies trade on, which is like industry differentials, trade balances, things like that. So in addition to all those forces, the dollar has this extra layer of, of demand that other currencies don't have. And which sounds great except for the fact that the cost of that is that basically the dollar is perpetually overvalued based on a lot of these things. And so our import power is really strong, our export power for lower margin goods is fairly weak. And when you've run that playbook for decades, and a lot of it is like a self reinforcing playbook, then the downsides of that start to become politically front and center. So the reshoring and the hollowing out of the industrial base, whether you look at, if you're the DOD and you're looking at it from a national security angle, that's an issue or if you just live in the Rust Belt, which has really shifted in politics lately, and it is responsible for some of the political changes, we're seeing the rise in populism, it's because of that hollowing out. So on one hand, having the dollar positioned how it is lets the government run bigger deficits than they otherwise would like. Right now, Brazil's having an issue because of their fiscal situation, even though their deficit as a share of GDP is roughly what the US is, but they don't have this entrenched inflexible forward demand for their currency. So they're facing kind of immediate consequences for it. The US rarely gets to delay those consequences. Keeps the train going for a very long time, which, if you're the government, you'd like and you can sanction almost any country in the world. So those are the benefits from being the global reserve currency issuer. But the cost is you're exporting your industrial base to basically maintain it. That's kind of the ongoing cost of doing it. And during the Cold War, probably the trade off was worth it. But now in the current time, as the imbalances have accumulated, the other things are front and center. So the average American says, I don't care if America can sanction country xyz, I want my manufacturing job back. So the downsides are getting interesting. So ironically, a bitcoin reserve is one of the ways that the US could start to balance out the dollar relative to other currencies. To say we're going to accumulate a lot of bitcoin should we later need to backstep our dollar. We have that option now, but while you're accumulating it, depending on the method of accumulation, that can actually be dollar weakening, ironically, which is, in the grand scheme of things, one powerful moving part in this whole trade issue. So I think there's more layers than people often talk about.
- [14:01]
Walker
Just a quick follow up on that, Sam, before you jump in. In terms of the mechanism by which they would acquire this Bitcoin being a weakening factor for the dollar. I presume you're talking about if they are going to inject a bu dollar liquidity, if they're going to, you know, print dollars and use that to acquire new bitcoin.
- [14:21]
Sam Callahan
Yeah. If you, if you merely say the bitcoin we already have, we're going to put into a little stockpile that's not going to meaningfully affect things, then there's different mechanisms you can revalue. There's a wonkish mechanism that they have in the Fed handbook that they can revalue their existing gold holdings and fill up the Treasury General Account with that mechanism which they can then spend. Or you could just do, you know, change the, what the assets that the Federal Reserve can acquire. So they can, they can do open market operations on gold. You could say that they can now do open market operations on Bitcoin. And yeah, you can essentially print dollars to buy, whether it's foreign. It could be standard things like foreign bonds, gold, or in this case, Bitcoin. And so a lot of, you know, when you, when you see a lot of countries with these really big current account surpluses like Singapore or Switzerland or say the, you know, the UAE that's pegging their currency but is running a big current account surplus often the way, often they'll suppress their currency from getting stronger by printing their currency to buy a bunch of foreign reserves. So instead of the accumulated surpluses strengthening their whole currency base and instead accumulates basically the sovereign level. The downside of that is that the workers there don't get as much of the benefit of the surpluses that they're getting. A lot of that accumulates at the sovereign level. So if you take it from an anti statist argument, that's not great. But we're looking at how kind of currency differentials work. That is a mechanism that they can turn to and other countries often turn to the US Doesn't.
- [16:02]
Walker
Sam, what about you? How are you looking at this?
- [16:06]
Lyn Alden
Well, I agree with everything Lyn said. It's interesting because Steven Mirren, he was just picked as the lead of the Council of Economic Advisors by Trump. He wrote a really good paper about the use of tariffs and the problem that Lyn describes with the overvaluation of the dollar and having to run these twin deficits and how they're going to try to implement tariffs to basically try to, you know, decrease the value of the dollar relative to other currencies. And so they know it's a problem. So it's going to be interesting how they use these different tools. And certainly I think Bitcoin strategic reserve could help that. And then I'm curious, Lyn, over long periods of time, if you just think about, also a factor in a country's currency is just the health of their finances, the health of the balance sheet. Right. And so if we believe that Bitcoin is a good reserve asset that's going to appreciate in value over time, if United States kind of bought a significant amount of Bitcoin and became a leader and they benefited more than other countries due to the price appreciation over decades, and that improved the health of their fiscal situation. Do you think that could do the opposite, where it could actually strengthen the dollar relative to other currencies, fiat currencies, over the long period of time?
- [17:28]
Sam Callahan
I think it could. I think the funny thing about that approach is you probably get both sides of the benefit. So if you print dollars to buy bitcoin now, you probably help with the trade, the reshoring that they're trying to do, and you accumulate bitcoin, and then over decades, if it appreciates that gives you a lot of options should you face crises in the future. And then, in addition, once bitcoin is big and liquid enough, one of the ways to solve this dilemma between being the world reserve currency and being hollowed out is to in some way no longer be the reserve currency. Not that you want to cede that to another power, but that ideally you want to seed that to a neutral reserve asset. So gold got replaced because gold itself is too slow. And whereas bitcoin has a chance of coming back into the system as that, because you basically have a settlement network and a reserve asset combined. But at a $2 trillion market cap, it can't serve that role yet. So if you accumulate it now, and then decades later, it's much bigger, and more countries naturally decide, hey, there's this settlement network reserve asset that we can hold, and that starts to kind of work itself into the system, then the US Is well positioned with a really big chunk of that. So, you know, people often ask me, like, should the US do it? It depends who you're at. Like, from on one standpoint, I want sovereigns to accumulate at last and have people accumulate it first. But I would rephrase that to say, whoever I'm advising, the answer is yes, you should accumulate bitcoin. If you're trying to maximize the thing that you're advising, whether it's a family, whether it's a company, whether it's a sovereign, the answer is yes. Try to accumulate bitcoin and hold it for decades, because that will affect your balance sheet and your future value, literally, whether you're a company, family, or in this case, a whole country for which the balance sheet does matter. Like, part of what makes, say, Singapore attractive to invest in is that they have a ton of reserves that they could use to defend their currency should they need to. And there's lots of other countries like that. So that's certainly a variable that matters in terms of currency long term.
- [19:44]
Lyn Alden
Yeah, Japan's another example, right?
- [19:47]
Sam Callahan
Exactly.
- [19:49]
Walker
It's going to be super interesting just to see how this plays out. And I mean, it seems that the way at least us bitcoiners who are inside our own little bubble, of course, but are talking about this SBR is that this is, you know, kind of a. It's a when, not an if. And I, I think that that is likely the case at this point. There seems to be quite a lot of pressure to do this. Now. I kind of don't think it's going to be via executive order that he would establish this. I think it probably makes more sense and has more legitimacy if he run, you know, supports one of the bills like Senator Lummis that is meant to establish this and it goes through Congress and, you know, has all those checks and balances in place so that, you know, you can hopefully get a nice bipartisan coalition to support this thing. But either way, it's going to be, it's going to be a very interesting year. So I'm, I mean, I'm here for it. I wanted to so because I could, you know, pontificate about the SBR possibilities all day. But I do want to get into the meat of this report that you both put together, so titled Full Steam Ahead, All Aboard Fiscal Dominance, A Great Train as the COVID image of it, of course. And I think a lot of these concepts, like, Lyn, if it wasn't for you, I would not have what I think now is still a woefully under informed position, but much more informed than I used to be about these things. There's a tendency to want to simplify a lot of the things that we see to talk in very, you know, kind of catchy ways about money printing and all these different things. But this fiscal dominance piece, I think is really fascinating because it's another piece of this puzzle that helps make a lot more sense out of where we are, where we're going and what actual tools the government, the central bankers, the Treasury Department has to make changes. So can we just start out at a very basic level with just what is fiscal dominance? Just so that people really set the stage for anybody who is hearing this and thinking, I don't entirely know what that means.
- [21:56]
Sam Callahan
Sam, do you want to take that or do you want me to jump in?
- [21:59]
Lyn Alden
I can take that. So, I mean, fiscal dominance, there's different definitions that have been proposed for what it is. And we mentioned two in the report, and the first one was by a guy named Daniel Ford. And it's basically an economic condition where once countries, debt and deficit levels get significantly high. Basically, monetary policy becomes ineffective at controlling inflation. Persistently high interest rates in that environment just increase the deficits even more, which exacerbates inflationary pressures. Now we propose a secondary definition that's a little bit more simple. It's just when fiscal dominance is when fiscal deficits and government spending, so to speak, becomes more significant in driving economic activity than the private sector. So commercial bank lending, non bank lending, these things typically along with monetary policy drive economic activity. But in a period of fiscal dominance, the fiscal deficits and the government spending just kind of overpower those factors. And so things like interest rates rising and the Fed doing these policies don't really have an effect anymore on things like inflation. And so it becomes like a dominant presence. And it drives asset prices, it drives economic activity. And it's why, for instance, a lot of people thought that when the Fed hiked interest rates back a couple years ago, they thought things were just going to crash. I mean, there's a lot of fear and Armageddon type doom post about how it's going to cause a terrible crisis and the debt levels were so large that it's going to cause this huge debt crisis and contagion. But it didn't really transpire. It's because they're ineffective right now because the fiscal policy didn't rein things in and they just kept spending and spending and running these massive deficits that it kept the economy floating, at least parts of the economy. It also kept asset prices elevated. I think right now it's important to understand how fiscal policy is the dominant player now. And the Fed can do things like interest rates, hikes and cuts, but it's not going to change much if there's not significant changes on the government spending side of things. And then I'll let Lyn kind of add anything she wants, but that's the gist of the definition.
- [24:21]
Walker
It blows my mind that there are bitcoiners out there who are not on Nostr yet. Seriously, what are you doing? Just like you shouldn't need to ask permission to use your money, you shouldn't need to ask permission to speak freely, but unfortunately that's exactly what you're doing if you're still stuck on centralized social media platforms. On Nostr, you can't be censored, you can't be banned, and you can't be deboosted for saying words Elon doesn't like. And the vibes are just better. There's nowhere else you can end up having a casual conversation with the likes of Jack Dorsey or Lyn Alden. Nostr also has bitcoin payments built in. So when you post a meme, a hot take, or a photo of your stake, people will zap you bitcoin to show you they like it. You can find me on Nostr by going to primal.netwalker and you can check out this podcast on Nostr@primal.net Titcoin Primal has a built in bitcoin wallet so you can literally get zapped by people for your posts. Then use those sats to buy a coffee or whatever you want, all from the same app. Search for Primal in the App store, go to primal.net or check out any of the hundreds of other Nostr apps out there, because you can freely switch between them all anytime you want. So come join the largest bitcoin circular economy in the world and start zapping sats on Nostr.
- [25:42]
Sam Callahan
One thing I would add is that this is pretty actionable, like one of the big, biggest successes I've had with investing. And I've had a bunch of, you know, downsides and wrong things too. But one of the biggest things I've gotten right is the fiscal side. So in addition to getting, you know, getting bitcoin on my radar, the other big thing was basically getting the fiscal situation right because that's what allowed me to expect inflation to come. And then after some turbulence in 2022, it was what I started expecting to see. Okay, we're actually inflecting upward again in terms of economic growth and basically asset prices. I often like to say that I'm so bearish on bullish, which is basically you're through the event horizon. It's kind of what fiscal dominance is. You're through the event horizon. And so some of the things start working in a different way. And the example that I often give is so back in the, you know, the 70s, when they had structurally high inflation, the majority of that was from bank lending. So so the rate of bank loan creation was pretty significant. Now there was a deficit overlaid on top of that, but that was a smaller factor. And then of course there were factors like oil shortages that would actually translate that into instead of just going to asset prices, it would actually go to consumer price increases. But basically you had above target money supply growth during that period and the majority of it was from money supply growth. And at the late stage of the 70s, early 80s, the federal debt to GDP was something like 30%, which is historically low. And so when the Fed comes in and sees this situation, when Volcker comes in, they say well, if we jack up interest rates super high, we will slow down borrowing demand, slow down overall fractional reserve bank money creation and that should contain inflation. Now as a side effect of that, it will increase the deficit because it will increase interest expense for the government and potentially hurt their tax revenue. But the, because bank loan creation is bigger than the deficit, the slowdown effect on bank lending will probably be larger than the blowout and the deficit. And that's what ended up being the case. So you kind of put the brakes on the economy, put the brakes on money supply growth. If you fast forward to today when depending on how you measure it, you have over 100% or over 120% debt to GDP. And bank lending is kind of sluggish and a lot of it's demographic. So back in the 70s, the baby boomer generation was entering their home buying years. So that, that's a big factor for why there's so much lending happening now. We have, you know, somewhat slower population growth and then a lot of the wealth is concentrated toward the top. So there's not, there's not a very rapid, you know, household formation. And so you have generally slower lending happening. But instead there's more money creation in the 2020s coming from monetized fiscal deficits. And when you, if you, if you apply the Volcker playbook and you say, well there's too much money creation, let's jack up interest rates. Well, like lending is not that rapid to begin with, so you're not going to slow it down that much. And to the extent that you do slow it down, you're also going to blow out the fiscal deficit by ironically an even bigger number than you're slowing down bank lending. So you don't really curtail monetary aggregates as much as one would think because the deficit is mostly industry insensitive. And if anything, higher rates increase the deficit. And so that's why monetary. Almost all the Fed's tools are based around either controlling the speed of bank lending or affecting interest rate currency differentials with other countries. And they still have the second one, like you know, making the dollar attractive versus other currencies. So you don't get like a capital flight. But they, but their ability to kind of, you know, affect bank lending is like they're only affecting the second or third smallest, like the second or third biggest variable in money supply growth. They're no longer affecting the biggest one, which is deficits. So that's kind of what it means to be stuck in fiscal dominance.
- [29:56]
Lyn Alden
And they're actually Making it worse, right?
- [29:58]
Sam Callahan
Yeah.
- [29:58]
Lyn Alden
You know, they're making the number one thing worse. When they raise the interest rates, the interest expense just blows out. So the interest expense is now was larger than the defense spending for the first time. That's the big difference between the late 70s and early 80s and now it's the sheer size of the debt and the interest expense that comes from that. And so I think one of the things that really made me better understand this too was how interest expense is like. The government has to pay these bondholders, the households, the money market funds, banks, pension funds, corporations that buy these treasury bonds. If interest rates go up to 5%, the government has to pay those bondholders. And those interest payments can be thought of income for those bondholders. And that income flows into the economy, flows into asset prices. It injects liquidity into the economy, so creates demand and counters the Fed's tightening efforts. So they're trying to turn things down in terms of economic activity. They're trying to put brakes on the bank lending. But now you have these bondholders getting larger and larger interest payments and that's like liquidity for them to basically put into asset prices and do whatever they want. And so that's kind of this flywheel that I made this graphic that's like higher interest rates leads to higher interest expense, refinancing costs, larger fiscal deficits, more money printing, more inflationary pressures, more higher interest rates. And just kind of is this cycle. And so that's fiscal dominance. And so it's just important to understand when you think about the investment environment right now, because people, I think, typically respond to monetary policy, but that's really not the driving force anymore. It's really what's going on on the fiscal side of things.
- [31:42]
Walker
And that's kind of the mind blowing thing right now is that just like the graph I had previously that you had put in the report, and then this one as well, you look at the interest expense and it should be kind of shocking to people, like when it's surpassing, you know, our defense spending. Like that's, that's something we spend a lot on. Right. And this is literally just interest on our debt. And what maybe Lynn, something just to touch on that, you had said earlier a little bit just about the fact that, okay, in a, in an era of fiscal dominance, when you're trying to raise interest rates to, you know, presumably kind of tamp down inflation a little bit because people are, you know, up in arms about it, you end up creating an even worse fiscal situation. I mean, does so like at that point then you know, what, what is the, what is the Fed to do? Because they're kind of between a rock and a hard place. I'm not trying to give them, you know, take away any onus from them. It's, you know, it's, it's their job as our esteemed central bankers to figure it out. But like, is there even any tool that they have during the current type of paradigm that we have if we're in this fiscal dominance period as you suggest, are there even any tools that they can use to be able to affect any sort of positive change?
- [33:04]
Sam Callahan
Not super well. And the tools they do have come with costs. So it's not that their tools are completely ineffective. It's that the, some of the downsides of the tools start to outweigh the positives. And so like when they jack up interest rates, they do slow down some bank lending like, so that tool still works similarly, but the problem is that it's only affecting a smaller part of the economy. And then unfortunately the way it's structured is it kind of amplifies the K shaped economy that we have, which is basically a two speed economy. So if you're younger and looking to buy a home, the Fed has now made that a lot harder. Whereas if you're wealthy and you either have like just you own your home outright or you've locked in a fixed rate mortgage and have no intention of leaving anytime soon, and you have plenty of like money markets and bonds and assets, then you're doing great and you're not going to stop doing great anytime soon. And if you're Google, like if you're one of these major MAG7 especially the ones that are really profitable, they've got a huge like cash equivalent hoard and then pretty low debt or whatever debt they do have is like, like Apple like locked in at like low fixed rates. So anytime you, you increase interest rates, you give them a raise and then they can plow it in more share buybacks. And so you're only really slowing down like the most vulnerable part of the economy. So you're, you're kind of, you know, around the margin it is tampering inflation, but it's also blowing out inflation in other areas by extension. You know, kind of the, the, the, the kind of, the cruelest thing that the Fed can do indirectly is, is make it another country's problem. So kind of the dark side of Volcker and the whole kind of 70s 80s era was we jack up the dollar, we basically bankrupt Latin America because they all had dollar dominated debts. If you look at their oil consumption, they flatlined for like, like global oil consumption flatlined because we basically impoverished certain dollar dominated countries. We like kind of got them addicted to dollars. Part of that's their own policies. But we encouraged a lot of debt accumulation and then we really hardened the dollar, crushed them. They consume less energy, that helps fix the energy imbalance. Right. So that's brutal and to some extent we're doing a slightly softer version of that now. Now countries are generally better positioned for it because they have more reserves going back to the prior point of why it's why they accumulate reserves during, you know, when their currency is really reasonably strong so they can defend it when it's, when it's, you know, under pressure. But you know, by basically keeping the dollar so strong now the, partially due to the Fed's policies, they are putting pressure again on Latin America. Not, not to the extent as before. They're putting pressure on like you know, Turkey. They're putting pressure, you know, to some extent like throughout much of Africa really. They are putting a lot of that pressure and that actually, that's actually kind of lowering their consumption and therefore alleviating inflationary concerns brutally. And that works for a period of time. So they're kind of playing that the hand that they have. I think the one thing they could be playing differently and better is so during the heart of the pandemic lockdowns, Powell came out and said we need more fiscal spending. He said our tools can't alleviate things enough. We need more fiscal, which is a rare thing for a central banker to do. They did it. They probably would have done it even if he didn't say it. But they did it. But now that we're on the other side of that, of course he's not saying, hey, we had too much fiscal, we need to slow it down. He's not, he's not being very blunt about that. So I think they could be more transparent and basically say, look, our targets are very hard to achieve when you're running 7% of GDP deficits. And I don't think they're doing that enough. And they're not really acknowledging where inflation's coming from enough and why their tools are somewhat indirect.
- [37:09]
Walker
Correct me if I'm wrong, but I think one thing, Powell, in a brief moment of honesty, I think it was maybe like Q3, 20, 24, he was asked a question in one of the pressers about what do you think about basically the government's spending situation? And he kind of Just offhandly was like, well, it's uns sustainable. But that was about as detailed as he went into it. Like there was a brief acknowledgment and then it was kind of like, okay, yeah, onto the next question. But I mean, it's, they must know that they have these problems, right? Like they're, you know, they're not completely incompetent. They must realize that they're kind of using a, a very blunt instrument that doesn't appear to work. And I mean, if obviously inflation was not transitory, I mean, which was just a terrible way to describe it because for the average person, like, they don't realize that the Fed is talking about the rate of inflation, right? They're thinking like, well, everything just keeps getting more expensive forever. How is that transitory? But I mean, do you think, do we end up entering an era where the Fed just kind of gives up on trying to bring inflation down to their kind of arbitrary 2% target and says, well, you know what? Now it's an arbitrary 3% target, like just to give. So then they say, oh look, we, you know, mission accomplished. We, we did it. Like we brought it down to our new target. Is that something that you foresee happening?
- [38:37]
Lyn Alden
Yeah, I mean, personally, I, I think there's a lot of speculation there, but there's been a lot of chatter. And you see these like, ideas start to get mentioned by some prominent economists who have really large platforms just saying, well, actually 3% would be okay. You started seeing that two years ago. And so now you're seeing that it's really hard for them to get it down to all that level. It's kind of, right now it's like 2.5%, 3%. And you even saw headlines like central bankers declaring victory on inflation when really they didn't reach that 2% target that they really always want to get to. Right. And so, yeah, I think you're going to start seeing that. But it's also, as we all know here on this call, that's just one part of the spectrum of inflation. That's kind of what Lyn was mentioning earlier. I mean, it doesn't stop asset price inflation, which just leads to that K shaped recovery. So even if the CPI drops, it's just the goods and services, but the inflation is just kind of shifting elsewhere to this asset prices, which worsens the wealth concentration and things like that. And so I think, I don't know if they're going to give up, but they may be just kind of change their language a little. Bit and say, hey, this is fine. And then once it gets down there, eventually they'll say, hey, mission accomplished. It really doesn't matter though, because it's really not the accurate way to measure inflation, in my opinion, as we all know. I mean, you just look at monetary inflation, asset price inflation, CPI is just one little piece of the puzzle that they like to focus on. And we know that it's manipulated and, and the methodologies changed and things like that. I think they'll probably try to do something like that. But really what it comes down to is what this whole piece is about is that it's kind of out of their control, what the main inflationary drivers are today, which is not them, which is. Honestly, I would push back a little bit because I think Rome Powell has been pretty. For its central bank chairman. For a Fed chairman to say what he said about the fiscal side. He's actually been kind of vocal compared to other Fed chairmans because usually they don't like to say anything. But he has said multiple times that the fiscal situation is unsustainable. It wasn't just that one interview. And I think they realized, like, if nothing changes on that side of the things, there's nothing we can really do to meet our price stability targets, because we could do everything we can on our side, but if they keep running $2 trillion deficits, then really inflationary pressures are going to persist.
- [41:14]
Sam Callahan
Yeah, and going back to your earlier question, so the 2% inflation target is actually fairly recent. The Fed adopted it in 2012 or something, and it kind of stretches back to New Zealand's decision in the 90s to define it. So it's a fairly recent phenomenon. And then there's different interpretations, like it's 2% the ceiling, or is 2% a symmetric target? Where if you're under 2%, like we, we have all these ironic quotes now from the 2010s of central bankers saying inflation's too low, we want to get higher. And it's like, well, you, you, you got quite a lot of that, you know, in the years that followed. And so they're, they're sometimes able to like, change their definition. Or they, they say, well, now we want a symmetric target around 2%. And then, you know, they can move the goalpost by saying, well, we want to get back down to 2%. But you know, these things take time. And it's like, well, you know, they're not projecting it to get there by then at 2025. So it's like, when, when exactly are you projecting it? To get down to your, your target. And Powell's also said at one point that like oil, like oil spikes are kind of outside of their purview, which is correct. So should there be some sort of later like energy related thing that makes inflation sticky, they can kind of define that as outside of their framework, which I would do too, because it's not the central banker's job to make sure energy's flowing and then they can only slow down demand so much to try to fight that. And then the only thing about the fiscal comments with Powell is that policymakers will often say that something's unsustainable, but it's kind of like another way of saying it's not their current problem. And what I haven't heard is Powell link the fiscal to inflation enough or at least, at least as an ongoing concern to basically say that not sustainable in the sense that our quote unquote kids and grandkids are going to pay for it. But unsustainable is in. I'm trying to reach the 2% target on my watch and this is the most actively difficult variable for me to do that right now. That's the part that I haven't really seen him vocal about. And in the future you could have goalposts change and say, well, national security, this event happened and so that's why we're going to raise target to 3% or we want to tamp down inflation, but not at the cost of xyz. So all these goalposts can change over time.
- [43:50]
Walker
Well, I'm curious too, because in Trump's kind of initial speech, one of the things that he said that obviously, you know, jumped out at me along amid a quite a long list of things that he wants to do, but I don't remember his exact words, but it was to the effect of, you know, basically defeat inflation, you know, and, and he's also declaring a national energy emergency. And you know, we're going to drill, baby drill and we're going to lower not just energy prices, but other prices. And you know, talking about in inflation these kind of, you know, blunt ways. And obviously energy is a huge factor, right? It's, you know, everything takes energy to make. But I'm just curious how you guys see that playing out because I think Lyn, you mentioned, you know, that energy prices have been, you know, fairly, you know, they haven't gone wild, right. And I mean, obviously they can come down more. But I mean, do you think that this is actually a meaningful way to be able to quote, reduce inflation or do you think? I mean, is he also referencing. He talked also about the Department of Government Efficiency as well and being able to reduce some of the government spending, but are these reasonable ways to actually be able to tackle a problem that is clearly quite sticky and also just kind of seems to be embedded in our system at this point?
- [45:11]
Sam Callahan
I think focusing on energy is meaningful in the sense that it reduces the probability of future inflation spikes from energy. So it's not that that doesn't matter. I mean, keeping the energy flowing is one of the biggest components of inflation, especially consumer price inflation. The other factors, like the deficit, is a big deal. I mean, that's why the incoming Treasury Secretary, Scott Besant, has the 333 plan, which is like increase oil production by 3 million barrels, have 3% GDP growth and get the deficit down to 3% of GDP. Now, while it's a noble goal, the question is, is it, is it achievable? Going back to the Doge question, and I would say that with the Republican Party's own campaign promises, it's very hard to be achievable because, you know, their 2024 platform is no cuts to Medicare or Social Security and not raising the retirement age. Obviously interest expense is challenging to manage, especially if you're not the central bank. It's not really supposed to be your purview dod. There's a lot of fat that can be cut there, but every dollar there is going to get pushed back by Congress. So that's going to be a battle. And basically the areas that are cuttable are smaller than are often advertised. A lot of times programs, they want to amp, like show the good things, but then minimize the costs that are going to come with it. And I think this is like another thing is like basically saying we're going to cut the deficit, but it's not really going to affect you. It's one of two things happen. Either they make massive cuts to things that are very unpopular to cut, which I think is very unlikely, or they get a lot of little optical wins. You know, you cut a billion dollars, just save some trout in like, you know, like Alaska, which, you know, I like the environment as much the next person, but you get the idea that there's a, there's a laundry list of little things like that. And they can say, look at all these, like optical winds we're getting, but it takes like 100 of those to save $100 billion in like a $2 trillion deficit. Right? So I think the end of the day they're going have a lot of optical wins and the depth is still going to be much bigger than they target.
- [47:31]
Lyn Alden
Yeah, I mean, look, I think focusing on increasing domestic oil production and improving the supply more broadly is a good thing. It's better than focusing on grocery stores, price gouging. It's a little bit more productive, I think, to do that. But as Lynn said, I mean, the deficit is such a large component here. And that's kind of what we shared was nothing stops us train in terms of why they're structural in nature. And so it's just important to understand what we mean by structural in nature. It's basically that this is baked into the cake with demographics and how much our entitlement programs are set to grow as our population ages and they become eligible for these benefits that they were promised. Right. So that Social Security, Medicare, these costs just continue to increase every single year that a greater percentage of the population becomes eligible for those benefits. And, you know, if they're not going to change these things, because as we mentioned that 61% of the spending last year were these mandatory programs. And it takes congressional, you know, piece of legislation to change them to change the age requirements. And as Lynn mentioned, the GOP specifically says one of their promises is that we're not going to touch Social Security and Medicare. But then the CBO comes out and they say 87% of the spending over the next. I don't know, was it two decades? Yeah. Next decade, 80% of the nominal spending growth is going to come from these entitlement programs and the interest expense. And so, you know, if you don't touch them, then you're looking at a very small slice of the fiscal. The deficit to actually make any kind of dent in terms of the spending. So in terms of to make a dent in the deficit, you're looking at 26% of the spending. That's basically discretionary spending. And then half of that is defense. And as Lyn said, it's just going to be so much pushback. I look out at the world by the geopolitical tensions, and it just seems very hard to think that they're going to cut defense spending right now because of just the tensions that are all over the world. And there's so much pushback from Congress whenever you mention cutting defense spending. And actually you look at the CBO's projections and they're expecting those to continue to rise over time. And so if we take that out, then we're looking at only 14% of the spending that was non defense discretionary. And that's really, where that's like the prime target for any kind of cutting, and that's only $948 billion. And so it's like way off this, like, $2 trillion goal that Elon Musk had. And now you can try to cut inefficiencies, and maybe deregulation kind of helps, and, you know, maybe you have a productivity boom that could help things. But in terms of just like the Doge cuts, I mean, I find it very hard to think that we're going to make any kind of meaningful debt in the deficit without changing any of these entitlement programs. And this is what Stanley Druckenmiller warns about as well. And then there's this other factor, which is the financialization of the economy and how tied tax receipts are to asset prices. And so if we cut a lot of spending and the deficits shrink, and as we mentioned, that's been a key driver of asset price inflation. And you would think that if they cut that, then that's going to have the opposite effect. So then tax receipts are going to fall. And so that's actually going to blow out the deficit because you're basically dropping the revenues at a time when you decrease the spending, so they offset each other. And so that's when you're really in a hard place because it's like, even if you did make a meaningful dent in the deficit spending, then you're just going to drop those revenues and it's just going to result in wider deficits or as wide of deficits, because that drop in revenue is going to offset the spending cuts. And so that's kind of a unique situation in the United States. And it's why, like, when you compare it to other countries, like in Canada or Germany, who has had more like austerity programs where they were able to be successful, it's because they had, you know, a difference where their whole economy wasn't financialized and tied to asset prices. And so they were actually able to be successful with their austerity measures. But with the United States, it's a unique problem where even if we were able to be successful in making a dent, it's just, it adds to this. You know, we basically need an overhaul of our tax system as well that untangles the tax receipts from asset prices somehow as well as totally revamp the entitlement programs to make any kind of meaningful difference. And that takes congressional, you know, legislation and in a very highly polarized political environment. And I just, when you look at that, you're just like, how is this going to work? And that's why nothing stops this train.
- [52:37]
Walker
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- [54:26]
Sam Callahan
So I think not in the next decade do we run into major things that would block it. I think we'll have dramas along the way, but basically there's 13 trillion in foreign debt denominated in dollars. All that represents inflexible demand for dollars. Probably more than that. When you look at derivatives and other kind of opaque areas and you have a pretty broad economy, a pretty diversified economy, and so they, they have more Runway than most other countries or any other country really. You know, like I mentioned Brazil, they're running into issues because they have a similar, you know, with their new with their, you know, current administration, they have a, they, they blew out their deficit, but by blowing it out, it just, it got as big as the US's deficit on a relative basis. And when you're Brazil, that's a problem because there's not really a lot of inflexible foreign demand for your currency. So capital pulls out, your currency weakens, inflation goes up, and you have an actual fairly acute problem. Whereas the us kind of the way I look at it is that the downside of the report and the downside of the whole nothing stops this train thesis that I've been hammering is that this is a far harder problem to fix than almost anyone thinks. Multiple layers of challenges, a whole Gordian knot that's extremely difficult to unravel in any administration, let alone two or three administrations. The upside is that I also don't expect doom anytime soon in the sense that the US currency just goes completely haywire and collapses or you get complete blowout. And just the whole financial system kind of is in shambles within that timeframe either because the structural stuff is kind of geared toward running hot, but not running into doom in that timeframe. Another way I would describe it is that before you go into doom, you gotta go through emerging market phase. And the US isn't even in an emerging market phase yet. So when they start running out of track, it'll look more and more like an emerging market, which is still, there's still track there. And so they have to mess up pretty bad to have a true crisis. And instead I think that we're going to see a long period of inflation running kind of hot, the better productivity growth you get. So if you get tons of AI to offset the money printing, then it translates into asset price inflation and kind of K shaped disproportionate economic benefits where some people on the wrong side of the deficit. So some people are receiving deficits, they're doing great. Other people are not receiving the deficits, but they're paying for the higher cost of the deficits with higher interest rates and higher borrowing costs. And they're getting all the downside of the deficits because they're not on the right side of it. And so you still have all this. Those are all real problems. And yet it's not like doomsday scenario. Now if you look at the long arc of time. So in the mid-2030s, the Social Security trust fund is estimated to run out, so you could get a meaningful cut in benefits, which would be a political crisis, or you could Keep the printing flowing from there along the way. Like the UK had a bond crisis and their central bank had to step in and backstop their bonds. We've seen similar less dramatic things in the US like the Fed had to go back to increasing their balance sheet in September 2019 because the repo market blew out. And repo was the primary financing vehicle for Treasuries. A lot of hedge funds were using repo to buy treasury, so it would've eventually hit our bond market. And so we can have little dramas like that where you get little tastes of looking like a banana republic or little tastes of the emerging marketification of developed countries, at least in terms of their currency dynamics. But the track still goes for quite a while. And I think that where we go in the meantime is Bitcoin and other hard assets to do damage control for ourselves and our loved ones. As this very difficult train just kind of keeps going and things kind of run hot and it has investment implications. All the people that are always expecting disinflation are always uber bearish, just keep getting caught off sides by fiscal dominance that just keeps running things hotter than they expect. So the error tends to be to the upside rather than the downside in that sense. Doesn't mean you can't have bad years and little disinflationary bursts here and there, but it's just something to really be aware of as an investor, as a business owner, as whatever your role is. It's just something to understand that that's kind of the background we are. We're in that one.
- [59:23]
Walker
Sam, is there anything you wanted to add to that?
- [59:26]
Lyn Alden
Yeah, I think you just look forward and what you should expect is persistent inflationary pressures, persistently high fiscal deficits. And so they're going to have to figure out ways to finance those deficits. And so we never really talked about this, but like who's going to buy the debt? Right. That comes into a question as well, because especially on the long end of the yield curve, they have to find the demand. And the foreign investors have been declining in terms of the percentage of ownership of Treasuries over the last decade, I think from 46% to 30%. And most of it's been picked up from households and domestic institutions and banks. And there's things that they can do like change the reserve requirements for the banks to try to create more demand kind of artificially. But they have to make sure that that doesn't get out of control, that the interest costs don't explode, because then it will really get the deficits to blow out if we lose control of the long end of the yield curve. What we're looking at here is who's going to buy it. Personally, I think what's going to happen is we're going to get back to qe. I think the Fed's going to step in. And what happens then is that that actually increases the money supply. And so increasing in the money supply, you should expect more currency debasement, more asset price inflation and things like that, because I think the Federal Reserve is going to have to step back in eventually at some point over the next decade to stop to add some demand to the long end of the yield curve to help finance these deficits that, as we mentioned, are structural in nature. It's going to be very difficult to change them. And so you should expect currency debasement, increase of the money supply, more asset price inflation, all those things that we talked about. You should just expect that to continue and the economy might run hot. And so in that situation, obviously bitcoin, hard assets, real estate equities, I think will all kind of perform well, at least sectors of the equity market. And people need to really protect themselves. I think other nations have it a lot harder. Lyn mentioned the UK guilt crisis, but also the ecb. I mean, what's going on right now? Even they have this instrument called a TPI that they announced in 2022. And it's because they're trying to fight inflation, trying to raise interest rates. But all of these countries have different levels of debt and they're also blowing other deficits. And it's just like the early 2010s where you had the Greek financial crisis, the debt crisis, but now it's France, which is one of the largest economies in the eu, that's really under stress right now. And there was a notable headline that said, will the ECB come in and save France's bond market if they need to? The answer is yes, because I think they have to. And that's fiscal dominance. Because even if the central bank doesn't want to, they risk something much, much worse happening. And they're trying to combat inflation, they're trying to raise interest rates, but they're going to have to stop, turn around and start buying French bonds. I don't know what they're called exactly. They're called bonds, I don't know, French bonds. But they'll have to turn around and start buying them because of the fiscal situation. It's just out of control over there. And so that's fiscal dominance. And so I look around the globe and the United States, as Lyn mentioned, actually has all these different benefits. The debts denominator, our own currency, the demand for the dollar across the world, how diverse our economy is, all these things will allow the US to be fine. It's the rest of the world that I think is in a lot worse shape. So, yeah, when you look out, hopefully there is no significant crisis that happens. As we know, the CBO has their projections, which we use in this report for our fiscal deficit projections for the next 10 years. But those assume that there's not going to be any kind of major crisis. And lately we've been, every decade or so we seem to have some kind of once in a lifetime crisis. And so if something like that happens, then that might change the game or if there's kind of major external war, that happens. But outside of that, then I agree with, I agree with Lyn completely. I think we just run hot, persistent inflation, persistent deficits, more currency debasement, increase of the money supply. And that's why hard assets, Bitcoin is a way to protect yourself.
- [63:52]
Walker
One thing that you guys brought up in this report, which I thought was just maybe interesting to kind of call attention to, is the situation in Turkey as it relates to kind of debt to gdp. And just obviously Turkey, for those that don't know it, is running extremely red hot inflation. And even obviously the government reported numbers, as we all know, it's the same as in the U.S. they, they do not capture the, you know, the real rate of exchange. But can, can you guys talk about the situation in Turkey a little bit and why you felt that was an illustrative example?
- [64:28]
Sam Callahan
The reason I think that was worth including is because some investors, I think, don't take into account the recursive elements here. So the fact that a fiscal deficit is a type of stimulus, it obviously comes with a cost of debasement, but that's a type of stimulus. And so when you're looking at nominal gdp, that can like disguise the nature of the problem. And I initially solved this when I was like, you know, before inflation started to take off back in literally like 2020, when I was saying this was going to be inflationary, I would, there'd be very respected analysts saying, you know, when I'm making all the 1940s comparisons back then, I was making a lot of these like, look, this is, this is not 2008, this is not a great depression. This is like 1940s kind of fiscal, massive monetized fiscal deficits. People would Say, well look, I mean the Fed only bought Treasuries equal to this much of gdp. And it's like, well, did you look to see what GDP did? Because it doubled in a very short period of time because there were so many monetized fiscal deficits. It's like fueling itself. So the funny thing is sometimes the treasury releases like very long run reports for what debt to GDP could look like and they eventually project very high debt to GDP ratios. I actually would probably take the under on those, which is probably surprising coming for me not because I expect them to slow down the deficit, but that I expect nominal GDP to probably surprise to the upside because of the debasement and the recursive nature of these. And so the reason the Turkey example is relevant is that throughout this whole ordeal that they're having this whole inflation over the past, you know, three plus years at least this current burst of inflation, their debt to GDP figures are down and their deficit to GDP figures look very controlled. You're saying, well, we're only running this percent. It's like, well, but the problem is you're running such big deficits that it's pouring out into the economy, fueling inflation, fueling nominal GDP growth and therefore masking the size of those deficits. And I think the US is going to be a similar situation, which is that, you know, the deficits, barring a crisis, generally stay in the single digit range. So maybe if they're really hawkish on Doge, they get down to 6% of GDP. If things get a little hot, maybe it's 8% of GDP. Whatever the number ends up being, it doesn't go to some crazy number, but you have both nominal GDP growing pretty quickly with a, some of that is inflation. And then you have the ongoing deficits that are getting bigger every year, but not necessarily growing compared to gdp. And so some of when analysts only look at debt to gdp, it can disguise the magnitude of the problem. And you have to sometimes take a step back and look at the nominal numbers because especially when you're looking at investing in hard assets versus other assets, you really want to look at the nominals. And when you're looking at say, are bonds worth investing in? One of the rules of thumb is what is the rate on the 10 year versus expected nominal GDP growth? And those are the types of metrics that I just think not as many professionals as should be are looking at those or realizing some of the recursive natures of those, unless some of them are investors in emerging markets. So they're more acquainted with it or other dynamics.
- [67:55]
Walker
Sam, anything you want to toss on top of that?
- [67:59]
Lyn Alden
Well, I think the, the example is just, it's, it's kind of crazy to look at because you just look at the charts of nominal GDP growth and the inflation rate of Turkey, and then the fact that the Dutch GDP dropped when those just go through the roof shows you how that metric can mask what's actually happening. I mean, it just, I put the red line there, just said that was like a sign that, hey, that's when the deficits start to become unstable. And then you just look at the red line at each of these charts and you're like, okay, yes, debt to GDP went down, but wow, look at the inflation, look at the nominal gdp. So so many people focus on the numerator when debt to gdp, but they don't focus on the denominator and the effects that the fiscal deficit, this can have on the denominator. And so when you think about debt to gdp and we kind of ran the numbers, it would actually showed, even with the interest rate policies at different levels, if the nominal GDP continues to grow fast, then you might not see those metrics actually blow out, as Lyn mentioned, because of that factor. But when you look under the hood, that doesn't mean that inflation won't be persistently high, nominal debt won't continue to accumulate at rapid, rapid rates. It almost gives the illusion that there's like some kind of fiscal stability going on. And so just important to keep that in mind when you're looking at these charts.
- [69:29]
Sam Callahan
Yeah, so the same thing's true for Argentina. If you look at Argentina over the past, say 10 years, when they've had, you know, this whole inflationary period there, you know, if you look at like, say, trading economics and look at their like budget deficit, it's generally been under 9% per year, usually less. And yet you have the crazy numbers. And that's because they have the same issue as Turkey. Whereas like the, not like, if you compare nominally in Argentine currency, how big the deficit versus how it was a year or two ago, enormously bigger. But so is nominal gdp, so is everything else. And so the percentage of GDP numbers look like they don't look good, but they don't look like Zimbabwe, but then it's like you wouldn't look at that alone and think these people are hitting like 100% inflation. Right. But when you look, it takes looking at the nominal numbers as well to see. And so the US I think is going to be running on, you know, not, not to say that we're going to be like Turkey or Argentina, but it's like we're going to be like Turkey or Argentina light, which is that directionally it's not just, you know, the percent numbers that run that, that are, that are worth looking at is the novel numbers is how things grow, like in absolute terms over any given you know, one year period or especially any like five year rolling period. You know, how sustained are these nominal figures growing? Because, you know, if you can, if Bitcoin's growing at this amount and gold's growing at this amount and the treasury market or the dollar market are growing at this amount, those nominal numbers are important to be aware of because they actually affect how much capital is like needs financing or how much capital is flowing out and multiplying versus other scarcer things that are not doing that.
- [71:18]
Walker
It kind of harkens back to the last report that you both worked on together, which was Bitcoin as a barometer for global liquidity. Right. That that's basically the best way we have to measure what global liquidity is doing because it's the most tied to it. And in this case, it's like you're measuring with an absolutely scarce asset. Like gold would be a pretty good measure as well, but, you know, inferior to Bitcoin in that sense because there's still, you know, pretty, there's consistent inflation in the supply of gold, but still very low inflation of it. Right. But I mean, so is that from both of your perspectives then? You're looking at this, obviously we're all three bitcoiners here. That's no secret. But I mean, what's kind of the message in terms of we're entering a really weird period? It seems also like just thinking of the Trump presidency, we know that Trump, he likes doves more than he likes hawks. Let's just say he's going to want the stock market to run hot. He views that very much as a measuring stick for how he looks at how well are we doing. So presumably we're going to have more dovish policy, I would assume in the next couple of years. And with that we're going to see a lot of asset price inflation. It seems to me that all roads lead to bitcoin at this time at least. You can still probably perform pretty well in other things nominally. But if you're measuring that against Bitcoin, your gains aren't going to look as good as they do if your money is in Bitcoin. I mean, is there any like you know, is there any counter argument you, I guess, see to that at this point where you're like, maybe there's a chance bitcoin doesn't perform as well as people think it will.
- [73:10]
Lyn Alden
I mean, personally I just think bitcoin's kind of made for the times or something right now. I mean I look at the deficits and the fiscal situation. I've always said like one of the bearish cases for bitcoin is like fiscal austerity or like responsible government spending. And so like, yeah, like Doge coming in and a really competent treasury secretary who understands these dynamics. You know, I would be like, that's kind of bearish for bitcoin. But then you look at like the structural nature of these deficits and their problems that the problem of the deficits accumulated over many decades and I'm like, even these well intentioned programs and the smarter people can't really fix this. And so that leads me down to Bitcoin again. And so they're going to have to increase liquidity. They're going to have to come in and monetize these deficits. And so when I look at bitcoin, it's like that's the purpose of bitcoin. I mean we talked about this on our last show. Bitcoin's like a, like a mirror for these reckless government spending programs. And it's the, it's monetary properties kind of allow it to do that, given its scarcity and its fixed supply and, and all these things that allows it to be really tied and correlated to, to the liquidity. And so I just think, and given the, how young it is and how it's still growing and it's still early in its adoption cycle, that's why there's so much potential opportunity because not only do I feel like it's built for these times and the value proposition is very strong, it's also very young that allows it to have significant potential price appreciation as adoption continues to grow all around the globe. Because we mentioned the US a lot, but the US is in a better position than all these other countries around the world. Bitcoin is needed even more so in these emerging markets with even more unstable fiscal situations and currencies. And so yeah, I mean obviously I'm bullish on bitcoin, but I really think that it's kind of a, like it's made for the times or something.
- [75:19]
Sam Callahan
Yeah, it's good for turning money.
- [75:22]
Lyn Alden
For turning money.
- [75:23]
Sam Callahan
Yeah. I think, you know, obviously there are multiple assets that can benefit bitcoin. I think we would generally agree is like the best way to do it because you get the absolute scarcity mixed with the fact that it's a young asset. If it was just looking at relative scarcity, we would say, okay, gold's growing by 1.5% a year, bitcoin's growing at less than 1% and long term grows at zero. So should we expect bitcoin to outperform gold by 1% a year? No, because we have a total adjustable market in mind for what Bitcoin could be or at least a range. And we think that a $2 trillion market cap is so small relative to what it could reach. So in addition to merely protecting against debasement, which is kind of what gold's doing, it's actually growing into whatever it's going to become. So I think that's the bullish thesis. And one way I kind of look at any investment is through the lens of market share and dilution. So if you're a holder of the dollar network, there's different instruments to do it. You could hold a bank account that pays you zero. A bank account in a smaller bank that pays you maybe 3% could be holding t bills getting a little bit more. And you have to compare that to the structural growth rate of the dollar supply or all monetary aggregates. So dollars plus say treasuries for example, you can map it multiple ways. And you always ask, is my share of the network if I just hold? So factoring out my new income, because we're just talking about investing or saving, what percentage of the network do I have now and in five years will I have less of the network just by holding and collecting any sort of payments I might be owed versus not. And so if you hold dollars and the money supply grows at 7% a year and you get paid 4% a year, you're going to end up with a smaller share of the dollar network over a given five year period. And same thing with true as gold, except your debasement rate is something like 1.5% per year. But then you also have to ask, is the thing you're holding increasing its like, like market share compared to other things. So for example, someone could hold IBM stock and they're buying back shares, so you're holding a deflationary asset, which sounds good. But then IBM is getting its lunch eaten by all these other tech companies. And so the market share of relevant tech for any one IBM share is decreasing. So when I go back to bitcoin, the main question I look at, okay, what are the, what are the monetary dynamics of the network? So we see the very low inflation rate and the hard cap and all that. Then the next question is, is it the best at what it does and will it continue to capture market share in its, in its like industry or even adjacent markets? And I view yes. So as long as I see nothing on the horizon that I view as disruptive to that trajectory, then I expect both from the scarcity dynamics and then the fact that it's the leading, you know, liquid secure cryptocurrency. And then it, you know, it's better than gold many ways, it's better than the bond market in many ways. It's as more people learn about it, the rational thing is for them, some subset of them to want to buy it. That I generally view as, yes, that that's structurally bullish for bitcoin. And the only time I might be more cautious on it is if it's, you know, we get a crazy euphoric spike. You can look at different metrics like market value to cost basis or something. And then I say, well, okay, now I think it's, it's going to go higher, but maybe, maybe it's going to take a two year break or something. Right. So there are certain moments I could be more cautious, but as long as I think the structural things are in place, I'm bullish.
- [79:09]
Lyn Alden
Yeah, the dilution piece is really important. I think of it like the coma test. Like if I were to go in a coma for 10 years or 20 years, how much will I be diluted as a percentage of the total supply of the network or the currency or the asset? It's one of the reasons that's what separates bitcoin from other cryptocurrencies is because I don't think there's that many assurances that, you know, that the supply, supply won't be changed on you. If I was in a coma for 10 years, and that's just what the history of those other cryptocurrencies are. They change often. And that's why bitcoin is very decentralized. It's difficult to change because of that decentralization. And so if I were to bet on one to go into a coma for 10 years where I'm not going to be diluted and I'm going to maintain the percentage of the total supply, it's going to be Bitcoin. And so that dilution component is so important. And then what Lyn was talking about with basically a competitive moat, I think it comes down to bitcoin's network effect. And all these things we talk about why bitcoin kind of is prone to keep winning into the future. Yeah, I agree. I think those two things are incredibly important to think about whenever you're making any kind of investment. I don't think a lot of people think about that stuff. I think, I think bitcoiners think about dilution a lot, but I don't think a lot of investors do.
- [80:33]
Walker
You know, this is a slight tangent, but it's really interesting. Just speaking of the bitcoin standing kind of starkly against the rest of the, quote, crypto world, you can't be very certain or certain at all that, for example, Trump or Melania aren't going to dilute their Trump or Melania meme tokens. I wouldn't want to hold that in a coma, you know. But even the. I think an interesting dynamic that I see playing out in this cycle right now is kind of this, I don't want to say, like, bitcoin stock meme coin. I don't know what to call it, but, like, you're seeing more and more companies start to announce that they're. They are buying bitcoin for their corporate treasuries. Like you've seen, you know, microstrategy, obviously that's, it's practically a household name at this point because of what Saylor has done. But you're seeing all sorts of, like, really little ones pop up that, you know, again, they don't have anything to do with, with bitcoin, but they're saying, hmm, wow. Whenever a company puts bitcoin on its balance sheet, their stock seems to get a lot more volume and seems to do pretty well. And I'm just kind of wondering if that's like the, that's going to supersede meme coins in this cycle or if we're still just going to have all sorts of meme coin degeneres. I don't know. How do you both see this playing out in terms of. It's now obvious that and Saylor has not been hiding it. He's been very clear about this, that this is his strategy, this is what he's doing. He's trying to accrue as much bitcoin as he can. And people are starting to notice small fish right now, but who knows, maybe some bigger fish along the way. But do you see this kind of picking up pace or do you think at this point, okay, there's a few companies doing it, you get a trickle of them here and there, but it's still going to be more of the exception than the rule. As far as corporate strategy, at least in this cycle.
- [82:32]
Lyn Alden
I think that we're seeing this trend really pick up speed. And I think there's a lot of factors of why. I mean, I think the education level around bitcoin has increased. I think the FASB accounting rule changes kind of help bring down the barriers for these corporations. I think the macro picture, I think people are just more aware of what's going on. And then I think we have a proof of concept. I think MicroStrategy can't look at that stock price and just ask yourself what the heck's going on over there? Right. And so I think all of those factors combined, I think you are seeing this trend. I mean, every single week you see a new company. Now there are. It's like, why is a company actually doing this? Is an interesting question. Because there's some, I feel like that are almost doing it out of desperation and they just want to pump their stock. I think a lot of them even just announce treasury strategies, hoping to just get a little bump in their stock. Because some of them announce a million dollar strategy and then they haven't followed through with it yet. But then some really appear to understand it and are kind of following in the footsteps like the similar scientifics of the world or I think cooler technology is another one that's come on the scene that he really seems to understand that this is a good way to preserve the wealth of his company and as a reserve asset compared to his other options. And the other thing that's like why bitcoin is really good for these corporations is that regulatory component where they can't own more than 40% of their balance sheet in any kind of security without reclassifying as an investment company and bitcoin as a commodity. They don't have to worry about that. And then it goes down to the dilution what Lyn was talking about. I mean, these corporations have to think about their dilution and you think about all the different options like corporations buying gold. Not only would that be a complete headache to try to move bullion back and forth and all the physical problems that come with gold, but also you're going to get diluted over time. And then Treasuries. We talked about all the fiscal problems that are coming. We know that there's going to be trillions and trillions of dollars of fiscal deficits that need to be financed through borrowing and that supply is just going to keep going up. So you're going to get diluted there. Cash, obviously, is not a good place to be in a persistent inflationary environment. And so there's bitcoin, digital in nature, hard, scarce. It's a good reserve asset. And so I think all these barriers are coming down and I'm just kind of waiting for a large corporation to follow suit. I think you can't really plan for these things. I think you're still going to see it more on the margins with these smaller companies. But, I mean, for instance, like, Meta has been on my. It's been on my mind for over a year now because you just look at the voting rights of Zuck, and it's kind of rare for somebody to have the control of a company that size. It's one of the reasons why Sailor was able to execute a bitcoin treasury strategy like he did, and Zuck really could if he wanted to. And I look at Zuck and this, like, weird transformation that we're seeing with him, and I'm like, it kind of seems like he, he's gone down the rabbit hole. Just anecdotally looking at him, he named a goat Bitcoin. You know, I, I just, I look at Meta and I'm like, okay, that could possibly happen, you know, because every single one of these corporations face the same problem and they have a ton of cash. And now you're seeing this, like, shareholder activism start to come up where bitcoiners can really, like, oh, you can just. If you're a shareholder for a certain amount of time and hold a certain amount of shares, you can just propose these things. And then the bitcoin community is so loud that they could actually create a little bit of a ruckus. Normally these proposals just get tossed out, but now you have social media making an uproar about it. I just think you're going to see more and more and more of that over time.
- [86:23]
Sam Callahan
I agree with all those points. I would make a couple other observations that in any given big company, there are bitcoiners, like at the vice president level, you know, they'll like, there's a lot of people like that in companies, and it kind of doesn't matter until they're majority, right? So, like, if you have like nine board of directors and like four of them, like bitcoin, it doesn't really matter until you hit five, unless the CEO or the one with disproportional voting rights is the. Is the one that gets it. So if, if it's Fidelity or mega strategy, you can be super early because it's top down, whereas bottom up inherently takes a long time. But then it kind of. It's like gradually and then suddenly. And I still think it's going to be a minority of companies to cycle that do it out. Of course, the thousands that exist, but they are popping up more frequently now. I think the accounting changes were a big deal. I think another thing is just seeing another cycle. So a point that I made before is that when someone sees like three cycles, not that there's been three cycles, but that they've seen three cycles, that actually matters. And for a lot of people, the first cycle they saw was 2017. And then, you know, because most people have not actually looked at the logarithmic chart or of Bitcoin or they discount some of the earlier small cycles as irrelevant. But the 2017 cycle, the 20, 20, 2021 cycle, and now the current cycle is kind of three cycles of higher highs and higher lows that are all. All in public, really, if you just discount those earlier cycles. And there's only so many times you can kind of say, well, that's a bubble. And then it's dead. Oh, that's another bubble. But that's only because of COVID money printing. And then it's like, oh, wait, it's back again. Despite, you know, high interest rates. You can only dismiss it so many times before you say, well, maybe I gotta reassess. So I think that's another factor that's kind of mainstreaming it. And then I did a piece. I called it a New look at. What did I call it? A New look at Corporate Treasury Strategy. And I analyzed kind of why this is relevant. And among assets that corporations can hold, there's kind of a hard cutoff, which is anything that you expect to underperform your equity, you can't really hold in scale. Like, obviously you hold cash even though it's going to underperform your equity because you need some cash. But you can't just unlimited stockpile gold because gold historically underperforms US equities, ironically, roughly by the dilution rate that it is estimated to have. And so you have to kind of cross the threshold of like, what is an asset that is, you know, going to equal or exceed your own equity? That's not another company's security. And Bitcoin is kind of the only thing at scale that that has a shot at that. So it's not an accident that that's. That's the asset of choice that these companies are turning to. It's the Only thing big, liquid enough, not a security, and then actually has attributes that make it a good treasury asset, at least for part of your holdings. Obviously, the volatility precludes it being too big. If you're running, you know, if you're, if you're trying to run a certain way, you have to have cash as well. But, yeah, you know, it's powerful.
- [89:43]
Lyn Alden
That's what, that's why Elon sold. I think the position size got him. I think he just said, like, oh, I had operating costs, I had to sell. So I think you might have just like, bought too much. But the other thing, like when you read these, like, smaller companies, press announcements, they mentioned the regulatory environment change over the last six months or so. A lot of them talk about the ETF approvals, A lot of them talk about the new administration being supportive. And so that definitely moved the needle as well. Maybe got people interested. And then the infrastructure as well. I mean, compared to last cycle, I think just in general there's more options for these corporations. The infrastructure's matured in the industry in terms of the custody solutions and trading. And, you know, maybe, maybe we weren't ready for it last cycle. I mean, Michael Saylor and Micro Strategy kind of pioneered it. I bet they would say that the services and the vendors and everything are a little bit better than when they started in 2020. And so that's probably going to help kind of push that trend along as.
- [90:48]
Walker
Well, just on the kind of regulatory side of things. SAB121, is this something that you're both kind of looking at right now in terms of, let's say, another big sea change, let's say, in this regulatory landscape?
- [91:08]
Lyn Alden
Yeah, like, I'm definitely, I'm definitely. It basically just made it like, prohibitively expensive for these banks to custody Bitcoin on behalf of clients. I'm also just looking at in general, like, some of the stuff going on at the FDIC and the lawsuits with the Coinbase, and some of these things need to change on a regulatory front. Even the Federal Reserve basically banned these banks from custody in Bitcoin and digital assets. But I think all those things are going to change. I think you've seen just complete pushback now and the pendulum swinging the other way really hard when you have these large banks, they've been wanting to get exposure to digital assets. They've been wanting to build products and services around Bitcoin and they couldn't. They weren't allowed to from the occ, the fdic, the Fed and the sec. And just think about, I mean obviously, you know, I agree with self custody, hold your own keys and all that stuff. There's going to be a huge spectrum of ways to get exposure to Bitcoin and some people don't want to do that. And there's going to be all different types of products and services in terms of lending and borrowing against your Bitcoin and, and bitcoin backed rewards cards that already exists to certain startups today, but it's going to exist from all of these large financial institutions. And just think about how much further along adoption would be if you could just buy Bitcoin in your bank account. I remember NYDIG was building this technology out two or three years ago and they were announcing it and there was on podcast and they were talking about hey, we're going to have basically in every single large bank you're just going to have a bitcoin where you can just buy and sell in there. And now we're seeing from these FDIC letters that it was just completely halted. Right. And I think think about how far a we've come despite these hurdles. And now that these hurdles are gone, think about how quickly the adoption could continue to rise. So like I think the reversal of SEB121 is probably going to happen very, very, very soon. I think it's just a rule that was slapped on. It can just get slapped off pretty easily. And I think some of these other hurdles in terms of operation choke point 2.0 and some like the FDIC, OCC and the Fed, I think large banks are going to get into Bitcoin in a large way. And you're hearing that in Davos, all these interviews. I mean every single large bank CEO is talking about this stuff and I think they all have plans to get in.
- [93:36]
Sam Callahan
I agree. Nothing to add. I think that's all super bullish. And the only thing that I'm not very bullish on is the US government's stance on privacy anytime soon. And I would like to see taxes removed on smaller amounts of bitcoin transactions to improve kind of the flow of nostr and lightning in general that whole space. So I wouldn't hold my breath on that. But I think all the big capital stuff is probably pretty favorable and including institutional scale bitcoin collateralized lending which might blow one of them up. But I think that's all going to be part of the process of growing.
- [94:22]
Lyn Alden
Yeah, I thought nidegg's news around using the funds from the reinsurance business, they have to help lower the price of. And make that whole lending bitcoin lending market more efficient, lower the borrowing costs. Those kind of developments. I think those are significant. And Nydig, I mean, other banks can do that stuff too. And so I think you're just going to see a more efficient bitcoin lending market develop and agree with Lynn's point on privacy. The minimus exemption for bitcoin. I mean, that was in the Lummis Gillibrand bill that I don't think went anywhere. But maybe they'll include that because I think that's important as well. I always thought that bitcoin should be considered a foreign currency because of El Salvador, technically. Right. I think legal tender.
- [95:12]
Walker
One can only hope that.
- [95:17]
Lyn Alden
Makes sense to me. We'll see.
- [95:19]
Walker
I mean, the future is full of surprises. Right? And I want to be conscious of both of your time here because I just realized we just ran to 90 minutes, but it flew by. Drinking from the fire hose of both of your knowledges, anything you either of you want to leave people with or maybe anything from the report that we didn't cover that you wanted to touch on briefly or anything like. Cool.
- [95:48]
Sam Callahan
I think we covered a lot. I think Walker got into Mistborn.
- [95:53]
Walker
I did.
- [95:54]
Sam Callahan
That's pretty cool. I'll give a shout. I'll give my last shout out to Mistborn then.
- [95:57]
Walker
Yes. I devoured all three in the first trilogy. I just finished actually last night, the first book of the Stormlight Archive, Way of Kings, which was about 1300 pages. It was quite a long one. Went through it faster than I thought I would. Now I've just started the second one. It's a problem though, because I'm not sleeping enough now. Lynn, this is, this is what you've done to me. I, like, literally Carla will text me and just be like, you should probably go to bed. It's like one in the morning. Like, you need to be up in a couple hours.
- [96:27]
Sam Callahan
I'm like, I just. I just shield miss. I just shield miss Port. I didn't show Stormlight.
- [96:32]
Lyn Alden
That's why I get. I get overwhelmed with like, how many books there are by this author.
- [96:37]
Sam Callahan
Like, and that's why Mistborn, I always say Mistborn because it's a. It's a trilogy and it's self contained. And sure, there's like later stuff you can read and other verse in the other stuff in the universe, but the trilogy is self contained.
- [96:51]
Walker
I love that story and it's awesome.
- [96:52]
Lyn Alden
I was waiting for like, I was saving it for like a long trip on a beach or something. But maybe I just gotta get into that.
- [96:59]
Walker
Yeah. Yeah. My last flight back from Europe, I was planning to get some shut eye on the plane home and ended up just like ordering coffees and beers the entire time and just reading Mistborn the entire way. Like, didn't look at anything else.
- [97:14]
Sam Callahan
I'm going to Mistborn, pill the whole bitcoin space.
- [97:17]
Lyn Alden
All right, so I mean, what's so great about it? That's. What is it the writing? Is it.
- [97:23]
Sam Callahan
The story that initially led me to read it over a decade ago was that it was known for having a very interesting magic system, which is. And this is kind of the author's specialty is to kind of make magic systems that are like hard magic, which is to say there's like rules. It's almost like alternative physics and characters are then problem solving within that set of alternative physics. And then it's just a pretty cool plot with a pretty cool story and stuff that's cool. And the fact that it's self contained, it's kind of dark, but in a cool way. I just think it's cool. It's up bitcoiners alleys also. It's like anti establishment instead of defeat, like stopping the Dark Lord from, you know, rising. It's like the plot is the Dark Lord already won and we're going to go like, steal from him. Like it's like a kind of. Yeah. Flip stuff on its head. So who doesn't like taking down the Dark Lord?
- [98:20]
Lyn Alden
That's good.
- [98:21]
Walker
It is great. I will second the fact that the magic system within it is just really creative but like firmly tied to the physical world also. So like it. It just, it makes a lot of sense. Like you don't have to suspend too much disbelief even though you are dealing with magic. So I will second Lyn's endorsement and apologize in advance for anyone who also stays up too late or doesn't sleep on planes. But it is well worth it.
- [98:50]
Lyn Alden
Apologize to Natalie.
- [98:53]
Sam Callahan
She would like it too, I think.
- [98:55]
Walker
I think so. I think so. Well, Lynn, Sam, really appreciate both of your times. I'll link your nostr and X and then also this report for anyone who wants to go through. A lot of really great graphs in there. I showed a couple of them, but there's a heck of a lot more. Thank you both for constantly putting out just incredibly high signal content. And yeah, until next time and maybe your next report, you'll hop on again. We'll have to see. We'll make it a tradition. But appreciate all the work you guys do.
- [99:26]
Sam Callahan
Thank you.
- [99:26]
Lyn Alden
Thanks Walker.
- [99:28]
Walker
Thanks man. And thanks to everyone on the live stream. All of your sats are going to be saved, cataloged and donated to Ross when he joins nostr. So thank you all and that's a wrap on this Bitcoin Talk episode of the Bitcoin Podcast. If you are a Bitcoin only company interested in sponsoring the Bitcoin podcast, head to bitcoin podcast.net sponsor or send an email to hello Bitcoin podcast.net net if you are enjoying the Bitcoin Podcast and find it valuable, give it a boost on Fountain a five star review wherever you're listening. Or better yet, share this show with your network so more people can learn about bitcoin. Or don't. Bitcoin doesn't care, but I sure do appreciate it. You can grab links in the show notes to watch or list this show wherever you get your podcasts. Or go to bitcoin podcast.net podcast and you'll also find the links to follow. Follow me and the show on Noster and on X. Bitcoin is scarce. There will only ever be 21 million but Bitcoin podcasts are abundant. So thank you for spending your scarce time to listen to the Bitcoin Podcast. Until next time, stay free.