← The Peter McCormack Show
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- [00:00]
A
Do you believe we're living through a slow financial collapse that the majority of people don't even recognize is happening?
- [00:07]
B
I do, yeah. And people kind of look around and say, why does it seem like everything's more expensive? I'm still earning money, but it just doesn't feel like it goes as far. And a lot of times they're right. Every currency system in the world has to grow or die, at least the way they're currently designed. People feel it not just through taxes, but then through their wages getting debased and their savings if they're holding currency and bonds getting debased. And you kind of keep adding new layers to the system until by the end it resembles theft. The best product Coca Cola ever sold was their bonds, not their Coke. And what they're basically doing is they're shorting the currency. You know, they're literally shorting the thing that you're holding your bank account and that you're saving in. Governments are shorting it, corporations are shorting it, wealthy individuals are shorting it. The system is based on having people hold the currency in the bonds while other people are literally shorting it and the least able to short it. Ironically, those at the at the bottom of the income stack, they're kind of getting the full damage of the inflation.
- [01:10]
A
So they're socializing the debt that the private sector has built up onto the public to protect the private sector to keep the economy going.
- [01:22]
B
Debt, take the risk away and lock in all the gains you've had and socialize the losses. Once you get to the part where there's this much debt on the sovereign ledger, there's really no way out of it other than they're going to default.
- [01:38]
C
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- [01:42]
A
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- [01:43]
C
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- [02:00]
A
is Irene.com Afternoon, Lyn. I think we might be about to make the most important podcast of the year.
- [02:07]
B
Ready? I don't know about that, but I'll do my best.
- [02:09]
A
I think we're going to do it. So, okay. Do you believe we're living through a slow financial collapse that the majority of people don't even recognize is happening?
- [02:20]
B
I do, yeah. And that's actually one of the talks I gave at your conference. Like the what I focused on is people always ask me, like, when, for example, will the kind of sovereign debt crisis like matter? When, you know, we talk about $39 trillion in US debt and all the debt that the UK has in other countries, when will that matter? In my view, it has been mattering. I mean, it's already the case that currency and bonds have underperformed most other assets just because they've been devalued. And all of the kind of the, a lot of the rising populism we see in the US and Europe, a lot of it stems back to basically our financial systems and kind of the imbalances that those have built for years and decades now.
- [02:59]
A
I think a lot of people listening might not even understand how currency works, how bonds work. How would you explain the financial system to them so they can understand the current state?
- [03:09]
B
I would say that it's one giant ledger. So in a given country, the central bank runs a ledger and then it's really a two tier ledger. So the central bank runs kind of the base ledger. And then commercial banks build on top of that ledger and then they fractional reserve currency by lending it out. And so they have something like five times more currency outstanding that's backed by a smaller amount of base money. And so both the central bank as well as commercial banks can basically create more money, although only the central bank can create the base money. And the challenge is all the debt builds on top of that. And you have to trust the runs who, who run the central bank, who run the government to manage that ledger properly. And you know, we think of paying taxes and then the government spends, you know, and does services and stuff, but they almost never kind of, you know, meet the difference. Like they always have kind of not enough taxes and way too much spending. And no matter how much they, they raise, they always kind of have a deficit. And so in practice that gets kind of leaked out into the currency. So they over time they monetize, meaning they create new money to buy some government bonds to create more money in the system. And so people feel it not just through taxes, but then through their wages getting debased and their savings if they're holding currency and bonds getting debased.
- [04:33]
A
And we'd kind of survived okay with this system up until say 2008, some people were able to outperform what was happening with the currency. But recently I speak to a lot of people and everyone said life is just getting a lot harder. And they don't really understand why is this us living through the tail end of the System.
- [04:58]
B
I think that this phase could go on for quite a while. But I do think that we are at the more rocky part of it. And what's remarkable is like, it seems normal now, but the system is actually pretty young. I mean, in the current form, it only really came into being in the early 70s. I mean, it's not that much older than we are. Many, many people watching this have been around since before this current system was in place. Before that, of course, it was based on precious metals. So there was kind of like another layer below everything. Now there's nothing. And even the central banking system itself, it goes back further, but still not that long in the current form. So it's kind of like there's been this grand experiment that the whole world has done. Basically can, as a nation, instead of relying on a natural ledger like precious metals that we don't really have the rules for, we have to just mine it and do things like that. Can we run our own ledger? Millions of people in a country, and of course our politicians, can they run a ledger and sustain it over the long term? And the answer so far is that in almost every country, imbalances slowly grow. And it comes out. We see it in debt levels, but then we do see it usually in rising populism and other issues like that. But I do think that this phase, even though we are far into it, is probably going to last longer than people think.
- [06:14]
A
So we're about 55 years into this current experiment. And when you talk about precious metals and things changing in the 70s again,
- [06:21]
C
I think some people might not even
- [06:22]
A
know what you mean. I think a lot of people will expect this has always been the system, a system of money, but not understand that previously the money was backed by gold. Do you want to explain that?
- [06:32]
B
Sure. I mean, for, I mean, depends how far you want to go back. But basically, for thousands of years, people have wanted something liquid, divisible and fairly scarce that they can use on one side of every transaction. So instead of having to barter for things or just kind of promise to, to exchange something later, you can have a money that kind of serves as one side of every transaction. Just makes things easier. Instead of trying to figure out how much grain I gotta give you for a shelter, for example, it's not really feasible. And for long, you know, for shells were early, like shell jewelry was an early example that many used. But of course, as technology got better and as kind of cultures all kind of ran into each other and some were more technological and they could devalue each Other's money. The world really settled on gold and silver as generally the best kind of natural ledgers, just because they're scarce, they're long lasting, they're verifiable, they're fairly divisible, especially silver. One of the challenges with gold is you can only kind of break it into, you know, a piece small enough that still might be pretty valuable. So that's often why silver was kind of used along with it. And so for, for thousands of years, gold coinage and other types of precious metal storage has been used as kind of a universal store of value and payments. But then ever since, you know, because it's very costly to move that around, to audit it all the time, for centuries we've had layers built on top of that that are representations for gold and silver. And so for example, you have a banknote or you'll have some other account that basically represents this is how many ounces equivalent you have, and you just kind of tell your bank to, you know, debit your account and credit someone else's. And so for centuries ran on that system until all around the world governments got kind of constrained by it. They didn't want to, especially in World War I, they got constrained by how much their finances they could kind of spend while still having that backing. So between kind of the aftermath of World War I and then especially into the 30s and 40s, they started to gradually decouple from precious metals. It wasn't like one individual time. First it was like a devaluation. And then they would say it depends on the country. But they would say things like, okay, so it's still backed by gold, but not for normal people. Like if a large foreign entity wants to exchange some currency for gold, will do that, but not the normal person. And then over time in the 70s, even that last peg was defaulted on, so we can consider it a default basically. So now instead of being based on precious metals and these other layers on top of it, we just have a ledger. It's just a computer system, it's just kind of a list of ones and zeros that we use for our money.
- [09:21]
A
So gold was a constraint on how much money the government could create, more
- [09:25]
B
or less, as long as they wanted to keep it backed. Now even in that system, it was still fractional reserve. And that's, I mean that was kind of the Achilles heel of the whole thing, is that if you have a lot of gold and you give it to a bank, if it's a pure custodian, they'll just hold the gold for you, if you have a safe deposit box, you've got very specific things in it and they can't lend those out because you can come back anytime and get your specific things back. But if it's something fungible, meaning kind of pretty interchangeable, like gold, if you go and deposit gold in a bank, the bank might say, okay, we have a thousand customers, we're holding all these ounces of gold at any given year. Only 10% of the customers ever really want all their gold back. So maybe we could lend some of it out and generate a return on this. And by doing so we can actually eliminate the cost for the depositor. Instead of charging them to secure their gold, we can actually pay them a little bit interest so we can know, get more people to come to our bank and deposit with us, not with our competitor, and we can lend it out. But then the problem of course, is that you have all these IOUs for gold in the economy when all the different banks and custodians are doing this and those IOUs greatly exceed how much gold there actually is. And then the government of course themselves also run into the issue where they, you know, they spend more than they tax, so they build up debt. And eventually when both the commercial banking system is kind of over leveraged and when the government's over leveraged, they kind of say, okay, we messed up. But it's due to this other factor that you can point to war, you can point to something else. And you say, well now every IOU is only worth half as much gold as it was before. And so you kind of do these devaluations.
- [11:10]
A
So it's the ill discipline of government, its inability to keep to a budget which is devaluing the money.
- [11:16]
B
Yes, that and just the. I would actually say it's even more fundamental than that. Basically ever since, and this is where it gets a little technical, I've argued in my book Broken Money that we're really kind of ushered in the modern age of money was the telecoms. As soon as we had the telegraph, the telephone, as soon as we could do long distance information transfer, which is basically the late 1800s, we opened this door where you could do fast transactions around the world, but we had no way to settle value quickly. So prior to the all the telecommunication technology, information couldn't really flow much faster than people could move around. And so transactions and settlements were roughly the same speed and you only had so much use for intermediaries. But in the kind of the modern age when money can flow around the world at the Speed of light. But gold is very physical. It's hard to audit. It gave a ton of power to those middlemen, those banks, those central banks, and then the governments that are attached to them, and they've been the ones that are kind of settling, they say, okay, well, we'll hold all the gold, and if you want to beam money around, just tell us and we'll send it wherever you want to go. And people trust that. And so over time, both from just the fractional reserve nature of the system, as well as governments being unable to balance their budgets, you get major inflation over time. A given year might not feel that bad, but occasionally during crisis, like a war or a lockdown or something like that, it'll kind of come out all at once. And so people kind of slowly get rug pulled from not just their savings, but also their wages. Basically everyone who has a contract, whether it's a business setting their prices or a person having a wage, all of that kind of like weakens over time, partially from the government, but also just because the system itself is kind of designed like that.
- [13:13]
C
So is this a.
- [13:14]
A
Is this a failure of design? Is it a failure of humans? Or is it just operating as a system exactly as it should?
- [13:24]
B
I think. I mean, most things go back to a failure of humans. We're imperfect. And part of why a government can't kind of meet its budgets is because, of course, people want a lot of things they want to. In an ideal world, you don't pay almost any taxes, but you get a ton of services. So people, if you say, okay, we have to balance our budget, what do you want to cut? Especially in the core, things that they want. They usually don't vote to cut things, but then say, okay, well, we'll raise your taxes. Then they say, no, we don't want to pay more taxes either. So they kind of obfuscate it by debasing over time. I think the other one is just every money I mentioned before, people had looked around and said, what can we use as money? Every money does have a certain limitation. And for gold and silver, it's their speed of movement. It's to some extent, their audibility, their divisibility has some limitations. And so most financial innovations in history are kind of attempts to make money move around quicker. And even things we don't consider like technology because they're so old, like coinage is a type of technology that allowed for quicker verification of money. You know, you put it into a standardized size, you put ridges on the edge. So kind of evidence that no one shaved it and made a little smaller than it should be. Then things like the printing press, they allowed us to have it, drastically reduced the cost to give someone, like a kind of a verified document that says, okay, this is a. It's issued by a bank. You get a certain amount of gold or silver attached to it. So most attempts in history are trying to kind of minimize the frictions. And I think the current one, it's not an accident that, like every country in the world uses this system, but it has flaws. And at the end of the day, it's. I mean, it's. It's a bunch of people managing a ledger together and disagreeing.
- [15:16]
C
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- [16:16]
A
So the ridges on the coins, I didn't realize this is that downstream from the Romans clipping the coins and debasing
- [16:23]
B
it, it'd be interesting to say where the first ridges. I mean, there's coinage experts that probably tell you exactly what region, but, I mean, Romans weren't the first two debase. And, you know, back then, debasing was actually hard because, you know, let's say there's like a million coins throughout the Roman Empire. I don't know how many there were, but let's say there's a million gold. Gold or silver coins out there. Silver was popular back then. Let's say they have a million coins and they're taxing in, you know, 100,000 coins a year, and they're spending out 120,000 coins a year. So their, their vaults going down if they want to devalue the coinage. They can't just snap their fingers and devalue the coinage. They actually, they have to tax it in, remelt the coins, put some, like, base metal into them. So they say, okay, instead of 95% gold or silver, now it's 85% gold or s. Silver. That, that lets them spend more back into the economy than they taxed. And over time, of course, prices go up because there's more coins floating around for a similar amount of goods and services. And now so they would do that debasing. But then even once those coins are out there, like if you're, if you're doing business on, you know, an exchange or like with a merchant, you know, it might look like it's a normal size, but they could shave a little bit off the edges and just every coin they get, they just kind of shave a little bit and take 5% of it off. And you wouldn't really know if you had like, a smooth edge. So the ridges basically show that this coin is roughly the size that it was issued at without being basically fraudulent.
- [17:59]
A
So it seems to me then the biggest problem is the misalignment between the political cycle and money in that to win an election, it's going to be very unpopular. To come out and say, well, we're going to cut significant amount of spend, we're going to balance our books, you have to make kind of vague promises. We see this, say with the Green Party in the UK at the moment, they say, cut bills, tax billionaires, there's no policy. But people who don't understand money think, well, that's a great idea. But that appears to be the misalignment which is leading to currency debasement. Because once the reality of governing hits a political party, they either have a choice of raising taxes, cutting spend, or borrowing more money. And they always tend to default to the borrowing more.
- [18:44]
B
Yeah, and I think one of the, if, if you kind of point to what is, aside from war, what is kind of a key reason why this, this, these debt levels have gotten so big and debasement's been so significant is that when they designed their kind of social insurance systems, their entitlement systems, they assumed that every generation is going to be kind of bigger than the prior generation. You know, we had a long stretch of global population growth, so they just assumed, okay, so the new generation, when they Work, they can pay for the older generation when they retire. But then the problem, of course, is that throughout the developed world, fertility went down, people had fewer children. And so we got to the point where the population's not growing like it was before. So you have a fewer number of young people that are kind of in a, a burden position to support now a much aged population. So it's top heavy. They, they kind of built these. It's basically a Ponzi scheme at the end of the day to always kind of pay the prior generation from the, from the younger one. And that only works until you slow down. And then all these politicians kind of run into issues where it's very impoperate to cut those programs, very popular to raise taxes to pay for those programs. And so it tends to come out in the form of debt and then debasement as well.
- [20:01]
A
So the system itself does appear, say in the UK and maybe in America, it does appear to be a stable system on paper, but people are increasingly feeling like they're falling behind. How does that happen?
- [20:17]
B
Well, it can happen in a number of different ways. I mean, fundamentally like in the U.S. for example, after World War II, so much was damaged around the world that Americans in particular and UK was also. I mean, they were more damaged by the war than the us but compared to much of Europe, they were at least, you know, in better shape. These places kind of things felt really good. But then over time, as kind of the rest of the world kind of recovered and caught up and as kind of big dislocations were addressed, people had more competition from overseas that I think put a lot of pressure. In addition, automation, anytime you have a new technology, it kind of changes the balance between certain types of workers and, say, business owners or consumers of those goods and services. So automation was a big factor. But yeah, at the end of the day, the reason kind of people feel like they're left behind is partially because they're in a more competitive world than they used to be. But then two, as all those forces we talked about occur as banks fractionally lend out their currency, as governments spend more than they take in and monetize the difference. At times there's just more and more currency units in the system and people's wages, let alone their savings. We always think of like debasement and inflation as impacting people's savings, but it also impacts their income because, you know, if you agree to pay someone £50,000 a year to do something, the burden's now on them every year to try to grow that number just to keep up with inflation. So £50,000 will be worth less, you know, next year than it is this year. It'd be worth even less two years from now. And in the developed world, money supply historically grows by something like 7% per year on average. That's a non crisis here. It's like over, over the, over a multi decade period, it usually averages around 7%. Developing countries, it's quicker. And if you look at what people are able to increase their salaries by every year, it might be 2%, might be 3%, might be 4%. It's rarely 7% unless they got a major promotion. Basically if they're doing similar work, they're unlikely to keep getting these 7% wages.
- [22:35]
A
Or a bonus.
- [22:36]
B
Or a bonus. And then so after say a five year, 10 year stretch, they're getting a smaller share of the money supply than they were five or 10 years ago just by having their salary grow more slowly than the underlying debasement. And people kind of look around and say, why does it seem like everything's more expensive? I'm still earning money, but it just doesn't feel like it goes as far. And a lot of times they're right. It generally doesn't go as far.
- [23:02]
A
And it's hidden sometimes through products becoming smaller, shrinkflation, ingredients changing. In certain products, there's different ways they try and hide the inflation, but they can't always do that.
- [23:16]
B
Exactly. And there's also just genuine productivity growth. So on average we get better at making things than we were decades ago. Our technology improves, our processes improve. And so if you had say, a fairly stable money supply over time things should get cheaper because we're more efficient at making them. And that's generally, if you compare most prices of things over the long arc of time to gold, gold can generally buy you as much or more than it did centuries ago, just because over time you've gotten more efficient at making things, but not much more efficient at mining gold.
- [23:51]
A
Just so people understand that's because gold is scarce and if you divide the amount of money there is into the gold, you will get a better share of the gold.
- [24:02]
B
Or basically if you take all the goods and services in the world, they're growing more quickly, there's more things you can buy, and gold itself is only growing at a pretty slow rate. So it makes it so that each kind of unit of gold generally lets you buy more goods and services than you could a long time ago, not way quicker, but over time it gets a little bit more, things get more affordable in gold terms, the problem is that for, for fiat currency, it's the opposite. Fiat currency grows more quickly usually than goods and services grow. And so there's more dollars, there's more pounds chasing a slowly growing pool of goods and services. And when times are good, like when we're getting way more productive, you might have say 7% money supply growth, but things get say 3% more efficient to make. So kind of their natural, kind of, let's call it their gold relative price goes down a little bit. So it feels like say 4% inflation because you get 7% more money supply growth, but 3% kind of more stuff or more efficiency in buying this stuff. And so you kind of feel that 4% difference, but then over time that keeps compounding and then it really kind of comes out all at once when you have setbacks in productivity. So either because you reach some sort of technological ceiling or, or more commonly because you have war, war is negative productivity. You're literally spending money to blow other productive things up. And then in today's world we have blockages for energy and things like that. And that's where years of kind of hidden inflation can kind of feel like it comes out all at once because we're no longer having those productivity offsets for the ever growing amount of money supply.
- [25:42]
A
So whilst we hear the headlines of GDP growth, inflation, the rise is inflation. Is it really actually more important that people understand what scarcity is and what productivity is?
- [25:58]
B
I think so, yeah.
- [26:00]
A
We failed to do that.
- [26:02]
B
I mean it depends on the country, the schooling system, but I think on average one of the biggest misconceptions is people, they think that inflation is just the price increases. When I think the bigger picture is that it's the money supply growing only being offset a certain amount. And so they're kind of showed one number, that's inflation. And if you earn interest, you can keep up with that inflation. But really the actual number is bigger and that's a hidden number. That interest on your bank account or your bonds doesn't generally keep up with that real number.
- [26:38]
A
So what is the real number? Is that hidden from us? Is this the changes to the, the money supply growth?
- [26:43]
B
Yeah, and it's, it's, it's public knowledge, but it's not common knowledge. I mean you, you can generally look up any country's money supply growth, but this is not how we're wired, it's not how we're taught to think, it's not how we're wired to think, it's
- [26:56]
A
not how the government wants us to think.
- [26:58]
B
Probably not.
- [26:59]
A
Probably not, No. I don't think people truly understand scarcity, which is, I think, a significant problem. And we should probably talk about, there are ways and people who win significantly within the system. If we talk about the expansion of the money supply, coming from the government obviously expands the money supply. But the majority, as I understand it, the majority of the expansion of the money supply comes within the banking system. And those who are able to take on large amounts of debt and acquire the assets when inflation hits, they're the people outperforming the market generally.
- [27:34]
B
Yes. One of the kind of the statements I've used before is like the best product Coca Cola ever sold was their bonds, not their Coke. I mean, if you, if you look at some of these, some of these companies, whether it's Coca Cola or let's just pick a British one, like British American Tobacco, whatever, there's US Companies, British companies, many of them have been profitable literally for decades straight. They've never had a year without profit. And you look at their balance sheet and like, let's say Coca Cola has $40 billion in debt. And it's like, why does, I mean, Coca Cola has been around forever. Why do they have debt? And literally the answer is because they, they can, they choose to. It's an arbitrage. They can issue bonds, let's say before this, you know, last few years of inflation, they could issue bonds at like 3%, 2% for five years, 10 years, 20 years, sometimes even longer. I mean, Disney did like a century bond once. They can issue these bonds, lock in these really low borrowing rates. And what they're basically doing is they're shorting the currency, right? So the current supply is growing at let's say, 7% a year. They're borrowing it, only paying 2%, 3% on their bonds, and then they're using it to buy more valuable things. Maybe they make an acquisition, maybe they buy their own stock back. And so over the long arc of time, the winners are those that are able to short the currency for the lowest rates for the longest amount of time while owning scarcer things, real estate, business equity, that kind of thing. And so, you know, they're literally shorting the thing that you're holding your bank account and that you're saving in governments shorting it, corporations are shorting it, wealthy individuals are shorting it. Even people that, you know are, you know, know, middle class or upper middle class and have property, they're generally shorting it. And the, the least able to short it are, ironically, those at the, at the bottom of the income stack that don't have assets that, that, you know, are, aren't, you know, going to get good loan terms. And so they're kind of getting the full damage of the inflation because they, their wages are getting devalued. What little savings they have are getting devalued, and they've not really gotten onto that asset treadmill of owning scarce things and shorting the abundant things, which is currency.
- [29:50]
A
They probably don't even understand how this works. I think a lot of people don't truly understand how it works or know how they can even move from one side of the game to the other.
- [30:01]
B
I think. Well, I think, yeah, most people, I mean, on average there's any like, there's a lot of things I don't know about multiple subjects. Right.
- [30:08]
A
Just.
- [30:08]
B
Just focusing on the money system happens to be one of the things. I know many other people, they're an expert in something else and knowing the details of the financial system are just not what they focus on. But unfortunately, it's such an important area that it affects everyone. And I think the other factor, of course, is even when you know the system, if you start or basically from scratch, it's hard to kickstart that process. Once you have assets, once you're shorting currency attached to those assets, it tends to snowball. It's pretty easy to maintain it, but it's hard to kind of go from zero to one. That's where, you know, people have to work super hard, save a lot of extra money, potentially get, you know, retrained or educated in something to have higher income or take the risk of starting a business that's, you know, a more challenging set of steps that of course, once they get past that, they're, you know, things get a little easier.
- [31:04]
A
But like I say, there's essentially two players to the game. If everybody understood how it worked and was trying to short the currency and long the assets, would that, would that just have essentially crashed the system? Does it require peasants on the other side having their life debased to allow it to work?
- [31:24]
B
Pretty much, yeah. I mean, basically the money only works as long as people are holding it. And that's also why developing market currencies fail more quickly, is it's harder for them to kind of maintain the system in a stable way. And there's not a lot of reason for them to want to hold the currency. They'd rather, you know, if they're going to own currency, they'd rather own dollars or pounds, not, you know, Pesos. And so entities don't want to hold the currency and so it collapses quicker. But yeah, basically the system is based on having people hold the currency in the bonds while other people are literally shorting it and growing it. By shorting it, ironically, when you, when you, when you borrow money or when a bank lends money, it's creating more broad money. It's literally levering up the money. You're putting more broad currency units into the system. So by shorting it, you're also helping to grow the number of units and you're benefiting. And those that are unlevered, that are just earning that money or that are storing some of that money in a savings account, they're the ones that are losing.
- [32:27]
A
Well, so I'm just remortgaging my house at the moment. I've been offered a rate, I think it's about 4.3%. And so over that period we would expect the money supply to expand 7 to 10%. So I am essentially in that scenario shorting the market. I'm a net beneficiary.
- [32:43]
B
Yes. And that's every year.
- [32:45]
A
Every year?
- [32:45]
B
Every year over the course of say a 25 year term, the money supply might be growing by 7, 8% a year or more. And you're getting, you know, you're paying 4 or 5% interest. And that's, I mean that's not even the most extreme example. I mean corporations can, can borrow even less for less interest than you can. But yeah, the closer you are to that kind of source of money creation, the more you can short currency and not get so over your skis that, you know, if the house price goes down a little bit or you lose your, your, your income's temporarily impaired that you'll default as long as you kind of don't get over leveraged. That's historically been the winning strategy is short currency, own scarce things. And yeah, there are people on the other side that are unable to do that and they're getting the negative effects of that.
- [33:31]
A
But that is the vast majority of the voting population. I think there's a small number who understand the system now to arbitrage it. There are others who may be net beneficiaries without realizing it, they just own a good home and they do own assets. It hasn't crossed their mind. There may be those treading water and a large number of people who are falling behind, which is why we get the populism. I think if enough people understood it, you might even get a revolution potentially.
- [34:02]
B
Unfortunately, every time currency fails they usually, we have now kind of decades and decades of instances of this, unfortunately. And whenever a currency fails, people temporarily default to a currency that hasn't failed yet, dollars, for example. But then they just restart the system and they, they kind of get enticed to trust it again and they go back to trusting it. And then years and decades go by and another set of politicians is in power and the same thing happens. So unfortunately, people kind of were almost like stuck in the same loop.
- [34:36]
A
It's like an infinite loop. Unless you had a politician who came out who could win popular support by explaining how this works. Milei has done it to some extent. How much have you looked at what he's been doing?
- [34:50]
B
I mean, he, he is knowledgeable on economics. That's, that's true. I think the challenge is that whenever someone kind of enters that system, especially because most places are not dictatorships, someone can't just come in and just do whatever they want. There's, there's other people that have power. They, and they all are kind of working with each other to figure out how we're going to, can we raise that tax, can we cut that issue, can we cut that spending there? So even if you ask him, would you like the money supply to grow? He'd probably say no. But Argentina's money supply is still growing just because the fundamental system is still functionally similar, even though you can dial some knobs around to slow it down.
- [35:32]
A
So the system as it is, really, it should lose its legitimacy because it is a system of extraction upwards from the poorest and middle class to the wealthy.
- [35:43]
B
Yes. Or at least the money part is the fiscal transfers. And that's partially why many governments have these fiscal transfers. It's an attempt to kind of offset that. So in the US it'd be Medicaid, it'd be food stamps, it'd be various types of say, free public schooling, for example. That's an attempt to kind of offset that siphoning that's happening. And people, that part's more visible. They see the kind of the top down flow, but they don't see that behind that top down flow there's this sucking sound, there's this value being siphoned. Yeah. From the bottom to the top.
- [36:22]
A
But is it to offset it or is it to quell rebellion to, is it part of bread and circus?
- [36:31]
B
I mean, this goes. Governance goes back lily millennia and before kind of the current era when information couldn't flow as quickly, when governance was generally smaller on average, people were more local. There's only so many services they could provide. In the modern era, people have kind of come to expect more. We kind of added, used to be the basic kind of function of government was to provide security. The lord would say, okay, you're all peasants, I'm the lord and I'm going to tax you and I'm going to set the rules, but I'm going to make sure that the barbarians don't come and burn down your place and your farm. Right. That's my end of the bargain. And that's kind of the, whatever country you look at, that's kind of the basic arrangement that's been around, you know, for thousands of years. And really in this kind of modern era do we have, we added more and more services to it. We say, okay, well we're going to do schooling, we're going to do more infrastructure. And then mainly what governments are now is military and insurance. You know, it's like they operate the military, but then they also have these big, usually social insurance programs, whether it's healthcare, whether it's retirement systems. They operate these big ledgers and that's the part that people see and that they vote for.
- [37:56]
A
So they are things that they create to ensure the system can continue. But this is a system where the engine of it is debt.
- [38:06]
B
Yes.
- [38:07]
A
So what happens if we stopped the debt part? Would it collapse or would it reset?
- [38:14]
B
Well, this goes back to the flaw of how the system is designed. Whenever money is lent into existence, the interest on that loans is not lent into existence at the same time. And so the way it works is basically that the system always has to grow or it collapses.
- [38:30]
A
So it must grow.
- [38:31]
B
It must grow. At least the fractional reserve banking system kind of having a base ledger and then this fractional reserve banking system layer on top of it that is designed so that it must always grow or it dies. Now it can go a year or two without growing. I mean there are occasional years where money supply could be flat or slightly down, but over a multi year period, especially a multi decade period, but even a handful of years, every currency system in the world has to grow or die at least the way they're currently designed.
- [39:06]
A
Right? So if it has to keep expanding, else it collapses, then wealth disparity will have to keep expanding until it collapses. Hence revolutions and governments have to keep making promises to keep the system alive, otherwise it collapses. So our choice is either a continuation of the rich get richer and the poor get poorer or collapse.
- [39:30]
B
For the most part, that's how it works. In theory, it depends on what you're spending money on and who you're taxing. Not every country has the same level of wealth concentration. I mean, Japan's an example where they don't have very high wealth concentration on average. And if you look at what the government spends money on, they're not really spending much on military. And then even though it's a very old society, they actually spend pretty. They keep healthcare costs in check. And so the combination of things makes it so that even though their current supply keeps growing, they don't really have that growing wealth divide because they've toggle the numbers in a way that is fairly harmonious there. So other issues compound, like including savers getting devalued and all this. But you don't necessarily see that wealth concentration that we see in the United States, that we see in parts of Europe.
- [40:25]
A
Is there a structural limit to this system beyond the collapse? If we end the expansion of debt, but the expansion within the world that we do have, the expansion, is there a structural limit?
- [40:39]
B
I mean they can always add zeros. I mean that's literally like Turkey or Iran. I mean when you go through major, major inflation and the numbers reach into the comical. It takes a billion units to buy a bottle of water. They just shave six digits off the end and kind of consider it a reset. And so that's. It works until nobody wants to hold that currency anymore. And then it literally can just restart if people don't have another alternative.
- [41:07]
A
And how does it restart? Like if you, if you look, I'm sure you've done this, you look back at history when debt levels have reached the say, I mean, compare the UK or the US what tends to come next? Yes, we can go a little bit further, but what happens when it does break? And how, how can it break? How will people even know?
- [41:27]
B
So usually it breaks in two phases. First it breaks in the private sector and then it breaks in the public sector. So in the private sector, because you have this fraction reserve banking system, you build up more and more and more leverage until you have, and every time you have like a minor contraction, because it must always grow or die, they will stimulate to try to keep it growing again. And so you go through these like cycles of debt where you kind of like get leveraged and then you kind of deleverage a little bit and then you get way more leverage and you deleverage a little bit. So you have this kind of higher highs and higher lows.
- [42:00]
A
Is that Q in Q T?
- [42:02]
B
No, that's just, that's interest rates. Okay, Just banks Lending money, people borrowing money, corporations borrowing money, growing money supply. And whenever you know that lending slows down, they cut interest rates to try to encourage more borrowing. And occasionally when it gets overheated, they'll raise interest rates, try to slow down lending. So they're moving the knobs on this centralized system and they're always growing it. And the problem is when they hit zero interest rates, so over the course of say from the 80s, 90s and 2000s, they would always kind of cut to lower interest rates than the prior cycle, encourage even more debt to build up. The problem is when they kind of go all the way to zero interest rates and debt is extremely, households, corporations and banks are extremely levered relative to the base amount of money in the system, way more IOUs for money than there is money, it starts to kind of crumble. And even when they cut interest rates to zero, or in some cases slightly negative, it still doesn't solve the problem. And that's when you get that kind of popping of that private sector debt bubble. And then historically what happens almost every instance is the government says, okay, we're not going to let this all collapse. We're going to, we're going to do big fiscal injections, we're going to spend a lot of money, we're going to monetize it, meaning we're going to, we're going to do qe. That's where QE enters the picture when we're going to create more base money, buy our own bonds, spend more money into the system. And what that does is that kind of gradually transfers debt from the private sector onto the public sector balance sheet. It's sovereign debt basically, so that the US is indebted or the UK is indebted. And it kind of does partially de lever the private sector. But then it's all on the public ledger now. And historically when that gets extremely levered, there's really nowhere for it to go. A government's almost never going to default on units that can print itself. So it just prints way more units and it defaults through purchasing power. And then if they manage that poorly, it spirals out of control and literally hyperinflates. The money becomes worth nothing. In kind of developed market history, they'll generally do like a partial devaluation. So they'll say double the money supply, devalue the debts, but then they kind of get the wheels back on the track and they say, okay, now we're going to stabilize. And then they start that whole multi decade process again.
- [44:28]
A
Nothing stops this train.
- [44:29]
C
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- [45:35]
A
so they're socializing the debt that the private sector has built up onto the public to protect the private sector to keep the economy going.
- [45:47]
B
Yeah, and I mean, and one of the. It always tends to work out. Of course, it'll depend on the country. But like for example, in the US when we had the 2008 crisis, banks were bailed out and bankers, they had one year of not really getting bonuses and there were layoffs in the industry. But then they go right back to making a lot of money rather than kind of facing the consequences of having levered themselves so much. And that's, I think, where the system becomes truly toxic is we talked before about how the winners in the system are the ones that are shorting the currency, owning scarcer things. And that does come with some degree of risk. But the worst scenario is that when they're doing that for years and decades, they're constantly winning. And then finally a crisis happens that would actually punish them for having leverage attached to their assets. The government comes in and says, no, no, we're going to stop this from happening and we're going to bail you out. So it's like we kind of lock in, we kind of take the risk away and lock in all the gains you've had and socialize the losses is there.
- [46:55]
A
When you look at what's happening now, is this comparable to what happened in the 1940s. Pre 1940s, it's similar.
- [47:02]
B
And that's why these debt cycles have certain patterns that can be watched. I've argued before that the 2008 crisis looked a lot like the Great Depression, meaning that was like the peak of the private debt bubble. Whereas what we're seeing now in this more public debt level issue looks a lot more like the 1940s. And I was making that comparison. I mean, that was before Russia invaded Ukraine, so before we were even at war, let alone Iran now, but before there were any major kind of wars, I was saying, like, the system now looks like the 40s and it's going to likely play out similar in terms of inflation and debasement. And I was like, hopefully we don't get, you know, an actual war, but, you know, now we're even in that territory too. But yeah, functionally it looks a lot like the 1940s.
- [47:54]
A
So is war helpful?
- [47:57]
B
It, I mean, it's helpful as a distraction sometimes. It provides a reason to, you know, instead of policymakers saying, hey, we messed up our own ledger, they generally want someone to blame. In a developing country, they'll often say that outside speculators in the currency broke our currency. It's not our fault, it's an outside force. And in developed countries, yeah, it's often war. It's often justifying it through that type of activity.
- [48:26]
A
Do you think it's fair to say this system is a system of theft?
- [48:32]
B
I think. Well, I don't think that people got together and it was like a piecemeal thing that kind of grew over time. Every time you're adding something new, you're kind of solving a prior problem. Which was, for example, merchants in Venice wanted ways to move money around quicker. So they started using a shared ledger, an account, to just make that process easier. And then you want your account to talk to some other account account so those banks link up. And all over time you have more and more banks and then you want them to be able to move money around quicker. So then they go and make a central bank and you kind of keep adding new layers to the system until by the end it resembles theft. And occasionally there is nefarious kind of design as part of it. But a lot of it is just come out of solving prior problems and creating new problems along the way. And just the incentive structure isn't great. So a lot of decisions don't really come home to roost for 20, 30, 40 years when the politicians are out of office and the Voters that voted for that can no longer. Enough time's gone by that they can't link what's happening now to votes they or their parents made decades ago. So I think a lot of it comes down to separating in time the, the downsides of decisions from those decisions being made.
- [50:01]
A
So, so it is then just an experiment. We're in an experiment.
- [50:05]
B
We are, yeah, we're in like a 55 year experiment. We're, we're a little longer. When you, when you kind of go back to central banking and it's an
- [50:11]
A
experiment, we could argue that has failed on a level of fairness across society.
- [50:19]
B
I mean, I think so. I think to steel me in the opposite view, people would say, well, in this past 50 years, most accounts of poverty in the world have gone down. So the number of people living in extreme poverty has gone down. Even being poor in a developed country looks different than it did 50 years ago. And so they said, well, look, the system worked. My general argument against that is really what worked. A huge piece of human flourishing over the past 50, 100, 150 years has been the discovery and usage of hydrocarbons. One barrel of oil has the energy equivalent of thousands of hours of human labor. So by harnessing coal, gas, oil, and then hydro and nuclear and all that geothermal. But really the hydrocarbons component is what's new and huge in the world that has done a lot to alleviate poverty. And the current system's kind of been alongside that. And people say, well, that's evidence that it's working. And I would say, no, it's our technology, it's our energy that's working. And the financial system itself is just a layer on top of that. And I would say it solves certain problems. I mean, money moves quicker than it used to, but it has these other failings. And unfortunately it kind of rewards central policymakers and gives them, I think, undue levels of power. I think it's one thing to have a taxing and spending authority. I mean, that's something that just if people dissolve the government, the first thing they do is make another government. So governments, it's like a vacuum. Like there, there's no like there. The phrase is like nature abhors a vacuum. So if you somehow make a vacuum, air will flow into it and just do its best to, you know, kind of go where there's nothing. Same thing's true for government. But I think where you get that toxic mix is when you have that spending and taxing authority. And then they're also managing the underlying ledger. So they can always just debase the difference. And invisible is basically it's an invisible tax on top of their normal taxing and spending authority.
- [52:33]
A
So the anti federalists were right in
- [52:36]
B
their prediction by arguing that as things centralize, it creates problems. Yeah, I would say, at least in the money system. Yes. The more you centralize it basically the rug pull capability increases. So like going back to that, we talked before about roman debasement. It was actually a long process to debase because they had the tax in the coins, melt them, re spend them into the economy. But in the modern system they can literally just overnight, with stroke of a pen, double the number of currency units or increase them by 30% like they did during for example the lockdown stimulus. And it centralizes power in a way that I think is it doesn't work with the kind of incentives that politicians have in place to generally optimize things on four or five year terms.
- [53:24]
A
And I think from my understanding it's fair to call this a Ponzi scheme. But all Ponzi's eventually break. I remember when I went to Colombia, I met somebody from Venezuela. He explained to me how overnight his entire savings were lost. And I think look, there is a slow bleed of people's savings, the slow bleed of their purchasing power because their wages don't keep up. But there is a general risk of hitting severe devaluation. This country, we've talked about Egypt before where they halved the currency overnight, I think twice. Is it now? Recently?
- [53:57]
B
Yeah, they've had a number of basically, you know, very quickly cutting the currency in half and you know, dramatically increasing the supply.
- [54:06]
A
But are there scenarios where that kind of situation could happen in the UK across Europe or the US and how would people know it's coming?
- [54:15]
B
The closest example would be the world wars. That was, you know, because it was such a damaging time for productivity and such a. You got the combination of lower productivity and way more currency because no government could make that math work with taxes. So they just kind of spent money in the economy for war. Now because developed, the main difference between a developed country and a developing country, obviously poverty and other factors are a big thing. But from a financial perspective, developing countries, they often have to borrow in dollars or sometimes euros or other currency, but usually dollars. And so they have this added kind of instability on their system, which is they actually owe debt to foreigners that they can't print. And so they're running their own kind of flexible ledger while they're kind of borrowing quote unquote hard Currency. And so they're operating these currency mismatches. Developed countries have the advantage that, that they're mostly borrowing in their own currency. So they have that lever where they can just kind of usually gradually disperse a problem. They say, okay, the numbers aren't working, but we'll leak that out over many years through debasement and people won't really notice too much. And really when that gets called out is usually some sort of productivity damage happens. War is the biggest one. It could be in ages past. It could be a famine, it could be some sort of. That's when the problems that have built up all get called at once. So if you avoid war and avoid things like that, the system could generally go a lot longer than you'd think. But as soon as something unexpected happens, that's generally when even a developed country can look like a developing country in terms of its currency and bonds.
- [56:02]
A
So this could go on for years? Decades.
- [56:07]
B
Yes. I mean, one of the, I mean the kind of, the biggest example is Japan. So they're further out on the aging curve than anyone else. Now they have the advantage of, they were extremely productive in the 80s, the 90s, 70s, 80s, 90s, kind of the whole, kind of the post war period really. So they build up one, a huge current account surplus and huge domestic savings. So even though they have a lot of debt, they actually own tons of foreign assets. And so they're kind of now in that harvesting phase where their public finances look really bad. Their trade surplus is not what it used to be. But because they've got that generation past of having worked so hard, they've actually got a lot of reserves that they can kind of gradually tap into and they can extend that time very, very, very far before like a major crisis or, or financial reset occurs. With Europe and the US we probably don't have quite that long of a Runway, but I think, you know, the system can last for decades longer unless we blow it up with war and energy shortages and stuff.
- [57:17]
A
But it will mean financial repression.
- [57:19]
B
Yes, and that's so historically, when you, when you have that private debt bubble, it pops and then you rotate it onto the public ledger. The last kind of process there is, they do financial repression, meaning they hold their interest rates kind of artificially blow the growth of the money supply. So people are kind of holding currency and bonds. Sometimes they're even forced to. They might do capital controls to say, okay, like in the US we literally banned the ownership of gold, which is insane, like for the land of the free. But you couldn't Own a benign yellow metal because it was competition compared to what they wanted to do with the currency. So they kind of force everyone to hold the currency, they don't pay interest that kind of meet the growth rate of that currency. And over years or decades they will try to basically siphon that value away and kind of reset the system.
- [58:12]
A
So why do they continue to raise taxes if they face this anyway? We were seen in the UK discussion around wealth taxes, raising capital gains tax to the level of income tax. They've talked about exit taxes because we've had so many people leave the uk if taxes are so unpopular, why don't they just do this all through debt?
- [58:35]
B
Because the taxes are basically a way of slowing down that process. If in theory just the government just didn't do any taxes, it just spent all the money into the system every year either through debt or even just debasement, borrowers would stop lending money to them because they say your deficits now like in the US we would have like a $7 trillion deficit instead of a $2 trillion deficit. I don't have the UK numbers on hand, but it'd be a much larger deficit. Way faster bond issuance flood the whole, you know, all the buyers would just have way too many bonds on their hands to buy so they basically there'd be a buyer strike. So the central bank would have to buy the country's own debt and therefore you'd get way faster inflation. So taxes are kind of like the speed break that helps them balance the equation and it's. So it ended up being a multi tool thing. They directly tax, they pull in currency. So that's the transparent part. And then the other transparent part is because taxes are quite unpopular. The last part is what they do with debasement.
- [59:42]
A
This is like a, like a slow motion horror movie. It feels horrific because I, I know what you see and you see it with a lot more clarity than I do. But I see it as well and I've seen the impact, but it doesn't feel like there's any way out of it. Is there any way out of this? I mean, if you were a policymaker lim, what would you do?
- [60:05]
B
There's really, once you get to the part where there's this much debt on the sovereign ledger, there's really no way out of it other than they're going to default. And then the question is what does default look like? Is it all at once? Is it nominally? And in a developed country it's almost always through debasement. You never default on the it's not like the government says, okay, we owed you dollars or pounds that you're not going to get back. They say, okay, we're going to pay you all the dollars in pounds, but we're going to sharply devalue them because we're going to print so many more of them.
- [60:36]
A
So default is socializing the debt on the, socializing the debt onto the voters.
- [60:46]
B
Yeah, defaulting. We often think of it as just failure to pay back, but effectively it's failure to pay back the value that you borrowed.
- [60:56]
A
So government purchasing power.
- [60:58]
B
Yeah, yeah. I mean, yeah, when a private sector entity defaults, they just can't pay it back. But when the currency printer itself defaults, it's, they pay it back, but it's just, it buys you less food and real estate and insurance and, and health care and whatever than it did when you, when you lend them that money in the first place.
- [61:15]
A
And so that's, that's a guarantee to happen now.
- [61:18]
B
I mean it's already happening, so it's been happening or the rate at which
- [61:23]
A
is going to happen is going to increase.
- [61:26]
B
I think we could see another like Covid level type of that because that was like a very fast rate right there. That was a. In the US and in many parts of Europe, in many parts of the world, we saw a pretty rapid rate there. We've since slowed down. But if enough things kind of go wrong at once, you could get back there even higher. But I think in general it's apart from kind of crises kind of pulling forward, I think it'll be probably more moderate than, than many people think and just be stretched out over a very long period of time. And I think that goes back to the incentive issue that because the system is designed so it's actually really hard to totally collapse. It allows it enables and incentivizes that kind of intergenerational decision making where a politician can do things now and kick the can down the road for someone to solve decades later on another generation. And I think that's kind of the, that's why things get so indebted is because short term decision makers are kind of optimized to, to optimize for the their term, their next two years, three years, four years, five years at most a decade.
- [62:39]
A
But can't, can't we just tax billionaires and fix this?
- [62:43]
B
I mean, it depends. It depends on, I mean generally speaking in the U.S. for example, we have a system where as you make more money, you generally pay more taxes. Some people, they can make so much money that they actually pay a lower tax rate than someone in, say, the upper middle class or kind of the lower end of the wealthy spectrum. So there are certain kind of loopholes that could be addressed. I think it was Gundlock, the CEO of Double Line Capital. He was, you know, he's a billionaire. He's like, you know, before you boost my tax rate from say 50% to 70%, how about you go after the person who's somehow paying 15% and get that up to my level before we, we just keep getting the numbers higher. So I think that there's a discussion around certain loopholes that can be fixed. So you don't have someone who's making more money than someone else, but paying less somehow. But the problem is once you are already taxing wealthy people a certain amount, it's, it's, if you raise it above a certain level, they have a much higher incentive to want to leave that jurisdiction. It's less incentive to start a business and hire people in that jurisdiction. And so that's kind of the effective limit of, of how far they can go.
- [63:59]
A
Could they not, if you had a smart government, couldn't, couldn't they work much harder at just reducing their spend levels, cut spend from certain departments or cut whole departments, try and boost productivity and try and even balance the books to begin with? If they slowly paid off the debt, even if they spent 100 years doing it, could that work?
- [64:25]
B
In the past, there have been instances where that can work. It's always very unlikely for it to work. And one of the, I mean, especially in the modern time, one of the challenges, and they encountered this in the US when they did the whole DOGE program, the idea was, you know, we're going to find all this fraud and waste and cut it out. And there are, of course, massive pockets of fraud and waste. But when you look at, say, the U.S. system, and this is true for most developed market systems, the vast majority of the spending is the social, like the social insurance programs, basically, the retirement, the healthcare system, that kind of stuff, as well as the military and the amount of money in the US Was actually going to say federal workers and federal, like buildings and things like that. That's actually a pretty small percentage of the pie chart. That's why trimming that was challenging because they committed not to touch the big stuff. So they're trying to kind of squeeze pennies where they can at the other stuff. But actually the core issue was the, those programs themselves are just large.
- [65:29]
A
Well, it's like here in the uk, the National Health Service, the pensions, welfare. It's a large, it's the largest sector of public spending.
- [65:39]
B
Yes. And that's, I mean, I don't know current polls, but it's unpopular to cut.
- [65:43]
A
Well, the NHS is very unpopular to cut. Anything that's seen as a cut to the National Health Service is seen as selling off the NHS to the private sector by rich people. It's never seen as a way to make it more efficient. Okay, so like I imagine we talk about Steve, we don't actually know who
- [66:04]
C
Steve is, but Steve's got a couple
- [66:06]
A
of kids, he's listening to the show right now. He's terrified. His wages haven't really gone up for the last few years. Everything's getting more expensive. What do you advise to Steve or even young people who are looking out there at this and thinking, what opportunity is there for me? What would you advise people?
- [66:25]
B
That's the challenging thing.
- [66:26]
A
Yeah.
- [66:28]
B
Especially once someone has kids. Everything gets more complex. Of course, when someone's young, you can tell them the hustle.
- [66:33]
A
Yeah.
- [66:34]
B
You know, work, work extra hours, get ahead. But once you kind of have all these other like, calls on your time, it's hard to do that. So I mean, really the only advice is to, you know, take, take appropriate risks where you can try to find ways to boost your income, try to cut spending on, on unnecessary things. There's, there's kind of research that shows certain types of spending really boost your happiness and other types of spending don't. You're just kind of keeping up with the Joneses. You're, you're just kind of spending for appearance's sake.
- [67:09]
A
Flash car.
- [67:10]
B
Yeah. And of course, if someone happens to be way into cars, then, then that might give them a lot of joy. But for a lot of people, it's. Fixing pain points is what really kind of boosts happiness. But at the end of the day, there's really, there's, it's hard to get out of it unless you can get ahead, meaning that you can boost your income, keep your expenses in control and then invest the rest into assets that then kind of start lifting you off of this financial repression scenario because you're now, you're now the asset holder that your things are getting inflated, you're shorting the currency, you're in good shape. But that's, you know, that's a multi year process to get there.
- [67:51]
A
Well, usually at this point I say to people, you should really research this thing called Bitcoin. And it's quite interesting because the history of the show used to be a Bitcoin show, and it hasn't been now for 18 months. And we have new listeners who you can see they switch off when we start to talk about bitcoin. They don't understand it. They think it's a scam. They think crypto is a scam. As you know, I think you're the most brilliant macro analyst in the world, yet you are pro bitcoin. So what would you say to these people?
- [68:20]
B
I would say that when we kind of analyze, like when people around the world look at money they want to hold, what they're ultimately looking for is usability and scarcity. And so there's a, there's a hierarchy out there. So if like people in Egypt, for example, they would rather generally hold dollars than Egyptian pounds because dollars lose value less quickly. So the Egyptian pound, the supply of those might increase by an average of 20% a year. Every year, just the number of pounds is going up by 20% a year. It's a huge runaway growth. So they say, I want to own dollars. And they can't put their finger on why. But the dollar is holding up better. And a lot of it's because the dollar is only growing by 7% per year on average. So instead of holding this thing that's growing by 20%, they want to hold the thing that, that's growing by 7%. And then gold is often people that, that, you know, they live in the us, they live in the uk, they want even scarcer money, they will often buy gold and that, you know, the supply of that on average, based on most estimates increases only by about 2% per year or even a little bit less around the whole world as, as kind of miners, you know, bring more out of the ground, refine it. We rarely ever lose much of the existing gold we have because it gets repurposed. So the supply of gold is growing by say 2% a year. But then the cost for that is volatility. So you can say, okay, I don't want to hold dollars, I want to hold gold. But in exchange for that kind of longer term appreciation, they have to take on the risk that it might be, be worth less than three years or five years, even though it's growing at a slower rate because it's volatile, more people buy it, more people sell it, it can get in a temporary bubble, it can get depressed. And so they can kind of start taking that kind of near term risk to store their value quicker. And of course real estate is an option, high quality equities are an option. And bitcoin one of the advantages is that there's zero long term supply growth. So if developing markets, currencies are growing by double digits a year, developed market currencies growing by high single digits a year, Gold's growing by 2% a year, Bitcoin's not growing at all after a certain point. And so as long as the technology functions and as long as the network effects make it so that one currency kind of captures most of the market, instead of tons and tons and tons of currencies out there, they're holding something that's truly scarce and that gives them certain resistances to debasement. With the cost being that just like gold can be volatile, Bitcoin, being a smaller and newer and less understood asset, is even more volatile. So it can go down sharply in a short period of time. But that's in exchange for holding something that's scarce and actually does protect your purchasing power over the 17 years that
- [71:16]
A
it's existed, it's come back full circle to understanding scarcity. Yes, okay, fine, the thesis. I understand the thesis. I hold Bitcoin. But even at that moment, how do you help people understand it's money? Because we grow up understanding money. As a kid, we're given a till with coins and a little pretend shop, and we go to the shop with our parents, we want a toy car or a chocolate bar, they give us some money, we get to use money, and money just becomes part of our life. Even if it's digital and even gold, we've come to understand and accept it as part of the economy. We know people wear it, we know it goes into products. How do you legitimize Bitcoin as this weird invention that turned up, is it 17 years ago, is all digital, uses these terms like sats. And how do you legitimize Bitcoin to people?
- [72:13]
B
I think one is just describing it as another way of running a ledger. Right. So we talked before about how our currency systems are basically ledgers. So the central bank literally has effectively a spreadsheet, and then commercial banks build a second layer of spreadsheets that are on top of that central spreadsheet. And it's literally just a bunch of people in a room running this ledger. And Bitcoin is similar, except instead of like a council of a handful of people running that ledger, it's designed to be decentralized. So the rule set for how new coins are created, how coins are kind of transferred from one entity to another, that's all kind of distributed among the users of that currency. And Then in order to move or add units, it takes energy to do so. So Bitcoin uses proof of work. So instead of like a. With a fiat currency, you can just snap your fingers if you're the policymakers, and you can just add a lot of currency units to the system. With Bitcoin, no one has that capability. Even the creator of it, if he's still around, no one has that capability. And so it's effectively just a way of using energy and code to run a decentralized ledger. And in the beginning, I think it was right for people to not trust that it would be legitimate because there have been multiple attempts at kind of private currencies in the past. The technology had to kind of show over time that it actually is stable. A system can seem like it's stable for a little while and kind of work until eventually some flaw just grows and then it eventually cascades. So I think it being around for a while, the legitimacy comes partially from the Lindy effect, meaning that for many types of things, the longer it has existed, the longer it will continue to exist. That's true for most things other than life forms, because we have kind of an eventual end date. But whether it's a language, whether it's a cultural norm, or something that if something's been around for a while, there's usually a reason it's been around for a while. It's proven its stability through multiple kind of periods. And Bitcoin's only 17 years old. But that's in terms of technology, that's pretty old. And the longer it goes on, the more it proves that there is this decentralized ledger. It is working. It has pros and cons, just like any other type of money. But it is an alternative that people can hold it, they can hold it in their own custody, and no one can debase it. And they just have to withstand the volatility that comes from holding that, as well as having some understanding of how the tech works, even though you don't have to know every detail. Kind of like how we don't have to know every detail of the financial plumbing system to use dollars or pounds.
- [75:05]
A
So it's certainly worth spending a little bit of time forgetting everything you've heard if it's negative. And understanding Bitcoin a little bit, I
- [75:13]
B
think in general, understanding money is really important.
- [75:18]
A
What other.
- [75:18]
B
Whatever other work we do, whatever skill sets we have, we can't get away from money. And it's kind of impacts on us. And so I do think it pays to study Money to some degree, to spend some hours to understand how money works. And that by extension includes Bitcoin. I think, I think any sort of reasonable study of money in the modern age. You can start with commodity money, gold and silver and other types of commodities. Then you can get to ledger money, fiat currencies, nation state money, bank money. But then in the current world, studying Bitcoin is, I think, really important because it shows you what the alternatives are.
- [75:57]
A
I mean, you mentioned your book earlier, Broken Money, by the way, go and buy the book. And if the current system is broken, if the money is broken, could Bitcoin be a system that replaces it?
- [76:09]
B
I think it has the properties where it could. It would have to be much, much larger than it is now, and that would dampen the volatility. But really there's nothing that would prevent it from working other than people. I mean, it's. If you look at, I mean, the way it scales, Bitcoin can do about as many transactions per year as fedwire. So as the US centralized system, it does about as many transactions per year, ironically, as Bitcoin. And yet it settles. And it sounds like a fake number, but a quadrillion dollars a year settles on the fedwire system. And of course, on top of that, you have all the banking system and things like that. And so Bitcoin has the capability to scale through layers. Those layers have already been developed. There's always kind of more research being done. But there is a layered stack that works. And I don't think people return to it until the existing systems fail, or at least like at Mass. I mean, obviously early, early adopters do, but yeah, it's a functional system that can work instead of a centralized Ledger. At least 17 years of history shows us this. I think we need more time to prove it, but so far it's working.
- [77:26]
C
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- [77:46]
A
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- [77:47]
C
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- [77:51]
A
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- [77:53]
C
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- [78:01]
A
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- [78:03]
C
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- [78:19]
A
more question, then I want to talk about your book, your new book. Okay, so if we are living through this slow systemic decline that most people don't even yet recognize, what would you say people should be paying attention to on a daily basis right now?
- [78:39]
B
I mean that's. It depends on what they do, I think. I mean, to end on a slightly more optimistic note, the financial system itself is in decline. Meaning that we've built up all these high debt levels in our system mainly through intergenerational promises and the combination of a generation promising itself something and then not having the population growth that has made that as possible as they thought it would be. And now kind of the chickens coming home to roost as it were. But underneath the surface, I mean technology on average gets better over time. People, you know, people have a lot more options now than they did decades ago. In many parts of the world, at least most parts of the world, like there's a lot to be grateful for. Not everything is in decline, even though our financial system is. And you know, people can get kind of trapped into the social media bubble and doom scrolling, but when you go outside and you know, focus on your health, focus on your family, focus on what's good in life, you know, hopefully there's light at the end of the tunnel.
- [79:52]
A
One more question on this. Have you looked at AI as a potential fix to this? Could that lead to the productivity boom and solve these financial problems?
- [80:03]
B
Well, so the short answer is that the more productivity you have, the more it extends the current system before you have a major inflationary reset. Whether it was blue collar automation with the manufacturing automation, AI is basically that for like more white collar type of work. It is a productivity boost over time, but it doesn't fundamentally change any of the things we talked about. And of course it creates winners and losers. It gives people a lot more optionality to start businesses at a lower cost because now they have more tools available. It allows people to save money on things that used to be expensive to do. But also it, you know, there are people whose salaries are, you know, at risk of being devalued because they, they were trained in something that software can do more effective than it could say five years ago. And so they might have to shift to new Things. So AI doesn't just magically fix any of what we talked about. But that's why policymakers, that's why they, a lot of times they don't focus on addressing things now because they hope that, that by growing the ledger at a moderate pace, they hope that enough technology will come online to keep disguising the inflationary kind of money supply that they're, that they're causing by having these productivity offsets. You know, if productivity can go up by 5% a year instead of, say 3% a year, it can, it can hide that 7 or 8% money supply growth more effectively. But of course, then it shows up in, in other pockets. I mean, you can't, you can't just print new homes. You can't print health care, you can't print energy. And software has kind of been a cheat code. Like when you look at old kind of science fiction movies, generally speaking, they overestimated how good our aerospace capabilities would be. They overestimated a lot of our mechanical growth of things. But they underestimated how powerful in many ways computers and screens and electronics could be. That's the part that's kind of surprised to the upside for, for many decades.
- [82:08]
A
Amazing. All right, let's talk about your new book. I have a copy. The Soul Guard Incident. Yes. Yes, I have a copy. I'm saving it for when I go on holiday. I've gone back to reading books from audiobooks, actually.
- [82:19]
B
Really?
- [82:20]
A
Yes. Yeah. Because, you know, I found with an audiobook, you don't pause and replay paragraphs. And I was finding that I was listening to something, you know, and I was like, I didn't understand that. And then I was trying to rewind can get to the point. And I realized with a book that you just take your time on a paragraph. I've been rereading a lot of books I've read previously, so I'm going to read this when I go on holiday. But you've gone from writing about broken money to a novel.
- [82:47]
B
Yes, I think, I mean, because broken money, it's about the past, present and future of money, but the majority of it is the past and present. It's basically analyzing what money is, how it works, what some of the future options are to try to. You know, we talked before about how a lot of people don't know how this works. And so it does its best to educate people. This, you know, speculates about the future. And it kind of takes certain trends, extrapolates them and sees how they could go awry. It could, you know, so is this
- [83:21]
A
the sequel to Broken Money?
- [83:23]
B
Weirdly, you could call it that. I mean, for the most part, I mean, people need hobbies. I've used the phrase before that no one should write a book unless they feel that they kind of have to. Broken Money. I didn't write it to make money, per se. Almost anything else I could have worked on would have a better return than sitting down in the tedious process of writing a book. But it was like the foundations of the structure of that book just built in my head, and it was too distracting not to write it. And this. I've had this story just bouncing around in my head for over a decade, and I was like, I don't know, when am I ever gonna have time to write it? But eventually I prioritized it. I think part of what happened was technology. Now that we have AI technology is catching up to what I envisioned in the book. And I was like, if I don't write this soon, instead of being science fiction, it's gonna be like historical fiction. So I was like, I gotta get it out.
- [84:16]
A
Was it harder or easier to write the Broken Bunny?
- [84:19]
B
Harder because it required new skill sets With Broken Money, I mean, I've written well over a million words of nonfiction.
- [84:28]
A
Wow.
- [84:29]
B
And so putting a book together like Broken Money, while it was a new challenge, it wasn't like a totally different type of writing. It was just kind of taking my existing writing, my existing ideas, and just making a very polished version of that. Whereas this required, you know, learning fiction prose, which is not the same as non fiction prose, and kind of just polishing up on skill sets that I didn't have before. I had the story in my head. I had kind of the. I had a good grasp of, say, pacing and character development. But for me, the hard part was how can I actually write it effectively?
- [85:05]
A
Have you sold the film rights?
- [85:07]
B
No.
- [85:07]
A
Yeah. And you put a young me on the front of.
- [85:12]
B
Kind of looks like.
- [85:12]
A
I wish I looked like that. Still, Lin, some new listeners to the show won't know that we've known each other a long time now. Can't remember the last time, the first time we spoke, probably six, seven years ago. And I've probably interviewed you like 15 times. But it's a real pleasure having you here in the studio. And thank you for coming to my conference. I wish you the best with this. I can't wait to read it and let you know what I think. Do you want to tell anyone about anything else, your amazing newsletter?
- [85:35]
B
No. People can. Yeah, they go to lynalden.com, they can check out my books, Broken Money or the Stolgard incident. Thanks for having me on. Always happy to. Always happy to be here.
- [85:43]
A
Thank you for coming, and thank you to everyone for listening. We'll see you soon.