Doomsday Inflation and a Bull Case for Bitcoin — with Lyn Alden

24:59So if you double your debt, but you cut your interest rate in half, your interest expense still seems quite manageable. And I think people got lulled into a false sense of security that they kind of said, okay, we were worried about the debts and deficits. It turns out we didn't have to worry. We're fine. And now people kind of, I think, the pendulum swung the other way that people are saying, look, what we learned is that they don't matter. But I think the key risk is that our interest rates have now, they bounced off zero. They're now going sideways to up. I think we're in a structurally, like no longer declining industry environment.

25:32And when you have accumulated debts, deficits, and interest rates are just going sideways, let alone up, that offset's gone. And the debts and deficits actually start to matter quite a bit more. And then, as I said before, when that sum of fiscal deficits is larger than the amount of net bank loan creation or even the sum of net bank loan creation and corporate bond issuance, that's just a much bigger factor in the economy. And then in addition, you can get to a point where the Fed rate hikes, they lose their effectiveness to fight inflation. Because if you have an environment, let's say back in the early 80s, where public debt is 35 % of GDP and most of the money creation is coming from bank lending, If you raise rates super high, you do blow out the fiscal interest expense to some extent, but you put a lot more downward pressure on that private sector lending.

26:23And so that tends to be a net disinflationary effect. On the other hand of the spectrum, if you have fiscal deficits are larger than bank lending and you have an accumulated stock of over 100 % debt to GDP on the public ledger, when you raise interest rates, which is what we've seen in the past couple years, you do put some downward pressure on bank lending. But also you blow out the interest expense of the federal government by an even larger total number than the slowdown you did for bank lending. And so it has a less disinflationary effect than it would if you had only, say, 35 % debt to GDP.

27:02And if you go far enough, like if you get to where Japan is and you have something like 200 % debt to GDP, then rate hikes could even be inflationary under certain circumstances because almost none of your money growth is coming from bank lending. It's all coming from monetized fiscal deficits and industry rates increase those fiscal deficits. I'm a Debbie Downer, half glass empty kind of guy. I'm not smart enough to figure out how monetary, you know, the theory that we can keep just spending more than we're making. What you're saying is a potential scenario that how it unwinds is just inflation that we lose bullets in the chamber, our tool against inflation becomes useless because of the skyrocketing interest on debt, which explodes the debt further, which more interest payments, more money printing, because we have no choice.

27:49One, can we continue to do this? Some economists say, yeah, you can continue to do it. Do you believe we can continue to live above our means like this? And two, is the doomsday scenario, just inflation that we no longer have the weapons to fight. So yeah, that is how I describe the doomsday scenario. That's the limiter, is that we get structural inflation that is beyond our ability to fight with all the tools that we're used to doing. Because all the Fed's tools for controlling inflation are really about accelerating or decelerating bank lending. And they really don't do anything about the deficit.

28:23So if the deficit is the source, is the primary source of new money creation, then the Fed's tools become limited and sometimes even counterproductive. To answer your other question, basically, I don't view it as sustainable. I think that these situations can go on a lot longer than people expect, but it doesn't mean that they're sustainable. Basically, this phenomenon is not new to, say, emerging markets. It happens to emerging markets all the time. They have a lot less rope to go down because their liabilities are a denominator currency that they don't control. They're more reliant on external capital.

28:57the U.S. has a ton of road or historically had a ton of road. I think people overestimate the amount of road that it has when industry rates are no longer structurally declining. And so I do basically think that the long-term outcome here is on average higher inflation and inflation that is less able to be controlled by central bank policy of tightening. And that really the only way to try to get a handle on it is to deal with the deficits. But a lot of that is structural. It's basically accumulated decisions over decades and things that are kind of third rails in politics to touch. And it becomes a very hard problem to solve, which is, yeah, I'm not very bullish on the strength of currency or the reliability of bonds as long-term investment vehicles because of that underlying situation.

29:51One kind of background point I would make is that when people talk about debts and deficits in the U.S. and they talk about it being like a doomsday scenario, for people that kind of study global markets, like, you know, I'm in a few weeks, I'll be back in Egypt. I go there every year. They're dealing with something like 40 % inflation right now. And life goes on. It's obviously not great. But the things that people think of as the end of the world are happening all the time in multiple countries, as we speak, at higher magnitude than any of this likely leads to in the near term. So I think that's the optimistic point there, is that there are always things that are more extreme.

30:33There are, people are adaptable, systems change over time, and the end of one system or the switch off from one system to another system is often more of a handoff. and, you know, apart from the biggest tail risks of the world, like nuclear war or something like that, life goes on, right? So it's, I generally don't like the phrase that it's doom, even though it is serious. We'll be right back.

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32:25We're back with Profit Markets. Could you give us your general assessment of the crypto market right now? Are you still a believer in Bitcoin? And how does it compare in your view to other digital assets? Digital assets, yeah. Basically, I've been a bull on Bitcoin as well as stable coins. It's really the two categories that I've found to be high utility kind of signal to noise. I've been very critical in the rest of the crypto space. Basically, when we think about money is, money is largely a ledger. So when people were using gold as money, they were basically relying on nature to provide the ledger.

32:59And we would augment that ledger with coinage and abstraction. But basically, we're kind of updating this ledger by physical possession of gold. And nature's kind of setting the rules for how you can make more gold or how to move around or authenticate that gold. Modern money relies on central bank ledgers. So basically, we trust the Fed to run a ledger. And then banks are kind of layer two on top of that kind of centralized ledger. So we have this kind of two-tier money system, really kind of three-tier when you incorporate fintechs and things like that. So we have this kind of two or three-tier centralized money system.

33:38And the challenge there, so in the U.S., at least for the past half century, we've had it pretty good. Our currency loses value slowly, and we have plenty of investment vehicles to save into. Whereas, for example, when you look at a country like Egypt, they don't have the S &P 500. They don't have, you know, their stock market's not a reliable investment, kind of a wealth building vehicle. They've got real estate, but real estate is, of course, illiquid. So there's all sorts of downsides with that. They can't obviously invest in their own currency in any meaningful amounts because you've got an average of double-digit inflation over a 50-year period.

34:16And so what things like Bitcoin and stablecoins do... And could you just explain what a stable coin is? I'm sure it'll become clear, but... Sure. A stable coin is when an entity holds dollars or things like T-bills, for example. You can wire them money. They will then give you tokens that are redeemable, at least by large entities, for those dollars. And so they're basically like banknotes in digital form. And then even smaller entities that don't have the right to redeem them, they can still trade them around. And the main ability there is that it allows countries that have historically had a heart that desired dollars because they wanted some stable currency that's more stable than their currency, but doesn't have the volatility of gold or Bitcoin or something like that.

35:03It allows them to access dollars more easily and in more digital form as long as they have a smartphone. And so they're very popular in Argentina. They're very popular in Lebanon. They're very popular in Nigeria. They're basically, we live in a world where there's 160 currencies, more or less. They're all kind of central monopolies. So if you're in Nigeria, you've got to trust the Nigerian Central Bank and the Nigerian government and how they're going to manage their currency. The borders are fairly tightly controlled, which is, you know, you can only bring so much value in or out of an airport.

35:36Bank transfers are quite controlled and often done at artificial exchange rates that differ wildly from what the actual kind of market rate for that currency is. And what stablecoins and Bitcoin do is, you know, if there's a Nigerian graphic designer and she holds up a QR code on a video call, I can pay her in whatever money she wants. She could ask for Bitcoin. She could ask for dollar stablecoins. And it goes to her around her local banking system. And she's able to then use that peer-to-peer. She can bring it with her wherever she goes if she ever leaves Nigeria. and she basically has more choice over what money she uses outside of her currency monopoly.

36:16Bitcoin is the fully decentralized, fully scarce version of that. It's the one that's not, there's no central hub. The thing you have to deal with is that higher volatility and the uncertainty of what it would be worth in, say, any given one or two-year period. Whereas stablecoins, the downside is that they are fully centralized. There's some entity that's holding the assets, and you have to trust them. You also have to trust their ability to operate in their regulatory environment. But the way I would phrase it is they kind of serve as offshore bank accounts for the working and middle class rather than just the wealthy.

36:51They kind of just compress the overhead of running one of those systems where if you're in Argentina, you might not trust your own government's ability to run the currency. So you might not trust the banks because in the past, you know, even if you store dollars in them, they can get confiscated away. But they say, well, you know, for small amounts of working capital, I'll trust this offshore entity. Yeah, if you're in somewhere like Argentina or, you know, Egypt, Lebanon, Russia, Turkey, those are places where, comparatively speaking, you're probably going to have more faith in the value of a Bitcoin versus the value of, say, a Turkish lira.

37:27What I don't see, however, is how Bitcoin could serve any real use case for an American today. Sure. So one of the attributes of money, it is that which you hold, even if you don't intend to consume it yourself. That's kind of historically where money kind of came from. So for example, if we hold a gold coin, we're not necessarily intending to melt it down into jewelry or industrial use anytime soon, but we're kind of holding it knowing that it's a useful thing that other people use. Store of value. And as an American, to your point, we generally don't find ourselves troubled for payments or even troubled for savings.

38:01We have no shortage of savings vehicles that are reliable. But if you kind of view it as something that could be useful for billions of people around the world, something like half the world lives under shades of authoritarianism, half the world lives under kind of persistent double-digit inflation and multiple hyperinflations within our lifetime, Bitcoin is something that Americans often treat more as that investment. And it's one that happens to have outperformed the S &P 500, the NASDAQ, almost everything other than NVIDIA over a three, five, 10-year period. So for us in America and Europe, it's often seen as an investment, which I think makes sense.

38:39But in, say, Africa, where there's roughly 40 currencies, or Latin America, where there's roughly 30 currencies, and every one of those currency borders is a friction. Most of those currencies are undesirable to hold. It's something that's useful to them. And therefore, it is an investment for people that kind of understand that there is a use case, even if the use case doesn't apply to them. And like America, I do think that we are running this more structurally high inflation because of the things we talked about earlier in this discussion. But that doesn't mean they have to happen super quickly.

39:10It doesn't mean that things have to end. If you do the rough math, I mean, Congressional Budget Office expects$20 trillion in net treasuries to be issued over the next 10 years. They also assume no recessions. So if there's recessions, that number is probably going to be higher. They generally undershoot the numbers. But let's say conservatively, $20 trillion in treasuries are going to be issued. If you look at how much gold is going to be mined over the next 10 years at current prices that's somewhere in the ballpark of$2.5 trillion. And the amount of Bitcoin that's going to be created at current prices is something like$70 billion.

39:46Now, of course, gold and Bitcoin can change in price to accommodate more inflows if people want to put more money into them. But the point is, basically, if you're just kind of saying, what do I want to own that's pretty scarce? Obviously, good equities are one of the options. Good real estate can be one of the options. Art is historically one of the options, especially for wealthy investors, but also Bitcoin is because it's liquid, it's fungible, it's portable, and it's got a lower kind of new supply growth rate than a number of other kind of liquid investments. So I think from an American perspective, it's often viewed as an investment, whereas in other countries, it could be viewed as a lifeline.

40:28Isn't that the core value proposition of Bitcoin? That over time, every fiat currency has failed because the temptation to think short term results in printing of money and flooding the market of that currency. And that Bitcoin, whether it's true or not, has created the perception that we will stop printing at some point. And no other asset. There's more gold in the ground. There's synthetic diamonds and there's a Fed and presidential cycles that just continue to print more money. At the end of the day, isn't it that they've convinced people we're going to stop mining Bitcoin at some point? Yeah, so basically the rule set of Bitcoin is distributed among the people that run nodes.

41:12It's open source software. And so it's built into the code since inception. So every approximately four years, the amount of new Bitcoin that's generated every 10 minutes gets cut in half. So it's not that mining just one day shuts off. It's that mining starts out at a certain pace, and over time it asymptotically approaches 21 million. So back in April, the amount of new Bitcoin created every 10 minutes got cut in half, and approximately four years from now it will happen again. And at this point, as of this latest halving, the annual supply inflation of Bitcoin dropped below 1%, which is approximately half that of gold.

41:52Gold generally historically grows at estimates of something like 1.5 % to 2 % per year in terms of supply. The typical developed market currency grows at 6 % to 9 % per year outside of extraordinary years. Emerging markets like developing countries, they typically grow at double-digit currency supply growth over the long term. And so among fairly liquid monies or money-like assets, Bitcoin is now a very slow-growing supply. I mean, the way you frame it is very compelling that when you look at the actual gross amount out there, even with its price run up, what you're saying is it's actually the perception of the run up is not the reality.

42:33That because of this halving and a reduction in supply, the asset price is still reasonable. Is that fair? Am I putting words in your mouth? That's my view. And I think the total adjustable market is still notably higher than it is now. I don't know what it's going to do over the next three months. But yeah, I'm bullish with say a two-year view or a five-year view or potentially a 10-year view. I went through a long phase where I was pretty skeptical on the asset. I was like, well, what if another currency is going to be better? Or what if the whole space gets so diluted? But once I saw the network effects really form, once I delved into the technology and why it's designed a certain way, Ever since really early 2020, I've been pretty structurally bullish on it.

43:15And that really continues to be the case, you know, over four years later. So I just want to return real quickly to the macro discussion. And that is, I'm trying to think of a soft landing scenario for what feels like reckless spending. And that is the following. And tell me if you think this is a potential scenario. We figure out a way to raise taxes, lower spending, and our deficit. we get our deficit down to$1 trillion a year. And inflation continues to run at 5%, 6 % a year, meaning in 12 years, the economy doubles, or the notional dollar value of the economy doubles to $50 trillion. And we're running deficits at 2 % of total GDP, which is lower than inflation, which argues that as a percentage of our GDP, inflation starts to go down and the market perceives that, interest rates lower and we're no longer in this cycle of upward inflation.

44:14Is that a potential soft landing scenario? I think so. But the main challenge there is that, and this is kind of unique to the U.S., our tax receipts are very tied to asset prices. It's kind of just especially since the 90s, because a large portion of taxes are from wealth individuals. So people exercising their NVIDIA options. Yeah. And so you'll generally see with a short lag, tax receipts follow asset prices. So if we were to pivot toward austerity, there's a decent chance we would get kind of flattish asset prices. And then therefore, you could ironically continue to widen the deficit anyway.

44:50It's a very hard tailspin to get out of. you'd have to, I think, not just tweak your revenue and spending model, but you'd have to kind of overhaul some of the ways it works, which would make it even harder to do in a very polarized environment. Generally speaking, when countries get out of this, like we got to similar debt levels in the 40s. We had much better demographics back then. We had a much stronger manufacturing base. But basically what countries do when they find themselves here is they generally run financial repression, which is that they hold rates below the inflation rate. It kind of slows down the interest expense of the public ledger and therefore can kind of slow down the money supply growth.

45:30It makes your currency fairly undesirable to outside entities, which is not what we're doing right now. That's what Japan's doing. But I think that's kind of in the cards for the U.S., which is basically that we're going to have a period of time where interest rates are just not really keeping up with inflation. If you're holding currency or bonds, you get kind of gradually devalued. Technology, and part of what disguises the inflation is that we think of inflation as being compared to zero, but the baseline inflation rate is negative because over time, technology gets better, things get cheaper to produce, but they go up in price anyway because of how we run our money.

46:08And so any sort of technological gain also contributes to the possibility of soft landing because as you get better at making stuff, if you're running money supply growth at 10%, but you're 5 % more productive at making things every year, then actual prices on average might only be going up at 5 % per year. That's kind of historically how countries try to grow out of this type of situation, but normally they don't do so without a pretty big currency devaluation along the way. And that generally shows up in whatever is scarce. So generally the high quality assets go up a lot in currency in those environments.

46:45If you get any sort of dislocation in energy production for a period of time, like if you're just not growing or a capex is not happening and you get a currency devaluation, that can show up in higher prices. That's generally what triggers pain in emerging markets is some of their key imports get very expensive. so there are ways to kind of smooth it out over a long period of time but it's very hard to kind of structurally fix it until there's basically a big change in how taxes are done spending's done and probably the overall currency level as we kind of know it now every time we have you on i think to myself why don't we have lynn on uh every week this has been this has been fantastic lynn is a full-time investor, independent analyst, and author of Broken Money, Why Our Financial System is Failing Us and How We Can Make It Better.

47:36Her work has been featured in the Wall Street Journal, Business Insider, Market Watch, and CNBC. And she's also served as a consultant to startup companies, hedge funds, and executive committees. You can find her research at lynnalden.com. She joins us from, Lynn, where are you? I'm in New Jersey. New Jersey. And you say it with pride. Well done. You stay with pride. Lynn, thanks so much for your time. This was fascinating. Thanks, Lynn. Thank you.

48:11Algebra of Wealth. Scott, we spent a lot of time with Lynn discussing the deficit and generally discussing debt. I want to stay on that theme, but switch it to personal. You often say that debt is a double-edged sword. You say, wield it as a weapon, but don't let it cut you. Can you elaborate on that idea? Sure. So there is good debt. And most financial advisors will say to you, you know, debt is the enemy. But the wealthiest people in the world leverage debt. Apple, which never needs to have debt, issues hundreds of billions in debt. And good debt takes on a couple different types of complexions.

48:48One, it's an investment in yourself. A limited amount of student debt in pursuit of a degree that I think, you know, where you'll get the certification, it'll pay off. I borrowed, I think,$15 ,000 to get through business school, which isn't a lot of money. It's been a huge ROI for me. The other type of debt is for assets that will appreciate in value. And that is, OK, I'm buying a home. I can get a mortgage for 6 % and it's going to force me to save some money. I'm going to live in it. And potentially, I think I think that the price may go up at the same rate or ideally more. So occasionally having some debt, if it's low interest and friendly, and you're using the proceeds to invest in something that'll grow faster than the interest rate on the debt, that is what you call good debt.

49:35What is bad debt? Using debt for consumption. I really want to go to Stagecoach because, you know, I love country music and it's my dream to see Willie Nelson and Post Malone. None of that is true, Ed. That's the wrong thing to use debt for. So debt for consumption, I think, is a bad idea because it puts you in a place where the credit markets or these companies will convince you that it's not real money. It doesn't feel nearly as painful. And the temptation, there's so many amazing things that capitalist economy offers you. But just be very careful about getting into any sort of debt for consumption.

50:12Good debt is low interest rate debt that either enhances your ability to make more money in the future, or you can invest in things that likely over the medium and long-term have shown a track record of returns that are greater than that debt. Does that make sense? Absolutely.

50:44the Vox Media Podcast Network. We'll be back with a fresh take on markets on Monday.

51:14The dark flies In love, love, love, love