TIP760: Dollar Dominance Decline w/ Lyn Alden

24:02Check it out at plus500.com. Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Let's say every day your business is late to AI. You fall two days behind. The competition is only moving faster, so how do you keep up? Fortunately, there's NetSuite Next. You probably know NetSuite, the AI-powered business management suite that securely connects all of your data, financials, inventory, commerce, HR, and CRM, in a single source of truth, trusted by over 43 ,000 customers. NetSuite Next is the next huge leap in how business gets done because AI is built into everything you do.

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26:12With Shopify, nothing stands between your idea and a real business. So go make it one. Start your free trial at shopify.com slash tip. Start your free trial at shopify.com slash tip. All right, back to the show. Yeah. And Lynn, thank you for teeing up my next question, because I'm curious to hear how you think the US should use dollar sanctions, if at all. And it might sound a bit controversial saying, if at all, like, if you have the dollar, why wouldn't you use that? And so there's this interesting dynamic where the more you use a weapon in some situations, the less useful it becomes. And so famously, the US I ran off from the global dollar system, also SWIFT, and Russia saw that.

27:04And whenever they hit by some of the same sanctions back in 2022, they already built up some reserves in gold and in the one, and they also expanded SPFS. Preston Pyshyshkoecki And I still think the Russians were probably surprised by how many sanctions they got hit by, but it looked like that they did anticipate at least some sanctions. And so if we fast forward then and say, okay, so what about China? Well, they've certainly accelerated the internalization of their currency. Today, over 30 % of goods and services are done in yuan, and it sells more than 50 % of cross-border receipts. So that also includes financial flows in their own currency.

27:46And perhaps with everything that's going on in China, perhaps a lot of that would have happened in any case. I mean, I can speculate that some of that has been speeded up because they've seen what happened to Russia. But perhaps you could outline the advantages and disadvantages of weaponizing the dollar and what policies would achieve with outcomes, short and long term. Right. I think we opened it well, which is the more you use it, the more you weaken it. And then also the bigger adversary you target with one, the less likely it is to be effective. So where it historically has worked somewhat well is when you pick a smaller pariah state and you sanction them, you're basically cutting them off from the world's biggest ledger.

28:25You're adding all sorts of frictions for them to trade with other countries, extra costs, risks, things like that. Even the effectiveness of those have been somewhat constrained. I mean, how long has North Korea been under sanctions and their regime still operating or same way with Iran, these kind of countries, Venezuela? So there's even, I mean, people can debate around the effectiveness of even those types of sanctions, but clearly they ricochet back into the US less severely than when they try to either use them more frequently or go after a bigger entity like Russia. During the opening phase of that war, I mean, I saw people say, you know, Russia's only this share of GDP, global GDP.

29:00It's kind of like Italy. That's not a giant deal. But not all GDP is created equal. And especially, I mean, when it comes to economic size, in many cases, purchasing power parity, GDP matters more, because that's kind of the amount of actually goods and services they can bring to bear. Another thing to look at is just energy production or electricity generation. These kind of harder metrics of an economy, I think, are a better descriptor of their size, especially when it comes to war, but also just economic weight as a whole. A place that's got a decent GDP because of tourism and services is different than a country that has a big GDP because of energy production, arms, raw commodities, all sorts of metals and stuff that the world needs.

29:42And if even 10 % of those metals goes offline, it's like a kind of catastrophe for the world. And so I think we were less effective there than many people thought. And to your point, where I think it surprised Russia was I think that Europe got involved more than Russia would have guessed. So I think they fully expected the US to sanction them. I didn't think they expected Europe to go as hard, given that intertwined energy situation we talked about before. And one of the ramifications was, like I mentioned that Europe used to price a lot of its Russian gas trades increasingly in euro. Of course, when that went away, one thing that China and Russia did was they increasingly priced them in China's currency.

30:20So what was kind of a loss for Europe was a gain for China in that regard. And it's in many ways out of necessity. If they can't use the sanctioned ledger, well, they have these other big ledgers they always kind of wanted to use anyway. And now it's like, instead of just doing over the next three years, let's just do it now. And so that's kind of the situation we found ourselves in. And basically, as you're no longer the biggest trading partner, that's another giant factor. So it used to be a couple of decades ago, the US was the biggest trading partner with the vast majority of countries in the world.

30:50Over the past 20, 25 years, China has greatly eclipsed us. The vast majority of countries, China is a bigger trading partner with them than the US. And there's still a handful of countries we have bigger deals with, but it's China. And so when sanctions fly, when things like that, the U.S.'s ledger is just weaker than it used to be in this regard. And so I think we are kind of past our prime in terms of sanctioning ability. But again, I don't view maintaining dollar dominance as the number one variable to optimize. Because as I talked about before, there are pros and cons to having an artificial demand for your domestic ledger.

31:31There are certain winners and certain losers. And we've had 40 plus years of one side winning and the other side kind of manufacturing and the things on the wrong side of this kind of hollowing out of our industrial base losing. So in some ways, losing dollar dominance is not a bad thing. I think the bad thing would be losing it while trying to gain it. Like if you do everything in your power to maintain it and it gets taken away from you, that's kind of like you're pushing into the wall and the wall vanishes. It's better to start easing away from the wall so that by the time the wall's not there, you're standing on your own two feet.

32:08So what I worry about is not losing dollar dominance. It's losing it inelegantly. Another analogy I've used is typically when an empire gets too big, instead of drawing back gracefully, some sort of the leader saying, humbly, we have gotten too big. Let's pull back something more sustainable. They often try to spend all their blood and treasure maintaining every border they have as the barbarians are knocking on too many gates at the same time. And they kind of fall back weakly instead of falling back from a position of strength. So if I give advice to policymakers, it'd be something like that, which is a lot of this is structural.

32:50It's inevitable. A lot of it's not even a bad thing. And it's mostly about how it's handled and whether it's prepared for correctly or not. I absolutely love that you say that, Lynn. And it's also incredibly challenging because you really need to understand it so well whenever you are on the other side of it. And in today's world, most things just have to fit into a 30-second clip. And so it seems like, of course, you want US dollar dominance, but then you're saying, well, yes, but also no. And if you are going to lose the dominance, how are you going to do it? I was about to go on a long rant about the UK and Egypt and everything that was going on.

33:40Sort of like whenever you have that pivotal moment, we're like, oh, we got a new sheriff in town and it's the US. It's incredibly difficult to do it gracefully because you're getting used to it. You saw what happened after the Second World War, and it was not graceful. I don't think it's controversial to say that at all. It happened very fast and probably a lot faster than what the UK thought, which is also why it happened the way it did happen. Then I wanted to talk a bit more about China and I wanted to talk about swap lines. I have this fascination with swap lines and I don't necessarily know if it always hits home, but it's interesting.

34:21So China has extended more than$600 billion worth in its domestic currency. So by definition, this is not in dollars, but people are familiar with what that is. But it's more than 600 billion, it's more than 4 trillion yuan. And they've extended that to 32 central banks. And they're not used significantly because by definition, you generally don't use a swap line unless you really need to, typically in a state of crisis. But it is a signal that they're building up their own fiscal plumbing around the legacy US-led system. The ECB has increased their swap lines geographically and the type of facility that they're not offering.

34:59And so I'm kind of curious to hear from where you're sitting, which role do you expect swap lines to have in the three major currencies over the next decades-less crisis? Yeah, good question. I talked before about how trade deficits are mostly how the reserve currency gets out into the world for the world to use. During crises, because at any given time, there's more debt denominated in that currency than there are units of that currency floating around. If cash flows dry up for any reason, let's say 2020, or any sort of other major economic contraction, there suddenly becomes a shortage of the reserve currency, let's say dollars in this case.

35:38And so another way of getting dollars out there temporarily is swap lines. and that's not giving them out in a similar way that trade deficits are. It's loaning them out until the crisis is over and the music keeps playing. Any sort of debt-based system is kind of like musical chairs where it works. There can be more kids than chairs as long as the music's playing. And when the music stops or slows, that's when something is a problem. And swap lines are meant to, when the music gets off, to bridge the gap so it doesn't become a crisis until the music starts playing again on its own. So that's kind of the main purpose.

36:09For China, because they run structural trade surpluses, they don't really get a lot of their currency out there. So I mean, that's part of why we don't see a much larger share of Chinese currency in reserves is because they're not spewing it into the world. They don't really want to replicate the exact US system. They just want to denominate a lot of their own trade in their currency, which they're effectively doing. So I think swap lines are for that purpose. It's mainly for those countries that have a lot of currency debt relative to their units floating around in crises. Because China doesn't have a ton of that, it's not surprising to see that swap lines are not greatly used.

36:45One thing I think we could see over time is that we have this Gordian nod I mentioned before of$18 trillion in dollar-dummit debt outstanding in the world. And for some of the dollar bulls, that's viewed as this invincible thing. There's nothing that can get around that. Well, one of the things that can get around it is that countries can kind of refinance their debt in another currency. So say China has some dollars, you know, as their reserves and elsewhere, because they've run such surpluses with the US and others, they've gotten a lot of dollars. And, you know, if there's smaller entities, smaller countries that are struggling with their dollar-dominated debt, especially if the dollar gets too strong or otherwise they want to change their orbit, China can offer to pay off their dollar debt in exchange for having it now in their currency.

37:33So it's not that they paid off their debt, but they basically swapped the debt domination of their debt. And there's a certain capacity to do this, but that could be something we see along the margins, whether it's swap lines helping with that or other types of contracts. I think that's kind of more the multipolar playbook. Now it could happen in Euro too, but again, I think that's kind of the weakest of the three major currencies. China's certainly more kind of outwardly engaged in all this type of stuff. So I do think that you could see around the margins that kind of shift toward the Chinese currency.

38:04Now, again, they don't necessarily want a lot of their currency being used for things not related to China, per se, because they're not trying to replicate the advantages and disadvantages of the US system. But it is a really powerful tool they have to keep countries in their orbit or bail countries out of struggling in the US orbit. So that instead of getting IMF support, for example, they can say, well, if you want to play with a different set of players, we're here. That's kind of an option. So, Lin, I'm going to say something that's probably very unpopular with our US listeners. The only thing I can hope for is that once they heard me talk about swap lines, they're already turned off.

38:47But I'm going to first talk a bit more about China and then transition into the US and make myself unpopular. So one of the things that always concerns me as an investor is whenever a country imposes capital controls. And so one of the most famous examples that would be China, they have this$50 ,000 rule or equivalent of$50 ,000 that there are some approved purposes such as travel, study, medical expenses, but there is this tight control of the currency. And of course, in the style of the local government, they were talking about securing stability. But at least for me as a capitalist who have this bias for free and open markets, to me, that's just capital controls.

39:32And also because whenever you read wonderful books such as Broken Money, you also learn how governments have an incentive very much to control currencies. And so I saw this 3.5 % remittance tax here that was a part of the One Big Beautiful bill back in May, and then there was some pushback, and then it was a 1%, and so on and so forth. And so many listening to this would be like, whoa, whoa, whoa, whoa, you're mixing up two completely different things. I don't do any remittances, so why would I even care? It has nothing to do with what's going on in China. And that's probably true. But as the investor, I'm always looking for signals of what's going to happen in the future.

40:15I want to capture the best returns. And I'm always concerned whenever I see signs of capital control. And so, of course, as an investor, you can still invest in that country, especially if you get an adequate risk premium. But with all of that being said, do you expect capital control in the US to come? Are you concerned about the US being less investable when you look five and 10 years out? And then the last thing I would say before I get too many nasty tweets is that technically, you would not call this a capital control. In my very subjective book, it is because you constrain capital from flowing, and I probably have this capitalist bias, but I'm kind of curious to hear how you look at it, Lin.

40:59So I think that I agree with the broad view of capital controls or capital frictions. I do think those will probably increase over time. A couple of reasons, and it might not just be the US. I think that could increase globally, whereas potentially China eases them from a very high level, but still maintain them in place as well. And that's for a handful of reasons, with the main one being fiscal dominance. So I've talked before about the US and many other developed countries are in fiscal dominance, which is to say we build up a very large stock of public debt, and we're also running structurally high fiscal deficits and therefore adding to that debt, which limits some of our options.

41:34And historically, when you have fiscal dominance, capital controls more likely to come into the mix. And I'm not a fan of them either for similar reasons as you are. I'm a fan of free and open markets. So especially global investors, when they look where to put capital, one of the biggest variables is can they get it out in a timeframe that is relevant to them? So when they invest in China, they say there might be opportunities there, the equities might be cheaper, other things might be going well. But when I want to bring this capital back for one reason or another, am I going to get told no?

42:09That point isn't even their capital anymore. Whereas if there's a jurisdiction that has a very long history of just freely respecting property rights, rule of law, no kind of arbitrary... If there's a country where the leader just doesn't like you and just says, nope, that entity can't get their capital out. This other entity can. You're kind of like, well, do I want to do business with that country? or if I do business, do I want to minimize it because I don't want a certain percentage of my portfolio or a certain percentage of my corporation impaired for things that I can't predict? So it does potentially make a region less investable.

42:44Now, because of the dollar status, one of the problems is we've been too investable. It's kind of like how Canada and Australia, their property markets get really hot because global capital goes into it, especially Chinese capital as like a store of value. And there's winners and losers from that. So those who already own homes going into that kind of surge are loving it. Their home, they bought it for X and it's now worth 5X. People that have trouble entering the home market, they don't have one yet, they're impaired. I mean, just the cost of having reasonable shelter is just through the roof in those jurisdictions because it's not...

43:23You have a lot of empty houses used for store value purposes or apartments. In the US, that doesn't really happen to our real estate market as much, but it happens to our equity market and our capital markets as a whole. And that kind of overvalues the dollar and therefore impairs our export competitiveness. So in some ways, making the US less investable is not all bad, but I wouldn't like that path of saying our capital controls are more whimsical. We don't know if you're going to be able to get your capital out or not. Rule of law might and may not be respected. Property rights might and may not be respected.

43:58That's not, in my opinion, a great path toward making the US stuffing less capital in the US. But it's not surprising in a period of fiscal dominance, which lasts years or decades. Yeah. And I'm very happy that you say that. And I should probably also clarify and say that I'm not comparing the US to any kind of third world economy in terms of getting money out. But I do think that there is something to be said about sizing. So for example, I have some of my investments in Turkey, which by definition is like real world capital controls, but I can size that. It's a very small part of my portfolio.

44:37And if I can't get my money out, it makes absolutely no difference. So whenever I see different things happening in the States that I consider my home market, and I live abroad, I'm also like, hmm, what does that mean? No, the probability of me running into any kind of issue is significantly lower, but my exposure is that much higher. It would be absolutely detrimental for everything. So I'm always thinking about what's happening on the long tail. And sometimes, whenever you have extraordinary times, the shape of the long tail is a little bit different than what you look at a normal distribution curve.

45:13That was a very nerdy way of saying, I don't know. Always think of all scenarios, I guess. I agree. I agree. So, Lin, I wanted to talk about if I can come up with a very rough oversimplification and then say afterwards it's completely wrong. So let me try to say that. Developed economies have independent central banks and then developing countries do not. That is, of course, absolutely not true. It is probably directional correct, but it's not really true. Independence is never absolute. Politics still lean on them. You look at the Fed in the 1970s. You look at ECB during the sovereign debt crisis.

45:49Perhaps it's more accurate to say that the Fed is independent within government rather than independent from it. And now, of course, we are discussing semantics, but it does seem like a shift may be happening in the world's largest economy, with some people calling for the government to lean more on monetary policy, either directly or indirectly. It could, for example, be replacing the current Fed chair whenever his current four-year term expires in May 2026. And I should also say, it is a committee that's setting the rate, and it's not exclusively by the chair, though that's typically the face of it.

46:25And so there's a lot of moving parts here. And going back to this discussion about, is it political? Is it not political? Every time you have a governor that's resigning for the board for whatever reason. It is always the sitting president who nominates, and then there is the Senate confirms by a majority vote. So it is, by definition, regardless of the administration, not completely independent. But I think what is interesting to discuss now, Lin, is if the markets were to perceive the Fed as significantly less independent than it is today, how do you expect the S &P and the 10-year treasury yield to react to that fact?

47:03Backing up, I'd point out that just historically maintaining separation of powers within a government is historically very hard. It's not really the historical state of affairs. In kind of modern times, it's more common. It's kind of what places strive toward, but it's hard to achieve. And kind of the difficulty of achieving it, especially in developing countries that don't have a history of it in many cases, it's hard to just forge that out of nothing. And a lot of times you have an illusion of separation that quickly goes away because it was never really there in the first place. So actually having robust, stained, long-term separation of powers is really hard to do.

47:42And what it means in this context is the powers still lean on each other, but they have checks and balances. So for example, the US Supreme Court, one of the three branches of government, the justices are put in place by the president and the Senate that once they're in, it's very difficult to remove them. And so they operate independently from that initial selection point, which basically tries to make it so that the whims of people or the whims of government can't change everything at once. So even if we have a crazy election one year, congressional terms last two years, presidential terms last four years, Senate terms last six years, and the Supreme Court is life until retirement or passing away.

48:23The Fed can kind of be thought of as a fourth branch of government in the sense that the governors are put in place similar to Supreme Court justices. And then from there, they run these pretty long terms that are then supposed to be pretty much protected by political whims other than with cause. And so we have this kind of fourth branch. Now, Now, historically, again, during fiscal dominance or war, whether it's the US or elsewhere, independent central banking goes away pretty quickly during crises. Because the handful of things they won't let happen are, for example, a sovereign bond default in their own currency, just major unchecked financial plumbing issues.

48:59They will generally put out fires if it means debasement 99 times out of 100. And so, especially during fiscal dominance, independence goes away. And I'm not surprised that now that we're back in fiscal dominance, since the first time since the 1940s and the aftermath, that we see an arguable deterioration in central bank independence. And I think this is going to be sustained. One of the ways out of fiscal dominance is yield curve control, which is basically a giving up of central bank independence for a period of time. The question is, can you ever get it back? After you burn away the debt, can you stick the landing and then go back to some state of more confidence?

49:36We did it before after the 40s, but that was a very different time. Can we do it again? We'll see. To answer your question, if a country does lose confidence of investors in its current central bank, you're more likely to get steeper yield curves. You're more likely to get capital flight, which then actually then increase the probability of getting capital controls or capital frictions to try to slow it, which can then actually accelerate the capital flight where possible. And the way they can manifest is the Fed could cut. And so if the market agrees with the Fed's cut, let's say the economy is slowing and inflation is not a problem and labor markets are viewed as increasingly a problem, and then the Fed cuts, the market will say, okay, that makes sense.

50:19And they might also be buying bonds and therefore driving bond yields down as well. If the market says, okay, inflation is kind of hot, the economy is not that slow, So it wouldn't make sense to cut here. But then a politicized Fed or politicized central bank cuts. The market could say, I don't trust that they're going to maintain inflation at their target level. I don't trust they're going to try to get back to the 2 % target the way they measure it. So maybe I want higher bond yields. So you can have a situation where the Fed cuts and longer duration assets, mortgage-backed securities or treasure bonds, go up in yields as people sell them.

50:58And the magnitude of that could depend on just how much confidence. If they think, okay, so there's maybe a couple politicized governors, that's one thing. If the whole thing's kind of captured, it's another thing. So there's a matter of degrees here. But I think it's unfortunately normal that as you enter fiscal dominance, stay there for a while, whether it's capital controls, capital frictions, or a deterioration of central bank independence, these are symptoms of fiscal dominance. As the ledger gets structurally imbalanced, more kind of scaffolding goes up trying to keep the wheels on the track.

51:32And those are well-trodden tools that they have that they'll probably resort to over time. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet? You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast. And with Plus 500, you can explore popular assets like oil, gold, S &P 500, Bitcoin, and more. From crypto to commodities, there's always something happening. The platform is super easy to use, so you can trade on the go right from your phone. You can get started with just$100 and jump into the action.

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55:02And you've seen some weird stuff happening in the treasury markets globally, especially on the longer end of the curve. And whenever we say that. So we typically talk about the 10-year or the 30-year. Whenever we talk about a steepening curve, you can sort of picture it as how far to go out in time and what kind of interest rate or yield would the investors want to have. And it seems like with everything that's going on, yes, we've seen some crazy moves, but perhaps we've seen nothing yet. And perhaps it's not even dependent on the Fed independence, some of the moves that you're going to see. Who knows?

55:40Yeah, I think the problem is that during fiscal dominance, the Fed doesn't really have good moves anymore. When they try to contain inflation, what they're trying to do is accelerate or decelerate bank lending with their rate cuts or rate hikes. But when the call is coming from the inside, when inflation is from monetized fiscal deficits, raising and lowering rates is not as effective because if they raise rates, it actually blows out the deficit even more. That's kind of the problem is that their tools are just not designed for fiscal dominance. And so that's part of why they lose independence at that point because they don't really even have the tools to deal with the situation anyway.

56:19So then it's easy to say, well, they're not even effective. Let's just take them over, basically. And kind of a key theme in broken money is that money is a ledger and there's different types of ledgers. So gold, for example, you're trusting nature and the difficulty of mining and refining to determine how much gold is in the world. And a key limiter is that it's slow, it's physical. Whereas with the dollar system, you're basically trusting the reliability of the government and the central bank and the broader banking system to maintain this gigantic human-run ledger effectively. And there are some ledgers, like a typical developing country, we don't particularly trust that ledger more than we have to, or as a trade or something.

57:03Whereas these really big ledgers, we're kind of out of necessity, we're kind of tied to. And so when this starts to have problems, I mean, the problem is those big centralized ledgers are permissioned. So they can seize assets, they can do capital controls. And if they lose certain checks and balances, they can inflate quite rapidly. And then the third type would be code. So Bitcoin or other time chains in general, which is a bunch of users run a ledger. And in that sense, you're trusting the security of the code. You're trusting the checks and balances that maintain the rule set of that ecosystem.

57:39So instead of being one centralized entity, there's a handful of players that all lean on each other and that the incentives have to be in place to maintain either permissionlessness, the ability to transact without getting censored, or that your currency is not going to get bugged or debased in some way. So those are kind of the three main ledgers. And the problem is during fiscal dominance, that middle type, that centralized one starts to degrade. So people either flee to ones that are not quite as degraded, maybe the Switzerland's of the world, or they flock into these other types of neutral assets, these ones that are just governed in different ways, either by nature or by code or whatever else.

58:15Yeah, I would give my... Well, I think legally, I can't give any advice on the podcast. So I'd probably make the observation that you better be on the right side of the bond trade. And whenever you see what's going to unravel here. But I think if you ask politicians, like I haven't knocked politicians enough, I'm going to do it one more time. But I think if you ask them, probably most would say they want to balance the budget. But politicians being both politicians also seek election or re-election. And that is tough. In practice, they have four tools at their disposal, lower spending, raising taxes, printing money, and then restructuring debt.

58:59And some, especially politicians, would also say, well, we can just grow out of this issue we have right now. And I've just seen that movie play out too many times now and read too many history books that that's usually just not what's going to happen. So you typically have to use other tools. The world just isn't that kind. So I'm going to give you a very, very tough challenge here, because it seems like the world's governments can't figure it out, but perhaps you can, Len. So politics aside, if you were in charge, and let's just say you could use, in this case, both fiscal and monetary tools, how would you balance those levers and what would the implications be?

59:42Yeah, it's a good set of question. I mean, that's kind of the trillion dollar question. First thing I would do is resign because I don't think I would be able to fix it, to be honest. That's why I don't work in public office. I work in private markets, kind of handle my own situation as best I can, rather than trying to govern everyone's ledger. I think that if I were to give advice or try to do it myself, if I was in sort of like a theory crafting mindset, it would be some of the stuff we already talked about, which is to recognize in the US's case that we are a fading empire. And to say, that is, I mean, empire is, again, there's those that are rewarded by it.

1:00:19So the military industrial complex is rewarded by being an empire versus the manufacturing base is not even helped by it. It's actually harmed by it compared to countries that are leaning into that empire direction. So I basically say, okay, we're in this fading empire path, how can we most graciously, you know, most gracefully transition in that regard? How can we pull back from position of strength? How can we continue being this, you know, shining republic on a hill that people want to immigrate to, that people want to do business with, that people want to innovate in, that people, you know, that it's viewed as kind of the most free and pretty wealthy on a per capita basis and happy.

1:01:03How can we optimize toward that? So instead of trying to maintain dollar dominance, I would promote neutral reserve assets. So I think that's the natural state of affairs. I would support a more multi-currency world and I would try to gear the domestic system more toward that. So one would be basically, whenever you have this much debt on the public ledger, you're going to default. The question is, how are you going to default and who are you going to default to? So you can default nominally, which generally doesn't happen when the debt's in your own currency. Or you can default through purchasing power.

1:01:39In some way, we already have. In the past five years of bonds, I mean, it's been absolutely lighting investor returns on fire in terms of purchasing power. We've already kind of done this partial default compared to every other asset you could have owned pretty much. But I don't think we're done yet because we still have very high public debt and high interest expense. There's also just entitlement systems that are just completely just out of control. They were designed with the idea that every generation is going to be bigger than the next generation. So that you're always going to have a low retirement worker ratio.

1:02:09And that's just not the case. So it's just not geared correctly. So we have this gigantic insurance state. We also, the US has the highest per capita healthcare costs in the world. So even though Japan on average is like 10 years older than us, they spend on average way less on healthcare than we do and longer life expectancy. So basically, I would kind of do the opposite of what Doge did. So Doge, they went after... So if you look at the government spending pie chart, there's defense, there's Social Security, Medicare, you can put veterans benefits and defense. And then there's a smaller part of the pie chart is like everything else.

1:02:42It's like the FAA. It's like the parks, the rest of the pie chart. That obviously could be optimized, but that's kind of pretending that there's not a bigger problem. The bigger problem is the defense, the bloated healthcare system, imbalance of security. So basically, that's what I would try to right-size, to try to clear out pork from the defense spending. I actually focus more on defense, not on hundreds of military bases globally. So I'd say pull back, make sure we speak softly and carry a big stick. So don't disarm ourselves, but have a military design toward defense of ourselves, occasional defense of our allies, global alliances.

1:03:24not just being everywhere all the time and not optimizing toward congressional pork. Two, I would stop subsidizing. Our food policy was geared toward making sure starvation doesn't happen. So, subsidizing unhealthy food, which then after decades gave us tons of health problems that then blows our healthcare system. And then in addition, our hybrid public-private mess. It makes it so price discovery doesn't happen. If someone goes for a procedure, they don't even know what the price is. The mechanism of buyers and sellers setting prices just doesn't really happen in the US healthcare system. Many other places too, but especially the US.

1:04:06So I don't think you can fix this without tackling the healthcare system, which is incredibly hard. I wouldn't have any illusions that I would accomplish it, but that has to be accomplished eventually, either through crisis or preferably before this crisis, and get back toward those areas of government being more limited. And then along with kind of a one-time major currency default, basically a currency devaluation. Now, where currency devaluations fail is basically when they don't get the problem under control. So after World War II, the US, I mean, they had a major currency devaluation, but then they did shift toward austerity.

1:04:42They didn't keep running big deficits. They had the benefit of really good demographics. They had an innovation boom, all of this. And they used that to shift toward austerity. So, okay, it's okay. Bondholders got killed, but then it stabilized. Rebuild confidence, go from there. That's kind of what you have to do is basically say, we already have too much debt. We already, you know, generations have made promises we can't do. How can we default on some of this in the fairest way possible and then stabilize to try to keep it together for future generations? Those are the things I would be trying to do.

1:05:16But again, it's much easier said than done. It's much easier to get your own house in order than to try to fix the ledger that 300 plus a million Americans use and the whole world's tied into as well. Yeah. And it's hard to be the emperor who scales back the empire. Like there is a selection bias. If you are the emperor, you probably didn't become the emperor by having that mindset in the first place. I don't want to derail the conversation too much. I know I nerd out too much about history, but if anyone would study what happened September 2nd, 1940 with the destroyers for bases deal between the UK and the US, I just think that it's a very interesting case study in a lot of things that's going on and how to navigate empires, for lack of better words, and a changing world order.

1:06:10Lin, I am going to ask you a reasonable question, but I've done that so far throughout the episode, so I can't help myself. So aside from hard money, I'm going to constrain you and say, you can't say hard money because I kind of felt you would go that route. But if some of our listeners are tuning in here and they're like, what should we do here over the next, say, five to 10 years? We know that we have a lot of listeners who are mainly thinking about equities. How do you think about high quality equities in the era of fiscal dominance? So I'm bullish on high quality equities. I maintain a three pillar portfolio, which is one is hard monies and commodity producers, things like that.

1:06:51The other one is profitable, high quality equities. And then the third smaller pillar is cash equivalents for liquidity and rebalancing and things like that. So the equity components is very large for me. and I try to be somewhat globally diversified. And quality is relative to price. So if something's extremely high quality, I'm willing to pay up for it a little bit more. If something is medium quality, I expect to get it at a bargain. The reason that equities can do pretty well in a fiscally dominant environment, especially if you don't overpay for them, is, I mean, in addition, just for all the reasons that your listeners know, equities are good.

1:07:26I mean, you're owning a profitable business that is, you know, it's doing more than a inert substance is doing. It's a bunch of people working every day to try to increase the value of your investment. But they're also... I've made the point before that one of the best products that Procter & Gamble ever sold was their bonds. Same thing for Coca-Cola. And another way of putting it is that Coca-Cola has been profitable every year for a century, more or less. And so why do they have$40 or$50 billion in debt? And the answer is because they can't. Because especially before the current high-rate environment, they could issue bonds that 2 % or 3 % for 5%, 10%, 20 plus years.

1:08:07And they were basically shorting fiat currency for low single digits, while that currency was growing in broad supply by an average of 7 % per year. And so they have this big fiat currency short that unlike a hedge fund or something, can't just be called back on them like a margin loan. They've got this kind of permanent short out there. And then they use it to buy anything that will give them a better return than 2%, 3%, 4%. They will buy back their own stock. They will make acquisitions. They will do all sorts of other things. And so one of the reasons why equities do well during currency debasement, or at least hold up pretty well, is that they're shorting the currency and then their long assets that are in general better than the currency.

1:08:50Now, if their revenue streams are denominated in foreign, so if you have a developing country equity, and let's say they get a lot of dollars in income, and their expenses are in local currency and they're shorting the local currency while they're earning dollars, that's really a place for them to be in if the dollar strengthens relative to their currency. Whereas obviously, the problem is if you have debasement, their own revenues are also being debased, which then they're trying to recoup with price increases over time. So it's not a perfect defense against fiscal dominance and inflation and debasement, capital controls and all these sorts of things.

1:09:21But it's one of the better things you could be in because unlike a bond that might pay you 4 % a year with no growth, in many cases, you can get an earnings yield of 5%, 7%, 10%, 12 % that also grows over time. And you either get dividends you can reinvest into owning more of the company or that you share buybacks and you own more of the company. And so I do find that high quality equities are useful in this environment. And sometimes even banks, for example, I mean, even though we're talking about currency problems, If a bank is shorting the currency at a lower rate than they're long the currency, and they're relatively cheap relative to their earnings or assets, they can work well also.

1:10:07So I've been reasonably bullish on certain countries' financial sectors, even as I expect currency problems. So I do find that equities are a great balance with hard monies and other hard assets in most environments. Thank you, Lynn. And I have a final question here for you before I let you go. You know, I look at you and I see that you're in such an inbuilt position. You know, there are so many directions you could go. You know, you could do more research. You could write another fantastic book. You're a GP at EgoDeath Capital. Full disclaimer, my co-founder, Preston, is also a GP there. You could spend more time on the conference.

1:10:48There are so many things you can do. Of course, you could sit home with your husband and have tea and read a good book or watch TV, whatever. Given all of these opportunities that you have, what do you find yourself optimizing for in life right now and why? I would say writing and work-life balance. There are different phases of a career. At one point, my research business took off tremendously. And then also, the pandemic happened. Macro was crazy. Everything was crazy. Money printing was happening. I had to lean into that really hard. Didn't really have a choice. It was just really hard to keep up with.

1:11:28But if you run at full speed for a very long time, you burn out. Or you're one of those people like 40 years went by and you wondered, did you ever live? It's the classic trap that people could fall into. too. So especially after 2022 and 2023, I wrote Broken Money while doing many other things like running my research business and other work, which was a very all-in period. So I needed a break for a period of time. And so I've been optimizing for health, optimizing for getting outside more, optimizing for just having more balance of interest. Sometimes things like with broken money, for example, for years, I was hesitant to write a book because it's one of the lower ROI things you can do in many cases, especially if you work in finance.

1:12:16It's super tedious, anyone who's written a book. And so I resisted writing a book until a very clear picture of the book formed in my head. And then it was too distracting not to write it. I had to write it. And with every year that goes by, I mean, that's one of the happiest things I've done. That's one of the things I'm most proud of. And it's partially because it's an artifact that is a self-contained thing that has a life of its own now. More than a collection of articles, more than certain investment decisions, this is an artifact that persists. And I find that interesting. I guess the funniest answer of how I'm spending my time is I've actually been writing a sci-fi book for similar reasons, which is, I mean, we talked about when you're in kind of a crazy environment, like, you know, we touched on, you know, not just finance here, but what happens geopolitically in these environments.

1:13:07There's also the question of how does tech change things? And so in this world of, you know, with AI, making it so you can like say, especially in the future, make a deep fake video that you have a lot of, it's hard to even tell if it's true or not. It used to be the videos where if you saw a video of something, it was obviously that thing happened. Increasingly, that's not necessarily the case. And so how do you even know what's happening in the world if it takes far more work to untangle lies than to spread them? in addition in a world of capital controls or governments trying to seize power?

1:13:40What does that look like? And so I've actually been exploring that to some extent in fiction. So on one hand, it's hopefully entertaining, but then also touches on, kind of extrapolates out current themes for many decades to kind of explore what things are like. And it kind of forces me to... My background is engineering. I've always found technology interesting, obviously. But when you're so focused on macro, it's easy to miss a couple of years worth of what tech's advancing pretty quick. You don't really have your finger on the pulse of it. So it's kind of like it forced me to do a check there on a bunch of technology-related stuff.

1:14:16I also generally find, and Dalio is kind of an exception in this, for a lot of people that work on finance, they become technicians, meaning they know how to trade the current market really well, but they can't really envision that structure structurally changing they don't really picture an environment that they never knew and one of the things is by having kind of diverse interests you know whether it's exploring fiction science fiction whether it's exploring philosophy whether it's exploring history you either either broadening your scope forward or broadening your scope back or up or down you have a bigger view so instead of being a technician it helps you kind of be a strategist or to have ideas in your head of how things could change that are maybe outside of the box.

1:15:01So I've been leaning a little bit to fiction, working on my second book, which will come out in 2026, while maintaining these other things. And I think it's partially just because I want to maintain flexibility and plasticity with my mind. I want to enhance the creativity because I think creativity is one of the skill sets we need to cultivate in these kind of crazy times when things are kind of more normal, it's more about operation execution. Whereas when things are more tumultuous, having ideas that are outside of the box and being aware of history and aware of possibilities for the future is maybe how you navigate that better.

1:15:39So, Linna, I wanted to ask you a very self-serving question, which I guess you can say I've done through most of the conversation anyway. But I was kind of curious, so I'm going to impose all more biases on you, which is not fair at all. So there are different stages of your life where life might be difficult, but knowing what to do, at least in my case, was somewhat easy in the sense of there was a time where you needed good grades, so you had to optimize for getting good grades. And then you needed to find a job, and perhaps you wanted to advance in that job. And there were sort of different things that was quite easy to identify.

1:16:21As tricky as it was, you could identify what you're supposed to do. Plus, perhaps, at least in my case, I don't think I asked too many questions of what I was supposed to do. It was just quite clear, even though I might be misguided, that that was what I was supposed to do. And so whenever you then reach a state of your life where you can do anything you want to do, and I don't necessarily think you have this issue of analysis paralysis, but what kind of framework do you use to figure out what to do next? Yeah, it's a good question. Like you, I mean, there's a period of time where I was on a pretty clear path.

1:16:57One of the frameworks I use is knowing whether you're in the yes phase or the no phase. So generally when you're in the yes phase, it means you're trying to expand. You've got more energy and time than you have other resources. And so when opportunities come your way, you generally have to lean into saying yes, and or you have to pursue opportunities. And so for example, when I was an engineer, I would go to my boss and say, what tasks? I was working on my engineering management master's degree, but I was also going to my boss and saying, are there certain administrative tasks that you'd like off your hands that I could learn and help you with?

1:17:34And I would kind of I kind of slowly became the boss over time. That's kind of how it is a proactive way to say yes. Or if you'd come to me and say, hey, could you handle this? Yes. Or if employees have issues, like, yes. You kind of lean into overdoing. And so there are certain, but of course, a lot of people don't get to that phase. You know, they wish they were doing more, but they're not. And so the answer is they probably should say yes more, or they should proactively reach out more. But then there's a phase, sometimes after a period of time, whether it's because you got older, your life became more complex, you were successful at saying yes so many times, you can do a thing where that's no longer your constraint anymore.

1:18:14Maybe you have other resources, but now time and energy are your constraints. And if you're bombarded in too many directions, it's hard to focus and execute on the things that are actually really important for one reason or another. And so you actually then have to realize that you're in more of a no phase. You're more of saying, you know, I appreciate what you're doing, but I don't have the bandwidth to do that properly right now. And you have to say that more and more. And that has been one of the things I've had to navigate to stay reasonably focused. I mean, as you pointed out, I do research, I write books, I do venture capital.

1:18:49I have to then have a pretty big safeguard on my time and energy and attention because otherwise, if you do too many things, you don't do any of them well. So I think that's the biggest thing is a person needs to know. Are they leaning in toward yeses and seeking opportunities? Or are they leaning back toward picking the more cautious, see what they can do? And that can also include work-life balance, spending more time with families, spending more time outside, focusing on your health, physical health, mental health, all these things like that, having a more holistic, balanced life. I think that's the biggest starting point that someone has to answer because everything else is kind of tactical from there.

1:19:25Then it's like, okay, what should I say yes to? How should I reach out? Or how do I say no more? How do I pull back more? But if you don't even know which direction you're going in, I think that's the biggest question to answer. Does someone want to expand or does someone want to, I don't want to say contract, but more like streamline, optimize? And that's the biggest thing to get right first. And then it's, you know, what makes you happy? What has a blend of being economically sustainable, but also rewarding and that you feel benefits yourself, benefits the world and is economically viable to do?

1:19:58Yeah, I love that you're writing fiction. I need to pick that up. And it's such an interesting place, right? Because to your point about being a technician, you can specialize even more, you can be even better, and it's fun to be even better at something. But it's also fun to try something new, and then you put yourself in a completely new position where you're perhaps not as good, which is not the case with you, I'm sure, Len. So it's just, thank you for sharing your journey. I'm happy to. And I think, I mean, there's sometimes like when you pull away from something, you don't do it permanently.

1:20:33Like if you do, if you travel too much, like if someone doesn't travel, they have a travel bug, they travel a ton. And then, you know, the exhaustion of traveling and the franticness of also trying to maintain your home situation can get very complex. So there can be a period of time where traveling is no longer fun, then you want to pull back. But then after a while, and you've got that stabilized, you get the travel bug again. And that can apply toward writing a book, that can apply toward operating in financial markets, that can apply toward travel. There's all sorts of things. So it's kind of like realizing that as you shift around, it's not necessarily always permanent decisions.

1:21:09It's just kind of realizing that there's seasons to human life in a similar way that there's real seasons. Wonderful. Wonderful way to end the episode. Lynn, I wanted to give you the opportunity to give a handoff to whatever you want to give a handoff to. I can say for one, I absolutely love your book, Broken Money. I love your newsletter, but whatever you want to point people to, please do. I appreciate that. Those are it. Check out Broken Money, if you haven't read it, and lynnaldon.com. I have free newsletters and articles people can check out. Fantastic. Any concluding remarks here before we let you go, Lynn, for this time?

1:21:44I don't think so. I think stay open-minded. Creativity is going to, I think, be important in the years ahead because we live in interesting times. Boom. I have to end the recording with those words. All right. Thank you so much, Len.

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