Lyn Alden discusses the evolving role of central banks and how Bitcoin challenges their relevance in the digital economy.
In an enlightening conversation with Lyn Alden, the episode of What Bitcoin Did delves deep into the intricacies of central banking, its historical context, and the growing debate around its necessity in the modern financial ecosystem. At the heart of the discussion is the rising sentiment against central banks, a sentiment that has evolved from fringe to a legitimate standpoint, with even some senators suggesting the end of institutions like the Federal Reserve.
Lyn unpacks the role of central banks as lenders of last resort in a fractional reserve banking system, highlighting the instability and centralization they create through defining money and influencing the broad money supply via policy and government debt purchasing. The podcast explores the evolution of banking from pre-telegraph systems to today's instant settlements, questioning the necessity of central banks in light of decentralized protocols like Bitcoin. Additionally, Lyn discusses the effects of bank lending and inflation, the economic distortions caused by central bank policies, and the potential for a Bitcoin standard to reshape the global economy.
Lyn encourages a critical reassessment of central banks, considering the potential for Bitcoin to transform economic transactions and stability. This episode underscores the ongoing need for informed debate and education on the evolving role of Bitcoin in the financial system.
00:00:00 Central/fractional/free banking
00:12:54 Boom then bust
00:24:39 Revolution or redistribution?
00:31:13 Deflation doom; Debt loop
00:43:59 Bitcoin free banking
Transcript:
(00:03) all right Lynn hi hey welcome back to Europe it's great to be back do you want to pull the mic in up a little bit sure yeah you're traveling a lot these days yes a lot of Demand on your time yeah I think this is my fourth international travel so far this year and we're not even halfway through you're traveling like I am now the other way pretty much pretty much it's hard it is hard yeah yeah it's really hard it gets gets to be a bit of a drain but Norway is pretty cool yeah I agree my second time here I
(00:31) uh I had to miss the last couple of years cuz last two years I was with Craig Wright oh that's right our mutual friend well anyway um I want to talk to you about central banks sure has Danny pre-warned you no oh going in blind big topic uh I want to talk you a bit about central banks because there have been kind of growing almost like a growing legitimacy behind the idea of not having a central bank not having the FED whereas before it it felt like like a radical kind of Fringe idea yeah it's not just Ron Paul
(01:10) it's not just the libertarian party I think wasn't there even I think one Senator didn't the senator put in a bill recently suggesting into the FED yeah it's one of those things that won't pass but it's a signaling mechanism and it just kind of shows more more people are kind of fed up for lack of a better word rightly fed up I think so but I think you know there are a lot of things that that are blamed in the FED that are not necessarily directly the fed's fault um the way I've been phrasing it lately is
(01:35) because of fiscal dominance central banks kind of find themselves more restricted than normal it's hard to be truly independent when when you know debts and deficits on the public sector are so big um but I think it's one of those things where you can see why they wanted a central bank um but I think it's it's kind of unique to a specific time period of technology so and one of the things emphasized in the book broken money is kind of pre- telegraph everything was analog everything moved at the speed of analog and so even
(02:05) though we had banking um we didn't really have fast banking we you could only move around ledgers as quickly as you can physically go someplace but ever since we invented the the Telegraph and then you know telephone and all this kind of range of Technologies now money is going around super fast but we still couldn't do settlement quickly so we we we kind of had to have someone abstract a lot of that for us and it was kind of prone toward centralization I think that's really kind of why the same model took hold everywhere
(02:34) um and but I think that as we leave that era as we actually now have ways to do fast settlement you know basically payments and settlements that can't be reversed it starts to kind of show that maybe you actually don't even need a central bank well we don't have a central bank with Bitcoin yeah we have a protocol and we have consensus but we're we're a long way I still think from just being on a Bitcoin standard and not having F currencies and it's very easy to join uh the chorus of end
(03:04) the thired chanting it but uh I I'll be honest I I only would say that because other people say we should get rid of central banks and I I don't understand fully the reason behind it I I understand the kind of the general sentiment interference that a few guys in a room are making decisions which have this Butterfly Effect through the economy which can be devastating but like what I wanted to get out today is just understand a bit more so if at least when I have an opinion on this it's an informed opinion and you're the
(03:36) best person to talk to about this um so I think a good starting point would be the kind of a short history of Central Banking would you I don't know how much you uh uh know to recall um you know why why we need them talk about the things perhaps that they do that nobody understands go into a bit more detail about their you know how they're hamstrung but then also maybe kind of consider a world of no central banks um but still having an economy which is both F Bitcoin so there's a lot yeah lot to go over I mean so they they started
(04:12) in Europe centuries ago and and Bank of England was one of the first ones and that was originally fun kind of put together to help fund war that was kind of one of the original purposes of of it um today kind of the main purpose of a central bank ostensibly is a lender of Last Resort so because fractional Reserve banking is inherently unstable um and it's kind of prone where if One Bank fails it's more likely to lead to like a Cascade of bank failures um there are periods of time where there's this
(04:41) whole all the liquidity kind of dries up and they want someone able to come in and say well we can we can lend when no one else can lend um that's kind of the the the idea of a central bank um but it's become more entrenched over time because in addition to that role they actually run the foundational Ledger for what money is like if you say what what is a dollar right it's a piece of paper but what what actually is it it's a direct liability of the Fed so basically the monetary base of a country is the
(05:08) central bank's liability side um and so we've run this two-tier money system where the base money is the liability of a central bank and then the uh the broad money are the liabilities of of you know commercial Banks um so Bank Reserves and physical Bank notes are direct liabilities of of a Central Bank in most cases in the United States is the fed and so that's that's a really foundational role like you l define what money is um you control how much of it there is how much base money there is um
(05:38) there other policies uh they don't directly determine but they heavily influence how much broad money there is they either accelerate Bank lending or or reduce Bank lending and they facilitate funding the government even at times where if they were to go issue bonds nobody wants to buy them central banks buy them uh and so they they they serve multiple roles today um but I think a lot of people are rightly concerned around the centralization aspect which is to say um you if you ask most people are price controls good most
(06:09) people that that have a sense of free markets would say no and yet that's exactly what central banks do they set the price of money which is arguably one of the biggest most important prices you could set it influences everything else and if they don't set it right you know if they don't set it in in a way that is like rational then it can either it has all sorts of distortion effects on the economy and that's why people get frustrated with it and it can contribute to booms and busts I mean they're
(06:33) supposed to be there to smooth out booms and busts but they they have a tendency to be kind of almost procyclical where they they kind of cause a bus they cause a boom they cause a bus or at least they contribute in a significant way many would argue all right I'm going to have questions can we can we start with fractional Reserve lending actually go back a step uh so you you talked about the birth of central banks was the the lender of Last Resort is this from the era Free banking when uh essentially Banks would fractionally
(07:08) Reserve but but because they never had the goal to back up they were kind of were they say getting greedy because they should have been full reserve and well some of it is actually Market forces which is to say like if you if you trust a custodian to hold something for you yeah you're trusting that they're actually going to have it and if it's a non-f fundable item like a safe deposit box they can't do they have to to keep it there but if it's a fungible item like a a monetary like asset like
(07:34) gold then they can say well that person doesn't need the same gold bar back or the same gold coin back we can just have a big Vault bunch of IUS that we owe this gold and then they say well you know every year only like 10% of people ever there there's very low churn in terms of people coming in and taking their gold out and they're saying well probabilistically speaking we don't have to have all of it here all the time uh we can have a big buffer we can have half of it we can have a quarter of it
(08:01) you know and it's still more than the normal year um and so what you get is fractional Reserve banking is it I think a good way to describe it is uh mismatch duration lending yes so people often think that a full Reserve Bank doesn't lend but that's not the case it basically just means that if you're lending out money to a business or something or any sort of purpose um that the the money that's funding that loan is locked in for a period of time yeah um so basically someone else has to foro
(08:30) spending they have to lock up money so for example they can buy a certificate of deposit at a bank lock it up for 2 years or 5 years whatever the case may be and then Banks lend out of that kind of uh Tim locked pool um whereas what happens in practice with fraction Reserve banking is people put their deposits in um they think they can pull out at any time they they have the right to to you know add add more deposits pull out the deposits but the bank only has a certain percentage of that there because they're Lending that into less
(09:00) liquid and longer duration assets and so they might be solvent but they might not be liquid uh when people actually want to get out and so that that's inherently unstable it's kind of rying on probability and the problem is that once a bank start to fail people suddenly get nervous about other Banks and it kind of Cascades on itself so it kind of works for years or decades at a time and then kind of breaks all at once but if you had more of an era Free banking and the banks issued their own money yeah you know so you'd had a Chase
(09:31) dollar or JPM Morgan dollar that shouldn't really Cascade as much maybe a little but you think it'd be self-correcting I mean there's um it's often pointed to in the US that the age of of Free banking was not very successful but it wasn't very free you know there was basically different states had their own rules and so generally speaking if you could if you could diversify or deposits more you'd have less of a chance of a of a bank failure um the US was really Emerging Market back back then whereas Free
(10:01) banking was more successful in places like Canada or Sweden um kind of those other markets that were more developed at the time but either way it's just kind of foundationally unstable um and that's why over time a lot of it centralized even you know one of my favorite books to site is William Stanley Jans money the mechanism of exchange 1875 because he lays out everything that's going to happen in the in the coming decades he's like basically pointing out how almost every solution for every friction in finance is
(10:30) centralization it's like if I want to send you money very efficiently we we can use the same bank and I can you know just kind of say okay take away from my account add to his account if we use different banks then our banks have to be able to communicate and so they end up tying into a central bank or a bigger bank and then even internationally like you know if you're if you're in Britain and I'm in the US and I want to send you money they have to have a way to coordinate so often historically they
(10:53) would coordinate around whatever the biggest Central Bank is it's basically ledgers built on bigger ledgers built on even bigger ledgers uh and so for for literally centuries as we got more and more complex with finance and had wanted to solve all these frictions every single one was solved with more centralization and so he's uh in the book he's saying look how hyper efficient this is uh we we can move around all these claims and gold almost never has to move anymore but then at the same time he's like it's
(11:20) lever 20 to1 and this is you know this is in the the late 1800s it's like kind of the what people point to as uh you know technically a sound system gold standard but under the surface even back then it was lever 20 to1 and he's like if 5% of people show up in banking hours and say I'd like my gold back it's not there so so is it really a choice of you can either have uh fractional Reserve uh lending and centralization or for reserve and decentralization you can't you can't have a decentralized
(11:53) fractional Reserve you can for periods of time I mean it's somewhat self-correcting you have you have bank failure ERS um there's no lender of L Resort though the people there are situ you're not going to have liquidity like in the Bitcoin world if a something fails you lose your money yeah yeah they only basically a bigger actor can come in and back stop it but they they have a finite ability to do that they can't just print it um with gold basically it's it's very slow um and so people
(12:20) generally don't challenge the banking system too often because physically withdrawing it was a burden uh and in a Fiat world people don't really think too much about it because whenever there's an issue they just print more Fiat there's never there's not really too many cases of Fiat uh uh like a Fiat banking system with no Central Bank because the whole point is that instead of kind of relying on nature like gold to be a foundation they rely on this like Central Bank to be a foundation um and so that's kind of
(12:49) where we find ourselves all right here's here's my here's my questions that might seem really dumb in a fra fractional Reserve world uh the banks can lend out more money than they have and so you in in you the 1800s they would just create new I guess the IOU Bank promes they're kind of Bank notes and in the current world they're digital yeah but in in the case of fractional Reserve new money is being created to lend out yeah and at the point where the mone's to say there was a you know we're
(13:20) a very small economy and there's 100 borrowers and everyone you know fractionally borrowed if we all pay it if we all borrow we increase the money supply yeah um does that itself does fractional Reserve lending also create inflation yes yeah for example in the 1970s uh most of the money creation back then was from Bank lending that was kind of the most rapid rate of Bank lending in US history uh and there were deficits at the time that were contributing to inflation um but really it was the the expansion of
(13:50) private sector Bank credit that really drove the growth of money supply and a lot of that was tied to demographics you had Baby Boomers that were born in the starting in the late 40s and they were were entering their home buying years which on average were earlier back then than they are now um and so that was kind of the period of peak credit formation you had an unusually large Generation all kind of heading together and getting mortgaged at the same time and so you get a ton of new money supply entering the market uh and it's not
(14:16) specifically because of the the central bank I mean their their base money supply was not growing very rapidly but it was that that layer of broad money on top of it um and when decades later when the Central Bank kind of increased is the monetary base they almost like lock in those prior Decades of Bank lending because if if they had held firm for example whenever there's a banking crisis you'd have the broad money start collapsing down toward the base money you'd have a period of deflation would
(14:42) you say that's just a correction and it's a healthy thing well I think it so under a system that operates normally that would be healthy um I mean as far as fractions or banking exist in the first place basically at least it clears it out the problem is that they they never let it clear out they never really let those things Things fall down and so if you let that go on for decad and get so levered that it's say you know 20 to1 or 50 to1 then by the time that starts to unravel it would it would kill almost
(15:11) every Bank in the in the country and so you get like an incentive problem where nobody really wants that to happen no one's going to vote and say you know what I want all my bank deposits to be wiped away and I want you know all this kind of cascading thing so everyone's like okay yeah just fix the problem this time and we'll sort out next time but then never sort it out is it there any objective measures that uh credit creation by the Banks for fractional reserve the inflation that causes uh is
(15:37) net better for society than inflation caused by government printing to fund their own uh activities it can vary I I think when you look at both emerging markets and developing markets inflation can be generated either way either from excessive Bank lending or from large monetized fiscal deficits um private sector lending is at least more distributed it's it's a bunch of individual people making a loan that seems rational to them at the time so someone's borrowing money someone's lending money um but they can still be
(16:08) distorted by some of those Central Bank um policies so for example if they hold rates too low it can encourage sometimes too much Bank lending um or if they hold rates too tight it can it can really slow down Bank lending but then they get kind of like their models don't always work the way they think they do so for example in theory cutting interest rates uh is supposed to kind of energize Bank lending because if you know you're not going to borrow at 7% for mortgage maybe but you're you might borrow it at 3%
(16:36) mortgage and buy a house so you're you're more likely to borrow but the problem is that if you drop rates too low banks are reticent to lend because they don't really get compensated for the risk they take and so there's kind of diminishing returns and so basically the problem with the centralized aspect is that if they're not kind of correct in how they're doing it and there's there's way more ways to be wrong than right uh then you're likely to get some sort of distortion in the economy some
(17:01) some money is being created for purposes that are not very suitable or you're facilitating bubble growth which might feel good at the time but then it's going to feel bad later so for example the the 1920s were booming uh but a lot of that was because of unsustainable credit creation and then that's what directly contributed to what what was far worse in the 30s and thereafter and was there a benefit when we had say close to 0% interest rates um that didn't really benefit the the the pleb the The Peasant so much unless you could
(17:36) get on the hous and that maybe get a 2% interest rate but it seemed that it benefited investors hedge funds VCS very well yeah very good for asset price is very good for unprofitable companies basically when money's weak you monetize other things so people monetize real estate they monetize the stock market and they just kind of plow money into the other things and that has distortions it can for example favor big companies over small companies because small companies are riant on Bank lending and they're not generally held
(18:07) as inflated valuations so cost of capital is higher to them whereas everybody just piles into a market cap weighted index like the S&P 500 they just keep giving the biggest companies even cheaper cost of capital and it's like an autopilot and it's like a a vicious cycle that kind of keeps feeding itself or uh you know one of the the biggest problems is just monetizing real estate it's something that should be for utility um but when people say I don't know what to do with my money I don't
(18:33) want to hold it at zero interest rates I'll just I'll buy another property um and sometimes you'll you'll buy it you'll literally leave it empty uh because it's better than just holding cash and that drives up the the the valuations of houses uh which feels good for the people that own the houses but it feels really bad for people that are locked out of the housing market because of that right okay hm so so it does feel like the the free market for money would be a much fairer and less uh I don't
(19:04) want to say less volatile because we would have Market forces we would have Cycles but we would potentially avoid the massive uh uh systemic issues that we say saw in 2008 or we feel that might happen at any moment today I think Kurt was just telling me earlier that bank losses are were reported today up up to what were the numbers 550 billion 530 or 40 in a quarters yes and so it feels like the the one of the primary issues we have with central banks is they're they're not allow they're basically uh governments are not
(19:37) allowing Corrections yes and then the problem is when you don't get small Corrections uh they kind of boil up to something far bigger and then that's a much worse correction when it happens is that essentially the issue is we politicize Central Banking and if we if we didn't politicize Central Banking do you think they would operate significantly differently I think the problem is incentives always Point toward helping the government over time yeah so in in theory for example they're not supposed to monetize the
(20:09) government debt but then they'll still buy bonds and hold them indefinitely and say it's not really monetizing the government debt because we bought it on the secondary Market they always kind of do roundabout ways um and then even intentions to try to be independent can just get overridden if there's a war and you know Congress can just pass bills and say well you're not really independent anymore uh and even at the current time like you mentioned the the bank uh loan losses the the FED itself and many other
(20:35) central banks they actually have losses on their books like the fed's uh right now their Equity is negative they actually have losses but unlik a bank no one can do a bank run on them and so they're they're not they don't have that issue but how independent can you be when you're indebted to the treasury like you know they're supposed to be separate from the government in in most important ways but they're literally indebted to The Entity um that they are supposed to be independent from so it
(21:03) just feels like we have a we have a growing bubble that feels like at some point is going to explode in ways none of us have experienced in our lifetimes like the levels of debt that exist uh seem astronomical the amount of debt that the that the government has 34 trillion here in the US whatever we have in the UK like something feels like it's going to break I think well what's funny is it it it normally does not break where people expect it to so most people have a tendency to fight the last battle um and
(21:39) so for example um you know in the late 90s we had this huge stock bubble and then that collapsed in the 2000s we had a big real estate bubble that collapsed and so many people are looking today at all these inflated asset prices and saying well we're ready for the collaps but the problem is that the bubble is now in the sovereign debt Market it's treasuries and currency and so one way that can resolve itself is kind of a longer period of above average money supply growth which has all sorts of negative effects I mean the
(22:07) most obvious one is is price inflation um but that it can even show up in in things that don't necess show up in CPI like for example house prices um could be completely out of reach to people and even though they get you know CPI back down to three three and a half% they say well look it's head in the right direction the cost of owning a home is astronomical right now um and so I think that basically this is the type of issue that instead of being one big implosion that kind of all happens at once I think
(22:36) the resolution of this bubble is probably a longer term grind because it it kind of gets diffused through the currency itself over time through inflation yeah which means I mean we've been talking about this for a couple of years now and you you've said you think the story of the next decade or so is going to be inflation yeah and do you think I spoke to Luke wowan and he I think it was Luke he thinks there's a there's a high chance we might have triple digit short-term inflation to wipe out the
(23:09) debt that's so it's one of those things where that can that could happen um it's hard to predict something like that because it's it's a very extreme thing so you're going to be wrong most of the time but if you get if you call it you're going to be you know it's it's a good call if you make it um my general base case is just higher higher than normal inflation for a pretty long stretch of time uh but there are events like energy shortages or things like that that can get you a more extreme
(23:35) outcome um and basically what we're it happens all the time in emerging markets and what's different now is that the the developed countries have this and they've not really had this issue since the 1940s and so a lot of people's models don't really go back that far their careers don't go back that far their models don't go back that far um and there are ways to mask inflation like for example if we get if we get Aid driven productivity increases that that keeps say white collar wages down
(24:05) because people are now competing with AI and we need fewer workers or you know we we can churn out more things because of technology that can suppress the prices of many things um but then it still shows up in asset inflation things that are truly scarce things like houses things like art things like gold or Bitcoin um energy when you have an energy shortage um so you can have very uneven inflation so I do think that a lot of it will show up in things like CPI but I think even to the extent that it doesn't it's showing up somewhere
(24:35) else and that that is also harmful even though if you're on the right side of it it can feel good yeah look holding Bitcoin has proven to be a good strategy over the recent inflationary period and probably will continue to do so but it does feel like the this this period of high inflation is going to have few few winners and a lot of losers it's a real squeeze on society uh the middle class uh and and the lower class especially how does that correct over the over time or is the trajectory of this always
(25:08) we've going to always have a widening wealth Gap until we have Revolution so partially depends on there's kind of two ways to do it one is Revolution Y and then one is kind of a more controlled one where you kind of do it more intentionally so back in the 40s for example there is this wave of Communism happening and the US basically did a thing where okay we're going to get a little bit communist for per period of time and we're going to do some redistribution but not as much as most other countries did there was this big
(25:34) and it was kind of all tied up in the war as well so when GIS came home it's like okay we'll fund their education we'll fund their Technical Training we'll uh subsidize their mortgages so they can get a house um interstate highway system things that were fairly popular at the time um and if you do that productively that's one way to do it they actually did narrow the wealth gap for for decades where where did they take that that money from basically from Bond holders so anyone anyone holding
(26:00) bonds or currency got screwed they also did extremely high tax rates um and but people still kind of felt in it together in a sense and so that's kind of like the it's almost like the mm's dream of how they want it to work out which is okay we we kind of diffuse the money from one place to another and it all kind of works out and we kind of emerge stronger from it but the problem is there's for every one of those stories there's 10 stories where it goes completely off the rails and you get
(26:28) more in Argentina or or any any number of other things where you you you start Distributing and then it just kind of keeps spiraling and people realize if you can do that why not just keep doing it again and again and again and it's very hard to do it a little bit yeah because this is this is what it feels like we're heading towards um you know even with my businesses I can see I I can see the real world impact of inflation right now and then you talk to your friends ask them how often they're going out how inflation's impacted them
(26:59) it's kind of impacting everyone but especially kind of middle and lower classes you seeing businesses close down because they don't have the customer base yet their costs are going up I can I can distinctly see this wealth Gap widening I can't see how it closes and I know we've been through periods of high inflation for I think in the it was the 70s in the UK and and somehow society rebalances and somehow you know the lower uh middle economic classes do get to rebuild themselves but does that also
(27:31) just come through a a grind of being a productive yeah building a productive economy or does it does it actually require government intervention well I think the part of the problem is that it gets it gets that way in the first place partially because of government right so we when we focus on the topic of redistribution we often think of from wealthy to the poor but often that's in response to so many decades of kind of quietly Distributing money from the poor to the wealthy so for example in the 2008 banking crisis you know you you all
(28:03) these Banks making all these crazy loans Bankers making crazy bonuses and then it all blows up and instead of letting all their Bank equ go to zero and get wiped out and uh kind of all get just sorted out they said well we'll come in with emergency loans and sometimes outright Capital injections during the worst time and then they they have like a you know one year of kind of low bonuses and then they go back to huge bonuses again because they got bailed out whereas the average homeowner didn't really get buil
(28:31) out and then even during Co everyone's focused on the stimy checks right they're like that that's what drove inflation but if you actually do the numbers for how much debt was created per household it's tens and tens of thousands of dollars even though that's more than most families got and it's because it went into other things it went into billions of dollars for Airlines for example it went into PPP loans that turn into grants and a lot of that found its way toward wealthy people you know there are people running a law
(28:58) firm or an investment firm or a tech firm and they had no intention of laying people off but they still get this big loan that turns into a grant so you know the average person got say a few thousand doll in stimy checks whereas the partner at a law firm could have gotten a 100,000 or a quarter million kind of a sometimes half a million or a million they get a really big check and that also feeds inflation those people then go out and they buy a second house or they buy a nice car they they travel a lot they stay at hotels they go to
(29:27) restaurants and that that drives up inflation as well so I think it's whenever I talk about the topic of redistribution I always like to point out that it's not just the ones you see it's also the invisible stuff that gets swept under the rug and is kind of always happening in the background so it's it's partially how we got here in the first place Travis cling said to me a long time ago I you know Travis yeah he said quantitive easing is socialism for the rich yeah pretty much and and for the well and and also for the
(29:55) government itself and it depends on what policies of the government's running because it basically what it does is it finances the government even though they don't like to phrase it like that and then it depends how the money is spent so for example in Japan where they're doing it a ton you you could argue at least they're doing it on you know health care which is pretty cheap for them despite their age uh and it's going toward it's going mostly toward domestic things they're not funneling into war
(30:20) for example they're not funneling it toward the top so it's a rough situation but there's a high degree of social harmony there and it's it's not as as people AR aren't as frustrated about it because in the US we're doing a similar thing except a lot of that gets funneled toward the top and so it goes toward people that already have more and so it shows up more in political polarization and that's why I mean I I've argued that basically Occupy Wall Street and the Tea Party were kind of two sides of the same
(30:48) coin they were right and left but they're both basically frustrated that we have this really so we have this very flexible Foundation of money which makes that you can you can always create more of it and kind of give it to some group they didn't tax it you didn't tax it from anywhere else and it was kind of invisible and people often focus on the more visible things even though all that invisible stuff kind of happens under the hood or gets Swept Away over time and they forgotten about wein told and I
(31:15) was told this when I studied economics that deflation is terrible you you don't want to have deflation because people stop spending because yeah they think things are going to get cheaper later on is is that a reality or is that a myth uh and should does does the reverse work true and that in periods of inflation we get a widen in wealth cap in periods of deflation do we get a closing of the wealth cap so it it depends on the fiscal policies of the time but in general the reason deflation gets a bad reputation is because
(31:44) deflation is very bad for highly leveraged systems so we talked about the instability of fraction Reserve banking deflation is very bad for fraction Reserve banking which is what our banking systems currently are so it's bad for it's bad for who which which people in that the people have the debt cuz I'd say that's well anybody who has a bank account yeah which is most people it's one of those things where when you let it when you let the debt when you encourage the debt to build up to those
(32:09) extreme degrees and then you say well now we want deflation you're going to have a really bad time and people are going to find it intolerable and then they're going to run out of it so that's where that's where it gets its kind of bad reputation but in a more Equity based economy so one that's less debt-based and is more Equity based then deflation is a good thing it's good for prices go down over time I the fact that for example that's what chff talks about yeah yeah his exact point so if you look
(32:34) at um say the late 1800s in the US there was long stretches of deflation and yet that was a kind of a major age for new technological growth the us became the the world's largest economy at the time when it often had persistent deflation um the Renaissance was basically built on a hard money situation you had you had this you know the gold floor and that went UND based for a very long period of time um you know those things can be very good it's just that we they get a bad reputation because the way we've
(33:04) structured things for the past Century and a half or so just don't mix at all with deflation so we think deflation is bad even though at at the foundational level it's not but but deflation is worse for the people with the most debt yes because it's harder to pay it off yeah basically you yeah you owe debts in a a unit of money and the amount of money supply is shrinking yeah uh and you know at any given time if you let it build up there's a crazy ratio like in uh the the global financial crisis in the US there was
(33:35) something like $50 of debt for every dollar of Base money okay which means that most of that debt is structurally unpayable um and so you get a situation where if you let it deflate it just starts feeding on itself you never should have gotten it that blown up to begin with and so that's that's why you almost never see a banking system implode on itself uh for too long because eventually no matter what someone's kind of view is they say we have to stop this and reverse it so all the incentives always kind of Point
(34:06) toward more inflation more Supply growth make the debts more payable and so that that side wins like 99 times out of 100 and with the government holding the most amount of debt yeah they have the most incentive to avoid deflation yeah it's extremely rare for a government to ever default in its own currency when they can instead default gradually through inflation and expansion of the money supply instead but if you were if you were a small country with no debt would you favor deflation would that make you a stronger
(34:37) country I mean deflation in that sense is prices going down because technolog is getting better yes I mean that that that's that's good that's a good thing we see it I mean our best performing sector is technology and that's one of the few areas where deflation is happening because it's strong enough to override the money supply growth so for example it used to you know the cost of a mega of storage used to be prohibitive and now that's trivial we we buy terabyte drives for example um and so
(35:06) technology that that field is able to kind of make some things cheaper so quickly that it even overrides the fact that money supply is going up on average 7% per year most Cate most uh sectors can't overcome that but it's funny that people think of deflation is a Bad Thing whereas it literally happens in our best performing sector on a regular basis yeah so it feels like uh Central Bank are playing with the economy yeah with a bias towards ensuring government's best positions to finance what it needs to
(35:36) finance yeah well it's funny there I mean they have a mandate for stable prices and they interpret that as 2% average inflation which is rather arbitrary I mean over at Royal fre op they wrote a fantastic article on this and they said even at 2% this has a compounded uh detrimental impact on the poorest in society yeah one one way to put it is that every every contract that exists so every everyone's wage every business supply contract that's denominated in the currency of a country and so a central
(36:08) bank that can come in and increase the amount of currency Supply or decrease the amount of currency Supply they're basically deciding who on on which side of contract is winning um and on average you know if you're if you're a wage earner uh you you're basically on a treadmill because every year you have to get a raise that keeps up with inflation and it's not just the CPI inflation you're trying to keep up with you want to have ideally you want to keep up with the inflation of prices for the scarcer
(36:35) things like houses uh which is generally a higher number than what we see with CPI so a lot of people when they go to their boss and they say I need like a 7% raise the boss is like well you're not 7% better this year than you were last year but it's really because money supply grew 7% and the person saying look I'm really I Want To Tread I want to keep up with money supply growth I don't want to get diluted and so basically the more inflation there is the more burden it puts on the people that have the status quo they always
(37:03) have to fight for price increases for their wages for their you know their business supply uh whereas if you had no inflation or deflation then it benefits Whoever has a status quo because for example if someone earns the same salary every year but things get a little bit cheaper over time fine um then then they're doing well and of course you know give that enough years maybe the employer has to try to negotiate their way wage down a little bit and argue that look there's been 10 years of deflation and we need to trim it um but
(37:34) at the same time seniority and and experience could make up that Gap so basically it it just kind of determines the outcome of of millions of contracts in a in a country yeah it's a really fascinating way to look at it if you have the lens of uh operating in a company obviously got a few and got various employees but uh when people ask for a pay rise they ask for two reasons sometimes they'll come for a you annual review it's like yeah I think I deserve more I'm doing more I'm good for the
(38:01) company I'm productive and it's usually very hard to argue with if they have been yeah but more recently last couple of years it's I need more money because everything's getting more expensive and it's a real challenge because it's not like we as a company are always bringing in more money sometimes we're bringing in more money or the same amount of money but our costs have gone up and we can't raise our prices and so it's it's I'm it's a proper lived experience of
(38:25) the consequences of inflation then I mean it's bad yeah and I'm seeing it at a minimal SC like what compared to place like Argentina I'm seeing tiny inflation yeah and I've um you know a lot of people when they focus on inflation they focus on savings being eroded that that's kind of the first thing people think of but it was in Egypt where I was talking to a videographer and he was pointing out that you know he he often does work for for foreign clients so he's often charging in dollars and even though by
(38:53) the time it hits his bank account it's in the local currency but he was still better off than many of his peers when they had major currency devaluations because if he charges say $100 for a job and the next and then big currency devaluation he can still charge $100 for a job and it results in twice as much local currency um and so he's kind of he automatically gets a raise that kind of keeps up with the the devaluation that's happening whereas many of his peers that are doing more domestic work and and
(39:20) charging in the local currency you know if you if you do a poll and say how many of you managed to double your prices in response to the fact that the current just got cut in half relative to the dollar and it's virtually zero so even even that unit of account that that things are denominated in can make a huge difference for someone in addition to just their savings being eroded by by inflation I I guess with debt it becomes this kind of uh Doom Loop in that if government's holding debt and they're
(39:49) not paying down the debt and there's periods of high inflation um they're going to have to continue to borrow more and more yeah and this is this is why we get hyperinflation cuz it's I mean we saw 800 billion during the global financial crisis and then whatever it was like was it like a couple of trillion during Co then I've s seen reports of like four trillion this year and and it's a growing debt but that it's still a liability they have to service the interest on yes and so yeah Imperials are high also in high interest
(40:19) that feedbacks there's a feedback loop into it yeah it feels I mean it feels evil firstly um but it feels like this is purely and entirely a political problem yeah and it's what I think what makes it hard is that it's built up over time yeah so right and and that's why inflation is successful because it's it's it obvious gauged the cost like if you had to do something and you had to raise taxes to do it people would know right away um like I say we want to go fight this war we're going to do a war
(40:50) tax it's going to be very unpopular most likely yeah um whereas you say we're going to do a war we're going to print money um we're going to rack up debt that's later going to get bought by the Central Bank uh the cost kind of gets put away for years or decades and so for example now we're sitting here with very large debts and deficits and some of that is driving inflation and everyone's saying is it is it Biden's fault is it Trump's fault is it both and no one's sitting there thinking well is it is it
(41:17) related to the Iraq War for example decades ago was it related to how the entitlement systems were set up decades ago and yet all of those past decisions partially led to where we are now but those get forgotten about which is why it was successful for from their perspective in the first place they they got to push the cost onto someone else and it becomes someone else's problem hence why we need to separate money and state because politicizing money and giving access to the money printer to governments you leads to corruption
(41:46) overspending irresponsible policy and uh it can affect entire countries of people I mean yeah we we have extremely poor countries who are extremely poor because of the decisions made by the people around that country yeah and and by controlling money those decisions can be so ubiquitous that they can affect everyone and so like we're here at the oo Freedom forum and when they talk about Bitcoin it's often focused on the censorship resistant aspect but you can argue that constant inflation is also a human right issue it basically prevents
(42:19) people from building up Liquid Capital reliably it either forces them to monetize IL liquid things like real estate or just keeps rug pulling them year after year after year and they're never able to build any sort of you know serious capital and and kind of better themselves if we were to think on on an Ideal scenario do do you still believe a central bank inherently is a good idea if it was if it wasn't politicized if it had pure Independence I mean I think they really only make sense in the context of
(42:51) fraction Reserve banking I think if you had a a money that was both scarce and fast it's very dangerous to build fraction Reserve systems on top of that so I mean I think I think a healthare system is one that's just it's duration match lending um I I think that's ultimately the the most sustainable way to do it and the funny thing is right now when when you hear the phrase like Shadow banking right you'll often hear that there's Banking and then there's the shadow banking Market some of that
(43:17) shadow banking is actually full Reserve banking by another name so there are for example credit funds they'll take in investors money um and then they'll lend it out in a variety of ways um but that money that they've put in is is kind of locked in um there's no guarantee for them that they have kind of ability to withdraw in any kind of tight time period um and they know that going in um that that's how those funds are supposed to work and so they can say look we're a liquid at the moment we
(43:44) can't process all the withdrawals um and that's normal in a in a duration matched lending environment um so yeah I I generally argue that central banks aren't necessary at all um unless someone is trying to Alize and run a fraction Reserve System so how do how do you think this will work in a fully Bitcoin system because we have seen recently obviously Biden vetto did but Banks want to custody Bitcoin yeah and so where does that sit within their assets or their balance sheet or what they do and how much risk does this
(44:15) present holders of Bitcoin who are custody in with them do do you envisage a scenario where they'll fractionally lend based on the deposits of Bitcoin or do you think they will segregate that from the rest of their business I think of that'll less likely be an issue for a while because there's not that much demand for Bitcoin denominated loans yeah and historically where there have been it's for it's for leveraging it's for you know you're borrowing Bitcoin than you're your you're buying grayscale
(44:44) for example that that's kind of an old trade of the past um there's not a lot of like like commercial uses of a Bitcoin loan um while it has this kind of big price variance um so I think it's less about that and more just about you know exchange hacks or custody hacks and things like that for example I don't really expect Fidelity or Black Rock necessarily to fractionally reserve it uh or reh hypothecate it um because it's such an easy mistake for them to get caught out on it um but it's possible so
(45:18) for me I think the bigger risk is probably State confiscation that if everything kind of gets pulled into big large buckets they can say look these things are new longer withdraw drawable they're and you can make up reason XYZ you can say it's 6102 in our Bitcoin yeah or at least saying you know it's it's wal Garden Bitcoin and uh we can't let into the wild because of terrorist financing or whatever the reason they they can do um that I would consider probably the bigger risk because I'm less concerned
(45:49) around how Fidelity manages their Bitcoin or Black Rock I'm more concerned with what they might be told to do with it one day because they want to steal it because the their own economy screwed their own currencies screwed it could be it could be that reason um it could also be I mean over time the financial systems become more and more surveilled more and more controlled and they don't really like freeer range Bitcoin too much uh it's harder for them to fre free- range Bitcoin so they could eventually clamp down on that especially
(46:20) if there's some major negative event and people get very emotionally driven you know like imagine if like 911 was obviously a very um you know tragic event but then they were able to get the patri attack through fairly easily and they were able to drum up uh you know people's uh desire to go to war with a country that didn't even wasn't even involved in the tax you know Iraq um imagine if there's some sort of similar major event uh and they say look we have to clamp down on bitcoin we can't let
(46:51) terrorist financing happened with it or we can't let XYZ or you know we have to have more control over this and you can get kind of an excuse to to block the exits even just even just Financial repression like for example when Argentina is having a currency crisis and they you know they pass things saying Banks can't you know offer it to their customers or even fintech companies can't offer it and they never say it's because we're having a currency crisis they say look it's you know moneya laundering and AML and we have to
(47:16) maintain Bank stability they they'll say any number of kind of normal sounding jargon for why they can't do it when really it's because they don't they want to slow down their currency crisis you see that with Nigeria you see that with turkey um and the way they're often phrase it is either something like that like we want to do safety and stability or they'll blame quote speculators the people are speculating with the currency and so they'll try to block the exits there and kind of demonize a certain
(47:44) group so I I do have concerns around in many jurisdictions eventually a sovereign entity kind of taking over those big Bitcoin honeypots [ __ ] okay not your keys um one of the other interesting things that's been obser I've been observing is the interest rates when you borrow against your Bitcoin you borrow dollars so if you go to an Unchained or a Leen um you'll be paying double digit percentage interest rates uh generally much higher interest rates than you'll pay on a mortgage or even on a loan um
(48:18) and I know there's a combination of risk factors here um but if you then I've been looking at the rates you get saying defi applications and by the way anyone list do not recommend using defi I don't trust it but I do find it quite interesting the rates there are a lot lower and and it feels like that's been a technology solution to get the price low in that they're not having to go to physical Banks to borrow money and and pay an interest rate they just have to collateralize the loans yeah and so that
(48:47) in some ways feels more like a free market for rates than those like LED in and Unchained who are you know potentially uh subject to the the the uh uh Central Bank interest rate yeah I think there are interesting price signals um from that um but I think I think also part of the issue is people underestimate the risk that they take on and so with defi it's less risky for the borrower but it's very lisky for the lender because in addition to liquidation risk you have hack risk yeah and that's something that often get gets
(49:24) kind of overlooked I think so it's it's not necessarily priced accurately um and but you know I would expect probably over time for the Bitcoin collateralized lending rates to go down because if you look at mostly how they work like the ones that do it properly like on chain for example there's no rehypothecation um those have very low loss rates I mean zero in many cases because you're fully collateralized by the Bitcoin it's a liquid Market technically the only way that you could really as a lender lose money is if
(49:56) Bitcoin had has a very liquid loss in in price so it basically you would it would lose value so quickly that you can't even sell the collateral and recoup the loan um so outside of that very specific scenario it's a mostly risk-free lending you'd expect the rates probably go down eventually but it it's not a market that I I follow super closely actually with Len they offer two different rates they offer uh segregated protected funds and uh co-mingled and assume re hypothecated fund options and you pay a higher rate
(50:30) to have it um in the segregated wallets which is a kind of interesting option because it's like oh crap I want that lower rate but I'm they're pricing in risk and I I think most of these things is quite it's quite interesting I'd rather have I'd rather have my pricing coming in from risk and I have the choice yeah than a central bank setting the price of money yeah I agree I agree and I think that then it just comes down to making sure that the terms are known to people so one of the one of the
(50:58) criticisms that um people have against fraction Reserve banking is that the depositor often doesn't really understand how that works um that it it can be categorized as fraud because you know um like if I go to my bank and I sign up a bank account you know and I'm signing whatever long things they're doing it might say somewhere that they could have liquidity issues or something but most people when you ask them a lot of them think the bank actually has their money yes um and and so it's like
(51:28) would it be the same if everyone was kind of educated on what exactly they're signing up for when they sign up for fractional Reserve banking um but yeah they don't really want you to be educated yeah yeah I think they they don't really want you to so I think but I think yeah you can argue that a free market especially when it's an educated free market and people know what they're choosing um you know I think obviously that's better than a centrally controlled price for money right so do
(51:53) you think we will end up in a place with no central banks there eventually long time I mean if if the more successful Bitcoin is the more that makes that likely I don't think it's going to happen in 5 or 10 or 15 years um but I think over the long work of time it's certainly possible um and that's why I'm less interested in kind of movements like and the fed and it's more like I'm interested in building an alternative yeah and and seeing that out compete the FED grow the Bitcoin yeah in
(52:23) the FED all right Lynn we'll keep this one short because we're uh we both want to go enjoy the rest of the freedom forum and thanks for taking some time out to do this don't know when I'll see you next Nashville I'm not going to go to Nashville this year I'll be I'll be in Egypt wow okay yeah uh Pacific yep I'll be there most we'll see you in September yeah I'll see you there thanks Lyn see you later everybody
