48 - Death of Dollar Dominance | Lyn Alden

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david this was a fantastic episode with lynn alden what were your takeaways yeah lynn alden has just been the rising star i would say of the second half of 2019 and get definitely going strong into 2020. she said she got uh got

notoriety when she started talking positively on b about bitcoin on macro podcasts and that the the feedback she would get when she would talk about bitcoin and micro podcast was way stronger than this the typical feedback as you would imagine bitcoiners tend to be like that and so she has just gone around the gamut with uh just producing content that is very macro focused using bitcoin as a frame and positioning bitcoin into the macro context we actually got her on a pod got her attention when we were talking to her about

she had some questions about ethereum and kind of how nodes work and centralization questions kind of the typical questions that you get if you uh find yourself inside of bitcoin circles and that actually that conversation led to this conversation here on the bankless podcast we do touch on that subject at the very end but something that we have in common on the bankless podcast with lynn alden is discussions uh about the concept of the fourth turning or peoples and societies just perception shifts or some sort of crisis event where people choose to just perceive value

elsewhere and access order in the world from uh somewhere else that's from their previous institutions lynn alden is privy to that conversation and she speaks uh in in similar terms with the fourth turning as with ray dalio's long-term debt cycles and so we get into that conversation with her about how this money foundation is shifting beneath people's feet and that is creating a tumultuous societal environment in this present moment that was my big takeaway ryan what about what about you

well yeah i just think the listeners if you guys are interested in trying to figure out how to position yourself for the next decade both in terms of investing but in terms of kind of life and in terms of crypto this is definitely the episode to listen to glenn has a fantastic mental model that i think will prove to have predictive qualities for it uh and i also think david was really good to discuss with lynn sort of the the ethereum uh perspective as well we kind of you know challenge uh some of her ideas on ether

as nasa and d5 so make sure you guys listen to the end and if you want a full debrief of our after the podcast conversation just with david and i where we talk about the episode that was and we dumped sort of our thoughts out that is available for full subscribers on the bankless premium feed we will include a link in the show notes to that if you are a bankless premium feed subscriber david i've been enjoying these debriefs it's it's kind of good what's your take

on them yeah it's been pretty fun because we would have these debriefs anyways after the podcast as soon as the podcast was over like we would hop into a discord calls discord has a great calling feature by the way and we would just talk about the podcast for for 20 30 minutes and then we realized that people really want those conversations and so those are some of the conversations where you know not only did i learn a ton in the actual podcast recording with the guests that we had on but i also learned uh a lot with the discussion with you about how to you know integrate that into you know other theses that we have like the bankless theses the the the triple point asset

thesis depending on whatever the subject matter is so that's actually where a lot of learning happens for me as well and i'm i'm pretty happy that we were figuring out a way to share this with the banker the bankers oh gotta cut that out the bankless full subscribers yeah just like you guys we are figuring this out as we go i uh commented recently on twitter this very much of what we do with like kind of education around cryptos like sort of like three-year-olds teaching two-year-olds like we're all just figuring this stuff out

as we go um so this conversation with lin is a key part of that and before we get to that conversation with lynn we want to tell you about our fantastic sponsors ave is a borrowing and lending protocol on ethereum and just recently released ave version 2 which has a ton of cool new features that makes using ave even more powerful with ave you can leverage the full power of d5 money legos yield and composability all in one application

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risen to fame in the bitcoin universe for some sharp analysis on long-term macro trends and she's got a ton of data to back up her analysis her her blog is one of my favorite places to hang out to understand macro and economic trends and because global macro events have such a strong interplay with crypto we wanted to bring lynn on to help us understand the big picture here lynn welcome to bankless how are you doing today

hey i'm good thanks for having me lynn some people thought that our financial system sat atop a house of cards before covid hit so our first question to you is is our is our global financial system in a precarious position right now uh in a sense i mean it depends on what part you're looking at i would say it was in a more precarious position right back before the great financial crisis uh and that's where we saw a lot of the kind of the internal bailouts happening there uh because if you look at for example uh you know how much bank reserves you know banks

had relative to their liabilities uh that's actually you know when they hit an all-time low since then they've been a lot higher uh so it's kind of like the core banking system's already been built out uh but now we have kind of a more broad kind of social issue wealth concentration high debt levels all sorts of things like that and so in many ways what happened uh you know about 12 years ago mirrored a lot what happened in the early 1930s uh after the you know the famous 1929 crash uh whereas kind of the environment we're going in now uh looks a lot more like 1940s you know hopefully

without you know the war that they had uh but the basically in terms of a physical environment like a massive kind of spending environment and kind of a broader bailout of society and that so so that kind of one-two punch uh kind of a private debt bubble and banking crisis followed by like a public uh debt bubble and you know that tends to be more inflationary but then aside from that we also have for example the way the global monetary system is constructed that's a whole nother beast entirely and so you know if you go back you know before 19 1944 you had you know a variety of

different gold standards uh and then from 1944 to 1971 you had the bretton woods system that eventually broke down uh in the late 60s and it kind of officially broke in 1971 and then since then we've been on the petra dollar system and signs are starting to show that the petro dollar system's starting to you know basically fall apart as well uh and so that's somewhat different than the debt problem uh but you know it's all kind of comes to a head probably here you know over the next 10 years as we sort some of this out so does that mean to say that you actually thought that the financial

system was more precarious before the 08 crisis and the 08 crisis reset ourselves to to some degree and we're actually perhaps in a better place than we were pre 2008 i think it depends on which part of the system you're looking at and so for example in terms of the way the global monetary system is constructed so uh you know the whole way that the international countries do trade with each other and what currency they use that's in a worse state than it was 12 years ago however if you look at for example the domestic u.s banking system it's more capitalized than it was back

then and it's because it basically imploded about 12 years ago and due to those bailouts it's at a much higher level of capitalization now and so by that particular metric uh it's far less fragile and that's why for example in this crisis despite the fact that this was a much bigger economic impact we haven't seen a lot of bank failures like we saw back then because that was specifically a banking failure whereas this is a broader uh solvency issue so it really depends on what what aspect you're looking at this broader solvency issue that you're talking about where we start to get into kind of like what is

money and reserve currency status and that sort of thing is it just a harder problem to solve like more difficult than what we faced in 2008 uh yeah i think so because you know what we faced in 2008 uh basically there was a handful of actors that could be billed out and of course there are all sorts of issues like that we saw occupy wall street and other sort of kind of push back against that because you know you had people lose their homes and they you know they did generally didn't get bailed out but then you had the banks that you know were going to lose their homes but they they're the ones that

often got build-outs and so but in terms of basically how they capitalize the system uh that's the easier problem to fix uh whereas how to uh you know basically restructure society is a much harder problem and if you go you know if you go back in history uh you know after you get the banking crisis that later part actually tends to be the hardest part and so that's kind of where we are in the cycle and it you know it feels a lot different so a lot of people you know they fight the last battle so that you know they always think that the next recession is going to end up being like the previous one before it uh but it ends up being you

know basically imploding from another area and so rather than having another banking crisis this time we had you know a much different area was impacted it was the it was not the you know the leverage in the bank system that was the issue it was some of these other broader trends so so many people and perhaps we could call them doomers um if if some people would call them dumers think that uh there was going to be some sort of event uh pre again pre-covered that would destabilize the global financial system and it doesn't matter what that event

was and it was going to create this a financial crisis no matter what the actual pre-crisis was and so now with kovid we are seeing that there there is a health crisis yet the uh the vaccine is starting to be rolled out uh it kind of feels like we're maybe in the sixth or seventh inning of a health crisis yet some um some of these people some of these doomers might say that we are actually just in the beginning of a of a long-term financial crisis and maybe you don't feel so strongly about maybe the the crisis word but i i have

read some of your writing that you do believe that we are in a very transition phase a phase change the transition uh period where we are going from uh one one spot to to the next what are you seeing ahead of us that we are transitioning into and what are the kind of the the macro forces behind that transition yeah so i i think you know kind of the main crux of it is that in the 2020s i expect a significant currency devaluation uh because we're at the point now where uh you know you know if you look back for example in the 90s you

know they they you had the implosion of long-term capital management you know basically you had you know systemic issues among hedge funds and they basically had a bailout of that you kind of kicked it up a level then you had the equity bubble uh in the late 90s right after that uh and of course when that you know imploded they they cut interest rates and they kind of kicked that up to the housing level uh and then when that all blew up uh that's when they they they transferred the leverage to the the sovereign level and so at that point doesn't really have any further to go other than a currency devaluation and so

that's generally what you see at this stage in the cycle and there's a couple ways to accomplish that i mean they you know basically they can run massive fiscal deficits the central bank buys a lot of the bonds to finance those deficits and then if interest rates try to rise to compensate for any inflation that can happen they can potentially lock yields below the inflation rate and even right now for example at the treasury markets you know pricing in two percent inflation uh but the yields are like one percent and so you anyone holding treasuries is currently you know slowly losing purchasing power and of course there's different ways to measure

inflation so it could be faster than that so and that was somewhat different than we saw back in the 2010s decade that was a more disinflationary decade because you didn't see a broadening you didn't see a rapid increase in the broad money supply instead you saw a rapid increase in bank reserves which are more about capitalizing the bank system under the surface uh whereas now you're seeing it at a you know broad money supply so the amount of currency and circulation the amount of currency that people hold and you know in deposits and banks that's all rising rapidly which is a somewhat more inflationary outcome uh but of

course we also have this big deflationary shock in the form of people you know they're not traveling they're not spending on things and so you know we're kind of held up in our homes right now still to some extent uh but you know as you look out you know deeper in the 2020s we kind of have our the situation now where we have structural fiscal deficits in many places in the world and high sovereign debts uh they can't support positive real yields and so people all around the world have a store value problem uh and then there's there's deeper issues for some emerging markets and you know you know the way that energy priced around the world uh

because we have kind of these dynamics of of the global reserve you know petrodollar system that's starting to kind of have issues around the corner and the main issue there is that for example all these foreign countries have dollar dominant debts uh and that so whenever they can't get dollars you have a problem uh but in addition the u.s banking system uh you know even though they were well capitalized uh they ran into issues back in 2019 uh because they were such an oversupply of u.s treasuries they're basically forced to buy and so

i think if you look at say doom and gloomers they're always talking about a crisis around the corner i think one of the key things you have to take into account policy response that happens and so for example you know some of the more sophisticated analysts say here's a problem and that's why we expect a response to happen and so for example uh there were starting to be a lot of uh signs of financial stress under the surface in the u.s banking system in 2019 and that eventually manifested itself with a spike in the repo rate in in september 2019 and for people that don't know what that means that's basically an overnight lending rate between banks and it just kind of sprung

a leak and literally tripled overnight and so the federal reserve had to come in they ended quantitative tightening and they started doing quantitative easing and basically expanding their balance sheet again to push that leak back down and then of course in early 2020 we had a much bigger issue and if you look at you know of course we had all the coverage stuff we had the shutdown we had this you know massive thing happening but for people that were following bank liquidity uh you know following kind of you know some of the financial markets you know behind the stock market the actual kind of debt markets and stuff uh what you had happened was you had to scramble

for foreigners to get dollars to service their dollar dominant debts and in order to get those many of them had to sell treasuries right so you have foreign exchange reserves all around the world that hold treasuries and so they started selling some treasuries in order to get dollars but that rendered the entire u.s treasury market illiquid and so the federal reserve had to come in and buy a trillion dollars worth of treasuries in three weeks and basically reliquify it and so you can read all the the federal reserve like meeting minutes i mean they had emergency meetings to try to you know stop this and i think i just basically think that one of the main

issues that people have in terms of doom and gloom is that you always have to take an account the policy response so that basically left unaddressed was a doom and gloom scenario but they have taken account what happens when it's printed trillion dollars and that that opens up of course its own set of issues uh but it's not the initial crash it's what it's what happens later and that's why whenever you have these kind of deflationary debt-based shocks instead what you know instead of all kind of unraveling like a house of cards usually you get an inflationary response and then it usually kind of grinds itself out through inflation you know later in

time so so lynn i i want to jump in here because so your prediction when david asked about what are the 2020s going to be like you use this term currency devaluation and then you made the the apt point that everyone always thinks the next crisis is going to be similar to the last crisis that they lived through or even the one before and the trouble with something like currency devaluation is we all know all listeners like they felt 2008 at some level right you know most of their kids are like a little bit older but

i'm i'm guessing the vast majority maybe 95 of our listeners today lin they have no idea what the 1940s felt like right and the type of currency devaluation that you're talking about um you like in a bit more to the 1940s rather than kind of the 2010s or maybe even the the 1970s can you paint a picture for us of what you expect in this term currency devaluation in the 2020s what you actually

expect that means for i guess ordinary people living and investing and trying to save money in this world what were the 1940s like that are going to be similar to the 2020s yeah sure so if you look at you know over the past century the united states has had three uh inflationary decades uh or two of them so far and you know potentially but like like moving into a third one here uh so if you look at the 1940s uh you know they'd just come out of the great depression right so you had yeah this big kind of deflationary

impact uh but going into that you know in the 1930s there's a big private debt bubble and that all unraveled there's there's far more debt there's business debt there's financial leverage and a lot of that unraveled it was a big deflationary shock uh so what the what the you know the united states government did was they devalued the dollar relative to gold so you know the dollar was backed by gold and they changed it so it was backed you know like uh you know one dollar is worth less gold and that helped the banking system recapitalize uh because they hold gold as reserves

and they you know a lot of their liabilities were dollars and so if you if you change that that ratio for how those work suddenly they have more dollars worth of reserves because their gold reserves are worth more dollars and so that was a you know a devaluation but it wasn't very inflationary because again that was mostly with inside the banking system and so all that did was kind of undo a deflationary spiral it wasn't until the 1940s that you saw actual inflation and that was because the u.s government started to run massive deficits like you know 15 20 25 deficits a year uh and

because there's so much treasuries issued to fund those deficits the public couldn't buy them all so you had the federal reserve basically print money by treasuries and because sovereign debt was so high so federal government debt was over 100 of gdp uh you know when he started to see inflation they couldn't raise rates because it would just it would you know would render the us government solvent because when you're running when you have 100 debt to gdp and you're running 20 deficits you can't have high interest rates on that and so they just said no no we're going to lock yields at 2.5 or

less and we're going to buy any treasury we need to in order to maintain that peg so you had inflation going to the double digits even as interest rates stayed at 2.5 percent and so anyone holding cash or treasuries uh you know you got all your money back nominally no one defaulted on you if you were holding that safe paper but you lost purchasing power compared to commodities so so let's talk about that for a minute because like i said none of our listeners have lived through that right so um like t-bills are a safe bet right now that's kind of common common knowledge but what you're saying

in the 1940s is they were not a safe bet you could end the 1940s by storing all of your value in u.s t-bills essentially and have a lot less value than when you started the decade what was the move to make in the in the 1930s and in the 1940s as kind of an investor that's just trying to to store wealth and store value through those decades who were the winners and the losers uh so most of the moves to make back then would have been basically to buy equities or to buy commodities

and that's because of course throughout the 1930s equities were very cheap because you know growth was slow everyone was pessimistic and when you're you're fighting a war not many people are buying equities and so they are very cheap there and so is basically the right move was to buy equities by commodities because those were all in demand and as the war kind of went on you had of course you first you had commodities spike in in price and as the war ended the the stocks did very well and so the worst move to make was basically to hold money in the bank uh or to hold

treasuries uh because even though you did get all your money back there was no nominal risk it's not like that the us treasury defaulted it's just that you know you got all your dollars back but at the end of the decade they lost roughly a third of their purchasing powers you could buy about one third less of a home you could buy a third of the amount of copper you could buy what you know there's different ways to measure it some things are more or less uh but overall is about a third of your purchasing power which you know over a decade is terrible i mean over a decade you expect to grow your purchasing power uh but without you know with those kind of paper investments

instead lost about a third of it and you think lin something like that could happen in the 2020s so i have a thousand dollars and i want to store my wealth for the decade at the end of my decade my nominal value may be maybe higher but my actual purchasing power might be 70 percent might be 700 rather than a thousand at the end of the 2020s you think something similar could happen i think potentially i mean even if you look at over the past uh decade if you held for example t-bill so the short end of the treasury curve

you lost a few percent of your purchasing power compared to cpi or compared to assets like you can buy a little bit less house you can buy less you know of apple you know apple's market cap whatever the case may be you basically can buy less stuff than you used to the one thing you might be able to buy more of is certain commodities like oil for example because you've been in a commodity bear market but you know in terms of official cpi which of course has its own flaws you can buy less stuff with your thousand dollars held in t-bills because it just failed to keep up with inflation

but of course that was a very it's a very small loss it wasn't a very large loss now in the 20 in the 2020s i do think it could be more significant i think at the very least you're going to get another one of those decades of just you know gradually losing purchasing power and it's possible like that you can get more like 1940s or the 70s and you know in terms of losing 10 25 maybe more lynn i think it could be really helpful to take a pause pause for a moment and define different types of inflation for our listeners because they're when we

people say inflation they end up in perhaps an argument that it's more of a semantic argument rather than a fact-based one maybe you could uh for our listeners give us your mental models about how you can define inflation in different ways and in what ways are those definitions useful yeah so there's one core way and then it can manifest manifest itself in two ways and so the core way is an increase in the in the broad money supply and that's basically that there's just more and more dollars out in the system uh and so you know in the 1940s and 70s

the two inflationary decades you saw a big increase in the money supply and you know in the past few years again you've seen another big increase in the money supply and that's why i think we're leading up to a more inflationary decade now where that inflation manifests uh can vary based on what the fiscal policies are what the you know the the kind of economic environment is uh and so if it man itself manifests itself in consumer prices or commodities that's when you get what is kind of more commonly thought of as inflation and that usually comes about because you have some sort of commodity shortage

or you have rapidly rising wages there are a couple of different ways that can happen uh and so the 1940s it happened due to very large fiscal deficits that were monetized to fight the war uh in the 1970s it happened because you had the dollar go off the gold standard and then you had oil you know oil scarcity because opec was squeezing us and so you had that issue there and so the other way it can manifest is in asset prices and so if you don't have uh commodity shortages and you don't have rising wages we still

have an increase in the money supply then sw has is that the money supply the money velocity decreases and that money kind of just pours into financial assets so stocks uh houses gold uh all these you know late you know in this decade cryptocurrencies uh all these different kind of anything that's kind of somewhat scarce so it could be fine art it could be wine it could be classic cars all those things go up dramatically in price and so for example if you look at the the price of a super bowl ticket uh you know the past 20 years that's gone

up dramatically even though it's the same venue and it's the same you know sporting event uh but because it's a scarcity and so anything that's really scarce uh that will go up uh even though you won't have say increases in you know the cost of bread or the cost of copper something like that so we've had we've had um over the past decade we've had um definitely this asset price inflation we've not seen the the cpi related consumer price index related inflation

uh that you talked about and we've absolutely seen the monetary supply inflation we can include some links to to some graphics in the show notes particularly with with kovid but i would say lynn that um it seems like the investing world in the financial world is not blind to this necessarily but it is probably a common belief that if you want to um like hold value during this asset price inflation you could buy things like real estate or you can buy things like uh equities and

stocks um i i heard you keep making the the case with the 2020s like the the 1940s of things like that are scarce things like commodities right those aren't necessarily equities those aren't maybe it's maybe it's real estate to some level but do you think that that that paradigm that i think is is probably a common belief that hey if what you say it's true the 2020s are going to hold a lot more currency devaluation um that inflation will manifest itself in asset prices so i better hold a whole

bunch of stocks essentially and and real estate right that seems to be what wall street's thinking anyway do you think it'll play out like that and did it play out that way in the 1940s i think it'll play a little bit different and so for example if you look at the 1940s like i said before the benefit the stocks had was they weighed into that decade at very low valuations and so when you had an increase in the money supply and you had their earnings go up you had a lot of room for those stocks to go up in value and you know whereas if you look in the 1970s for example stocks went into that

decade at very high valuations and so when you had inflation you had rising interest rates which was different than 1940s because in the 70s debt was low and they were they were able to rise uh interest rates to fight inflation and that's that's a killer for stock valuation so that you know stock valuations went near record lows uh so in this period we're of course entering this with extraordinarily high stock valuations uh real estate's more mixed i mean if you look at for example a penthouse in manhattan it's very expensive but the you know residential house in many areas is not particularly expensive so it's

kind of a mixed bag there i think kind of if you go forward uh looking at commodities that's that's kind of a more kind of high probability bet on inflation uh and then you know same thing with digital assets and things like that whereas i think some of those traditional assets uh they're they're far less certain you also have to kind of break it down by sector or geography so so we've had a very kind of a sharp period of u.s equity outperformance compared to the rest of the world and particularly growth stocks and that's because you've been in this kind of disinflationary

environment but if you have that reverse you start to have kind of more money flowing to say the working class or middle class maybe green new deal whatever the case may be starting an actual increase in cpi inflation that's when you would generally see value stock outperformance compared to some of these growth stock outperformance and that's of course that's what you also saw in the 1940s and 70s if you look at under the surface what the index was doing you saw that kind of rotation happening and so i would expect to see more international equity outperformance and value outperformance in this decade which

would be the opposite of what happened in 19 in the 2010s it's kind of interesting because what you're saying is like um people thought that this that what you're saying was going to play out actually in like 2009 2010 you know with uh broad currency devaluation gold price shot up and it didn't play out that way why is this time different uh so a lot of it's because the broad money supply is going up this time and so back then bank reserves went up uh but not broad money supply so if you look at broad money supply it didn't really change if

you look at you know where it was in 2006 where it was in 2007 8 9 10 11 there wasn't a big change you just kind of kept going up on this normal trend instead the bank reserves are going up underneath the surface which just recapitalized the banks what we're seeing now is is that you're in addition to seeing quantitative easing you're seeing the federal government hand out checks to people they deposit them in the bank and you basically get a rise in the broader money supply uh combined with the fact that you know back then we're at the kind of the peak of a commodity cycle so we were kind of had we were in a period of