Balaji explains his Bitcoin bet

This is how it all went down. There's a pseudonymous Twitter poster named, calls himself James Medlock, describes himself as a tax enthusiast and hyperinflation doubter and says, I bet, I'll bet anyone $1 million that the US does not enter hyperinflation. That of course being a sort of joke in itself in that if it enters went to, if we had hyperinflation, the million dollars wouldn't be worth so much. But Balaji, you jumped in and said, I will take that bet. You buy one Bitcoin, I will send a million US dollars.

In a sense, this is a bet that I've already won and a bet that I've already lost. Right. Why? Okay, so the point was to bring attention to the stealth financial crisis that at the time that I tweeted this, that had not been acknowledged as such. People were treating it as an isolated bank failure. They were trying to say that the Fed had nothing to do with it. They were trying to say that, oh, of course, everybody knows how to hedge duration risk. And it was just, you know, one dumb bank manager. People were not talking about the fact that the crypto exits were being closed with crypto banks getting shut down and crypto companies getting assaulted. And so how do you punch through that? Right? How do you, how do you go like, you know, you have cnn, you have Wall Street Journal and like Martian is reporting on this some, somewhat, but they're reporting it on a, as a, like a blow by blow basis. Like this bank is going down and this thing has a problem as opposed to an overall narrative that puts the facts together in a different way which says the Fed actually killed the banks and, and that's actually the up hand like marginist and firefighter. Right. And that gives a model of what to expect. So point basically being how do you punch through that cycle? And I actually a few days earlier had a different thing where I was just basically paying people like a thousand bucks to post about graphs and charts on this stealth financial crisis. And then mocking that came and he was like, oh, and then the US will never enter hyperinflation. And so then I was like, okay, fine, why don't we, why don't we take this little bet? Because I had already set out to essentially burn money as a public service to alert people to the self financial crisis. This was the post that I wanted people to see. Okay, It's a reply to the bed post and essentially lays out a completely different narrative than what you'd read in the press where, you know, insofar as if you're to believe Twitter before this. Some immigrant engineer in Sunnyvale is responsible for finding a hidden insolvency in a footnote of a bank 10Q. But Jerome Powell is responsible for nothing. Right? That literally what the narrative was. And I knew hundreds of like Indian founders, other founders who are like, I don't trust us banks and moving their money back home, just getting their money the heck out, not knowing what the hell was happening, just knowing they were getting blamed for the bank losing their money and pulling it all together. Essentially, just as in 2008, the bankers lied. This time the central bankers, the banks and the bank regulators have lied to all dollar holders and depositors. Not your typical fractional reserve situation. There isn't enough in the banks on a mark to market basis to cover withdrawals. They knew this all through last year and communicated internally in their coded language. I give a bunch of citations. The keyword is unrealized losses. Citations to the Fed, citations to fdic, citations of banks themselves. Citations to the bank's accountants showing them how to hide the insolvency. I'm not selling any bitcoin. Holding bitcoin until US Dollars no longer observe currency.

Because the allegation would be that you own a lot of bitcoin, so you're trying to pump up the price to make more than the one or two million dollars that you've bet.

Yeah, exactly. That's his allegation, which is false. And I've rebutted it publicly. First, obviously, disclose I've had bitcoin forever. But second is I didn't actually even propose this bet. I accepted it. Right. It was somebody else who proposed it and so on. They're poking at me. Third is that this is like a Simon Ehrlich style. That's like an ideological bet. I can't actually make, you know, money on it. It was meant to prove a point about this financial crisis. And you can see my state of mind if you go and look at the tweets since like March 11th. Like, essentially what I'm doing is piecing together this narrative that I just kind of described. I was trying to figure out what the heck, looking at real estate, banks.

Okay, so it's a. Sorry, so it's a. You're saying it's a Julian Simon, Paul Ehrlich style bet, who famously made a bet, trying to see, you know, you know, Ehrlich was, was predicting that we're going to be overpopulated and commodity prices are going to go crazy. Julian Simon said, no, let's bet on this basket of commodities and Simon famously won that bet. So he, he actually believed that this was not going to happen and he won the bet. I guess that's the one question I want to get to you before we have Larry weigh in here is like, do you actually believe bitcoin's going to a million dollars or is it really just to draw? Is it like a, you know, drawing attention to this problem that you've laid out?

I think bitcoin will eventually go to a million dollars. I do think there's some. Arthur Hayes also thinks it's going to million. Like, basically, I think we're now in the, the final stages of fiat in a sense. Like they have realized that they cannot. They tried this rate hiking thing, they buckled. They're now printing again. So we're in like. And we're already in a base of high inflation. And unlike 2008, the US dollar is no longer too big to fail. Like, it has two scale competitors in the form of BTC and rmb. And God help us if rmb, if they open the capital account and China's new currency, then we're all under some horrible surveillance state. Even the dollar itself is being turned into something pretty terrible I think with this Fed now thing, which is not technically a cbdc, but it's got many of the negative aspects of CBDC for civil liberties. So. So, you know, the thing is, timing is. Timing is hard. Prepping is easy. Okay, so I don't know exactly when this is going to happen, but I wanted to draw attention to the combination of A lots of small banks being destroyed with money being centralized in, in big banks or money market funds. B, the crypto exits being closed. C, an enormous amount of printing beginning and then D, in midst of all this in July, pushing up the timetable evidently for the Fed now launch, which would make it easy to impose capital controls and lock you in to a system of potentially devalued dollars.

Let me play a clip from Fed Chair Jerome Powell expressing a contrary opinion about the state of the banking system. And, and then Larry, I'd like you to weigh in and tell me, you know, do you side more with Balaji, do you side more with Powell or do you have a totally different take on all.

This system is sound and resilient with strong. Our banking system is sound and resilient with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound.

What do you think Larry no, I.

Think I'm on Balaji's side when it comes to the soundness of the banking system or lack of soundness of the US Banking system. And I think he's doing a real service by drawing attention to what's been going on. Now, I don't follow that hyperinflation is going to be the result of it. But yeah, the banking system's in very deep trouble and it's because of central bank policy. And even if the Fed hadn't tightened monetary policy, there would have been a problem because the loose monetary policy that the Fed ran during the pandemic and then didn't withdraw when the need for that much liquidity had vanished gave us the 8.9% inflation that we had last year. The Fed itself is already insolvent. It's worth mentioning the Fed itself has a very long bond portfolio and it's lost enough money to wipe out its capital. But that doesn't stop them. In a fiat money system, nobody can redeem their liabilities. So they can keep on printing, they can keep employees, and they can keep on lending to banks, but they don't need to engage in a hyper expansion in order to lend more to banks. And even if they lend more to banks and don't neutralize the effect on the monetary base, they can neutralize the effect on money held by the public. So it depends on whether the Fed will take those steps. And if they're at all serious about keeping inflation contained, they will have to take those steps. Now that we've seen in other countries the kind of problem where central banks issue a blanket guarantee that they're going to print enough money to save all the banks. The Philippines did that in 1997, and the result was inflation and a sharp devaluation of the Philippine currency. But in the US we bailed out the savings and loan industry without that causing an inflation. In fact, that happened in a period of a falling inflation. So I'm skeptical of the prediction of hyperinflation in the U.S. and correspondently, I'm skeptical of hyper bitcoinization as a result.

Let's talk first about hyperinflation. What do you say to that skepticism?

Balaji so the thing is that actually I'm trying to find this paper. I mean, there's a difference between hyperinflation and hyper bitcoinization. Those are actually distinct. And it's actually possible, for example, to have something like, you know, what happened to Argentina, where you had both the massive economic contraction and the dollar tripled in value, like relative to. So people were trying to. The economy was contracting and people were trying to exit it at the same time for a stronger right. That is what like quote hyper bitcoinization looks like where, you know, you could potentially even have some prices fall or you could have weird things happening where like, I don't know, housing prices fall and food prices rise or things are all just haywire because they've broken some of the normal relationships where they're still hiking rates, but they're then bailing out the banks while they're hiking rates. The normal relationship between high rates and tight monitors is being broken. So just like stagflation is in like a region of the graph where you think that, you know, inflation, unemployment are traded off, but maybe they could happen at the same time. I don't know whether typical economic relationships will hold. So I don't have a strong thesis on all the internal dynamics of the US or more generally Western economies. I do think that more and more people will want to exit them and that's what hyper bitcoinization means.

Hey, thanks for watching an excerpt from that conversation with Balaji Srinivasan and Lawrence H. White about Balaji's million dollar bitcoin bet, the state of the banking system and the US Dollar. You could watch the full conversation here or another clip.