The Problem With Reserve Currencies and Switching to Crypto w/ Lyn Alden

Today on Upstream, we're releasing a conversation I had last year with Lyn Alden, an investment strategist known for her unique blend of engineering, tech, and finance expertise. We talk about her book, Broken Money, and her reasons for writing it. We also cover the impact of the global reserve currency, inflation, interest rates, and her best advice in the face of an uncertain economic future. Here's Lyn.

Lyn, welcome back to the podcast.

Thanks for having me back. Happy to be here.

Lyn, excited to deep dive into your great book, Broken Money. Highly recommend. Why this book?

Why now?

So it's a good question because I resisted writing a book for a while. Writing a book is not a good ROI. It's time-consuming. It's tedious. I only recommend writing a book when you feel like you have to write a book. So that's the short answer for why I wrote it is enough pieces came together that I felt like I had to write it. A lot of my content's very long form. There's years of it. And when someone wants to access the content for the first time, I wanted to have a starting point for them. And also there are some things that are complex enough like money and finance where it really helps to lay out the whole thing at once to help someone get the big scope of it rather than little pieces here and there. So basically there's a couple key themes I really wanted to emphasize in the book. And I felt that in the macro money space or the digital asset space, there's a lot of a range of books out there. There's a lot of really good short ones. I wanted a really comprehensive one, including one that has a little bit more of an academic angle to it so that it confronts some of the academic discussions around what is money a little bit more directly. And so that's kind of the short answer. I also wanted to take a global view of this whole phenomenon. How does this impact developing countries? How does this happen? There's not, in my opinion, enough emphasis on kind of the structure of how things work at the global level. Everything's kind of focused on one country, especially the United States, or other countries, they'll be focused on the local region. But it's like, when you actually take a step back and look at the 160 different currencies out there, And all the little kind of capital controls around them and how they tie into each other and what it means for Africa to have 40 currencies and Latin America to have 30 currencies and all the frictions that that provides. There's very little literature on what's going on at that level. So I felt that it was the book that I had to write. It was distracting not to write it. And the reception's been very good. And it's It's a lot of work, but it's the most rewarding thing I did last year. Yeah.

You've dropped some breadcrumbs for us to deep dive in this interview. Let's start with the academic arguments. What do you think you've contributed to the conversation, or where do you think you differ from some of the academics or mainstream conversation that were happening in academia about academic understanding of So a couple angles.

One is, there's big discussions with different economic schools of thought around commodity money versus credit money. And so I wanted to back up into the literature and synthesize those 2 arguments and see what they have in common. Basically, you'll see people in the Austrian School of Economics versus the Keynesian or Chartalist School of Economics discussing, what is money? And what I generally viewed is that it's not just commodity money or just credit money. It's really that all these different things are ledger money. And the only person I really saw make that argument in depth was Vences Casares years ago, mainly just in short talks, not in long-term literature form, and not to the comprehensive extent that I think that that subject deserved. So that was one, is basically to Look at what all these different monetary systems have in common. And the main way to synthesize that is to say that when you're trying to do a trade, if you're trying to avoid the frictions of barter, there are 2 main ways to do it. One is you can defer the transaction through time. So instead of trying to find things that I have a surplus in that you have a deficiency in, while you have a surplus in something else that I have a deficiency in, instead, if just one of us has something that the other one needs, You can defer that over time. So one person can do a favor, either informally or formally, that then they're owed back later. And so that's that time element. Or you find a unit that's so desirable that it can serve as one side of every transaction. And so you make transactions easier that way. Basically, everyone starts naturally gravitating towards storing their surpluses in some sort of scarce, divisible, portable unit that has better monetary attributes than any other commodity or any other good. in the region. And so those are kind of the 2 main methods. And a lot of times you see siloed arguments about which one is actually money. And so what I try to do is kind of look at both of them and see what they have in common, which is basically, people are always trying to figure out how do we make trade easier and how do we agree on what is the ledger? What is savings and what is payments? And those are the 2 methods. The other thing I really wanted to focus on was the role of technology for shaping not only what money is, but how we interact with it. So a lot of monetary history books, you'll see a big focus on political decisions that happened. Such and such president did this, or this geopolitical thing happened and these 2 nations decided to do this, and that affected this other nation this other way. And that's all important, but a thing I emphasize is that politics is temporary and local. So political decisions affect the timing of things. They can be reversed. They can become irrelevant in the long run. Whereas a technological solution is global and permanent. When someone invents refrigeration, as long as civilization exists, that spreads everywhere and lasts forever. It's not just this kind of temporary localized thing. And what we generally see is that over time, new technologies have just, not just in a local level, but at a permanent global level shaped how we interact with money. And I felt that there was very little emphasis on the role of changing technology in monetary history. And maybe that's just my engineering background speaking, that I'm like, why is no one looking at it from this angle? And so one thing I was really grateful for is that my editor, Joachim Book, he's got a master's in economic history from Oxford. So he helped me fact-check everything I was saying. He helped dig up extra sources when he wanted to go into a a certain subject in more detail. So he brought some of the more traditional historical chops to the book, whereas I really wanted to focus on how does technology shape this. And I felt that that's just something that's woefully underexplored in academia, and I wanted to bring that to the forefront. So those are the main themes. And then just in academic literature, if you separate the— there's mass market books and there's academic books. Academic books are often really dry, They have like 20 people read them and they often are purposely kind of not making strong arguments. It's just this more dry approach. Whereas I wanted to kind of combine that where I wanted to write something that has academic rigor to it, but is still speaking to a mass audience and diving into real modern problems that people face. If you're in Egypt and you're dealing with 37% inflation, Your money supply is growing by 20% a year, year after year after year, and you're dealing with that environment. What is that like? And what are the solutions for you? And what does it mean when there's dozens of countries with that type of problem? So it combines that historical element with, okay, what's actually happening now? Why are people annoyed about this? What are they doing about this? What could they be doing about this? So it tries to find a balance between those different types of Yeah.

That's well said. And one thing you do early in the book is you chronicle the rise and fall of different global monetary orders. What do you think is underappreciated or misunderstood about the history of some of these rises and falls that could give us some perspective on how we should think about it today?

I think the biggest one is going back to what I said before, which is the role that technology plays. It's not just geopolitical decisions that affect things. It's how technology shapes what makes sense, what incentive structures start to win. And so a key part that I really emphasize is the invention of the telegraph, and specifically the adoption of the telegraph. So prior to then, there were kind of 2 paths of technology that really shape money. So one is the actual ability to make more money itself. So for example, in hunter-gatherer times, grains or shells could be money. But in the industrial age, we know how to mass produce those things or harvest those things way faster. And so we can dilute them. And so over time you gravitate towards harder assets like silver and gold. So that's one kind of technological path. The other one, for lack of a better word, is almost like analog encryption. It's like, how can proto banks and eventually full-service banks securely and efficiently exchange legal ownership of underlying assets. And so even simple things like how can you make a— the invention of paper, for example, and then the binding of paper in book form rather than scroll form, those were literally technological advancements that we take for granted today, but at the time they were anything but taken for granted. Then things like better inks or analog encryption methods. If I have a paper receipt that says, okay, XYZ's entitled to 5 ounces of gold, how do I make it so that receipt is not forged? It's like I need some sort of analog encryption technique, some sort of counterfeit-resistant technology. Then things like the printing press drastically lower the cost of some of these things. So all of that was important. That generally happened over a multi-century period. The really kind of big trend shift was the adoption of the telegraph in the second half of the 19th century, because that made it— So for the first time, every other commodity money, all these other banking technologies, what they shared in common is that information still moved at the speed of matter. You couldn't send information from the UK to America or to India any faster than humans could get there with ships. Even banking ledgers still could only move at the speed of Physical paper getting there. And what the telegraph did, especially once all those undersea cables and transcontinental cables were installed and started to be used and incorporated, was that you could update ledgers globally at roughly the speed of light. And so for the first time, speed was a new variable, and that dramatically shifted who has the power here. Because if you're the one controlling the ledger for a big area and you're connecting to another entity that's controlling the ledger for a big area, You're the ones talking at the speed of light. You now have roughly a monopoly status on fast, long-distance value transfer. And so you start to get to a period where these slower assets have to be increasingly abstracted and centralized in order for their claims to keep up with global commerce as it accelerates and moves around at the speed of light. While, say, physical gold settlements, in order to ship them, verify them. That's all a time-consuming, slow process and expensive. And so that kind of shifted who has the power here, kind of shifted things more towards banks, more towards central banks. And that really defined the 20th century in particular and going into the 21st century. And what's kind of unique now is that ever since the invention of Bitcoin and then extended into things like stablecoins and so forth, is that for the first time, you can do actual settlement, not just transactions, but settlements of value. And so you can transfer value to someone without going through centralized ledgers. You can go around existing banking systems, around existing capital controls, peer-to-peer rather than institution-to-institution on behalf of peers. And so that just dramatically realigns what the power structures are. But of course, even then it takes time. I mean, it doesn't matter until liquidity and size is big enough, which takes years of kind of slow grassroots type adoption. And so that's kind of a big theme in the book and is something that I think is just that whole technological path is so crucially important for— I mean, obviously technology is important for any field we study, but it just seems like especially in the field of economics and monetary history specifically, it's very Deemphasized compared to the importance it plays.

And let's say we're having this conversation in 2040, so 20 years from now, and we're reflecting on how technological innovations in money, you write a lot about crypto, have reshaped global finance, or just how the world works in the same way that you just outlined how the telegraph and other inventions changed how the system worked. What might you predict on some reasonably long timeframe, like say 20 years, that the technological innovations in money that we're seeing will be bigger than just that little— some people getting rich, but actually affecting the whole system? What might you expect?

I think a big theme is monopoly breaking. And so going back to my prior point, 160 different currency monopolies. And the reason they exist is because of the technological limitations that got them there. So for example, let's say you're in a country, maybe it's Nigeria, and you think, okay, how does money get in or out of Nigeria? There's really 2 main ways. One is physical ports of entry. So bringing physical currency or gold coins through a border, through an airport, which is obviously tightly controlled, easily to enforce. You see signs every time you go through an airport, you can't bring more than $10,000, for example. And then the other way is bank transfers. But of course, bank transfers, banks are highly regulated, centralized, governed institutions. So there's all sorts of rules. Who can they transfer to? And also, who can have access to currency in a given unit? So if I'm in Nigeria and I want dollars, if I want a dollar-based banking account, It's kind of the government and the central bank's choice if that's even an option to me. And if so, how safe is it? Because this is basically an unlevered dollar bond fund with no direct access to the Fed or FDIC insurance, even if I am allowed to access it or if I'm wealthy enough to access it. For example, some of these countries you can only access it if you're wealthy. And so as an American, if I want to pay a Nigerian graphic designer for work and we're going through our banking systems, Nigeria can really determine what currency they receive their money in, because they control the ports of entry and they control the bank wires. So I could pay them in dollars, but it might hit their bank account in their local currency, which is devaluing and generally negative real interest rates. And it's hard to save in it. And if instead they want dollars or they want Bitcoin, now there's ways with Bitcoin and stablecoin to go around that. She can hold up a QR code on a call just like this, and I can pay her around the banking system, or she can send me a DM or an email, some sort of just string of numbers saying where to send the payment to. And it can either be fully decentralized if she's kind of a power user, or a foreign hub, let's say a stablecoin in Switzerland, could offer this service. This is okay, it's centralized, but the central hub is not in Nigeria. And so it's basically like an offshore bank account for the masses, for the middle class, rather than just the wealthy. So depending on what level of decentralization or scarcity you're looking for, there's multiple options here. But the point is, there's competition between monies at a global level. The blood-brain barrier around these monopolies is slowly made more and more porous, just because you can circumvent that. You can memorize 12 words and bring $10 million worth of stablecoins or Bitcoin with you through an airport. So when you see the sign that says only $10,000 allowed, you kind of chuckle to yourself because you think, I mean, that's based on the premise that you can prove that someone doesn't have this other type of asset. It's just an antiquated analog world. So I think that that's probably the biggest factor is that it creates more competition of money and more broadly liquid assets. So even things like a tokenized treasury bill, for example, but just kind of liquid assets in general now have more global competition because they can pierce through these different borders way more easily than they could pre-Bitcoin and pre this space. I think that's probably the— and that starts small, but once the liquidity's big and once adoption's big and once it's normalized and once it's widely understood, That's disruptive. That can disrupt who has power. Because if you are a government and you benefit from seigniorage, and let's say you are an authoritarian country and you make deals with the IMF, so you get all these kind of hard currency loans in dollars, and your people are kind of stuck in the local currency that you can keep printing more of and devaluing and siphoning their savings and devaluing their wages and funneling it to whatever you want to funnel it to. That starts to get disrupted because those people can start saving in other types of money that is not that centralized local money. And then that kind of more quickly depowers those people that are kind of constantly siphoning that money towards the top. And of course, the reason I answer that for 2040 is because that's not a short-term thing. That's a very long structural network effect challenging type of thing. That's a long-term big thing. But I think over the long run, that is the biggest, or at least one of the biggest things that matters here more than just a few people getting rich or more than what asset you can have in your Schwab brokerage account and things like that.

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In continuing to introduce some of your bigger ideas and, you know, nice segue from the idea of monopoly, one of the things you've written about is how the global reserve currency status that America has creates some imbalances with other countries. It's negatively affected our manufacturing, basically accelerated globalization, right? And that has had effects on jobs in this country. But you recently also wrote about sort of the impacts of reshoring, which I'll hear you unpack as well. But then it also creates these effects for other countries too, in terms of sort of the trade balances. It's never equal, and that can't sustain indefinitely. Can you unpack that for the audience that is unfamiliar and then also share What will change that or what could change that?

Sure. So going back to my prior point, there's 160 different currencies. They can enforce local monopolies, but on the international scale, they've always had competition. So why do I decide to hold dollars if I'm in country XYZ rather than hold yen, for example? It's partially because of that global competition, that network effect. So back in the day, that common unit was gold. That was kind of the underlying And as speed became more and more of a variable, we started to abstract that. So for example, the British currency was a layer 2 on top of gold, but it was basically this faster clearing, centralized clearinghouse type of thing that entities could, whether large banks or central banks or other large entities, could all go through this efficient clearinghouse to store value, transfer value. And of course, after World War II, that shifted increasingly over to the United States. And what's different about this era is that the dollar is free-floating. All currencies are. They're not tied to gold anymore, even though central banks still use gold as kind of long-term collateral. But basically, these currencies are free-floating. And whenever there is a money that is the network effect dominant, money good. So it's the one that most people want to hold. It's the one with the most liquidity. It's the one where the most people are storing their savings in it. They give a monetary premium to it, meaning that they're putting more emphasis on that than just its utility value. So in a world where there's a bunch of commodity monies and people realize that gold is the hardest one to debase, so they store their money in gold, that overall gold market cap increases quite a bit because it's not just the utility value of gold, it's the whole monetary savings as well. And on the global fiat currency stage, a typical currency like Egypt's currency, there's not really any external forces saving a lot of value in Egyptian currency. So Egyptian currency's trading at its equilibrium value. It's utility value. Whereas a lot of countries around the world and a lot of even people around the world at the black market street physical currency level want to store their value in dollars. And so they give a monetary premium, $2 above their utility value. And so a lot of currencies trade real interest rates. That's a big factor that kind of makes more entities want to hold it or less hold it. Another big factor is how good the economy's doing and what's the current account surplus or trade surplus look like. If they're producing more than they're consuming, that's generally good for a currency. These are all things that affect a utility value of a currency. What makes the reserve currency, in this case the dollar, different is that regardless of what real interest rates are doing, for the most part, regardless of what the trade balance is doing, simply because it's the network effect dominant good, it's what debt's priced in, it's what international contracts are made in, it's the largest, most liquid capital market. So many people are holding that currency or that currency's derivatives. And what that's doing is that even as a trade deficit develops, It doesn't really get corrected in a way that many other currencies would. And so the whole world demands dollars. And so the question is, how do those dollars get out to the world? If all these countries are holding dollar surpluses, if they're all denominating their contracts in dollars, or at least a lot of them are, how do those dollars get out there? And the answer is structural trade deficits. They basically hold dollars so much that they increase the value of them. And then the United States finds itself saying, okay, well, It's very expensive to make things here, especially low margin manufactured goods. It's very expensive to make things here. Our labor's expensive. Our kind of our whole supply chains become expensive. So we have increased import power because we're the currency with an extra monetary premium on top of it. But our export competitiveness is weaker. And so we kind of build structurally these trade deficits. And so we have constantly just dollars flowing out to China, flowing out to Switzerland, flowing out to Germany, flowing out Singapore, flowing out to Japan. It kind of shifts over time based on if it's industrialization or is it other types of goods or is it software or is it commodities? Basically, it's dollars flowing out there. And that feels good for a while and it feels good for those of us that are not really impacted by it. So if we work in government, if we work in healthcare, if we work in technology, kind of high-margin coastal industries, we are not really facing the impact of it and we're getting the benefits. So we can go anywhere in the world. Our dollars are accepted. We have a lot of import power. But if you work in manufacturing or even adjacent to manufacturing, like you worked at a restaurant that served a manufacturing hub, for example, or a steelmaking town, those areas have generally been kind of deindustrialized in a way because we're running these structural trade deficits in part because how the currency system's structured. And so that's kind of the imbalance that builds up for decades. So when we look around the United States in particular, we see a lot of political polarization. A lot of it indirectly is because of that. There's more and more wealth concentration. There's more and more kind of segmentation between industries and kind of segmentation between kind of coastal centers and kind of the middle of the country. And a lot of that comes down to these multi-decade imbalances that have been building. in large part because of the reserve currency status and the structural trade deficits that it contributes to.

And I guess 2 follow-up questions to that. How much longer can this last? Or I think you predicted something where the dollar will decrease as a percentage of global trade somewhat significantly. And the other thing is you wrote recently about Sort of the US efforts to reshore and build back some of that capabilities. Why don't you unpack your thoughts there as well?

So I think the main thing to watch I think is the net international investment position because that's kind of the long-term accumulation of the effect of this. So basically if a country runs structural trade deficits with the rest of the world, there's a couple things that happen. If it's old school and it's based on gold, basically what you're going to get is an outflow of gold from that country towards the surplus country. But of course we don't rely on gold anymore. So what happens is our currency leaves the country and then those foreign entities can reinvest that into our assets. So for example, if we've run a very big trade deficit with China, they can buy treasuries, for example. That was a classic use case. Increasingly they've been deciding to buy equities or real estate or private equity and things like that instead. And so basically what we're doing is we're selling part of our appreciating capital stock, our ownership in businesses, our ownership in real estate, our income-producing long-lived assets. We are selling ownership of that in exchange for current depreciating goods. And so the amount of American assets that the foreign sector owns relative to the amount of foreign assets that America owns is now very lopsided. So back in the '70s, for example, the United States as a whole, whether it's government entities or whether it's mostly it's private Americans, we owned more foreign assets than foreigners owned American assets. But because of accumulated trade deficits, now it's the opposite. Now the rest of the world owns way more American assets than we own foreign assets to the tune of something like negative 70% of GDP, which is the most negative out of any large country. And it's the most negative in absolute terms. One of the most negative in percent terms. And that's the thing that starts to become just eventually structurally impossible to keep going. It's hard to say exactly where that stopping point is, but it's not like negative 300% of GDP. It's like maybe negative 100% of GDP is where you start to kind of run into that there's just not enough fuel to keep that engine going. And we already started to see shifts ever since the global financial crisis. So for decades, foreign central banks were holding less and less gold and more and more treasuries. That started to reverse. Ever since 2009, they've been increasing their gold tonnage. And ever since about 2013 or so, their foreign central bank exposure to treasuries has kind of flatlined. So they're not rapidly selling their treasuries, but they're not really accumulating them at the rate they used to. And so overall, it's just this gradual shift. Kind of what led that was China decided it was more in their interest to do the Belt and Road Initiative type of investments. They want to take their surpluses and then go out and fund commodity deposits or fund port infrastructure and things like that rather than just keep buying more and more treasuries or US stocks and things like that. And so over time that kind of in some ways multipolarizes the world. Then we've seen a couple kind of watershed moments like Russia invades Ukraine, American and European entities freeze Russian reserves, and then that forces them to redenominate some of their contracts elsewhere, accelerate their building of non-dollar payment systems. Other countries see that and say, well, I want to reduce the tail risk that ever happens to me. And so they start making bilateral trade agreements. And this is, again, it's It's a very large network effect, but it's one of those things that quarter after quarter, year after year, it's starting to take shape. And we're seeing in general the percentage of dollar-based assets in foreign reserves is very slowly kind of diminishing. The peak was around the year 2000. First the euro disrupted it a little bit, but lately some of the Asian currencies, particularly China, has been taking market share while Europe has been giving up market share. The United States is kind of flatlined or ever so slowly kind of inching down. So I think that partially technology and partially geopolitical incentives and partially imbalances, you're just getting kind of a gradual acceleration of all these kind of non-dollar payment systems or the desire to hold alternative assets that are less kind of heavily invested in the US. And that disrupts us at first, But I think in the long run that helps us rebalance things. And I think that reshoring is one of those long-term goals, but it's going to be very, very hard while you still have this current system in place. Because as long as there's so much global demand for dollars, trade deficits are how those dollars get out there primarily. And if you're running a structural trade deficit, then pretty much by definition you're not reshoring as much as you'd probably like to. And if anything, what's reduced our trade deficit to some extent is our oil production. So we're less reliant on imports than we used to be, but our ability to physically make machinery and industrial type of things is still kind of heavily impaired. We've seen, for example, Taiwan Semiconductor wanted to— they're in the process of building US facilities, which is a good thing, but then they found, okay, we have a shortage of labor. the right kind of skilled labor that is required to make these various advanced equipment. We have trouble finding the people to do that because in addition to all the physical capital, there's just a deficiency in human capital because that's not what we've emphasized for decades. If you wanted to get wealthy, you'd go work in Wall Street. You wouldn't go work in kind of blue-collar manufacturing or kind of having the best technicians in the world. We have really good technicians, but not to the same scale that you see in China, Taiwan, and many other countries in the world that've built up that culture of manufacturing and physical production. And that takes years and potentially decades to gradually realign back to national interests.

Yeah. Well articulated.

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One of the other big ideas I took from you and your writings is this idea that I believe something like 51 out of 52 times when a country has had a debt-to-GDP ratio as high as the US, or over maybe 130% or something like that, they've had persistent inflations in order to inflate away their debt. And as a result, you predict that, or predicted and probably still predict that the US will run higher inflation than perhaps expected for this decade. We've seen interest rates come down recently. Or sorry, expectations of interest rates come down, which has led to a bit of a boom in tech and otherwise. It was a good year last year. I'm curious how you sort of think about that in context of your prediction. And then let's also get into just what is your thoughts on interest rates going forward and how do interest rates intersect with inflation? You have a great post on that? Because a lot of people listening to this are venture capitalists or people in technology and interest rates, we've discovered the last few years, highly impact our business.

Yeah, it's a good question. So we've had over 4 decades of structurally declining interest rates until they hit zero, they hit negative in some cases. And when you have ever-rising debt-to-GDP, There was a lot of alarmism about that back in the '80s and '90s, but what they didn't anticipate is you would have decades of declining interest rates. If you double your debt but you halve your interest rate, then your interest payments remain the same, especially relative to your growing income. And so that's been kind of a balanced force for a while. The problem is when debt as a percentage of GDP is still rising, but interest rates hit zero, bounce off zero, and start going even just sideways, in kind of this more moderate band, then those fiscal deficits start to kind of get out of control. In addition, there is a valuation bubble in some of those spaces. So back in 2019, I wrote about the bond bubble. Kind of emphasized it again in 2020, 2021 as kind of the early stage of this kind of fiscal injection started to play out. And the issue there is that when bond yields get super cheap, it basically means that bond prices are very overvalued. Bond proxies, like for example utility stocks or defensive consumer staple stocks, they get very expensive. And then the other area that's really impacted is VC or broadly any sort of unprofitable tech, including publicly traded ones, because they've been in an environment where interest rates are so low, so the opportunity cost for usage of capital is low. And so people are very willing to monetize equity. So They're saying, well, I'm getting zero return on my cash anyway. I might as well hold this long-duration tech play even if it's got no clear sight to profitability anytime in the near term because my opportunity cost is zero and getting devalued. So they bid very high valuations. And what that does is that these companies can then issue a ton of equity to kind of COVID their losses and keep operating their business. They can underprice their goods and services and therefore emphasize growth at all costs. And the problem is that if it returns to that there's a cost of capital, that if you can earn 3%, 4%, 5% by holding fairly safe money or money-like assets, the valuations you pay for these companies is lower, which impairs their ability to cover costs by just more and more equity issuance, which then means they have to try to raise prices and get a little bit more towards equilibrium. Which then slows down their growth a little bit, which then has a feedback loop of making the equity valuation even lower until it kind of right-sizes to the point where it actually finds out, okay, what is the actual total addressable market of this company if the prices are not artificially low because of the expectation of just endless equity issuance? And so basically it's just that the magnitudes all get tweaked back in that kind of bond bubble that existed And it's painful to go through a period to say, okay, how can we separate the wheat from the chaff here? So what kind of companies only existed because interest rates were zero versus which ones are still very valuable, but that might just have to be right-sized a little bit in terms of valuation or growth expectations because they have to align a little bit more towards profitability and a little bit less towards just ever-constant equity dilution. Because of exceptionally high equity valuations. So that's kind of one of the more disrupted areas and it just changes the magnitudes of a lot of these things. And it's important I think going forward that I think we're probably in a more sideways choppy band for interest rates. There probably is a cost of capital going forward. And that makes it so that when you model out what you can pay for an idea, It just changed the equation to some extent and adds a little bit more conservatism back into that because it's not an environment where there's zero opportunity cost anymore.

Say more about our ability to curb inflation using interest rates. Either what have we learned or what might you expect? And if you had to make certain predictions around inflation numbers or interest rate numbers going forward, What are your best estimates or even frameworks for doing so?

Yeah, it's a good question. So when central banks raise interest rates to try to reduce inflation, there's 2 main mechanisms that they're targeting. One is they want more foreign capital to hold that currency. That matters more for non-reserve currencies. So for example, if Turkey's experiencing massive inflation, but their interest rates are very low, everybody wants to get out of the lira. No foreign entities want to hold the lira because real interest rates are negative. And so one of the ways to fix that is increase interest rates so that more people want to hold it and fewer people want to flee it. And then that can help stabilize it. So that's number one. Number 2 is that in most decades, most money creation comes from bank lending. So as banks lend, they create net deposits in the system. Particularly if they're lending at a faster rate than debts are being paid back. The overall kind of the broad money supply is increasing because of that lending. And so one of the ways to slow down money creation is to slow down lending. And having higher interest rates changes the borrowing calculus and ability for borrowers to kind of take out money and service debt. So they're more judicious with how much debt they take and lenders are more judicious with who they're willing to lend to and how much and compare it to what asset values and things like that. So that slows down money creation there. A big challenge and what makes this period different than the '70s is, so back in the '70s, public debt was very low and most of the money supply growth was coming from that bank lending. And so by raising interest rates sharply, it reduced bank lending considerably, even though it had other effects like increasing the deficit, for example. Well, when you fast forward to— back then it was 30% debt to GDP. If you fast forward to now and you have like 130% debt to GDP, the problem is that bank lending is slower than it used to be, partially because of demographics and other factors. And deficits are larger than they used to be because there's so much accumulated debts and all the interest expense on that debt. And so the problem now is when you raise interest rates, you do put some downward pressure on bank lending, But the increase you get from deficit interest expense is larger. And so you actually risk not really slowing down money supply growth by raising interest rates. And so that's kind of the challenge that you can get to a point, and I don't think we're— we're kind of flirting with that point now, which is that interest rates become a less effective tool for slowing down inflation compared to what they used to be if you had low public debt and rapid bank lending. Instead, the large fiscal deficits are more at the core of why money supply is increasing. And the central bank tools are not really designed to deal with that. And the highly politicized political apparatus is not really well suited to fixing deficits anytime soon. And so the risk is that's just a background long-term thing that's here now. And measuring how it's going to be inflationary or not, I think really comes down to the rate of technological growth. If AI makes a bunch of services cheaper, and if we are constantly developing new commodity deposits and energy deposits, and so we're not getting bottlenecks there, then we can keep inflation pretty low. And a lot of that money supply growth goes into asset price inflation. So NASDAQ keeps going up, Bitcoin goes up, waterfront real estate goes up, all this stuff. That's where the surplus accumulates. On the other hand, if the technology growth is not as fast as that rate of just kind of constant deficit monetization that tends to happen over the long term, and especially if we're not kind of keeping up with energy and commodities, then that's when we risk getting outright of significant CPI inflation. And so those are kind of the 2 paths going forward, which is one, interest rates are not really the anti-inflation tool they used to be. And so instead it really comes down to you want to own real assets. And then when it comes down to which real assets you want to own is basically which ones are scarce. So if you expect that energy CapEx is going to be tight, maybe you want to own energy stocks, for example. On the other hand, if you think that's going to be not a problem, then owning NASDAQ stocks or owning waterfront real estate or owning Bitcoin, those are the types of assets you want to own. But either way, treasury bonds are likely not where you're going to make your great purchasing power in the years ahead because it's just this ongoing kind of fiscal spiral. It's like a slow motion—

it's kind of what happens to emerging markets just at a When you get into disagreements with your peers and people who really get this stuff, what do you think are the most interesting disagreements where you're actually not 100% sure and maybe there's some credibility to the other argument? What do you think are some of the most interesting ones?

One of the biggest disagreements is kind of the source of money creation. That's not one of the ones that I'm really unsure about. But that has been one of the bigger disagreements. The area that I'm most unsure about is modeling a base case for the rate of technological growth. And so determining where— basically, we're mathematically in a fiscal spiral, which is the deficits can be very, very large as far as the eye can see. And raising interest rates just makes them worse. And when liquidity gets tight, central banks might have to monetize those deficits to not cause a liquidity crisis in sovereign bond markets. So that's kind of the background problem. But then the question is, where does that show up? And that goes back to my prior point of, are we going to have energy bottlenecks or not? Are we going to have bottlenecks in key metals, copper, lithium, nickel? Cobalt, battery metals, things like that, or are we not going to have those? What is the rate that AI is going to keep a lid on labor costs? It's already doing things like making art way cheaper, making research way cheaper, and charting things way cheaper. It's obviously going to keep eating into things that were once expensive. So in the prior decades, We had all this different equipment and one smartphone just kind of dematerialized and replaced a lot of that. And so we're gonna see some of that with labor in the years ahead, especially white collar. It's kind of white collar's labor, their time to get kind of disrupted a little bit. Whereas historically a lot of the automation's been disrupting blue collar labor. So now a lot of the white collar stuff gets disrupted. That should keep a lid on prices and wage and labor costs and things like that. But the really hard part is to model what's the annualized rate of that going to be relative to the annualized rate of money supply growth. And that's the part that I have the highest degree of uncertainty about other than knowing that monetary system itself is designed so it can only grow. And we can roughly know it's going to grow at a pretty significant rate. And just what is that technological offset going to be? And that's— I think that's still an open question.

Yeah. The other thing I've seen people disagree with you about is sort of the impact of the debt or the implications of the debt or what we have to do as a result of the debt. Where do you think people have a misunderstanding or don't fully appreciate the nature of the debt or the implications of the situation?

So I think that there's been a situation of the boy who cried wolf, which is that ever since, you know, the National Debt Clock went up in the late '80s, Ross Perot ran the most successful independent presidential campaign in the early '90s based largely on the debt and deficit. And if you look at a long-term chart, that was literally the peak. They really timed the top for interest expense as a percentage of GDP. And that's because in the late '80s, early '90s, you had the fall of the Soviet Union. You had the ramp-up of China opening up to the world starting in the '80s, but really accelerating in the '90s and 2000s. So we had this kind of rapid period of globalization. So Russian gas connected to German manufacturing and Chinese labor connected to Western capital to add all these deflationary forces, especially to manufacture goods around the world and to take an edge off of a— we broke up the American unions and put downward wage pressure on them, which again has obviously consequences, but it was a disinflationary force. And so those interest rates were able to keep falling for decades more than anyone thought at the time. And so you had higher and higher deficits and debt-to-GDP, but lower and lower interest rates. And so that debt never really became a problem. And I think the lesson that people learned from it was debt doesn't matter. And I think that's the wrong lesson is that you have to make sure you have your math right. So as we enter a period where interest rates are now going, let's call it sideways, in a big choppy band for a period of time, let alone up, let's just say sideways. Those deficits don't have an offset anymore. So the higher and higher deficits, higher and higher debt, it's not being offset by lower and lower interest rates. And so the absolute debt levels and deficit as a percentage of GDP starts to accelerate. And that's what I think is not widely understood. And really the kind of closest comparison in American history would be the 1940s. Which kind of no modern analysts were alive and adults at the time. So it's not in living memory. It's only in the history books. And so that's kind of the— when people think of inflation, they think of the '70s, which again was a very different environment, very different causes of inflation. And so I think that's the idea that debt doesn't matter is one of the things they get pushback on, which is that it's not that we're at risk of nominal default because we can always print the money. It's basically what are the consequences when interest rates lose their effectiveness as a tool for fighting inflation or when there's clearly a fiscal problem with no end in sight and no congressional appetite or ability to address it. And that's where you get almost like emerging market style kind of background structural currency issues. Again, at a lesser extreme level because it's not an emerging market, but it's that same kind of general concept which is that you just have this ongoing background unresolved problem that actually starts to materialize in the present rather than be one of those distant future things. And how big that problem is, again, depends on how can we keep enough unity to keep technology growing at the rate that we've been accustomed to? Can we accelerate the rate of technology growth? We can mask some of those problems with that technological growth. But then that starts affecting who benefits from that. If a lot of the benefits go to the very top, then you get more and more political polarization. So I think a lot of this feeds into things that we don't directly associate with the deficit, things like political polarization, things like deindustrialization, things like wealth concentration. All these things are indirectly tied to this background problem. That people, I think, mistakenly assumed is just not a problem at all.

Yeah. Yeah. That's well said. So gearing towards closing here, let's say that what you've written about in your book and what you've written about in your blog was universally understood and agreed by all the people who matter, the Fed, central banks, politicians, How would the world be different as a result? What policies would be different or what plans or what strategies or what would be the biggest differences as a result if the world truly internalized Lyn Alden thought?

I mean, it's one of those things where I think that certain things are inevitable, that even if I could just do whatever I wanted, there are certain mathematical realities to the current system that are hard to address. And so I think that it's basically the importance of when a technological disruption happens, the worst thing you can do is fight against it and try to not have it, just kind of pretend it's not happening or try to fight it. And what we generally see in— let's put aside governments for a second. If you look at blue-chip corporations, they rarely disrupt themselves. They fight back on disruption and their goal is to die as slowly as possible. Which is they kind of just bury their head in the sand and ignore it. And it takes decades to play out, but then they gradually diminish to either nothing or something small as they get disrupted. There are very few entities that are willing and able to disrupt themselves because it's painful at first, but then it gives them kind of benefits in the long run. And so what I would say the number one thing is That famous quote, software's eating the world. And the latest thing that software's going after is kind of the final boss, which is value transfer and value storage. And so it's the banking system. It's the governments that are intertwined with the banking system, not just our government, but 200 governments around the world and 160 different currencies. And how they're, again, going back to the early part of the conversation, how value flows in those monopolies and in between those monopolies, that's a disruption. And so the longer that governments push back on it, the more they risk just their country loses out versus countries that embrace it and say, okay, we want to embrace this change. We want to be part of it. Then they can have a leg up in the reconstructed era, whatever era's next, whatever transition's next. And so we've seen, for example, countries like India have tried to ban Bitcoin, and then there's usually legal challenges inside because there is rule of law. And then they say, okay, well, that's not actually legal to do that. Or you see Nigeria cut off cryptocurrencies from its banking system for 3 years, and it was completely ineffective. Nigeria had the highest, according to Chainalysis, they had the highest peer-to-peer volume of any country relative to their usage. And they had one of the highest overall adoption rates of the technology in the country. And so after 3 years, the central bank is like, okay, we're going to strike our prior complete ban and we're going to instead try to bring this back in and regulate it. We've seen in 2022, Argentina banned banks from— a bunch of banks were announcing they were going to get into offering crypto to their customers. Especially Bitcoin stablecoins. That's kind of what's popular. But just in general, the ecosystem, they were going to offer it because there's demand for it. The government said, no, we're going to ban you from doing that. And they cited all the normal things, cybersecurity and money laundering and volatility and blah, blah, blah. But really it's the peso had 100% inflation and they wanted to slow down the exits. Then in 2023, they even banned fintech. companies, like non-bank fintechs from offering these types of assets. And so again, you have people go around it. They have peer-to-peer trading. They have other means of going around this. You have very high adoption. And then they elect anarcho-capitalist who then says, okay, people can use whatever money they want. We're going to start tearing down some of these restrictions. And it's ineffective to fight against it. And so I think that's going to be— you don't want to be on the losing side of technology. You don't want to be the one that's pretending it doesn't exist or that wants to regulate it in the same way you'd regulate an old system, or you don't want to be the one that just kind of makes it hard to flourish there. You want the companies to be there. You want your population to be using it and holding it and knowledgeable on it. And I think that's probably the Kind of biggest advice I would give for countries, which is that technology's complicated, it's rough. We don't know the speed with which things take off. We don't know for sure the direction that things take off, but you don't want to stifle that kind of just usage of things. You don't want to constantly kind of trap people into that system and try to just pretend the problem's not there because it It just makes things worse in the long run. Yeah.

That's a great place to wrap this podcast. Lyn's blog is online on our website and the book is Broken Money. I've learned a lot from it and highly recommend it. Lyn, thanks so much for coming on the podcast as always. And until next time.

Thank you. Thank you for having me.

Upstream with Erik Torenberg is a show from Turpentine, the podcast network behind Moment of Zen and Cognitive Revolution.

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