Jeff Booth  01:45

Thanks so much! I’m a fanboy right back.

Preston Pysh  01:48

Jeff, you have a super ridiculously strong background that I want to highlight to the audience because when I first heard your background, I thought, “This guy gets it.” You’re somebody who’s been in the trenches of building a business and not just a medium-sized business. We’re talking a large-cap business from the ground up. So, I want you to tell people your background, your experience, the size of the company that you have built –all that kind of stuff. Just give them a little bit of context of your background.

Jeff Booth  02:22

I’ve generally been in technology for most of my life. I started building a company out of school in real estate, and then a building company. Out of that problem, I started a company called BuildDirect. First, it was an e-commerce company. We went through multiple cycles, the dot-com crash in 2008, and everything else. We turned that into a platform type of company, with at one time, reaching over half a billion dollars in market cap. That path took me into the realm of technology, where I’ve sat on many different boards, investors and portfolios, different companies, and technologies. Right now, I’m a co-founder of about 10 different technology companies and sit on board.

Preston Pysh  03:06

Where did you start off at? Like, at what level? And then what market cap did it arise to?

Jeff Booth  03:10

I started at zero, out of my house, and then I went to over a half a billion dollars of market cap.

Preston Pysh  03:17

In my opinion, and I’m kind of curious if you’ve seen this as well, very few people understand the definition of inflation and deflation. First of all, would you agree with that?

Jeff Booth  03:28

Yes, I would agree with that. I would agree with very few people understand how economies work and are constructed. A part of that is an inflation-deflation, for sure.

Preston Pysh  03:39

So, I think it’s vital that we talk about the definition of those terms. Let’s talk a little bit about it as if we’re going to put them into an application for somebody to understand the terminology. Describe that. Which one would you like to talk about first, inflation or deflation?

Jeff Booth  03:55

I try to simplify really complex topics to try to make them broadly understood, so I’m going to do that. If you really understand a topic, you can explain it to a five-year-old.

If you just take inflation and deflation, I would say, one seems like a bad word. Most people would say deflation is a bad word, right? We don’t even want to look deeper into the conversation about what it is. So I’m glad you asked the question. Inflation is when the value of your money goes down, and goods and services cost more. Deflation is the opposite of that; the value of your currency goes up, and goods and services cost less. It’s as simple as that. There are different winners and losers, depending on if you have inflation or deflation, but in principle, that’s all it is.

Stig Brodersen  04:42

So let’s just say that we’re dealing with a deflationary currency and I can buy a chocolate bar for $1. Tomorrow, I might only need $0.90 to buy the same chocolate bar. But you can also have the opposite, inflation. For instance, due to an inflationary monetary policy, the chocolate bar could cost me $1.10 tomorrow.

Jeff Booth  05:03

Let’s isolate both cases because you can design different solutions outside of those. But if that is true, I think people assume that if you have deflation, that’s a bad thing, and they do the consequences because of the bad thing. It is true, it’s a bad thing for debt. If you have too much debt, deflation, you can’t pay back that debt. The debt explodes in real terms and value, so loop holders of debt boots in a deflationary environment because it has to be written off. I’ll go one further on inflation, to try to get your listeners to really look at this at a different level. What if a government, instead of saying we had inflation targets, said, “We are going to try our best to destroy the value of your currency?” Because it’s the same thing.

Stig Brodersen  05:51

Here’s another thing for everyone hearing this. When you hear that you could buy a chocolate bar for $0.90, you’re probably thinking, “Yeah, that’s the world I want to live in. I want deflation. My cash is more valuable.” But if you’re a government entity and you have to pay back debt, you don’t want deflation.

Preston Pysh  06:08

Let’s talk about the incentive structure that effectively occurs after a government or world governments have implemented inflationary monetary policies. If a country does this for a year, the impacts are not going to be all that noticeable. But when they do it for decades on end, talk to us about what happens in that incentive structure, particularly after they do it for so long.

Jeff Booth  06:42

If you can grow your real economy faster, then maybe it’s okay because you didn’t have to stimulate, so maybe it’s not a bad thing. I would argue the way that the world has worked since World War II has lifted the world out of poverty. It has done a lot of good things and everything else. What’s happening though today is the same amount of debt to create growth is exploding. Every time you’re creating more and more debt to pretend to drive growth, you’re debasing currency every time. You’re holding asset prices up, and so we get stuck on this merry-go-round. I don’t think it’s good or bad people. I think we’re stuck in a system that we don’t see we’re stuck in, and without a bridge to, how do we change that system? We’re dealing with really profound consequences of having too much debt in the world and not enough growth.

Stig Brodersen  07:36

Let’s talk about a concept called “price deflation,” which is tied to technology and related to death growth. Can you please elaborate on that?

Jeff Booth  07:49

The whole premise of my book is, “Technology is creating falling prices.” You can see it everywhere where technology lives. In fact, if you look at the consumer price index where technology is and where it is not, you can see clearly that you have technology overdriving price deflation, and where you get more for less. The byproduct of that more-for-less also takes jobs. Technology companies create a whole bunch of jobs, but not as many as the jobs that they displace in the non-technology businesses. Overall economies are finding fewer jobs if you let deflation happen, so you have governments, businesses, corporates, and people who have too much debt. If that happens, the debts wiped up. How do you press reset on that debt? If the prices fall, and you don’t have a growth rate to support the debt, then the debt explodes in value.

Preston Pysh  08:51

How do you respond to a person listening to this who’s very skeptical about this time, saying, “This is no different than what happened in 2008 nor 2000 nor 1987 nor the early ’90s”? They’re looking at this event right now, and saying, “These policies aren’t going to change. This is just more of the same of what happens during business cycles.” How do you respond to that person?

Jeff Booth  09:18

I think they’re totally missing the point. I like to go to, first, principles. Technology is moving so fast, it’s exponential across industries. We’ve constructed economies at a different time. Technologies mean the same thing, how fast it’s moving today and how fast it’s giving benefits. The people listening to your show look for you through their phone, right? The iPhone is not quite 13 years old, so the smartphone, the whole industry is 13 years old. Look at your phone, at all the apps on the home screen, and ask yourself how many of them you pay for, and you’ll see it. That power is moving into every industry at lightning speed. In other words, your phone gives you abundance at a way lower price than what was previously possible. Your Waze app is free, your Google searches are free, it’s all abundance; that is exploding across our society, and our policies aren’t keeping up.

Stig Brodersen  10:17

In your book, there’s a great example of where we are when it comes to the speed of which things are taking off right now. You used an example of a piece of paper that you continue to fold 50 times. Let’s hear the question and how people typically respond.

Jeff Booth  10:33

I’ve asked this question to tens of thousands of people around the world, and very rarely do I get anywhere close to the right answer. If I fold a piece of paper on itself 50 times– you can only fold it seven times, but if you imagine one could continue to fold it, how thick would that piece of paper be on fold 50? The answer is from here to the sun. Generally, what happens when people hear that is they don’t believe it. They go Google it, or you just see the shock on their face. I don’t say that to say I’m smarter than anybody because I would have missed the answer too. Most people answer about two inches.

What it shows is a terrible understanding of exponential paths. Like in the case of COVID-19 right now, it shows why people misjudge how fast it’s moving. It’s just an exponential pattern. Exponential patterns are really hard for human minds to understand. Technology is moving exponentially. It’s backed by Moore’s law, which I go through in detail. Yes, Moore’s law will end, but the next curve, whether it’s quantum computers or the digitization of societies, it doesn’t matter. I think what’s happening to AI technology, in general, whether it’s quantum AI or everything else, will feel exponential to us.

Understand that fold 33 is from Detroit to Boston, and fold 34 is double that going to the sun, and we’re on fold 33 on Moore’s law right now. Fold 34, we’re in the steep steps, so people think it’s moving faster. It’s moving exponentially faster, and I think it surprises people because they’re not looking at the numbers. But it took $185 trillion of overall global debt, or monetization of debt, over the last 20 years to produce $46 trillion per year of economic return. Those are the stats. It’s crazy. Those are the stats before the crisis.

12:34

I wrote the book before the crisis. If you think about the exponential deflation that we’ll see, that’s going to take exponentially more debt. It took $185 trillion to drive marginal growth over the last 20 years. To get the same amount of growth over the next four years, it’s going to take that debt again because technology is moving so fast the other way.

I see all the news reports and the Fed printing, which is completely logical. What they’re trying to do is to save the existing system. If they did nothing, we would enter a depression. In fact, in 2008, doing nothing was what caused people to abandon capitalism, and bail out the same people who created the crisis because doing nothing means depression. And all that happened is you kicked the can down the road, and it’s a way bigger camp. Trying to escape this crisis by doing the same thing creates a way bigger problem. But I don’t know if we’re going to escape this crisis with how much more printing is going to be required.

We talked about first principles and what has to happen, but if you think about how this whole system is interconnected, today, the Fed put another $2.3 trillion and high-yield debt. That high-yield debt is subprime of 2008, and while they’re doing that and taking that on their balance sheet, next, they’re going to take baseball cards. If they don’t, the system unwinds, the assets unwind, and then the banks fail, too. It’s a domino effect. Remember in 2008, everybody said, “Oh, subprime’s isolated,” but the interconnections are not, and the whole system is tied to that amount in debt. So, if it starts unwinding, you start to see who has it, and the system fails.

14:48

So the Fed is boxed and they’re trying it all *inaudible* to stop that asset price from unwinding no matter what because then the banking system fails. I understand that. It is a very real problem, and that very real problem could create a depression so severe, but just papering it over is a very real issue too.

I’m going to go a little deeper on that. Think about what’s happening when papering it over. So technology is wanting to keep creating everything cheaper. By manipulating the markets, we’re holding asset prices higher. Then a whole bunch of people who can’t pay the rents on those asset prices is artificially held higher because we created money to keep them high. We have to bail out the people who can’t keep up the cost of living rise, to pay for the prices that we artificially created. It’s the most insane system, and we call that capitalism. We think, “Oh, it’s working fine.” Right? But if you dig into this from a first principle standpoint, there’s nothing in this that’s fine.

Preston Pysh  15:47

If I were to summarize what you were saying there and relate it to the example of folding the paper, I’m kind of curious if I’m capturing this correctly, but so, you’ve got an inflationary monetary policy that’s been in effect for a long time, right? The longer that that inflationary policy is in effect, the more that all the people that are sitting there on this money are saying, “I’ve got to invest this money, or else it’s going to go down in value.” That incentive structure, that exists for decades, it compounds on itself and using the piece of paper that you fold 50 times and it goes to the sun, you were saying we’re on fold 34. You were referencing where we’re at on Moore’s law, but if you would also equate that to inflationary monetary policy that’s been in effect for decades. We’re at some fold there, that, on the next fold, you’re literally jumping from mercury to the sun on that fold.

Jeff Booth  16:45

It’s almost a mirror image. You can see it if you look at technology and the deflationary trend of technology and how fast that’s moving, and you look at how much debt is created in the world be able to stop that. It’s almost a mirror image, and if you add the unfunded liabilities, and what’s really happening, it is a mirror image.

Preston Pysh  17:04

Everything that you’re talking about here just makes total sense in such a simple and elegant way that you describe it. One of the things that popped out of it, though, when I was looking at the deflationary impact on prices that inflationary monetary policy has, is that I’m looking at a chart I found on Twitter somewhere, showing how there’s this giant separation between various items since 1997. One of them is the price of a TV, which has literally gone down 90% since 1997, to buy a TV of similar size, and it’s gotten way better. Quality has gone up and the price has gone down that much, but then there’s a counter-argument to that where you can look at the price of medical care, and it’s gone up significantly since 1997. How do you describe that and this deflationary price argument due to inflationary monetary policy?

Jeff Booth  17:04

Let’s start with education because education has gone straight through the roof. So does anybody believe that the amount of debt created for education and student loans can be repaid? If all you’ve done is created an artificial market that’s screamed higher because you threw a bunch of data at it and without any fiscal discipline. Why do you think hoses rose so fast before? Why do you think your dot-coms did before that in 2000?

When you have free money chasing things, they go up in price, and the question is: If you never have to pay back that money, will they go up in price forever? The only way to never have to pay back that money is to debase your currency to essentially make the currency worth way less. And so, you have a bunch of incentive structures that aren’t right and don’t work. If you actually take into account what’s going to happen with technology and medical care, you’re going to see, if you let natural forces happen, the cost of medical care would come way down through technology, as well. It’s just starting. So technology is creeping into every sector, and every sector is being digitized. My Apple Watch knows more about me than my doctor.

Stig Brodersen  19:15

Let’s talk about your thesis. I love this because it’s so contrarian. You have so many interesting arguments. Your thesis is that we need deflation. Not conventional price deflation because we do have that many areas, but starting in another place, namely with a deflationary monetary policy on a global scale. Could you please explain your thesis, Jeff?

Jeff Booth  19:40

Economics is driven from scarcity, right? It’s not from Valley. The air you breathe is free. Why is that? Because it’s abundant. In a lot of places, the water is free because it’s abundant. Now in Africa, the water isn’t free because it’s not abundant. And so, you see it’s not about value. It’s about scarcity. It might be about the perceived value if you can create scarcity out of perceived value like a brand would do, it’s really about scarcity.

I argue in the book that the real scarcity going forward is high-paying jobs because of what’s happening in technology. Technology is making more and more jobs, and, in the book, I go through countless examples of where you’re going to see job destruction due to technology.

Google, when they created a monopoly business, destroyed way more jobs than they created in that monopoly business. I also see that the technology landscape start in my own companies, and would go and see it in other companies today. I can see the next steps and what’s happening because these things are getting digitized.

So, if high-paying jobs are scarce, and every single government around the world is trying to, essentially, play game theory to protect their highest-paying jobs, what they’re doing is what Blockbuster did with Netflix. It was obviously a death threat. And if you look at Blockbuster through that lens, people look at it today, and say, “Why didn’t they buy Netflix for $50 million?”

Some of the companies I’m involved with are exploding in value right now. COVID-19 is actually an accelerator to robotics, an accelerator to technology adoption. It moves things fast. Look at Zoom going from 10 million users to 200 million users. How many of those businesses that are working from home right now will say, “I need four floors of a building”? Maybe they’ll want only one floor of a building, and they can get through their work more efficiently. Technology does that.

The thing is, hindsight is 20/20. Blockbuster management had 9,900 stores. It looked like their business was perfect, and it looked like, in the future, their business was perfect. All they missed was how fast technology was moving, and it made their business redundant overnight. The entire thing that drove their success drove their failure overnight when digital download speeds went faster. And what did they do? They added candy aisles to the stores, and we laughed at that. “Are those crazy people?” If you look at monetary policies today and check what all the solutions are, we’re adding candy aisles to the stores. That’s what we’re doing. It’s driving off off a cliff the other way. It’s so evident in everything. And all the money is going into protecting the status quo, just like Blockbuster trying to protect their 9,000 stores.

Preston Pysh  21:23

It’s not just a CEO and a small staff that’s adding candy to the aisle. It’s like almost every academic on the face of the planet is trying to add candy to the aisle. We’re talking about monetary policy. This is such a massive global groupthink situation that it’s almost unfathomable that so many people are trying to add candy to the aisle.

Jeff Booth  23:02

But again, it’s logical when you think about it. I explained in the book about top businesses in the world. Blockbuster was a really top business in North America, and I’m assuming it’s not just a bunch of dummies running the company. Those are the top CEOs, top people around executive teams trying to protect the status quo of the system. If they can’t see it because they’re in the system if it takes somebody outside of a system to see it, who is inside of the system that we’ve created for all of us to enjoy our economic benefits and everything else? We’re all caught in the same system, and that radical idea I had was really looking at it from ground-up first principles and saying I understand the dilemma of central banks. I understand what it looks like. How do you bridge from Blockbuster to Netflix in a global economy? How do you do that, Right? And so I think that that’s the conversation we should have, how do we transition to something that looks way more digital in nature to something way more technology in nature? And, as a byproduct of that, it’s going to have fewer jobs.

Stig Brodersen  24:08

I think it’s important to understand that these decision-makers are not incentivized to want a deflationary monetary policy. For instance, if interest rates go up, the value of all assets go down because everything is based on the cost of money, then elected officials around the globe want to have funding into the district so they can get reelected. That is their incentive structure, so they’ll want a lower interest rate because that would be good for the lobbies that support them. Then, if you add to this that fear currencies are not packed, elected officials might make the wrong decision for the population, but they’re actually very rational whenever you consider their own incentive to not having a deflationary monetary policy.

Jeff Booth  24:49

Yeah, and what is it? That we have a transition coming one way or the other. It might be too late to do an orderly transition from Blockbuster to Netflix. I suspect it’s too late because we haven’t done the right things before, but what that transition looks like could be a reset, and we’d go through a depression, and your debt wipes out. It could be central banks getting together around the world and pegging to a common currency, like gold before in ’71. But the facts are inescapable. We’re breaking the society by doing what we were doing. We’re driving wealth into the hands of very few, and we’re socializing the losses.

Preston Pysh  25:28

Let me ask you this, and this is a super hypothetical question, which I usually don’t like, but I’m just kind of curious to hear your thoughts on it. Let’s say I could snap my fingers, and poof! We’d have a deflationary monetary policy. Would that slow down this breakneck speed of innovation that we’re seeing today? Would you see that start to subside?

Jeff Booth  25:49

I don’t think so. I think that will still move just as fast. Let’s say you could start over right now, and you had no debt in the world. You had a global world order tied to a unit that made sense that you couldn’t manipulate, and you allowed capitalism to take place. Innovators would move faster to make more efficient things, and technology would be a byproduct of that, and that benefits society. Those people would still create value, but it just wouldn’t be manipulated value. If you own a house, and the currency grows worthless, the house goes up by that value.

Stig Brodersen  26:22

All right, so let’s talk through the entire array of how this could play out, moving forward, based on what we know today. The first one you said was, “Could this be another Bretton Woods system?”

Jeff Booth  26:34

I suspect that won’t happen because we’re already past the point of governments trusting each other, and what is the value of a currency? It’s just an exchange rate of trust, right? If you lend me money, you lose your utility of money today, and I gain more utility of money. If you lend me more money the next week and more money, and I keep gaining and you keep losing, my internal economy will look way better than yours because I can hire gardeners and go on vacation. If you just look at that, I look rich to everybody, and it’s coming from me pulling forward demand with your money, and then having to pay you back later on.

One day, I have to pay the piper. If what I do, instead of paying you back with the unit and exchange we agreed on, because I changed the underlying currency to pretend I paid you back with a different base, you lose trust in a currency. You wouldn’t do that trade again. If every government is doing this exact same thing, you very quickly lose trust in global trade and any sort of rational trade. Exchange rates, debt, there’s mispricing everywhere because of that, especially if you’ve done it for decades.

And again, just like you can’t see the paper folding go into the sun, it’s such a small amount early on that you miss it, so nobody sees it. It’s a tiny little bit. “Okay, let’s keep going,” and then it gets bigger. We’re in a spot right now that it’s such a big problem. At some point, the numbers are just so insane that the whole system breaks because you lose trust in currencies.

Preston Pysh  28:10

Jeff, I want to hear your opinion on this. I’m of the opinion that even under a gold standard, you have inflation in monetary policy because, when you go back to Bretton Woods in 1944, and we come off the gold standard in ’71, why did we come off the gold standard in ’71? Well, it’s because you manipulated the money multiplier for 30+ years between those two periods of time, which is effectively an inflation-based monetary policy. So..?

Jeff Booth  28:36

Yeah, and I think I look at the period through the lens of game theory. If everybody cooperates, incentives accrue to the person who cheats. Then, as more people cheat and don’t trust each other, incentives accrue to cooperation. You see this cycle throughout history. That works like this: If you look, through that lens, at the nations that, under Bretton Woods, were gold-pegged via US currency, then at Vietnam not being paid for, what that says, in-game theory, is your own personal needs always take precedence of the international. Your own family matters more than everyone else, than your friends, than your country, and everyone else. It always goes to “I have to protect myself first.” But overall incentives are better when everybody cooperates.

Through the lens of game theory, in 1971, back when Vietnam War couldn’t be paid for, it makes sense for the US to then, with the gold standard, export the problem to other countries, and then we had fiat currency. It became the functioning global currency. For a long time, that worked, but in these bigger steps, it’s starting to lose trust across the world.

Every other country needs their own currency because if you have your debt denominated in US dollars, and the US dollar does what it’s doing right now, you just exploded your debt of other countries’ gaming currencies and balance of trade. All the trade wars are really currency wars. The US wants China’s dollar to go higher, so more product is produced in the US and less in China, without understanding the interconnections of what that looks like. And China wants the US dollar lower so they have more labor, so they can sell more goods. But yeah, if you have a fiat currency that the world order sits on, and you manipulate the underlying currency, you have a whole bunch of problems.

Stig Brodersen  30:35

To summarize, what you’re effectively saying is that, as you transition from a trust-based system to a system without trust, when you’re working in a global inflationary monetary system and you consider the game theory and there’s no trust, the devaluation becomes competitive on a global scale.

Jeff Booth  31:00

That’s what I think people miss. Japan got away with it for 20-30 years, they had deflation and kept on printing, but they missed a couple of things. Most of Japan’s debt was owned by them, so it was their own. One country might be able to get away with something like that, but if every country does the same thing, it doesn’t look the same.

Preston Pysh  31:21

I’m kind of speechless. I’m just sitting here, just shaking my head. I don’t even have words to describe how mind-blowing some of this is. Let’s transition a little bit here to artificial intelligence. What is something that you see coming in the next 10 years that will make the audience’s mouths just drop to the floor?

Jeff Booth  31:42

Most of the artificial intelligence today is dominated by deep learning or machine learning, but it’s doing things today that would blow people’s minds. I use an example of the game of Go in the book. The game of Go is a Chinese game. It’s thousands of years old. I can’t remember the exact number of combinations of moves, but it’s a staggering combination of moves. Even the top AI researchers didn’t think it could be solved by AI by another five years, but a few years back, AlphaGo beat Lee Sedol, who is a top player at the game. It was the way that it beat Lee Sedol. I think it was game five. The AI put a chip in the middle of the board, and all the commentators and China who were following it said the AI made a mistake. It wasn’t until after the AI destroyed Lee Sedol that they said, “That was the most creative move we’ve ever seen.”

It was kind of the first time that AIs were esteemed to be creative. If you look at what’s happening in an AI, if your creativity comes from pattern recognition, artificial intelligence is moving first in machine learning, then deep learning, and now into artificial general intelligence where computers are smarter than all of us. That is in our future. It could be 10, 30, 5, or 50 years in our future.

Considering that, I would ask you to think about this: We know the day will come when artificial intelligence is smarter than every one of us. It won’t be just smarter, but more creative, too. I know that people will fight it, but it’s already happening. When that happens, and every single job is a function of our intelligence, how could we say artificial intelligence doesn’t change the rules? If artificial intelligence is going to be smarter than us, how can one say that’s not going to change the rules? How will we construct societies around jobs?

Deep learning itself won’t get AI all the way there. It needs massive data sets and computing power on deep learning itself. It’ll do some things, but people will have no idea how powerful that is. You can think about connecting data sets and what that can do. And with way better classwork, it will learn a bit better than us. It can be super powerful.

I am working with a researcher from the University of British Columbia right now. He’s a top researcher on a subset of AI, called probabilistic programming. It might be the next piece of artificial general intelligence and everything else, so this is moving that fast, and I suspect it’s not going to slow down.

Stig Brodersen  34:28

Billionaire Peter Thiel is famous for asking a really important question during his job interviews. I think I can see you smirking because you might already know where I’m going with this question.

Jeff Booth  34:39

I love the question.

Stig Brodersen  34:40

Yes, so, he asks, “Which important truth do very few people agree with you on?” I propose the same question to you, Jeff.

Jeff Booth  34:49

I think when I wrote and launched the book, very few people agreed on the impact of technological deflation. The reason I wrote the book is if you see it, you can’t unsee it. I think about my kids and the world they’re going to grow up in. I couldn’t stand by and see that, and not say something about it. Today, I think a lot more people are starting to see it.

Preston Pysh  35:15

When you have this conversation with the typical person, what’s their common argument? Or what do they usually fight back with? I talk to people about X, Y, and Z, and you always kind of hear the typical flow of arguments or the typical feedback. I know some people are listening to this that are skeptical of what we’re talking about. They probably have the question that you’re going to say.

Jeff Booth  35:37

Okay, here’s the thing. If somebody actually goes through the book, they’ll see that I’ve done a balanced approach to the entire thing. It is a fact that we have a technological deflation period, and that it’s likely to move into areas of society and move faster. So what I get, typically, is no questioning that, but I can’t do anything about it. “Let’s just do the old way,” but that’s not a solid either.

What I ask, and what I would ask the audience that is pushing things to go back, “Defend why the existing system works, and why it will continue to work.” Defend that. Imagine that we started today with no debt and no anything else. How do we want to construct society? If we had a fresh start, would we rebuild what we have, and why? I think the question allows people to step out of the existing framework of “I can’t do this because my personal wealth gets destroyed,” or “I can’t do this because I’m going to lose my job.” “I can’t pay my bills tomorrow…” It allows you to step out of the fray and have an intelligent conversation on what things could look like going forward.

Stig Brodersen  36:57

A person listening to this might be thinking, “I believe everything I’ve just heard. It all makes sense, but what do I do? How do I find the right investments?” What is your response to that?

Jeff Booth  37:09

About 70% of the value of technology companies comes from network effects. In fact, the entire internet itself is built on a network effect. An easy way to see a network effect is a telephone. If I’m the only one with the phone, it has zero value. Each time another person acquires a phone, the value of the underlying network increases. Most platforms of technology companies that are built today, especially that of monopolies’, were built with really understanding network effects and how to construct them to be able to exploit them. The entire internet is based on a network effect.

Most people wouldn’t realize that Amazon works over 500 million skews, all competing for your attention. That competition for your attention means you can go there and get everything you want, and it keeps getting better and better out of the competition to try to get your attention. It’s the same way Google works with over 130 trillion websites competing to try to get to number one in each category. So companies that can exploit network effects and build products around technology that can enable network effects can create enduring monopoly businesses. Constructing businesses that way is one powerful way of looking for investment opportunities.

You asked the question, “What do I do personally?” By that, I think you mean how do I protect my own wealth with what’s coming? That would be one way, to look for companies like that make use of network effects.

38:48

Another way is that I have a portion of my portfolio in Bitcoin, and I think that in every dip I’ll buy more because I think the asymmetric bet on Bitcoin of what it’s valued at today, and what likely will happen as governments can’t stop gravity from happening by printing money, the likely beneficiary is something like Bitcoin. There needs to be a new standard going forward, and I think the most probable right now is Bitcoin. Gold’s also a decent investment and running high right now, but we’re in a land where everybody is destroying currency value.

But why does gold have some $7.5 trillion market cap? I would argue that the only reason that gold is a $7.5 trillion market cap is it used to be pegged currency. It’s no longer pegged currency. There’s just a hope that one day it will be again by people who own gold. That’s why they own it. It’s not that the underlying brick of gold has any value other than it was pegged to a currency.

Bitcoin has a market cap of $120 billion. I think it’s highly likely that the new peg-to-currency regime is something like Bitcoin. If it doesn’t happen first by governments, it’s going to happen by institutional players who drive a network effect, who drive it higher and higher in price. If I were a government right now, what I would do is I would be buying it in the back. I wouldn’t be telling anybody, but I’d be buying it in the background because it’s far more likely that something like that with a network effect around trust turns into something that is kind of a store of value for world currencies.

Preston Pysh  40:31

My concern with gold in the coming four to five years, especially as you now have digital scarce tokens that have been invented, is the speed at which you can clear a transaction for the gold market. I think gold’s going to do very well in the coming months, but I think it’s going to face some concerns. Bitcoin will go through its next halving cycle, and everything is going to play out based on the incentive structure, scarcity, and some of those ideas that you talked about earlier.

Bitcoin has a small market cap relative to gold. With players starting to come in if the price of gold is going to go up by 2% or 3% a day in the market, while Bitcoin goes for 10%, and with Bitcoin transactions literally able to be conducted immediately, versus the gold bar that needs to be sent in the mail and might take a few weeks to get there to possess it, or will take me three months to receive it after buying it from an entity or business, I think those are major concerns.

I have another concern. This is getting into the technical stuff of Bitcoin, but I think you’re going to have this halving event in May, and historically, the price really doesn’t catch on for a couple of months until after the having event just because of how the miners execute the fiat. If that plays out, let’s say that you don’t start to see the price acceleration on Bitcoin until the fall timeframe, and now you have a lot of people concerned about a currency peg.

Today, right now, you’re seeing the technicals on gold that look like they’re ready to explode to the upside. I’m concerned that you’re going to see the market just fly to gold, while you continue to see Bitcoin sit a little bit dormant because of how the incentive structure is set up and where it’s at in the current halving cycle. But only to find that there’s this rocket ship that blows past gold six months later after you had everybody go in there.

People don’t want paper gold. You saw the separation in the paper gold market relative to the physical market. They’re going to get their gold bars three or four months later, only to find out that this rocket ship zooms past them while they’re stuck in the cage of slow transaction times. And nobody will want to buy the gold because it’s going at 3% when Bitcoin has gone at 15% at that point. It’s a network effect and incentive structure based on how the protocol executes fiat.

Jeff Booth  43:04

In a  lot of these types of things, you need to investigate what you believe, and the second-order and third-order consequences of that. And then do that for the other side of the argument. What you just did is one of the reasons I really like following you and everything. I think you have a measured approach to put things into concepts, and look at both sides.

I agree with what you said about gold. I use that example in Venezuela. People say it can’t be a peg to currency because it moves around too much. In Venezuela, there was a 1.8 million percent inflation last year, and the holders of Bitcoin lost 30% of their value. If you were a holder of Bitcoin last year and lost 30% of your value, when that was happening, you would be happy because you could still eat and you could move and cross borders seamlessly. You could go anywhere you wanted, and you still had wealth. If you think about all those users who have it and it’s done that for, it builds on the network effect of trust. So every single person into this that’s experiencing this as you have fiat currency exploding country after country, builds faster and faster trust to a network. And at some point, I think you’re right, it explodes in value.

Stig Brodersen  43:47

A few years from now, one of the major changes that we may see is the concept of decentralized applications. You sometimes hear them referred to as dapps. Could you please explain what it is, and please explain how you see that type of technology integrated into our existing ecosystem of technology.

Jeff Booth  44:39

Let’s use blockchain as an example. The internet was at the promise of distributing right? Small companies could make money and everything else, and it took the giant monopolies, and so then it’s going to redistribute. What it actually did is concentrated power into fewer hands faster. That’s not an internet problem or protocol problem. It’s a human being’s time problem.

So when you say dapps, it’s going to do the same thing where blockchain is going to allow this wave to decentralize again, I don’t buy it. Because the power aggregates really fast, and because we need to go to one place or something that we can trust faster. That’s why we go to Google or Amazon. It’s hard to see our time being able to look at your phone and how many apps you’re actually on, versus the 15 million that are available. But we don’t have the time to think like that. So if you could create that, then it comes to you, maybe.

Preston Pysh  45:35

This is interesting because I think I have a different take on this. Hear me out and shoot holes through my opinion here. About four or five months ago, Jack Dorsey announced that he is effectively going to try and stand up a protocol that he would run the Twitter client through, which would be a decentralized application or decentralized protocol of Twitter. He would try to set up a baseline that any other social platform could use as well.

The way I envision these dapps working is you’re effectively removing the middleman between a transaction of an advertiser and the end-user. If I go on, let’s just say that we remove Jack Dorsey’s overhead, and he’s no longer there anymore, I’m still using my Twitter platform, and advertisers want to advertise on any of my posts. Well, anytime that post goes up, and it advertises against somebody else, and they like the post or whatever, I’m effectively paid that reward directly from that advertiser. Twitter is basically removed out of that loop.

Now, Twitter’s incentive to do this is they’re going to create an index of decentralized tokens that run on this protocol that has to be swapped into from whatever currency. It doesn’t matter what currency it is, but if I’m advertising on Twitter, I have to buy those protocol tokens that are in the Twitter protocol. And when I do that swap, then I’m incentivized as a user to post more and to do things on Twitter because I’m being directly paid for my contributions, as opposed to Twitter sucking all my data out of me and I’m getting nothing in return as a person who’s making posts on the platform.

Where I see that this would be interesting if this could be done, and it appears that the Jack is trying to do this, is you’d have all these users that are now, instead of being a victim of the application that they’re using on top of a protocol, they’re actually benefiting and receiving rewards for the use of their data and the use of their interactions on that platform.

Jeff Booth  47:55

Yeah, potentially, but could that start, and could that work? From there, aggregate into something here’s what would likely happen. If you were the best, you would aggregate other people into yours, and if you didn’t do that, you wouldn’t be found anymore. Because a billion people are doing this same thing. We don’t have the time to go through all of that. It could start, but it’s really hard to scale up. And it would be good for the people that came out on top early on. They could just aggregate again.

Preston Pysh  48:26

No, you’re exactly right. Because then you’d have all these people that would then start to effectively build their own social networks of particular topics.

Jeff Booth  48:34

Instagram stars. When new technology comes out, a whole bunch of new stars, they aggregate it up.

Preston Pysh  48:40

Do you see this playing out? Do you think Jack’s gonna be able to successfully implement something like this?

Jeff Booth  48:46

I think he could make that work because of who Jack is. I have tons of respect for who he is and what he does, so I think he could make that work in the beginning, but I don’t think it would solve the problem that you’re talking about.

Preston Pysh  48:58

One of the things that fascinates me so much about this is you look at something like Facebook and you say, “Oh my god, there’s no way that that company could ever fail.” We say these kinds of things about Sears, and all these massive companies that don’t look like they could ever have a competitor step into the marketplace. But from Jack’s standpoint, if he cannibalizes his application platform that runs on top of the Internet Protocol, and he turns his application, Twitter, into a decentralized protocol with tokens associated with it, but he onboards all of his users, his clients, into that protocol. Why can’t he do that with Facebook? Why can’t he create a Facebook protocol that devours them or a LinkedIn protocol that devours them because it’s completely decentralized?

Jeff Booth  49:47

The winners of the aggregation will just be moved up the channel, right? Think about the cost that you would load on to advertisers to find all of these little audiences. The costs explode. So, not that it wouldn’t work, but it would aggregate back up.

Preston Pysh  50:07

All right, so Jeff, talk to us about the book, Actionable Gamification. I really like this.

Jeff Booth  50:14

I came across this book written by Yu-Kai Chou. Like you, Preston, I read about 50 books a year, and it was one of those books that stood out in a way that others haven’t, and I had already read a lot on social psychology. I think that if you think about group behavior, how we make decisions, and everything else if you really understand how we make decisions and some of the biases in our decision-making process, I think you can both invest better. I think you can make better business, and you can understand human nature a lot better.

50:46

He said eight different triggers can drive human behavior. I won’t go deep into the book or any of the triggers. I’ll use a game as an example. When we play a game, whether it’s Candy Crush or something else, we believe we play it because we want to. That’s not the way it looks like from a game designer’s standpoint.

If the game is too hard to win at first, you bounce from the game. So they design rewards that are easy to win at first and gives you a feeling of accomplishment. But if the game is always easy, our brain gets bored and we don’t stay with the game. So those triggers get longer, and the game gets harder when we work and put more energy into that game. Think about it. We think we’re doing it for our pleasure, and we’re putting more and more energy into the game, and then they combine that trigger with superpowers in the game that make us better than other people. That then gives us a fear of loss because we don’t want to lose our superpowers. The fear of loss triggers us to stay with the game.

All games are designed that way. When I thought about that on a broader spectrum, I thought that this book gives a really important framework for life and how I raise my kids, and what they are triggered. It tackles the things that you think versus what is actually happening.

52:23

Applying it to sports, in most of the sports that you would be good or better at, you took them up earlier than friends, and when people reinforced you positively, you wanted to do it more, so you practiced more. And that practice made you better and better. In contrast, for the sports that you’re not good at, you might have been laughed at early on or what, so you never did it again and you never practice.

Designing behavior hooks and everything else into technology products is the core of all technology products. It’s what I do in a lot of the different technology companies. I try to do it in a positive for humanity way because it has negative light constantly. If you look at Facebook, all of those triggers are designed out of the same kind of function, and it can be manipulated badly. It’s easy to manipulate us, but I’d say the book gave me a new framework for thinking about motivation, why we do the things we do, and what things I might want to question a little deeper.

Stig Brodersen  53:25

Jeff, we covered a lot of ground here today. A request I really like to ask our guests, especially when they are as ultra-successful as you, is for them to give a piece of advice to the audience, whether it’s about business or in life. I know that you define success very differently from most conventional metrics, so please tell us about how you define success, and then give some advice you would leave our audience with here today.

Jeff Booth  53:55

I measure success by the positive impact I have on other people. By that measure, I am the luckiest person around. I have so much abundance in friends and family. Those are the important things for me. If I said that, those things can’t be taken away from me no matter what. The most important things in my life can’t be taken away from me because it’s how I think about people generally. And that seems to feedback on itself.

I believe all of us, and me too, through learning, evolving, and thinking, things I didn’t know have come into view of how to get better. I think every person I meet has a sign on their forehead pointed outwards. The sign on their forehead tells everybody around what’s stopping them from what they really want, and what most people do when we come into contact with that person, like a friend, is they won’t tell them what’s written on the sign. So most people can’t see that the thing that it’s written on the sign is stopping them from everything they want, and their friends won’t tell them. Their friends tell themselves a story that goes something like this: “I don’t want to hurt your feelings.”

But if you actually investigate that, it’s actually not that. What you’re really saying to yourself is, “I care more about what you think of me than you,” because if you invert that, and you say the two or three most important people in your life, the people that have made all the change in your life, that you had a zero-to-one type of change, they did the opposite of what that person did, they would never tell anybody else, they would turn the sign around, so you could read it in a way that came from the heart. In doing so, they say this: “I care so much about you. I have to tell you this. I’ll never tell anyone else, but you need to know.”

If you actually invite people like that in your life, and you only have people like that in your life, it’s staggering how much better you get, and how much better the people around you get because you really care about them. We all make mistakes. How fast you can accelerate your growth by inviting that? In fact, if you just think through timelines, why doesn’t everybody do that?

Preston Pysh  56:08

I think most people don’t do it because when they have done it in their past, a lot of the times the person receiving that can handle it, right?

Jeff Booth  56:17

So, my co-founder, BuildDirect said to me, “You make everybody cry, and they love you for it.” Here, I think, is the thing. It’s not about me. So when the person doesn’t receive it, well, it’s because you’ve said it about you. “I don’t care if the person changes at all.” It’s a thing. “I would never tell to anybody else, but I need them to know it because otherwise I feel disingenuous in the relationship.” You think about this on your own in everything else, and you’ll have a thought about somebody that you spent a lot of time with, and you’ll tell everybody in their network except for them about that. But you’ll go and tell all their friends about what’s on their sign, while they have no idea.

Preston Pysh  56:55

I don’t think I could possibly ask another question after that. No, because it’s just such a profound piece of advice, and I think something that is not evident at face value. When you explain it to somebody and they hear that, you can’t help but intuitively know that it’s just total truth, and it’s something that everyone can work on and think about.

Jeff, the name of the book is The Price of Tomorrow: Why Deflation is the Key to an Abundant Future. Where can people learn more about you? Give them a hand up. I know you’re active on Twitter.

Jeff Booth  57:28

Twitter, @JeffBooth. My personal website is jeffreybooth.com.

Preston Pysh  57:34

Well, Jeff, I really thoroughly enjoyed this. I want to do it again. We’ll have to do this again in the future. Your expertise in so many different areas is just such a breath of fresh air to listen to and to learn from. Thank you for making time out of your very busy day to come on the show, and spread your knowledge. I know your time is valuable.

Jeff Booth  57:56

Thanks so much for having me.

Stig Brodersen  57:59

All right, so, at this point in time, the show will play a question from the audience, and this question comes from Manish.

Manish  58:06

Hi, Stig and Preston. Thank you for taking my question. I was wondering if you could talk a little bit more about the interest rates? What does it mean when interest rates are down to zero or negative interest rates? What does it mean for the average consumer? Can I get a home loan for negative interest rates? Or can I get a home mortgage for zero percent? Can you elaborate a little bit more on that? Thank you.

Stig Brodersen  58:30

So, Manish, I absolutely love that question, and I think it ties perfectly into our discussion about inflation and deflation that we have in here today. Another reason why I love this question is that, as you might know, I’m living in Denmark where the interest rate has been not just zero, but negative for years, and we had this discussion a long time about how this negative interest rate environment, or zero if you want. What does that mean as consumers, especially if we want to have a mortgage? So, I’m really happy that you raised that question.

59:06

The first thing I have to say is that unfortunately, you don’t get paid to take a mortgage. However, you’re sort of doing theory, so please allow me to explain what I mean by that. So, right now, you’ll be paying and negative 0.11% interest on your mortgage. This is an example actually taken from the biggest bank here in Denmark. Negative interest rates effectively mean that a bank pays a borrower to take money off their hands, meaning that you will have to pay back less than what you borrowed in the first place. I know that sounds ridiculous.

Now, in reality, you will still be paying your bank for your mortgage. It won’t be called interest rates, so whenever you look at that statement, it would still say a negative interest rate. But there will still be a handful of different costs that the bank has added into the final calculation of that monthly installment, so please don’t be fooled if anyone’s telling you that you won’t be paying interest on your loan. It might not be called interest, but I don’t think you’ll really care because it’s still real dollars flowing out of your bank account. That part hasn’t changed. It might be called handling fees, processing fees, or whatever you want to call it. You’re still paying your bank for that service.

60:30

The other thing that you have to consider is: What is the real interest rate? And that is calculated as the nominal interest rate minus inflation. If the interest rate is 0% and inflation is -2%, meaning you have deflation, the real interest rate is still similar to an interest rate of 2% if there’s no inflation. If you have debt, you would rather have inflation than deflation, since it makes the future payments smaller in real terms.

Stig Brodersen  60:57

The other thing to consider is that you might not be credit-worthy for a loan especially in times like this. For instance, JPMorgan recently tightened its lending standards. ‘Tighten’ here, meaning that you would need more taxable income. Perhaps, you would also need other assets. There are different ways that the banks can tighten and say, “Hey, you used to be eligible for a loan, but you’re not anymore.” What you see now in the world economy is that we, as consumers, can’t service our debt, for instance, due to job loss, or loss in our portfolio, so banks are much less inclined to grant us any loans.

That’s also why you see central banks, globally, do everything they can to pump out as much liquidity to make sure that credit doesn’t freeze, or at least mitigate some of that contraction that we see. Keep in mind that, as crazy as it sounds, trillions are pumped into our system. Trillions are also being taken out of our system, and huge debt amounts are being defaulted at a rapid rate.

Now, looking away from mortgages, and looking more at what it means, in general, for consumers, it has the interesting effect that the Fed and you as a consumer do not have the same goals because a low-interest rate intends to make it as cheap to borrow as possible and encourage people to invest and to consume.

That method worked temporarily before the current crisis, but now that we are in a depression, perhaps you can’t even borrow if you wanted to, and perhaps even if you could, you don’t want to because you’re just looking for safety more than anything else. So you just want that, for instance, to be in cash. You don’t want to invest in bonds since you can’t get any yields. You might also be uncomfortable investing in stocks. You know, you can have all types of worries, like you might be losing your job. Whatever the reason is that you might be holding on to your money, as much money that’s being pumped out there, we are still going to be in this vicious downward spiral. Perhaps not the US consumer, but the economy as a whole, which the second-order derivative of that is also on you as a consumer.

63:06

So, Manish to sum it up, in many ways, a low-interest rate is good for you as an individual. However, you need to look at the real interest rate first, and while it may appear to be attractive, for instance, when taking out a loan, given that we’re in a depression, the low-interest-rate environment, or even negative interest rate environment, is not as attractive as it looks at face value.

Preston Pysh  63:30

All right, so Manish, the only thing that I would add, in addition to what Stig just highlighted there, was this last comment where he said that it’s really good for somebody who’s borrowing because interest rates are so low, and I completely agree with that. If I was only going to put one caveat onto that comment, it’s, particularly in the housing market.

If you’re locking in an interest rate really low right now, let’s just call it zero percent, and let’s say interest rates do go up for whatever unknown force that we can’t understand, I would expect the valuation on that house to go down. So, if you’re in the market and you’re planning on selling your house in the next five years, if interest rates would go up, which could happen, you might expect the valuation of the house to actually go down in that type of environment, so that would be a risk for people that are planning on moving out of that house in the short term, if interest rates would, in fact, go up for whatever reason. If you plan on living in the house forever, that risk, in my opinion, isn’t something necessarily that you’d have to worry about.

64:45

So with that, Manish, thank you so much for asking such a fantastic question. We’re going to go ahead and give you a full year subscription to TIP Finance. This is our tool that helps people filter across the whole US stock market. It’ll help you filter and find awesome value picks. Not only that, but it also has a momentum tool in there that optimizes for long-term holdings. And so, using those two tools together, we feel it just provides tremendous value. We even have ETFs in the momentum tool, so like, our tool came up and flagged the S&P 500 red at the end of February, which completely assisted a lot of people to miss the big downward push in the S&P 500 that we saw just recently. But we’re really excited to give you access to this tool, TIP Finance, on our website, completely for free for a year. Thank you so much, Manish, for asking an awesome question!

Stig Brodersen  65:38

All right, guys! Preston and I really hope you enjoyed this episode of The Investor’s Podcast. We’ll see each other again next week!

Outro  65:45

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