[00:02:47] Stig Brodersen: And perhaps, 99% of the listeners also have confirmation bias one way or another and so I guess this is my way of asking you, whenever you wrote the book and you might have a thesis going into the book, how do you find the right sources to go to? There might be some sources that are more in line with what you expected to find. Perhaps there are sources that are not in line with what you expect to find. So how did you balance the process and stay unbiased?

[00:03:13] Lyn Alden: I show the work and I say, okay, here’s all the logical steps and pieces and so if someone’s following along and let’s say, I’m 7 steps in and they disagree with step 5 and they start going in a different view from there.

[00:03:26] Lyn Alden: They might disagree with the end of the article, but they still learn a lot from the article because now they. If anything, I’ve refined their argument against mine, right? That they have a clearer picture of their argument or that they can articulate a snare better than they could before I read the, they read the article.

[00:03:42] Lyn Alden: So, one thing I try to do is basically say, not just here’s my view of the problem, but here’s the whole framework that I’m going in with this. And then it’s kind of like open sourcing your research, right? Someone else can say, okay, well, I agree with this 80%, but then I diverge here. And so that actually helps me as well.

[00:03:59] Lyn Alden: And so that’s something that the book does on purpose, which is, it’s okay. It’s the past of money. It’s the present of money. And that’s the potential future of money. And purposely, I don’t put Bitcoin in the title. I purposely, other than brief mentions, it doesn’t come up until the final third of the book.

[00:04:14] Lyn Alden: So, the first, the book’s divided into six parts. The first two parts are mostly the history of money and banking. The middle two parts are mostly kind of the way that the current system is constructed or, recent memory, basically within our lifetime, our parents’ lifetimes, what the system looks like, how it functions, what are some of the pros and cons of it.

[00:04:33] Lyn Alden: And then the final two parts are more about the future of money. And even like the last part is mostly not even money. It’s mostly other things that are kind of related to money. So really bitcoin only comes up in that final third for the most part. I’m conscious of the fact that I have audiences from many different camps.

[00:04:50] Lyn Alden: There’s people that primarily follow me for equity research, people that, that follow me for macro research and are not really big fans of Bitcoin or other digital assets. And then there is a big component that follows me because they like Bitcoin and they found my work and then they actually go the other direction.

[00:05:06] Lyn Alden: They learn more about macro after already having liked Bitcoin a lot. Right? So, there’s multiple different audiences that I know are going to read the book. I also write the book knowing that there’s people that don’t know my work at all. They could be academics. They could be someone from another country.

[00:05:20] Lyn Alden: They could be, there’s all sorts of people that are read the book. Not big for me with my work, and I want it to just, the whole piece has to kind of stand on its own two feet, and so whatever conclusion someone takes away from the book, I want them to say, okay, this was a good book, it was well argued, it was evidenced, it provided a lot of context, and the book doesn’t even make any, like, firm claims on what’s going to happen, it kind of shows the branching outline of where I think things are going, and why I think that one branch is helpful to support but basically I think the reader will take away from that what they will.

[00:05:54] Stig Brodersen: I think that there’s a huge element of that and if we can use that as a segue into my next question, because I was, whenever I was asking you that question, it’s because I’m thinking a lot about it for my own primarily equity research, but I think it’s an important topic to discuss regardless of what your views are on whatever kind of asset class.

[00:06:14] Stig Brodersen: But one of the challenges I face whenever I’m looking at a stock is that the bull thesis is always more plentiful and the more. thoughtful than the bear thesis generally. And of course, there are good reasons for that. Because if you think that a certain stock is overvalued or you’re just not interesting, you very often just quickly move on to another stock.

[00:06:33] Stig Brodersen: And so unless you want to make a living out of being a short investor, which is just brutally tough, just because your odds are against you whenever you’re shorting things, but even if Like, some of those people, of course, they would give a really thoughtful, short thesis, which is perfectly fine, but generally, whenever you look at, you, I don’t know what kind of stock you might be interested in, and you look it up, and you see all of these wonderful bull theses, they’re just like you, you agree, and you all agree that you’re all super smart, because you’re all bullish on that stock.

[00:07:04] Stig Brodersen: How do you, because I know you also invest in equities, but how do you stay unbiased and explore the bear thesis of your long positions, perhaps specifically about equities, but we can talk about any other as a class, if you want to.

[00:07:19] Lyn Alden: Yeah, key thing I do is I purposely go and seek out disagreeing views.

[00:07:24] Lyn Alden: And so, it could be on Seeking Alpha, it could be on any other platform, it could be, different analysts out there. If I, if there’s a stock that I’m forming a bullish thesis on or that I’m, doing like a checkup on it to see if I still have a bullish thesis on it, I will purposely go out and say, okay, what are the bears say?

[00:07:41] Lyn Alden: What is the smartest bear article I can find on this? It’s steel manning your opposite opinion because My goal is not to find people that agree with me. It’s to make good returns. And so, I need to hear the critical view of whatever this is, especially because any bullish thesis will come with risks or, what will invalidate this thesis and reading a bare article, one, it just might make you not bullish anymore if they’re right.

[00:08:06] Lyn Alden: Or two, at least you say, okay, so if these, I don’t agree with this article or the probabilities of this article, but if these problems start to materialize. I now define them better, and I know what to look for if the bearish thesis starts to manifest itself, and so my risk analysis section is now improved by the fact that I’m familiar with the bear arguments.

[00:08:29] Lyn Alden: Then another part is just having the humility to change your mind. I mean, one of the most famous, I would think most successful trader of all time is arguably Stanley Druckenmiller. And his biggest superpower is that he can just change his mind on a dime when new information comes in. He’ll like, okay, he’ll have a view.

[00:08:44] Lyn Alden: And then as things start to kind of shift or something new happens, he’ll fully reset and be like, okay, was long bonds and now I’m short bonds. Things like he can completely go the other direction. And while, I have a lower portfolio turnover than a trader, it’s still a similar mindset where, you know, just because the stock’s going down doesn’t necessarily mean you keep doubling into it because, the thesis might just not be there anymore.

[00:09:10] Lyn Alden: You have to kind of treat every day as a new day, whether it’s equities, whether it’s a macro asset, whatever the investing view might be. You always have to just fully reset and just think, if I were evaluating this today with no attachment, is this right or wrong? And, with shorts, it’s interesting because shorts, you have to be more careful if you short a stock.

[00:09:31] Lyn Alden: And so, you use stop losses. You define your point where you get out and then let it run and then maybe reassess after it’s done running. And so, for example, there were a couple of times where I shorted Tesla because I had a case where, okay, they’re going to, they are going to sell more cars, but they’re overvalued and they’re going to have a tough time sustaining profitability.

[00:09:52] Lyn Alden: And it’s funny because I would read the opposite opinion, which is like ARC research. Right. So they were, they had very aggressive price targets. They were talking about like a fleet of like robot taxis in a couple of years. And the funny thing is that my fundamentals were right. So, I was like, no, we’re not going to get robot taxis by that date.

[00:10:09] Lyn Alden: And we didn’t. And like, they had all this thing for like robot taxi revenue and insure and insurance revenue. And I was like, no, none of that’s going to materialize in this time horizon. And they sold about as many cars as I would’ve guessed. But the funny thing is the numbers favored ARK’s view. So, they, their fundamentals were off, but the actual stock price reached their targets.

[00:10:28] Lyn Alden: And so, when Tesla started just hitting the levels that I had predefined as getting out of the position, I did, I got out of the position and the stock price ran. So, I made sure not to lose any money on the trade. And it did his thing. And it’s like, well, I don’t really agree with Tesla’s valuation, but the market’s going to do what the market’s going to do.

[00:10:46] Lyn Alden: And I just have to step aside and let’s kind of let that play out. Another one was after banks fell a lot last year, which is before the March 2023 banking crisis, I started to get more interested in them because they were pretty cheap and everybody’s talking about like a banking crisis blow up.

[00:11:04] Lyn Alden: And I view a lot of the conditions as different than 2008. So, there’s a lot lower risk of major credit issues, at least for the big banks. But there were a couple of things that were different that kind of made some of that more pressure that I would have guessed, which was that the switching costs between banks are a lot lower now than they were in prior cycles.

[00:11:24] Lyn Alden: So, if you look at most interest rate cycles, when the Fed starts raising rates, normally bank deposits are really slow to adjust because, people are kind of just locked into their bank and they’re not really kind of seeking out alternatives too much. So basically, there’s like a moat there, there’s a stickiness there.

[00:11:41] Lyn Alden: And so, they get the profit from that spread for a while before rates start even, slowly kind of inching up. But in the age of mobile banking, and with the sheer size of the rates move, basically, industry is kind of quicker to adjust this time. And then also when you have things like, you can pull out your money with the software API, like bank runs can be quicker now, just because of the way we do things.

[00:12:04] Lyn Alden: And so, although I still view the case that there’s not a high risk of a major kind of credit event among the major banks. I had to reevaluate my thesis around their forward profitability and things like that. And so basically, it’s just, its always approaching things, not tying your ego to an investment and then having taken the conscious choice to seek out the bearish view so that you can always articulate both sides.

[00:12:29] Lyn Alden: So that you’re always kind of weighing the probability of which side is going to be right in the long run.

[00:12:34] Stig Brodersen: Lyn it’s really interesting that you mentioned the Druckenmiller framework before, because I think that is the gold standard where you just change your mind on a dime. It’s also extremely difficult to do that because we all have recency bias.

[00:12:49] Stig Brodersen: So, we hear something and then all of a sudden it seems way more important than it probably is. And so. One way to safeguard yourself, which is ironically the very opposite of Druckenmiller, but if you don’t have that skill set, and few of us do, there are also a camp of investors who force themselves to, for example, not sell a stock two years after they made it, or three years, whatever kind of limit you have, just not to be susceptible to recency bias.

[00:13:13] Stig Brodersen: But that has the advantages of, again, not being susceptible to recency bias, but also has the disadvantages of there could come something that would just completely destroy your thesis. And in this case, you’re just still stuck, holding the bag. So, it’s just very interesting to hear how you went about that.

[00:13:29] Lyn Alden: Yeah, there are research that show, for example, that like some of the best performing brokerage accounts are people who have like got locked out of their account or like passed away. And like the stocks just keep, doing their things because people have a tendency to overtrade. To sell the lows to buy the highs.

[00:13:45] Lyn Alden: And if you just kind of take off that behavior, things often work out, that could certainly work well. If you’re managing position size carefully, if you say, okay, I’m going to put, I’m going to get 50 stocks, 2 % each, and I’m going to make sure I don’t sell for 2 years and I’ll reevaluate the thesis then because the worst case scenario is that, a couple slices your portfolio do very poorly.

[00:14:03] Lyn Alden: Whereas if you’re taking more concentrated positions, obviously you have to watch that closely. You have to be more dynamic with your positioning. So, it really kind of comes down to investor temperament, portfolio strategy, and things like that. But the point is to always be objective and to like, not just accidentally come across the views that disagree with you but make it part of your checklist.

[00:14:22] Lyn Alden: that you actively seek out views that disagree with your thesis so that you’re not blindsided by them.

[00:14:29] Stig Brodersen: We talked about last time how you would have a different incentive to fight a war in a fiat currency versus a non-fiat currency world. For example, whenever you had a gold standard, you had to finance a war by, say, increasing taxes, lowering your expenses.

[00:14:45] Stig Brodersen: which are things that are not that popular to do. And so not being on the fiat currency can give you incentive, perhaps not to wage a war. But what we have now is in a situation where, you get taxed through inflation. And so, the expenses will be paid by money printing, and we all get taxed through that.

[00:15:03] Stig Brodersen: So, you have this wonderful argument for a non-fiat monetary system, which is, you have fewer wars. But my question is more about incentives. If we had this world, what would prohibit a country from reverting back to a fiat currency while the war was fought, which has happened multiple times in the past?

[00:15:24] Stig Brodersen: Because what we’ve also seen is that the winning side could, can then impose their monetary system on the defeated country after the war.

[00:15:33] Lyn Alden: Yes, I have two main kinds of answers to that. And they kind of come across different lines. So one would be, That the whole reason why that dilution works is because it’s nontransparent.

[00:15:45] Lyn Alden: Right? So, for example, when we went into when the U. S. went into the Iraq war, we didn’t pay taxes for it. We didn’t change anything major about our money system for it. And just over years and decades, we’ve racked up trillions of dollars of kind of dilution, interest expense. But now when people talk about the fiscal budget, the fiscal deficits and things like that, they’re always talking about Trump and Biden, all this recency bias, not talking about stuff like, decisions 20 years ago that compounded into where we are now.

[00:16:15] Lyn Alden: Right? And so, it’s kind of like that obfuscation and delay. Now, if you had to change the monetary system to go into the war, that’d be, that would violate the whole purpose of trying to do this opaquely. It’d be more in your face, right? So anytime a country has to kind of change its monetary system and say, okay, it’s known we’re going to revert to fiat and dilute people.

[00:16:35] Lyn Alden: Well, now they get a cost to that war that they weren’t paying before. So, it’s kind of like a change that is actually definable and discussable. Whereas we didn’t really have that. The other one would be to point out that just Technology is challenging now. It’s a different environment. And so, for like a lot of countries having trouble, and I think this is only going to accelerate in the next 5 10 years as liquidity of these things gets bigger, but countries now have a tough time imposing their own currency on their own people.

[00:17:03] Lyn Alden: I mean, Lebanon and Argentina and Turkey, If the currency is bad enough, people now have a lot more options to escape from it. And so, money is like a market good in a sense, especially globally. But that has been kind of contained by the fact that until recently, technology was able to silo those pretty efficiently.

[00:17:22] Lyn Alden: So, if you think about a country, there’s really only two main ways to get money in or out of it. One is physical airports, ports of entry, but you can only bring so much cash or gold with you. So, you’re very tightly controlled there, in or out. Number two would be bank wire transfers. But again, they’re, they’re all government controlled.

[00:17:41] Lyn Alden: Of course, there’s FinTech things, but they’re just, they’re overlays on top of the banking system anyway. And so, all of that is controlled. There’s two major ways to get money in or out of a country. And so, for example, like, I know an Egyptian videographer, and he does work for foreign customers, and he charges in dollars, but by the time the money hits his account, it’s in Egyptian pounds.

[00:18:00] Lyn Alden: There’s a financial barrier there, that is, it, the only, it’s hard to access these other monies in these environments, and so. Let’s use Egypt as an example. If you’re one of the 105 billion people in Egypt, you’re in this, little currency monopoly, and the money supply is growing by 20 % a year.

[00:18:18] Lyn Alden: And it’s not that they’re fighting wars, but it’s instead that they’re doing major infrastructure projects, like they’re building whole new cities. that is, kind of government decreed, right? So, it’s not really based on market forces, it’s based on government decrees. So, they’re getting external debt to do it.

[00:18:33] Lyn Alden: They are diluting the money supply greatly to do it. So, people are kind of paying for it without necessarily being taxed for it or really, it’s just kind of constantly draining. in that country has to try to keep up with the money supply growth that’s happening. If you’re not getting a 20 % raise every year, if you’re not a small business raising your prices 20 % a year, if you’re not a landlord raising your rent on your tenants 20 % a year, you’re getting diluted.

[00:18:59] Lyn Alden: You’re becoming a smaller share of that monetary network, and you’re probably losing, say, dollar global purchasing power if you’re not kind of aggressively trying to keep up with that dilution treadmill that’s happening. The end. Until pretty recently, there’s not that many ways to get out of that currency bubble.

[00:19:16] Lyn Alden: Like, I actually, hold on, I have Like, here’s an Egyptian pound, right? 200 Egyptian pounds. And this is, for all intents and purposes, a casino chip. In the sense that outside of Egypt, there’s almost nothing I can do with this. I can’t buy goods and services with it almost anywhere. And even finding someone to convert it into local currency would be very hard in most places in the world.

[00:19:38] Lyn Alden: Like, I’m in New Jersey, I wouldn’t even know where to begin trying to get this into dollars. And even if I could, the fees and the exchange rate would be like, awful. It’s got extremely low salability. It’d basically be about as hard as converting a casino chip, arguably harder. It’s like, if there was a casino in Singapore, it’s like, what if I had a chip here, what am I going to do with it?

[00:19:57] Lyn Alden: That’s kind of the situation. But what things like Bitcoin and stablecoins do is they go around those prior gateways. And so, for example, If there’s a Nigerian graphic designer and I want to pay her, she can show me a QR code on a video call like what we’re having now, or she can send me an email or a DM and I can pay her and it can be in whatever currency she wants.

[00:20:19] Lyn Alden: It could be in Bitcoin, it could be in dollar stable coins, it could be in gold backed stable coins, those exist. It could be, whatever kind of global competition money she wants, I can actually send it to her, and she has it now in a way that goes around her local banking system. And so, we see increasingly Argentinians are turning to things like stablecoin and bitcoin.

[00:20:39] Lyn Alden: Turkey is doing that. Lebanon, I mean, they basically hyperinflated and people kind of just forcibly dollarized. And so, if we imagine a world where from the beginning, if we could just like teleport gold to each other, if we just, if I could just mentally think and teleport gold to you.

[00:20:55] Lyn Alden: It would have been very hard for governments to ever impose fiat currencies on us, right? Because fiat currencies materialized because they were solving a problem. So, the banking system fixed a lot of the shortcomings of gold, which was its verification, its portability issues, it’s securely keeping it.

[00:21:11] Lyn Alden: So, we put our gold in the banks, and it all got centralized and abstracted and levered 20 to 1. And then when that all blew up, they just said, okay, it’s not gold backed anymore, but keep using the bank ledgers. And so, it’s kind of like a series of steps, one at a time, most of which were solving a problem, and then we got rug pulled.

[00:21:28] Lyn Alden: Whereas if from the beginning, if gold was just effective enough that we could just kind of beam it to each other, it never would have materialized in this fiat currency sense. And so, but the way I would argue that going forward is that now that technology is good enough that people can send money to each other and it could, again, it could be Bitcoin.

[00:21:45] Lyn Alden: It could be stable coins. It could be gold backed stable coins, whatever the whatever money is winning on the market. In a global sense, people can send that to each other now. They can self-custody it if they want to pretty effectively, pretty cheaply and pretty securely. And it’s hard for governments, either a local government or a foreign government to impose that on people, basically that they have now have multiple tools to go around those in a way that we’re not here before.

[00:22:12] Lyn Alden: And so, I think both in terms of, I think if you give this another 5, 10, 15 years, people will become increasingly normalized to the idea that they can access global assets now in a way that they could not until pretty recently.

[00:22:26] Stig Brodersen: Yeah, it’s definitely a new world that we’re in. And we are increasingly in, we’re in a dead world. One of the arguments that I’ve heard you talk about is that we have many credit worthy borrowers that have incentive to take on debt even if they don’t need capital. And simplistically, we can think of this as if you can borrow at say, 3%. I don’t think you can do that anymore, at least not in the states.

[00:22:52] Stig Brodersen: But if you can borrow at 3%, and let’s say that your currency and in turn your debt are debased by say 5% a year. you have incentive to take on debt. And, even for us, who were raised in the church of Buffett and Munger, and we’re taught not to take on debt, Berkshire Hathaway itself are taking on billions and billions of dollars in debt and they could easily operate without, it’s not too long ago, they took out billions in Japan and paid next to nothing for that and then bought Japanese equities.

[00:23:20] Stig Brodersen: Cause there’s no reason not to, but if we take it back here to us as retail investors, how can we best leverage the debasement of currencies to our advantage, for example, to taking on debt in our portfolios?

[00:23:35] Lyn Alden: So historically, over the past 40 years or so, investors and companies have been rewarded by taking on moderate amounts of debt.

[00:23:42] Lyn Alden: And so, you’ve generally been punished if you’ve taken on no debt, or if you take on so much debt that you get over your skis and get liquidated. So, entities that can successfully manage that middle, area. That’s kind of how the system’s been optimized. That’s who wins in this system is if you have a long-term low interest short on the fiat currency and use it to buy better assets and structure that well, that’s been the winning trade.

[00:24:08] Lyn Alden: So, Berkshire Hathaway has nailed that both in terms of debt and in terms of their insurance float. That’s another type of leverage in a way. It’s, that’s one of the superpowers that, that they’ve had. But even if you look at their portfolio so Berkshire Hathaway has its own leverage, but then it owns the portfolio stocks, including Apple, Coca Cola, American Express, Bank of America, all these different companies, Chevron, most of those have significant debt as well.

[00:24:37] Lyn Alden: And, we think, why does Coca Cola have debt, right? It’s a company that’s more than a century old, they’ve been profitable for, longer than our grandparents have been alive. Why do they have debt on their balance sheet? And the reason is because it’s an active choice there. It’s basically a fiat currency short.

[00:24:52] Lyn Alden: It’s a cheaper part of their capital stack than pure equity. And so, a company like Coca Cola can borrow for 10 years, 20 years, 30 years at low interest rates and they can, basically they can use it for share buybacks or dividends or business expansions. And they basically have this kind of permanent long term short on their balance sheet.

[00:25:13] Lyn Alden: So, one is you don’t have to have your own leverage to do that. You can own entities that are themselves just taking advantage of that going forward. Now, I think that the next years and decades are going to be a little bit different in this regard than the past 40 years. I think the cycle is getting more challenging.

[00:25:29] Lyn Alden: I think a lot of the wind in that position has been, taken out now. There’s also, I mean, any homeowner that, for example, locked in a low fixed rate mortgage and refinance whenever rates went down has been very much rewarded in the current system. That’s another way that the average retail investor can do it is, okay, you don’t buy stocks on a margin, but you buy your house on 80 % leverage.

[00:25:50] Lyn Alden: Which is just like a normalized leverage in society. It’s like the socially acceptable type of leverage. That’s how our society structures. It’s normal to do that. And if you buy your house carefully, if you don’t buy in a bubble, it has been the smart move to term it out for 30 years and leverage it, 5 to 1.

[00:26:07] Lyn Alden: like 20 % down. That has been a good trade. There are still some global opportunities, but they’re generally hard to seek out unless you’re tied to that space. So for example, we just bought an Egyptian property and it’s financing works differently there than in the United States or in Europe, but basically it’s a, money supply is growing there by 20 % a year, and we have a seven year payment term at like a 3 % interest rate, so we have a seven year short on the Egyptian pound that’s growing by 20 % a year, and it’s kind of just a quirk in their financing for how that works.

[00:26:39] Lyn Alden: It’s like developer financing, it’s like basically part of them trying to move the bill is that they’ve constructed. So, if someone in the country is selling a house and wants to buy this house, they would probably not take that deal. They just want, they don’t want to hold their equity in other things.

[00:26:55] Lyn Alden: They want to hold; they want to transfer their equity from one house to another house. But if you’re a foreign buyer that makes your income in dollars and has significant dollars, not made assets or, globally priced assets. Being able to go in there and do a 7-year kind of 3 % short on the currency makes a lot of sense in a way that wouldn’t necessarily make sense for her local investors.

[00:27:18] Lyn Alden: And so, there are opportunities out there to still kind of do this type of thing. Basically, whenever you have an opportunity to have a long term non-callable short on a fiat currency at an interest rate, it is well below the typical money supply growth of that, and you can then deploy that as something that’s.

[00:27:36] Lyn Alden: Got a pretty high chance of beating that very low hurdle. It doesn’t make sense as long as you are judicious about it. It’s not that I like that aspect of the system. And it’s one of my criticisms of the current system is this financial engineering is generally a more profitable thing to do than real engineering, right?

[00:27:55] Lyn Alden: That’s partly why the U. financialized. If you get an engineering degree, it often makes more sense to take all that quantitative knowledge and go to wall street than it does to go to Silicon Valley. And it shouldn’t really be that case, but that’s kind of the world we’ve been in, at least in this kind of 40 year, declining, this kind of 40-year period of disinflation, 40-year period of the system we’ve been in.

[00:28:20] Lyn Alden: There’s even like small factors, like for example, in Argentina, if you’re wealthier, you have access to credit cards. If you’re not wealthy, you’re in more of a cash-based payment situation. And so, with the rate of inflation that they have, even doing things like buying something and paying for it 30 days later makes a lot of sense.

[00:28:40] Lyn Alden: And so, but again, that’s only available to people that have access to decent credit. And so all these things kind of stack up to favor those who have, a lot of assets that they can lever cheaply, or that they can access global markets and find, pick out all these little opportunities, or they can do financial engineering, whereas none of this really benefits, say, the bottom 50%, the working class, the people that are renting, the people that are just not making use of all this kind of credit arbitrage.

[00:29:10] Stig Brodersen: That’s a fascinating story and well thought out. And I was, there’s this irony that it’s typically those who can afford. debt that doesn’t need it in the first place. And that’s just one of the ironies of finance. And it’s very interesting to hear about that story in Egypt that it’s possible to do.

[00:29:27] Stig Brodersen: You’re saying, I was speaking with another friend of the podcast here the other day, and he’s investing a lot in Turkey. And so, the obvious thing to ask would be, and I think at the time, perhaps the interest rate was like, I don’t know, 15 % or 12 or whatever it was. And, with inflation raging at, I think at the time, like 80 % or something crazy.

[00:29:45] Stig Brodersen: And. So, I couldn’t help but like ask, why don’t you just take out like a long-fixed loan and then, just pay it back with a worthless, not worthless, but worthless currency. And he was like, yeah, they know that trick. You just can’t do that. It’s not how it works. We have sort of interest rate, but you can’t really just go out and take out that loan.

[00:30:04] Stig Brodersen: So, it was fascinating to hear how things are in Egypt and how you managed to create that type of deal. So, thank you for sharing.

[00:30:11] Lyn Alden: Yeah. It’s a country-by-country basis and Turkey. So, when you’re trying to run below market industry, it’s like Turkey does, it usually comes to some sort of credit restrictions.

[00:30:20] Lyn Alden: So, for example, they also limited like companies have less borrowing access if they hold a lot of foreign currency because, but they don’t want. Is to people just to take out tons and tons of Lyra debt and then buy dollars with it, right? Because whenever you take out debt in a currency, you’re, if it’s a bank loan specifically, you are actually increasing the money supply of that currency.

[00:30:41] Lyn Alden: So, you’re literally shorting it and increasing the supply of it at the same time. So, you’re contributing to its weakness while profiting from its weakness. But that’s, when an industry trade is, doesn’t make sense in a market level, that’s when you start to get artificial restrictions on it.

[00:30:55] Lyn Alden: Also, a thing I have in the book is that bell curve of monetary hardness and leverage. And so basically if you’re in an environment where money is super hard, right, let’s say it’s a gold standard. or a future maybe a bitcoin thing or whatever, if you’re if it’s a very hard monetary unit, the borrower incentives for borrowing that currency are limited, right?

[00:31:15] Lyn Alden: You’d only borrow in it If you have a very high rate of return thing you want to do with that money, maybe you want to get a degree that’s going to pay you a lot. So, you’ll take out a little bit of debt and you can pay it back quickly. Maybe you’re doing a business expansion that you expect like a 30 % internal rate of return.

[00:31:30] Lyn Alden: So, you’re willing to borrow, a few years, but you wouldn’t just have like debt as a permanent part of your capital structure in a very hard money environment. Robert Leonard On the other hand, on the other end of the bell curve, if money is like Argentina or Turkey, where it’s constantly devaluing, lenders normally are not going to give you like very long-term lending because they don’t know what the currency is going to be like.

[00:31:54] Lyn Alden: So, a lot of financing gets shorter term and they’re basically, it’s just the borrowers would love to borrow tons of it and short it. But the lenders, of course, are more careful with how they’re going to do that. And ironically, it’s the middle of the bell curve where we get most of the debt because, borrowers are happy to borrow it because it’s, it’s, a dollar, the euro, the yen, they’re not inflating away as fast as the Argentine peso or the Turkish lira, but they are inflating away relative to most hard assets or most equities.

[00:32:22] Lyn Alden: And so various entities want to borrow them. And then also various entities want to lend them, including for pretty long amounts of time, as long as they have access to an even cheaper funding rate and can make some small amount of spread. And so that’s how in these systems, we build up maximal leverage is by having that slowly devaluing unit of account.

[00:32:42] Lyn Alden: That’s neither too hard nor too soft. But then the downside of that is that after many decades of that. We build up such high debt levels that we have, potentially our own instability event. Basically, that multi decade period of stability, ironically, then leads to a period of instability because it’s only because of that stability that we’ve built up so much leverage to begin with.

[00:33:03] Stig Brodersen: Yeah, there are so many ironies when it comes to currencies. And there are so many people in our space, Lin, who are talking about that debt must be restructured. And so, if we’re looking. Through the lens of euros or dollars, our listeners have many different types of debt. I’ll imagine a lot of them have a mortgage.

[00:33:22] Stig Brodersen: Some might even invest in various securities using leverage, and I’m sure there are many who have something in between. So, whenever we hear about debt restructuring, what does that imply and should investors who feel comfortable servicing their current debt be worried about a debt restructuring?

[00:33:40] Lyn Alden: So I think when we talk about debt restructuring, most of it’s about the sovereign level, like how our government’s going to deal with their debt, because a lot of what we see in recent years and decades is that debt starts moving up the hierarchy.

[00:33:53] Lyn Alden: And so, a big thing we saw in the global financial crisis, for example, is in the U. S. a good chunk of household debt and banking debt went up to the sovereign level. Some of it was inflated, some of it was just outright shifted, bailed out and put on the sovereign level. And so, banks became way more capitalized after 2008.

[00:34:11] Lyn Alden: And households, for example, going into this whole recent inflation period, any household that had a 30-year fixed rate low mortgage. And then the money supply increased by 20 by 40 % in 2 years and house prices jumped and prices of everything jumped. And there’s just permanently more money in the system.

[00:34:30] Lyn Alden: Now, if you had a, like, a 3 % mortgage locked in on an appropriately priced piece of real estate. You’ve already partially had your debt restructured. Part of your liabilities were inflated away. And that’s, even though they’re trying to fight back now and have a tighter monetary policy, some of that is just permanent now.

[00:34:49] Lyn Alden: Like, basically that even if we slow down CPI growth, we’re not going to go back to the prices of things we had before. We’re not going to get money supply back down to where it was before. And so that’s what I mean by over these kind of C years and cycles, more and more debt gets pushed up to the side of a level.

[00:35:06] Lyn Alden: And you mentioned Ray Dalio. I mean, Dalio was a big source of research for mine over, starting about probably six or seven years ago about how these long-term debt cycles play out. He’s done really good work on the long-term debt cycle and how these things kind of go. And so, the first type of restructuring is to kind of over time, push this up to the sovereign level.

[00:35:26] Lyn Alden: We’ve also seen this in Japan. If you look at over the past 30 years, they had basically 30 years of falling private debt relative to GDP and rising public debt relative to GDP. There’s been this very slow transition. to kind of de lever corporate balance sheets, household balance sheets while levering up the sovereign balance sheet.

[00:35:46] Lyn Alden: And so, the question then becomes, well, what happens when you push it all up to the top level? And that’s when it normally gets taken out on the currency, right? So basically that kind of like how the homeowner de leveraged to some extent, if they were short the currency and then money supply grows by 40 % and prices of everything, including their house go up, their liabilities now de leveraged relative to their house and the rest of the things in the market, you kind of eventually see that on the sovereign level where they can partially inflate the debt away through the currency.

[00:36:17] Lyn Alden: And it ultimately gets taken out in the cash holders and the bond holders. There are other ways to do it, but that’s generally how this works. It’s not so debt restructuring is often. Not always, but especially developed markets, it’s often less dramatic than you’d expect because people say, well, when is this debt restructuring coming?

[00:36:35] Lyn Alden: I mean, for the private sector, it’s already come in many cases. Now, Europe is different, and Canada and Australia are different because those are very real estate focused markets. And so, they still have significant household debt tied to significant property values. So, it kind of comes on a market-by-market basis.

[00:36:53] Lyn Alden: But for example, in the United States, in Japan, kind of country-to-country basis, you’ve already had debt restructuring. And the question is, what’s the next phase of debt restructuring, which is the sovereign level itself. And in Japan, you see kind of just endless financial repression. Yield curve control and below, negative real interest rates.

[00:37:10] Lyn Alden: As far as I can see in the United States, we’re a little bit more volatile. We’re trying to still, I think, retain the view that we’re going to have positive rates for the long term, which is just mathematically doesn’t really work. But I think that we’re going to probably have a similar thing as Japan, where eventually that sovereign debt just kind of gets held below kind of.

[00:37:29] Lyn Alden: The rate of money supply is growing at a certain rate and the industry you’re getting on your bonds are not keeping up with that. And so, bonds. Basically, just keep losing value relative to other assets out there.

[00:37:41] Stig Brodersen: So, to put our listeners at ease, if they can service the current debt, they should not be worried about any kind of restructuring that would be deflationary, which, everything is equal. If deflationary, they will get higher debt compared to, say, their income?

[00:37:55] Lyn Alden: Yeah, I mean, you show it. So, for example, if you have a fixed rate mortgage, you still have to make sure that, you’re, you have substantial equity compared to your liabilities that you have, that your income that provides for those payments is secure.

[00:38:10] Lyn Alden: So, for example, if you’re a 2-income household, if you lose 1 of your incomes, can the other income support all of your base expenses? Even if you have to aggressively tighten your belt, like, can you still pay for all of your key expenses? Do you have substantial investments build up that you could tap into if need be?

[00:38:26] Lyn Alden: So, whenever you have leverage, there’s always a risk to it. But of course, that can be minimized by having leverage that is not recourse, right? So, it’s tied to a specific asset, for example, not to your entire net worth. So, you eliminate the prospect for bankruptcy, even in the worst-case scenarios. And then two, you just are very judicious with it.

[00:38:47] Lyn Alden: So, you still have a low loan to value ratio when you consider all of your assets together. your leverage is hopefully low relative to your total assets. I think the danger comes with some of these countries that are just very high property values that are also highly levered. That’s where I would be quite worried about because they haven’t really gone through that restructuring yet.

[00:39:08] Lyn Alden: And that’s a political process. And so, for example, going into the ART crisis. The banks were bailed out more than homeowners were. So, a lot of homeowners did lose their homes or get their equity nuked. So, if you buy overvalued property on too much leverage, that’s when you get into major problems.

[00:39:25] Lyn Alden: So, you have to definitely avoid that mistake. But in general, if you’re locked into a reasonably priced property with low value, I think you should be in pretty good shape and then going forward, you just kind of keep building your equity side.

[00:39:39] Stig Brodersen: Yeah. And I think the takeaway here is really moderation because it is tempting whenever you hear about the inflation and to think, let’s take on that.

[00:39:46] Stig Brodersen: And so just to summarize what Lima has been talking about here, it’s like, yes, you can do that, but you really have to be careful about how much you’re doing it. Like it’s really those in the middle who get rewarded. Those who don’t take on any debt, they get punished, and those who take on too much, they go bankrupt.

[00:40:01] Stig Brodersen: Do you think, Lin, that, and I’m sort of like jumping here to talk about technology, many of our listeners have been reading Jeff Booth’s wonderful book, The Price of Tomorrow, and he talks about technology being deflationary, and there are different voices out there with different takes on, I’m more slow on how deflationary it can be, but I am interested to hearing where you’re coming from.

[00:40:25] Stig Brodersen: Can technology be so deflationary that the Fed cannot print us to a specific inflation target and how would that play out?

[00:40:34] Lyn Alden: Yeah, so I’m a big fan of Jeff. I actually work with him at Ego Death Capital venture investing. So yeah, I get to see his kind of brilliance on a regular basis. The short answer I’d answer that is no.

[00:40:44] Lyn Alden: Basically, that because the central banks can print unlimited money, there is no deflation that they can’t overcome. The key question is what are the consequences for overcoming it? I actually, so back in 2019, when there was 18 trillion worth of negative yielding debt in the world, and we were in kind of a multiyear period of disinflation, I wrote an article called, Are Bonds in a Bubble or Is This the New Normal?

[00:41:10] Lyn Alden: And of course, the conclusion of it was bonds are very likely in a bubble. And I made the case that, equities were expensive looking. But not outrageously so, whereas bonds were like, unfathomably expensive and we’ve had, the worst 3 years in bond market history starting in like the, it took another year to kind of play out.

[00:41:29] Lyn Alden: We ran into the pandemic and then the 3 years after that. It just absolutely killed bonds. And one of the cases I made there, because I was like, there was articles at the time. Let me see if I can bring that article up. Actually, it’s really interesting case study. So, there was I was kind of doing this thing where I was like fading headlines.

[00:41:45] Lyn Alden: Like there was a Bloomberg business week magazine. It’s called is inflation dead. And of course, we had long term of like lower inflation, lower interest rates. And they were like, is inflation dead? There’s another article that I quoted. It was like inflation is dead.

[00:42:00] Lyn Alden: We’ve You know, we’ve solved inflation. It’s no longer a problem. Macro deflationary forces are more powerful than central bank monetary forces. That was from a Business Insider article. It did not age well. Yeah, it did not age well. Another quote was that really is the headline here. Inflation no longer exists.

[00:42:17] Lyn Alden: Inflation has been solved. We solved it through our new inventions. And I, so I quoted these, and I was like, okay, all of this is true. But then I used, I actually used the analogy of Superman. Which is that if you’re familiar with Superman comics and stuff he always holds back because he doesn’t want to hurt people around him.

[00:42:33] Lyn Alden: But every once in a while, like some villain comes like Darkside or Doomsday, he’s got to absolutely go all out and he just like changes the rules. And I use that analogy. I said, central banks can literally just completely, both the combination of central banks and governments can completely change the rules.

[00:42:50] Lyn Alden: And so, I said, so far, this is my quote, 2019. So far, central bank tools have not been inflationary because they have primarily benefited asset prices rather than middle class consumption. They printed money but kept the money on the central bank balance sheets by buying bonds. If central bank actions get more aggressive, combined with fiscal policies and start targeting the middle class.

[00:43:13] Lyn Alden: They have power to override these various deflationary forces with sheer monetary expansion. They can issue helicopter money to pay off debts, boost inflation, build infrastructure, bail out unfunded pension systems, and prop up the middle class if that’s what policymakers decide to do. I wouldn’t want to be holding a 20 year or 30-year bond at super low fixed rate yields in that kind of environment.

[00:43:34] Lyn Alden: Negative yields would be even more vulnerable. Sometimes Superman goes all out, and every few decades, central banks do unusual things. And that was 2019. And, I mean, I didn’t know that we’d have a pandemic the next year, but basically that, step by step, that’s exactly what they did. They just sent out money to people, monetized by the central bank, boosted middle class consumption, boosted inflation, boosted asset prices, and just completely overrode the various disinflationary forces we have.

[00:44:01] Lyn Alden: And so, yeah, I do think that they, to the extent that they choose to, they can override demographic driven disinflation, technology driven disinflation, especially if it starts to challenge their sovereign debt and they start to actually run into kind of acute solvency issues, they can literally just print money.

[00:44:18] Lyn Alden: And if anything, that type of disinflation gives them more cover to do that because it’s harder for it to manifest in real world inflation. I think another factor we might see going forward is a bigger divergence between real world inflation and tech. So, for example, AI can make so many things way cheaper, right?

[00:44:40] Lyn Alden: The cost of doing art, the cost of doing a video, the cost of writing code, the cost of. Analyzing something, the cost of editing, the cost of just X, Y, Z across the board, so many things now are more productive, more disinflationary, cheaper to do. And a lot of that is in the information world, the white-collar world, whereas if you try to find someone in the US to like to fix your HVAC system or be a plumber or the cost right now are skyrocketing.

[00:45:08] Lyn Alden: The cost of people actually going out and doing stuff. And robotics are nowhere near the point where just like, a car can just drive to your house automated, and then a robot gets out and fixes your HVAC system and drives away again. Maybe one day we’ll be there, but we’re not there. This decade, even if we have self-driving cars on the margins, but imagine a robot that can just come fix your HVAC system, right?

[00:45:29] Lyn Alden: We’re not there yet. So, this kind of physical blue-collar stuff is where I think some of the inflation is going to be more centered going forward. In addition, I think the energy side, the tightness of the energy supply is still where inflation can come from later this decade. And so, I think we can see a divergence were.

[00:45:49] Lyn Alden: The cost of some things keeps just trending towards zero, right? I mean, it used to be that taking pictures was somewhat expensive. Now, it’s basically free that can continue eating into other things, and like, more things that are expensive now trend towards zero cost. Whereas real world stuff still has a substantial cost.

[00:46:09] Lyn Alden: And if, especially if money printing is used to override the deflationary forces from those other areas, it can jack up the prices of these more physical goods and services. And so that’s where I think that the costs come when policymakers and central banks try to override. the tech deflation and it manifests in areas that are not being driven by tech deflation.

[00:46:35] Stig Brodersen: It’s so fascinating to speak to you about this then. And if we continue to be a bit more futuristic here, I’m talking about the declining influence of the U S dollar on the global scene. And I’m not talking tomorrow or next week or next month. I’m more talking very like decades now, but who knows, would it be realistic for the world to shift to a more multipolar Currency world that is not pegged to a neutral reserve currency, but where each region is built up around a dominant currency.

[00:47:05] Lyn Alden: Yeah, so a challenge is network effects. And one of the reasons why the dollar is so useful as a global reserve currency is because the capital markets are so deep. So, once you get dollars, there’s so many things you can do with a dollar. You can buy treasuries, you can buy S&P 500, or any of the stocks they’re in, there’s an extensive private equity, there’s a whole continent of dollar dominated real estate you could buy.

[00:47:29] Lyn Alden: There’s just tens and tens of trillions of dollars’ worth of highly liquid assets you can buy with it, that are all in one big regulatory scheme, currency scheme, very liquid and open capital markets. The Euro struggled more in that regard because even though you have a shared currency, you have different silos of capital markets.

[00:47:49] Lyn Alden: And so, none of them are as liquid as US capital markets, right? And so, you’re still siloed. In China, there’s not a lot of foreign demand for Chinese equities or real estate. And so, it’s like, if you have a, if you’re running a surplus against China, let’s say you’re an oil producer, what do you do with that currency?

[00:48:08] Lyn Alden: It’s like, well, there’s lots of things you can do in the near term where you can buy all the Chinese goods. You can go to the Shanghai gold exchange and convert it to gold. If you want, there’s plenty of things you can do. But just merely holding their currency, and kind of reinvesting into Chinese capital assets is not a very attractive thing to do with it.

[00:48:27] Lyn Alden: And when you get outside of those three major currencies, it drops significantly. So, if Brazil is trying to make their currency or regional currency, how many entities, if they’re running a surplus against Brazil, want to hold a lot of that currency and then reinvest it into Brazilian capital markets, right?

[00:48:42] Lyn Alden: And so that’s the challenge with this. I think that. Over the long term, I mean, you could have maybe like two major currencies that really compete, like you could have, say, the dollar system and the yuan, Chinese yuan system, you could potentially fracture that into two, but it’s really hard to have No neutral reserve asset at all.

[00:49:01] Lyn Alden: Usually there’s a network effect tendency that makes one dominant asset kind of the underlying one. And that even as you have more multipolar world, like, even as you have payment arrangements that don’t use that reserve asset, you do, you have China by energy from Russia without using dollars or China by iron from Brazil without using dollars or India buying arms from Russia without using dollars, right?

[00:49:25] Lyn Alden: There’s. I think we’re going to see, and we already are seeing, but I think we’re going to continue to see de dollarization of payment channels. We’ll see more reserve accumulation more reserve diversification, but there’s still liquidity itself is a network effect. And so that’s, and we’re already seeing this manifest.

[00:49:40] Lyn Alden: For example, India and Russia are on good trading terms. They were for a while and they still are because, India needs commodities. Russia makes commodities. Russia also makes arms. And so, they’re, and they don’t share a border. So, they’re not really enemies in the way or like, adversaries in the way that some other entities are.

[00:49:59] Lyn Alden: So, they, they’ve had a constructive trade relationship. The problem is when Russia runs a surplus against India, they accumulate all these rupees and they think, well, what do I want to do with these rupees? You don’t want to There’s only so much I want to reinvest into Indian capital markets, right?

[00:50:14] Lyn Alden: And so, they start saying, well, can you pay us in Chinese currency? Can you pay us in? They start to want to go up to stack to a higher network effect, higher liquidity currency at a certain point. And so that’s the kind of self-reinforcing challenge. Of not having any reserve asset is that the top two network defects really kind of start to dominate, even as you can, it’s not necessarily one, but it’s not a lot of assets is my point.

[00:50:40] Lyn Alden: Only the most liquid deep capital market or most liquid markets can really. Maintain that kind of global monetary status.

[00:50:50] Stig Brodersen: Yeah, and I think that’s important to distinguish between, are we talking about what fiat currency dominance we’re talking about, do we measure it in payments? Do we look at the balance sheet of the central banks?

[00:51:01] Stig Brodersen: Like we will come up with different pictures depending on your methods here. But. I want to sort of like in this segment of the episode to talk about different events around the world and perhaps start in Europe, the president of the European Central Bank Christine Lagarde, she recently said in the interview with The Economist, and I’m going to quote here, if there’s more trade in euros, we need to provide the liquidity supporting that trade.

[00:51:25] Stig Brodersen: An international euro is a force for stability. Now, I found that quote Interesting. And not because you had a central banker who felt that her currency was really important, and more people should use it. I think that’s probably inherent in all central bankers to, to think that way. But I do think it’s interesting whenever you are taking these snapshots and whenever you’re looking at, say, the different balance sheets of central banks around the world and how that has changed over decades and how it looks to change now, you also see more gold being accumulated now, for example.

[00:51:53] Stig Brodersen: But I think I want to talk about Europe here because to your earlier point, what is the role of the Euro on the global scene?

[00:52:02] Lyn Alden: I mean, that’s so far been an example of how hard it is to establish a new network effect. So, it was a very optimistic time 25 years ago when the Euro was kind of coming into existence and, on the uprise.

[00:52:15] Lyn Alden: In recent years, when we see. some degree of reserve diversification. So, we see a little bit, China goes from almost no countries have reserves in it to maybe 5%, whatever. The dollar has been pretty flat. It’s the Euro that’s been losing market share in the past few years. So, for example, China has kind of been taking market share from Europe, you could say.

[00:52:35] Lyn Alden: And there’s been a few reasons for that. One is that going back to my prior point, the fractured capital markets, make it hard for any entity running a big surplus against Europe to want to know what to do with those euros. So, prior to the euro, German debt markets were highly liquid and after the euro, German debt markets are still highly liquid.

[00:52:54] Lyn Alden: And so that’s the one everybody wants. When you get into other ones, they suddenly get less attractive. There’s a long tail of debt markets that are just not interesting to foreign investors. And even the German debt market can’t compete in scale with the U. S. debt market, the size and liquidity there.

[00:53:10] Lyn Alden: And so, it doesn’t fundamentally solve the problem of fractured capital markets. And the major setback with Russia has also harmed the Euro because, one of the, one of the key benefits of the Euro is it allows Europe to buy energy in their own currency. And for a while that was working. And I mean, it still is, but for a while, for example, if you looked at.

[00:53:31] Lyn Alden: Russian natural gas and other commodities going to Europe, it was increasingly Euro denominated. Over time as that built up for years and years, the dollar denominated trade was diminishing and the Euro denominated trade, was increasing, but now with the war, and then with the busted pipeline and what the count that, that whole trend is derailed until you’re kind of starting from square one again.

[00:53:54] Lyn Alden: And it’s, it’s one of those It’s big enough currency where it’s a serious contender to build a buy energy in its own currency. So, it’s helping with that problem, but it’s just it’s not, none of the network effects are making ground. And then now that Europe doesn’t really have the energy security that it used to, we’ve seen, for example, German de industrialization.

[00:54:17] Lyn Alden: So, Germany’s kind of been the economic powerhouse of Europe. And if you look at, if you’re in any sort of energy intensive industry, if you make chemicals, if you do manufacture stuff, a lot of that’s been leaving Germany and going to places like China, because the energy costs are just not really competitive anymore.

[00:54:33] Lyn Alden: And just future everybody hello, everybody. And who really made this happen. They sold it to Ford to start selling to Everhart as someone else from B Fresh. And in 20, you wouldn’t have any idea how people would get that stuff. So, he, everybody, they ended up selling to Ford and Ford makes this, I think there’s no doubt about it.

[00:54:48] Lyn Alden: All the good people, everybody buys it from Ford. If there’s network effects and you’re like in third place, it’s just not a great position to be in. It’s kind of what we’re seeing as well as just an internal policy issues that might kind of hamper that or just bad luck with things like, they’re biggest natural gas provider going to war in Ukraine.

[00:55:05] Lyn Alden: Like, there’s both external things that happened to them. Internal energy policies, I would argue that they’ve taking missteps on and then just the sheer challenge of trying to compete with leading network effects in money is just hard. So, I’m not very optimistic on the Euro’s prospects for globalizing itself more than say the high watermark that it’s already reached.

[00:55:27] Stig Brodersen: Let’s continue on our trip here and go to China. So, you have renowned economist Richard Ku. He recently claimed that China is in a balance sheet recession. And he also claims that the solution is simple because if households will not borrow and lend at low rates, then the government must, at least that’s what he’s saying.

[00:55:47] Stig Brodersen: So fiscal deficits must offset the financial surpluses of the private sector until the balance sheet are fully repaired. Now, perhaps we should take one step back before we discuss this and define what is a balance sheet recession. And I’m also curious to hear whether or not you agree with Koo’s assessment.

[00:56:07] Lyn Alden: Yeah, so balance sheet recession, basically it’s kind of running the Japan model. And a lot of that actually does have to do with our prior discussion on debt restructuring. Whenever you see a multi, like a very long trend of deleveraging of the private sector and a leveraging of the sovereign sector, your kind of going through that type of model, right?

[00:56:27] Lyn Alden: So, I, I do think that in some sense, China is going to go through what Japan did in a sense that, China is known for their very high housing leverage. That’s been a big issue for them in recent years as it’s kind of deflated that bubble to some extent. They’ve historically not had much sovereign debt, but now they are inching up over time in terms of their sovereign debt levels.

[00:56:48] Lyn Alden: And so, we are, I think, going to see a gradual transfer from private sector debt, household debt, corporate debt, regional government debt, like province debt, up to more of the sovereign level. And so far, China is currently running kind of the opposite playbook of the U. S. So, the U. S. is currently running very loose fiscal policy.

[00:57:05] Lyn Alden: I see very huge deficits and they’re pretty tight monetary policy to try to offset that. Whereas China is currently running pretty tight fiscal policy. They don’t really have very large deficits. They’ve been very reticent. They’ve not been aggressively trying to do this transfer up to the sovereign level.

[00:57:21] Lyn Alden: They’ve been very hesitant to do that. That’s why I think it’s going to be a very gradual process. And because of how centralized China is, and because of the culture itself, they generally have a higher tolerance for economic pain, I would argue, then. say, the West and whether that’s a good thing or bad thing is I’ll let the listener decide.

[00:57:40] Lyn Alden: But basically, they can go through longer periods of deleveraging and stagnation. It seems like then many other countries. We’re also seeing a big divergence there between the export sector and the consumption sector. So, their export sector is still firing on all cylinders. I mean, they’ve this it’s just been a straight line up in terms of exports.

[00:58:00] Lyn Alden: And specifically, they’re also moving up the value stack. And so just in the last three and a half years, they’ve had like a hockey stick like growth in their full auto exports. And we don’t really see, I don’t know about Europe, but we don’t really see it in the United States. Don’t, no one drives Chinese cars, but if you go to Egypt, for example, there’s big %age of Chinese cars in the road.

[00:58:20] Lyn Alden: Basically, all of the emerging markets are their primary target. So, China is now the biggest auto exporter in the world. They’ve actually surpassed Japan. And this all happened in three years. They also just, now they have their own aircraft producer, commercial aircraft producer.

[00:58:35] Lyn Alden: So, the COMAC is now up there, potentially with Brazil’s Embraer and probably has the opportunity to surpass that and kind of rival Airbus and Boeing as, kind of a leading commercial aircraft producer. That’s been a long time in the making and its still early stage for that.

[00:58:52] Lyn Alden: They’re further behind that adoption curve than their cars, which really kind of taken off in recent years. But the, where I’m going with this is that their export sector is still just absolutely on fire as the kind of the manufacturing hub of the world. And where they are going through something like a balance sheet recession is their domestic consumption economy.

[00:59:11] Lyn Alden: So, their household deleveraging, their internal use of commodities, their internal construction, their internal kind of retail sales, and things like that. All of that is pretty stagnant at the current time because China’s leadership is trying to deleverage it. and without the fiscal looseness that we’ve seen in the West.

[00:59:32] Lyn Alden: And I think that this is, it has global implications because it affects China’s internal commodity consumption. It affects, the success of Chinese equities, for example. And I think that this is a transition that they are going through for probably quite a while. We could see some nonlinear moves in the future.

[00:59:49] Lyn Alden: Right now, they’re sticking pretty. If you look at their money supply growth, it’s pretty consistent. If you look at their fiscal deficits, they’re pretty low. We are seeing a very gradual shift from private sector debt, cause that’s mildly deleveraging as the sovereign mildly levers up.

[01:00:05] Lyn Alden: We are seeing that shift. Now you, if you do get a change in the public’s perception of it, you could have a more stepwise change in terms of larger fiscal impulse. A good kind of example of this is that they did their multi year zero COVID policy. kind of some of the tightest lockdowns in the world, even beyond some of the initial points.

[01:00:23] Lyn Alden: Like, so for example, in like 2022, they were still heavily locking down and eventually started to get protests there that were some of the biggest protests in decades. It was not just one city. It was like protests are breaking out in multiple cities. It was increasing dissatisfaction. With how their leadership handling this and so you saw a pretty quick pivot at one point where they finally just say, okay, we’re ripping the band aid off.

[01:00:48] Lyn Alden: We’re going to change our policy. And that was 1 of those things where it was tied to some extent to national identity. 1 of their kind of arguments was like our system is better than the West because, look, we can handle a pandemic better than they can. But increasingly, that was not the case. It is not the case.

[01:01:05] Lyn Alden: And so, they were, they ran that policy for longer than most other countries, but even then, they couldn’t do it indefinitely. And the people just. kind of revolted. And they had to change course, kind of social harmony of it starts to get out of hand, it can force a pivot. And you could eventually see that in the de leveraging, right?

[01:01:24] Lyn Alden: If the economy stagnates for too long, or they do encounter too deep a recession, you go back to my prior point, like my 2019 piece about Bond, Bubble, and print thing like, you could have an absolute, just massive kind of stimulus outside of China. I mean, coming out of China. At any point where they feel that it’s a risk not to do that, if the public is just kind of increasingly frustrated with the economic prospects, you could see that type of pivot.

[01:01:50] Lyn Alden: But until we do, the base case, I think, is just more gradual shift from China’s sovereign level is probably going to keep levering up and their private sector is probably going to be stagnant. for a while, their domestic private sector and then their exports. I expect to continue to be very strong.

[01:02:08] Stig Brodersen: Let’s continue on this trip around the world and go to Argentina.

[01:02:12] Stig Brodersen: And now I think that from a currency perspective, at least if you’re a nerd like me, this is perhaps the most interesting country right now. The latest number I found was 113 % inflation rate. I think that’s also heavily debated what it truly is. And I think it probably depends on who you’re asking.

[01:02:28] Stig Brodersen: And at the time of recording, we don’t know who the next president of Argentina will be. We probably will know whenever this episode goes out, but I want to talk a bit about one of the candidates. There’s a runoff now, Javier Mirio, my Spanish is terrible, so I do apologize, I probably butchered that name, but you can say a lot of things about him, but boring is probably not the word you want to use.

[01:02:51] Stig Brodersen: Among his many proposals, one headline that caught the financial media attention has been to dollarize the Argentina economy. And the proposal is of course controversial, but it’s probably not as farfetched as it might appear from the outside. Many Argentinians already use. dollars today and dollarization of your economy has a precedent.

[01:03:17] Stig Brodersen: One example could be Ecuador that dollarized back in 2000 and at least in the short term that reigned in inflation. So, I guess my question to you, Lyn, is not whether or not Argentina should dollarize its economy, but rather what would be the implications if they decided to do that? And what would the implications be if they decide not to?

[01:03:37] Lyn Alden: So yeah, it’s a good question. And when you have an untenable situation, eventually you do get more polarizing figures come up, people kind of hit their breaking point. and start to say, you know what, I want to kind of throw a hand grenade into the situation and mix things up. I, I’d argue that the Brexit vote was a similar direction.

[01:03:55] Lyn Alden: The election of Trump was a similar direction. We kind of eventually just like, you know what, I’m going to throw the dice on this kind of outcome because clearly the current just incremental trend is just not working. And so that, that’s kind of, I think what we’re seeing manifest in Argentina. And again, I don’t know, I don’t know what the election outcome is going to be, but, in general, when a country’s own ledger becomes so destabilized, it kind of gets forcibly dollarized, like it basically, it becomes increasingly tenable for that country to offer currency.

[01:04:21] Lyn Alden: But you know, people the inflation so high, it becomes so unusable that the people themselves just increasingly refuse to hold the currency and they hold other currencies and so that currency either hyperinflates or nearly so, and they can persist in that period for a long period of time, but they’re kind of fooling themselves.

[01:04:39] Lyn Alden: And so, one of the things that they can do is say, okay, we’re just going to use. the dollar as our currency. And so, it’s basically an admission that they’re just not capable at the current time, the current political infrastructure running their own currency. And that it, when you’re, when you have constant double-digit inflation, or in Argentina’s case, triple digit inflation, it’s very hard to run an economy because currency is an accounting system.

[01:05:06] Lyn Alden: It’s impossible to make long term contracts, business to business, or business to consumer, or it’s just, there’s so much overhead. that you are extra administrative overhead you have to do with is constantly renegotiating prices and constantly having shorter term contracts that have to get updated a regular basis.

[01:05:25] Lyn Alden: And it becomes so untenable. And eventually those costs outweigh the government’s own desire to have their own currency. And so eventually they say, you know what, we’re just basically forced to dollarize. And so there has been a decent track record of countries that dollarize, right now, Salvador, for example they’ve been dollarized for a while You know, they’re doing pretty well in Latin America, a number of countries that once they kind of rip the bandit off and try to have a firmer, they kind of let go control the money system that they’re able to stabilize and start building a base in there because people are actually able to make economic calculations again.

[01:05:59] Lyn Alden: Now, what would make this one kind of unique is the sense that. It’d be the, I think the biggest country to do it, usually dollarization happens to lower population countries. Just, the fact that Argentina’s size and even their former wealth, it basically would be pretty remarkable for a country like Argentina to dollarize.

[01:06:17] Lyn Alden: And it’s one of those things where if too many countries do it, you actually get a really big imbalance. It becomes like, if too many countries are using the dollar as their currency, that actually starts causing major balances in the global system. So, it’s not really an answer for every country, but it’s an answer for a lot of countries, potentially in the intermediate term.

[01:06:36] Lyn Alden: And this goes back to my prior point of basically all the gates are down now. So, with things like stable coins, anyway, you can just completely go around the former control. So, Argentina used to be able to keep out dollars or minimize the inflow of dollars, whereas over time, technology makes it harder and harder.

[01:06:55] Lyn Alden: Their financial borders are more and more porous. To dollars, to Bitcoin, to whatever currency, whatever market currency is winning there are far more porous to it. And so, I think we’re actually probably going to see an acceleration of this type of thing where the long tail of the weakest currencies, it’s going to be increasingly hard for them to maintain a currency.

[01:07:15] Lyn Alden: Because the options that people have are so much better and I think the big downside risk is it can cause major changes in policy. And so, for example, Argentina has a lot of fiscal support for the poor that’s out, just done with printed money. And the challenge is that it harms the poor at the same time as it helps the poor, right?

[01:07:39] Lyn Alden: It’s saying, okay, you’re constantly getting diluted. It’s impossible for you to save. especially because the poorer have trouble accessing dollars and investments in credit and things like that. They’re actually suffering the most from inflation but they’re also getting a constant stream of new money to go out buy their grosses with and things like that.

[01:07:55] Lyn Alden: And if that gets kind of shut off, especially abruptly, you could get protests, you could get breakdowns of social cohesion. So, these are not often pleasant transitions, even if they might, it’s kind of like how if you rip a band aid off, it hurts. If you put medicine on a wound, it hurts, but it’s important for like long term healing of the problem.

[01:08:16] Lyn Alden: And I think that’s the way to think about this. And so, it’s just kind of remarkable to see a country like Argentina going through it. And I think that’s. Parse a testament. To these technologies that just make it harder and harder for borderline currencies to be able to sustain themselves.

[01:08:31] Stig Brodersen: And I think on that note, Lyn, it’s important whenever you discuss something like, should you dollarize and not to say yes or no, but say, this is what happens if you do X. And this is what happens whenever you see and depends on. what you want the outcome to be. It’s very complex and I can’t help myself but say one decision that is not complex is the decision to buy your wonderful book, Broken Money.

[01:08:55] Stig Brodersen: But before we end the interview, Lyn, I want to hear how has the public received Broken Money? I’m fairly certain I’m not the only one who is a big fan of the book.

[01:09:04] Lyn Alden: So far, it’s been very positive. The ratings on Amazon and Goodreads are both better than I expected. I like the diverse kind of people from multiple different countries are buying it.

[01:09:14] Lyn Alden: So, it’s like, it’s cool to see all the different markets that it sells to all the translation requests that we’re currently working to get it translated into other languages for people, which is always kind of rewarding to see. And then there’s like the academic interest in the book and so, for example, there’s some professors that are planning on using it as part of their class on money or inviting me to give guest lectures about the book or to give talks about the book at universities.

[01:09:39] Lyn Alden: And so, it’s a very rewarding experience. And, and I’ve said this from the beginning that. Nobody should really write a book for the money side because it’s not generally a very economical thing to do with your time, especially if you work in investments or you work in other, kind of profitable industries.

[01:09:55] Lyn Alden: A book is generally not the best hourly rate of your time at all. Instead, if you have a set of ideas that you’re It’s like distracting if you not to write the book, like you have a calling to write the book. If it’d be harder for you not to write the book, then to write the book is when you should write the book.

[01:10:12] Lyn Alden: And because I did it like that, it kind of came out of the heart. And the tangible benefits of having a book out there are very constructive. And so, it’s so far, it’s just, it’s been very humbling to see the responses to it. And I’ve just been very happy that it’s out there and that people are able to enjoy it as much as they do.

[01:10:31] Stig Brodersen: I can most certainly say, and I’ve probably said it 10 times already, but I got to say it yet another time, this is a wonderful book, and I encourage everyone tuning in to grab the book whenever they can, gift it to friends and family as well, which I have too. But you also have a wonderful blog, I just wanted to give you the opportunity to give a handoff to that, Lyn.

[01:10:49] Lyn Alden: Yeah, so Lynalden.com. I have public articles, public newsletters, and low-cost research for people, including macro equities, digital assets, kind of covering a pretty broad thing. So, people can check that out if they want my ongoing thoughts.

[01:11:03] Stig Brodersen: Wonderful. Wonderful. Thank you so much for taking the time to speak with me again here on the show, Lyn. It’s always a pleasure chatting.

[01:11:10] Lyn Alden: Thank you for having me again. Always happy to be here.

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