Jim Bianco on the Health of the Global Financial System

Jim Bianco is the Head of Bianco Research and owner of BiancoResearch. ETH, Jim is our go-to source of macro analysis from someone who also knows crypto. Jim was early and loud about the initial Fed pivot into rising interest rates, all the way back in March of 2022, before much of the crypto industry really understood how significant interest rates can be. Now, we’re having Jim back on for his 4th time to help us navigate this next wave of macro chaos. ------ 📣 Infura | New SDK for NFT APIs For Devs https://bankless.cc/Infura ------ 🚀 JOIN BANKLESS PREMIUM: https://www.bankless.com/dashboard ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken 🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap 👻 PHANTOM | FRIENDLY MULTICHAIN WALLET https://bankless.cc/phantom-waitlist 🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask 🚁 EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi ------ Timestamps: 0:00 Intro 8:10 Balaji's Bet 10:48 Arthur Hayes & Ben Hunt 14:30 The Fed's Balance Sheet Chart 18:00 Deposits in Banks Chart 27:20 BTFP 36:09 Raising Rates & Insolvency 38:35 The Long Tail of Banks 47:09 Treasury Returns?! 54:45 Uncertainty & Bond Market 58:20 Phase Change 1:02:24 Signs of Health 1:06:55 What is Jim Doing? 1:10:40 Closing & Disclaimers ------ Resources: Jim Bianco https://twitter.com/biancoresearch https://twitter.com/biancoresearch/status/1638995201770536961 https://twitter.com/biancoresearch/status/1639004727001358339 ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ryan Sean Adams?

  I'm going to talk about what's going on with the banks. David, this has been, I think, a running series for us ever since Balaji put up the bit signal and started a conversation around the banks' insolvency, the dollar hyperinflating, Bitcoin going to $1 million within a 90-day period of time. Of course, this is on the back of a few bank runs that we've had in the United States. Silvergate Bank led the charge, then Silicon Valley Bank led into Signature, all sorts of intervention going on with FDIC and US government. And we're trying to figure out what's going on, what is actually happening.

• 0:41David Hoffman?

  What is the truth?

• 0:42Ryan Sean Adams?

  So we have Jim Bianco here today, and I think this is maybe the fourth in a series of episodes. So our first episode with Balaji, where we actually talked about his thesis for bank insolvency in the United States, and it was a very bleak, pessimistic outlook. And then, but he brought lots of evidence. And then we had a conversation with Arthur Hayes, who took kind of a trader's perspective. He also sided with Balaji in this entire, in his thesis, except he thought it would happen over a longer timeframe. So rather than 90 days to a million, maybe Bitcoin takes like two, three, four years to get there. Then we had Ben Hunt on the podcast, who gave the complete opposite take,

• 1:25Ryan Sean Adams?

  rejecting both of those takes with a counterpoint. And now here we are with Jim Bianco today. Jim is somebody who I think you and I both respect quite a bit, because he's got one foot in the traditional finance world and one foot in crypto. I think we're going to ask him, David, to just make sense of this whole conversation and everything that's going on.

• 1:45David Hoffman?

  Yeah, especially when all of these other conversations that we've had find themselves at the far ends of the spectrum. Like Balaji's Bitcoin to 1 million in 90 days, calling for more or less doom as we know it, triggered a lot of people, made people very upset and really didn't, whether or not you believe it, you either are scared because you're of what is, what that means. Or you're just upset because of just how doomer that that whole perspective is. And then on the, like you said, on the flip side of things, you have Ben Hunt, who's saying that is just a complete farce. And I think we need to bring somebody that you and I, Ryan, are familiar with, that the Bankless Nation is familiar with, because we've had Jim Bianco on

• 2:26David Hoffman?

  three other times. So Jim feels like home for us. He feels like known, a known quantity. And so I'm assuming he has a stance in this debate, a stance in this conversation. But regardless of this crazy debate that's going on in the crypto world, also just regular old macro is back in season as it's in people's brains. And so we're going to get Jim Bianco's take about what is going on in the macro world and hopefully shine a light for us in these dark and chaotic times.

• 2:55Ryan Sean Adams?

  Guys, before we get in, we got a shout out to our friends and sponsors over at Infura. They just released something really cool, which is like an NFT API tool. David, what is Infura up to? What do they want the developers listening to Bankless to know about?

• 3:10David Hoffman?

  Yeah, this is for the devs out there. So Infura has built all of you guys, an SDK to help you build your NFT application on various different blockchains. And so what you can, what can you do with this SDK? Well, whether you are minting NFTs, you are buying or selling NFTs as functions, burning NFTs. It's got a bunch of different functions for you to write and mint NFTs and both ERC 721s and 115s across three different blockchains and aggregate all of the data about your NFTs across eight different blockchains. So basically, if you are building an NFT application, Infura has got an SDK ready for you to make that world easy. These three contracts that they've got out of the box covers what they say 85% of all NFT use cases.

• 3:54David Hoffman?

  So if you are a dev, there's a link in the show notes to make an account with Infura, register with them and get that SDK available to you. Link in the show notes.

• 4:03Ryan Sean Adams?

  Guys, this is going to be a live stream today and we're going to bring Jim on in just a second. But before we do, we want to thank the sponsors that made this episode possible, including Kraken, our number one recommended crypto exchange for 2023.

• 4:18David Hoffman?

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• 6:32David Hoffman?

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• 7:10David Hoffman?

  Bankless Nation, we are here with Jim Bianco. Jim Bianco is a frequent returning guest to the Bankless program, head of Bianco Research and also owner of BiancoResearch.Eth. Jim has become more or less our go-to source of macro analysis from someone who also knows crypto. There is not that many of these people out there, and Jim is definitely one of them. Jim, I remember was early and loud about the initial Fed pivot into rising interest rates, all the way back in March of 2020, before much of the crypto industry, including myself, really understood how significant interest rates can really be. Now, we are having Jim back on for his fourth time to help us navigate this next wave of macro chaos. Jim, welcome back to Bankless.

• 7:52Speaker 02

  Well, thank you. Bankless is now becoming a cultural movement here with these banks in the last couple of weeks.

• 7:58David Hoffman?

  The word "Bankless" is meaning a little bit different things these days. Yeah, the banks are taking it literally, I think. More literally than we intended. This wasn't exactly what we had in mind, but either way, it's becoming hastened. So Jim, as you heard in the intro, there's this debate going on in the crypto world. And I know that you've got your own macro takes that are independent from all of our shenanigans in the crypto industry about who's right and who's wrong about this like $1 million Bitcoin bet, but I do want to start the conversation there. Now, Bology thinks the United States' dollar is going to hyperinflate inside of 90 days. Arthur Hayes directionally agrees with him, just isn't so rapid and doomer about it. He thinks $1 million in two to three years.

• 8:38David Hoffman?

  Ben Hunt says that this is completely irresponsible and overly doomist, which is also a sentiment shared by many's out there. I wonder, do you have a position in this debate? Like, where are you in the spectrum of million-dollar hyperinflation Bitcoin to this shenanigans?

• 8:54Speaker 02

  I'm pretty close to where Ben Hunt is right now. In full disclosure, he's a fishing partner of mine in Maine. We go every August with some others. Yes. And I, let me, let me come down on what I think is happening with the banks and where I think we need to have this debate. For a bank, an asset is a loan or securities that they own. If they hand out bad loans and if they buy securities that lose value a lot, then they're unable to meet their obligations and that is a solvency crisis. But on the liability side for a bank is deposits, your money, my money.

• 9:38Speaker 02

  If we all decide that we want our money back, then that is a liquidity problem or liquidity crisis. And that's what we're having right now. People want their money back from the banks. The problem is banks don't hold 100% cash. Custodial would like to do that, but they won't let them, but that's a whole nother issue altogether. The banks have loans, the banks have securities that can't be immediately converted into cash. So if too many people show up at once and say, "Give me back my money," you have a liquidity crisis. That's what we have going on with the banks now. Now, a liquidity crisis can become a solvency crisis if you squeeze the banks hard enough. A solvency crisis was 2008.

• 10:20Speaker 02

  If you squeeze them back bad enough, you can turn that into a liquidity crisis. But I do think it's a liquidity crisis. And really, the question we need to be asking... Is why are people asking for their money back? What is it that is motivating them to ask for it back? And then put banks in a bad place? Seems like we're going through the letter S right now between Silvergate, Silicon Valley, and Signature as well.

• 10:48Ryan Sean Adams?

  So Jim, I want to ask you, so did you get a chance to listen to the Ben Hunt conversation and also the Arthur Hayes conversation, for instance?

• 10:58Speaker 02

  Yeah, I listened to Ben Hunt's conversation. I heard some of the Arthur Hayes one.

• 11:02Ryan Sean Adams?

  Okay, so can you give us some like, I guess, context here? So my take was that Arthur Hayes was making the claim, and Bology was kind of making a similar claim, that this is akin to maybe not quantitative easing, because we can't use the same term, but the money printing that was going to happen as a result of the Bank Term Financing Program, the BTFP, was going to result in sort of the same thing, which is the Fed balance sheet increasing. And then I kind of lined that up with tweets like this, which is from your Twitter. And this is a graph, the Fed updated their balance sheet. And you say now two thirds of quantitative tightening, that's the quantitative tightening

• 11:47Ryan Sean Adams?

  that they've been doing kind of post-COVID, you know, early 2022 up till now, has been reversed. And so this looks like the Fed balance sheet going back up, which seems to like indicate that the Arthur take is correct, or at least the Bology take is correct. Now, Ben Hunt was saying, no, no, no, this is all temporary. This is all kind of liquidity that the Fed is injecting. It's not something that's going to be permanent. And this is sort of where the conversation at Bankless has kind of left off. Like, I don't know who is right. I don't know who to believe on this. Can you help us make sense of this?

• 12:24Speaker 02

  Well, let's, let's put some concepts on this. Quantitative easing, let me start there. That is the Fed printing money to buy bonds to go into the market and try to manipulate the price of interest rates lower. In fact, they refer to it as permanent, they use the word permanent, open market operations. So they just invent some money, they call JP Morgan, or they call Goldman Sachs, they say, we, sell us some 10-year notes and they agree on a price and then they pay for it with the printed money. I'm simplifying it for our purposes as well. What you're seeing here is not quantitative easing by that definition. It is an expansion of loans.

• 13:09Speaker 02

  So the banks are showing up at the Fed discount window, which is a lending facility, and they're saying, look, everybody wants their money back and I don't have cash, but I do have a billion dollars' worth of other securities and loans and other assets. Will you take them as collateral and give me a billion-dollar loan? And that's what's been happening with this expansion of the balance sheet. Now, you know, I, to kind of, you know, square the circle between Ben and Arthur, the Fed thinks this is going to be temporary. They intend on it to be temporary. We'll have to see whether or not it turns out to be temporary. But I have a feeling that if it's not temporary, then it is going to continue to, if it's

• 13:54Speaker 02

  not temporary, then the balance sheet is going to continue to go up and up. And that could be very inflationary for the economy as we go, not necessarily hyperinflation like Balaji's talking about, but maybe more like 2022 inflation type levels that we could see come back into the market. And that would be a big problem for the TradFi markets. Otherwise, if the problems with the banks, this liquidity problem with the banks subsides, then you should expect these loans to get paid off by the banks and then you could expect the balance sheet to go right back down again. So it remains to be seen what kind of level of problem that we have with the banks.

• 14:33David Hoffman?

  So, okay, the take that I've heard about this particular lineless graph, this chart, is that the line's going up and to the right extremely quickly. And while it might not technically be QE, it's something else. I think a lot of people are just advocating for the perspective of never mind what they call it, never mind their fancy language about this. Look, stimulus is stimulus. And so the net effect of whatever operations that they're doing into the market is increasing the Fed's balance sheet. The net effect of that is stimulus, risk on asset favorability, inflation, and, you know, capital asset appreciation. Basically, you know, the bull market that we're all hoping for, right? And so, like, never mind the names. That's

• 15:18David Hoffman?

  kind of what some people are thinking about, or perhaps crossing their fingers and hoping for. And I think what you're saying, what you just told us, is like, hold on. Yes, it is that, but no, it's still not that. And the reason why it might not be that is that because there is a chance that these loans being made by these banks are going to be paid off. At least, that's what the Fed is hoping for. And if they are paid off, then we're just not going to see that inflation. We're not going to see a growth in the balance sheet. Is that the right, is that the right perspective to take here, Jim?

• 15:49Speaker 02

  Yeah, remember, these loans that the Fed is handing out are collateralized. They're not just printing money and hand it to the bank. The bank is giving them in the BTFB. You know, the bank basically is saying, or the Fed is saying, you got to give me a billion dollars of securities. Power them out, yes, maybe it's a little bit less, but, and then I will give you a billion dollar loan.

• 16:10David Hoffman?

  So it's that collateralization that's really unique?

• 16:13Speaker 02

  Right. Well, it's not unique for the Fed, but it is unique in that they are not just printing up money and handing it out to everybody like we did in 2020. Or if I'd actually shown you a balance sheet from 2008, it actually, the balance sheet, in a couple of weeks after Lehman Brothers went bankrupt, actually doubled. The entire balance sheet doubled. This is not a double. You can see the, the scale is at a trillion right now. So this is not quite what we've seen in the past. So let's just, let me just put some, some numbers on this. If The Fed expands their balance sheet. You are right. It is stimulus. It stimulates the economy. It encourages a faster economy. It encourages higher risk markets. If the

• 16:58Speaker 02

  banking problem subsides, the fear I think that will come back in the market right after that is now the Fed's going to turn around and they're going to have to hike even more aggressively. They're going to hike interest rates to above 6% because we're going to have an inflation problem in the second half of 22 or in 23. So they're going to slam on the brakes. But if all of this lending does not alleviate the banking problem and it continues, don't worry about inflation because the economy's slowing. They're going to continue to stimulate and stimulate and it'll look more like 2008. And then you might have this creep from a liquidity problem, everybody wanting their money back, to the

• 17:38Speaker 02

  securities that they've pledged to the Fed start losing more value. And then you could be creeping into a solvency problem. You don't have a solvency problem now. But whenever you start down this road, that is always a risk, that when you start off with a little problem, it metastasizes bigger and bigger. So I guess really the question we need to really address is, why is everybody asking for their money back? What has changed in the equation over the last couple of months for everybody to ask for their money back? And Ryan, you've got a chart of the drawdown of, not that chart, the, yeah, that chart

• 18:17Speaker 02

  right there. This is the size, this is 43 years of deposits in banks. And it shows you on the bottom part in red, the drawdown. How high are you off the all time high? Now what jumps out in the chart is the middle. That is October of 2001. And that was right after 9/11. And what happened was the World Towers came down, World Trade Towers came down, and a lot of the buildings around the World Trade Towers were damaged. A lot of those were like the Bank of New York. That are big, um, uh, transfer banks. The, there was a blockage in the payment system because of damage to the infrastructure that caused that drawdown in deposits. Physical damage. Physical damage, yes.

• 19:01Speaker 02

  Uh, and so that is a unique situation. So if you remove that, what you see on the chart is the biggest drawdown in deposits in at least forty-three years and probably fifty years that we've seen in banks. And there's a little label on that chart for March eighth, when the drawdown was still minus three eighty-three. March eighth is two days before Silicon Valley went bankrupt. So this was underway for a period of months, this withdrawal of assets out of banks. And I think really what we need to understand is the nature of how banking has changed in the last couple of years and that's sped up in the last six months. Let me explain that. We have now live in a world of mobile banking.

• 19:45Speaker 02

  Everybody listening to this podcast is probably into crypto, probably a lot younger than me and Ben. Um, and you do all your banking on your phone. You probably never even physically set foot in a, in a, in a bank branch. Uh, that is the way that the world works. But for fourteen years, interest rates, whether your bank gave you on your savings account or your checking account or was available in the market was the same. It was both zero. So there was no reason to think about those interest rates. Well, a year ago, the Fed started raising rates. And because of quantitative easing, the bank said, I've got enough deposits. I've got enough assets. I don't need, uh, I don't need anymore. So they didn't raise their rates.

• 20:26Speaker 02

  So as rates went from one, two, three to four percent, the, the interest rate you got on your bank account was zero. In fact, JP Morgan Chase still advertises on their website that if you open a savings account with them, your interest rate you will get is one basis point, one. But if you are a preferred customer, they'll double it. So you'll get two basis points if you are a preferred customer. So that has worked for fourteen years because market rates were for that. But once we got past four percent, that was about Thanksgiving. Behavior started to change. People started to pull their money out of the bank and put their money into a money market fund because it was yielding four, four ten, four twenty.

• 21:10Speaker 02

  Or they bought treasury bills, or they went to a fintech firm that was giving them more money. Or they, they went to an ETF that was having a higher yield. I'm keeping all the TradFi examples in here. And so what we started to see was more and more movement. They became yield seekers. Let me put this in crypto terms for you. This is DeFi one oh yield farming is what has happened now. It has come to TradFi. They have now noticed that if I spend five minutes on my phone, I could pick up a lot more yield. And just like the one, the DeFi one oh yield farmers, they tend to be a bit mercenary. They, they have no allegiance to where their money is.

• 21:54Speaker 02

  They have allegiance to who's giving them the highest yield. And so they seem to be jumping around, whether it's to T bills, to money market rates. And so all of these people started asking for their money back because they didn't want to get two basis points, or they didn't want to get all these low yields. Now, we had two types of banks that were being squeezed at the same time. The crypto banks in Silvergate and Signature and the tech bank in Silicon Valley Bank. They were seeing deposit outflows because after FTX, there was a loss of confidence and people were kind of withdrawing from Silvergate and from Signature. And because of all the tech problems, the tech startups were not able to do Series Bs and Series Cs to replenish their accounts.

• 22:39Speaker 02

  And they were bleeding money as well, too. The executives at those banks knew those problems existed and were managing those problems. But then over here on the right, they was looking at their deposit, their regular like yield seeking deposit accounts. And they would make a statement that was true, that you are more likely to get divorced than you were to change your bank. And so they said, these people will never move. They will just sit there and they will never move. Then around Thanksgiving, it's like, wait a minute, they're starting to leave now too. I didn't anticipate this. They were already managing a problem of depositors leaving because of crypto and because of tech. Then you piled

• 23:20Speaker 02

  onto this, the yield seekers are starting to leave too. That forced Silicon Valley Bank into a difficult position. They needed to get more cash to meet deposits. They consulted with Goldman Sachs and they decided to sell $40 billion worth of securities off their balance sheet, mortgage securities, treasury securities, agency securities, and realize a $1.8 billion loss. They thought, and this is my supposition, that, oh, our stock will have a bad day. It'll be down 20% and we'll raise extra capital because Goldman will help us raise extra capital to cover that $1.8 billion hole. And by the end of the year, this will all be water under the bridge. What they did not anticipate was the gates

• 24:03Speaker 02

  of hell were going to open. Their stock would be down 61% that day. And by noon the next day, they were going to be taken over by the FDIC. Last off for you on that, noon the next day, because of phones and because of digital, the history of the FDIC or the California Department of Finance, which took them over and then put them in FDIC receivership has always been that when a bank fails, it usually gets taken over Friday after the close. The money that was leaving Silicon Valley Bank was so fast and so furious, they couldn't wait until 5pm when the bank would close. They took it over around noon that day because the money, otherwise there would have been even more deposit outflows.

• 24:48Speaker 02

  So this is something that bankers are now going to have to really get their head around. What is it that has changed about the deposit base of banking? And what is it that is influencing them? What do we do about it? Obviously, the answer is raise your deposit rates, but that kills your profitability. And I'll come back to full circle. If you want to learn a lesson from somebody who's dealt with this, instead of kicking crypto in the teeth, why don't you take a look at DeFi 1.0 and yield farming? And how that there was that struggle with yield farmers and their mercenary attitudes about, you know, just, you know, in fact, we automated it with a urine vault, you know, just, we're just gonna every five seconds, look for the highest yield and bam, we're gonna go there and get the highest yield.

• 25:32Speaker 02

  And if somebody else offers a higher yield, we're gonna jump there. That's starting to happen now in TradFi banking because the technology is making it very easy. Last thought for you. I think the biggest mistake everybody in the traditional world makes is here's a new technology. Oh, well, I could use this in case of mobile banking. I could close some branches. I could reduce my overhead. I can increase my margin. What a great thing this mobile banking is. But often what what new technology does is it changes business plans. It changes business models. It changes behavior. It does more than just allow you to skimp a couple of margin points off of your costs.

• 26:14Speaker 02

  And so they didn't realize that they were opening up a whole new business model by going mobile banking. They didn't see it because we were stuck with zero interest rates for many years. But as soon as rates started rising and the public started realizing for five minutes of my time on my phone, I can make thousands of dollars by moving to a money market fund or buying a Treasury bill. And they started doing this. And now these bankers are going to have to grapple with what you think you understand about your deposit base no longer applies. They are not more likely to get divorced than switch the bank. That is now changed and really changed the last 90 days. And it's going to be very difficult for the that to be unlearned. The public stopped doing it.

• 26:58Speaker 02

  And while maybe we won't see another bank go into receivership, maybe. I don't think we're going to start, we're going to see the outflow stop from the banks. People are going to continue to say, I don't want two basis points from Chase. I would rather move to a money market fund and get four and a half percent. And we're going to continue to see that until those rates converge on each other.

• 27:20Ryan Sean Adams?

  So Jim, this is just kind of the question. I'm wondering if you'd still sort of help me, help us collectively, Bankless Listener Square, the Ben Hunt versus Arthur and Bilashi type of debate. Okay, so we see this chart. You just made the case that we're going to see increasing outflows. We saw massive outflows. This kind of looks like a bank run here. That's what maybe a bank run looks like is everybody digitally, using their mobile app, withdraws funds from the bank, right? So what Ben, though, was saying is, these withdrawals will kind of stop, right? This need for the Fed to add to its balance sheet will stop after this liquidity

• 28:02Ryan Sean Adams?

  crisis is over. It almost felt like Ben was like, saying, okay, well, the bank run is kind of over, or it's in its end phase. Whereas I think what Arthur Hayes was saying is basically like, hey, this ain't stopping. People are going to continue. It might be a slow motion train crash, where people, rather than right away, over a 24-hour period of time, people over weeks and months, withdraw funds from the bank. There's a sucking sound from the bank into money market funds, into these higher yield, like DeFi pool accounts, that sort of thing. And what that will lead to is not a decrease in this number on the Fed balance sheet, but an increase, up to the tune, says Arthur Hayes, of close to $4 trillion,

• 28:45Ryan Sean Adams?

  which is like, the size of COVID. And whereas Ben was saying, no, this is temporary. We're not going there. The BTFP is a one-year program, and it's just liquidity injection, and then it's kind of done. Arthur was making the point that, like, done? No, it's never done. Like, the Fed starts something, then the financial system adjusts, everybody becomes dependent on it, and it becomes the new normal. And suddenly, you have a Fed balance sheet that is never going down. It's just perpetually going up. Can you help us square that? Like, is your idea basically like, hey, we don't know. It could be one or the other. It's too soon to call it right now. We'll just have to see how it plays out? Or is one of these theories clearly right?

• 29:29Speaker 02

  Right. Well, first of all, so everybody understands that DTFP, if that's too much for you, just remember, buy the fucking pivot. That's basically what it is right now. And that's what everybody's hoping for is that the Fed's gonna, it's gonna cause the Fed to pivot. Uh, and yes, as I'm more towards Arthur in this respect. What Ben, I think, was trying to say, I'm gonna put words in his mouth, and he can yell at me in Maine next time he sees me. Uh, is that, uh, is that the initial panic? Get your money out of all of these regional banks might be subsiding. Okay, I'm with you on that. But I'm with Arthur on the idea of, okay,

• 30:11Speaker 02

  so we're not gonna see a massive amount withdrawn from our bank in the next week or two that finds up going into FDIC receivership. At least best guesses is that problem might be behind us. But the outflows will continue over weeks and months until there's a reason to stop them. And the reason to stop them is my bank account's giving me 4%. A money market fund is giving me 4%. I have no reason now to leave my bank as far as the traditional people go. But if my bank account's giving me two basis points and a money market fund's giving me four, I have every reason to eventually, I don't have to drop my life and do it today, but in the next few minutes, when I've got some time, I'm gonna get on my phone and I'm gonna move my money to a higher yield.

• 30:56Speaker 02

  So that is going to continue. Over time, though, these banks should not only rely on a lending program to meet those outflows, because remember, these banks have to pay an interest rate, a market-based interest rate on those loans. These loans are not free. So yes, they're saying, here's a bunch of collateral. Give me a billion dollar loan, but they're paying 4% for that money. The banks are. So they don't want, they don't want to hold that loan forever because it's going to be a significant draw on their profitability. They will eventually sell securities, reduce their lending, uh, in order to pay back those loans

• 31:37Speaker 02

  by running the bank with more cash and less securities and less lending. Now, let me make a point here about a bank that seems to get lost in the discussion. And to my mind, it goes to why they denied custodia. I mean, I, I think they were wrong in doing it. But if you ask the Fed and everybody else, what is the purpose of a bank? The regulators and the bankers would answer to hand out loans. It is the lifeblood of the economy. Eighty percent of commercial real estate loans come from a regional bank. Fifty percent of personal loans, forty percent of commercial industrial loans come from a regional bank. That is their purpose. If you ask normies, what do you think the purpose of a bank is?

• 32:22Speaker 02

  They would say it's a warehouse where I put my money and they give me an interest rate. Well, that's this is the crux. What Custodia was offering was a safe warehouse for money. And the Fed looked at this and said, we can't have this. If everybody did this, no one would hand out a loan and that would hurt the economy. That's why I think.

• 32:41David Hoffman?

  Just to Jim, to provide some context on Custodia. Custodia was Cynthia Lummis's, no. Caitlin Long, Caitlin Long, excuse me. Caitlin Long's fully reserved bank in Wyoming. So a different kind of bank, a bank that's designed to be more than 100% fully reserved. So the opposite of a fractional bank. So that's, that's why Jim is talking about Custodia specifically here. Sorry, I just wanted to add that context, Jim.

• 33:05Speaker 02

  Yes, yes. And basically what they wanted was a license where if you have reserves with the Federal Reserve, they pay you an interest rate. So they were saying, you give me a dollar. I will put their, your dollar into a Fed master account. The safest possible place you could possibly put a dollar is in the Fed master account. Cause if it's not worth anything in the Fed master account, that means that all of society is done.

• 33:28David Hoffman?

  The world's on fire.

• 33:29Speaker 02

  Yeah, exactly. And so, and then I would then hold it in, in a form of cash in the Fed master account. So if a hundred percent of the money wanted to leave that bank in five minutes, they could convert, they already have the cash to convert it. The Fed is afraid of that banking model because they think banking, the purpose of banking is to hand out a loan. You and I might think the purpose of banking is to warehouse my money. And that's where the rub comes in between the two organizations, the two thoughts at that point. So what the Fed is looking at with the banking crisis is they're worried that lending is going to slow. That's called a credit crunch.

• 34:11Speaker 02

  And they are right, because if this deposit bleed continues and continues, a banker is going to sit there and go, I don't trust the liability side of my balance sheet. I don't know where my deposits are. Are they leaving? Are they staying? What causes them to stay? What causes them to leave? I thought I understood it. I don't. So what are we going to do about it? All those, all of those loans, applications that we have right now, they're on hold. I'm not going to hand out any more loans till I figure out what's going on with my deposits. And then you're going to have a bunch of commercial real estate guys going, I'm ready to go with my office building. I'm ready to go to build a new apartment. I'm ready, I need that personal loan. I need this business loan to expand my restaurant. And the banks are going to just say, no, no to all of that. And that could really hurt the economy.

• 34:55Speaker 02

  So that's the way the Fed looks at it. I know that the, the problem maybe with the biology argument is we're looking at it as a money warehouse. And we're not remembering the other side of the equation. And that is the, the lending part of the equation. So that's why this deposit flow thing is critically important. Do the banks understand why they're losing money? Well, I would argue they're really struggling with it because 90 days ago, 120 days ago, this wasn't happening. This is new since rates went above 4%. They don't want to believe the answer is kill my profitability, that I have to pay 4% for deposit rates and invest that money in a 4% loan

• 35:39Speaker 02

  or a 4% T bill, which leaves me no margin as the bank. They don't want that to be the answer, but grudgingly more and more, I think they're going to have to accept that that is going to be the answer. Until then, money is going to continue to leave and leave the banks. And where does that matter? No more lending. And if we have no more lending, then GDP and everything else could really take a dive. Earnings can take a dive because the economy is so, it is such a lifeblood for the economy to make sure that we continue to have lending.

• 36:09Ryan Sean Adams?

  But Jim, can they do that? Can they raise those rates without going insolvent? Is is kind of the question. And I know Ben did not like the term insolvency. So I'm not even quite sure what term to actually use here, but certainly a term that Balaji and Arthur Hayes did is basically like, there's that delta between what the money markets can provide and what the banks can provide. And his case was for the small community banks, they're basically insolvent because they can't possibly meet that higher deposit or interest rate without going going under somehow. Like that delta will

• 36:42Speaker 02

  Well, it depends on, it depends on what you mean by going under. Insolvent means that the bank has lost money and can't meet its obligations. What raising the deposit rate will do is make them unprofitable or less profitable in the best case. That's different from insolvency. I could, I can own, I can own a restaurant that is both solvent and unprofitable at the same time. I can own a business that's solvent and unprofitable, that those can be kind of two things. Now, over time, unprofitability can lead to insolvency. But that's really where the concern is. That's one of the reasons why I, if you, if you look at what the bank stocks have been doing, they've been going down and down and they

• 37:27Speaker 02

  really haven't been bouncing. And people have been saying, but the banks aren't insolvent. I'm like, yes, but they're not profitable. Or the fear is they're going to lose their profitability because they're going to have to raise those deposit rates and all of their margin is now going to have to be paid to depositors. That's why the bank stocks aren't going up. It's not because they're worried that the banks are going to collapse. It's just where's the profitability going to be in this environment? Now, the hopeful fix from a lot of bulls on Wall Street is at the first sign of a credit crunch. The Fed panics cuts rates. There you fixed the deposit problem into the market rate problem. You took the funds rate back down to 2% and the banks can still stay at 1%. And therefore you've you've you've fixed the problem without it going the other way.

• 38:11Speaker 02

  Well, the only problem with that is that requires tangible evidence. Then I'm going to use a technical term here that the shit is hitting the fan and it's hitting hard. And yet we don't have that tangible evidence just yet. And I'm talking about the economy. We don't have that tangible evidence just yet, but that's kind of the bull case. Oh, don't worry. The banks won't have to raise their deposit rates. The Fed will panic when they see it's hitting the fan and they'll cut rates.

• 38:35David Hoffman?

  So this part of this analysis, I'm I'm seeing a lot of overlap with my conversation with with Arthur Hayes, where he was saying that the the long tail of banks is what gives credit to the long tail of the economy. And I think you said something like this earlier in this episode, Jim, where just the regional banks of the world of the United States give out loans to their particular region. And so if the whole entire banking sector starts to become unprofitable and starts to not finance, not give credit to parts of the the long tail of the United States. The the net effect of this is the economy starts to suffer because the economy doesn't grow. Especially again, in like in the long tail, the big banks are fine and the big businesses totally fine.

• 39:16David Hoffman?

  But it's really, it's just like the the mom and pops, the main street of America is going to lose their credit. And and also banks are going to lose the value of their shares. And that part of the economy is going to halt at best. And so I just want to make sure that that you are in alignment with with what Arthur Hayes was saying, because these two analysis I'm seeing line up pretty well here.

• 39:37Speaker 02

  Yeah, yeah, exactly. So let me, let me put a a clarification on that and then something. The the majority of people in the United States work for a company of less than 100 employees. I do, you guys do, a lot of people do. That's where all of the job growth is. That's where a lot of the, that is where a lot of us work. Those businesses have specialized needs which regional and small banks have catered to. So if you run a restaurant in suburban Chicago, I'm in Chicago, and you need a loan, you go to a regional bank and there's a guy who's 45 years old, who's been handing out loans to restaurants for 20 years. And in 10 minutes, he understands why you need the loan.

• 40:22Speaker 02

  And now you're just talking terms and it's very simple and it's very clean. If you decide to call a JP Morgan Chase branch in downtown Chicago and get a 23 year old kid, a year and a half out of school, you got to spend a month explaining him the business of a restaurant before he's willing to extend that loan to you. And so that is the, that is where the regional banks come in. Commercial, commercial real estate lending is always local. It's what market are you in? And so you have bankers at the small banks that specialize in that. And if those small banks are in trouble, then you're going to see this. Now, where I agree with Arthur in, I would almost say, let me put this in, in biology terms. I agree, Balaji, $1 million in Bitcoin. And I agree in 90, but maybe not days.

• 41:06Speaker 02

  Maybe it's weeks, maybe it's months, maybe it's quarters, but it's nine, it's not going to be 90 days. It's going to occur a lot slower, but it will occur over time is where I think we're going. We have a new technology with the blockchain. We have new understanding about banking. We have new technologies with cryptocurrencies that are going to make, that are going to compete a fully reserved bank. Look, AVE is a fully reserved bank. Compound is a fully reserved bank. That's essentially what their business model is. Custodia is proposing to be a fully reserved bank. So is other more traditional ones that have been proposing this called the narrow bank

• 41:49Speaker 02

  and the reserve trust, which are similar, but not in the crypto space as well. That is going to probably come over time. And we're going to see a movement towards that way of finance, holding our money, getting interest rates, just not in 90 days. 90 days, like you said, is that's the world on fire. That is the, the absolute world on fire, everything crashing down among us that gets you a 40x return in Bitcoin, you know, by this summer. And this crisis is not that. It can. Be a slow bleed. It can take time and it could and it could metastasize into something worse, but it's going to take some time. It's not going to happen that quickly. This is not

• 42:34Speaker 02

  2008. This is not the banks handed out a bunch of loans. They're all bad. We just hit our hand on our foot and go, holy crap. We just now realized that they have all bad loans. They largely don't. It's more about they weren't giving anybody interest rates and everybody wanted their money back and they had, now they don't have cash. They've got a bunch of illiquid stuff and they're trying to convert it into cash and they're trying to figure out how to stop people from leaving every week because they're going off to get higher yields. Like I said, they're yield farming is what they're doing and that's new for traditional bankers.

• 43:07David Hoffman?

  Jim, there's a few other topics I want to talk about. I think this really leads us right into the topics of interest rates, especially if you're telling me that the long tail of America, the long tail banks, serving the long tail of the economy is on, on the limit of what they can really do. That, that brings up the country, the conversation of interest rates. Can we really raise interest rates anymore with even allowing that part of the economy to still maintain itself? So I want to talk about that next, but also there's this idea of like these swap, swap lines with the, the rest of the world. So I want to get your opinion on that and also just maybe play around with the idea of, okay, let's, let's hypothesize, what if we do get scope creep in the BTFP? What if it does stick around for longer in the ways that Arthur thinks that it does? So I think these are the topics that I want to bring up. I'm sure Ryan's got more as

• 43:52David Hoffman?

  well, but first a moment to talk about some of these fantastic sponsors that make the show possible.

• 43:58David Hoffman?

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• 44:39David Hoffman?

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• 45:24David Hoffman?

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• 46:06David Hoffman?

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• 46:50David Hoffman?

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• 47:10Ryan Sean Adams?

  Bankless Nation, here we are with Jim Bianco, trying to put together what is going on with banks in the United States right now, how that's going to affect treasuries, inflation, interest rates, everything, where we should store our value in the future. Jim, I, you know, I'm starting to put some pieces together here, and you're really helping to to square things between some of the episodes I, we had lately, particularly the Arthur episode and the Ben Hunt episode. And I think one thing that Ben Hunt was saying, which I think you're echoing is, look, banks are important as a facilitator of credit in the United States. And this is what Ben was very much reacting to. If you go and you replace the bank system with this warehousing technology,

• 47:53Ryan Sean Adams?

  as you called it, then you then you lose credit. And no one wants to lose credit because if we lose credit, we lose basically the last 100 years of civilization. I mean, our entire modern world is based in credit. And I think that's why he was reacting in such like, you know, in such a way to the argument. And then, but here on the other side is Arthur Hayes and Balaji, and they're thinking about like where to store value. They're thinking about the monetary system and they're looking at treasuries and they're looking at the Fed balance sheet and they're saying, no way treasuries are safe. So Ben, you're saying that treasuries are safe? Safe compared to what? You know, they don't see a a future of real returns on treasuries moving forward. Maybe there'll be some nominal returns, but they won't be real. Inflation will be higher than the actual returns.

• 48:38Ryan Sean Adams?

  And so they're saying, get out. Escape the system. And then Ben is saying, well, like, even if that happens over the long term, in 90 days, you guys are causing a bank run, Bology, and that's irresponsible. Like, you are making the problem even worse. And so this is the back and forth, and you're kind of helping us to square it. And you seem to be sort of somewhat in the middle. Like, you see both of these sides, and you see the elements where Ben is right, and you appreciate the value of credit. But then, I want to ask you this question about treasuries. So what is the prospect for treasuries? Do you think that they will, in the years to come or the decades to come, actually provide real returns, not nominal returns, but real returns to the typical, the average investor?

• 49:24Speaker 02

  Yeah, so, real quick about the banking system. It was actually invented in the 15th century. Fractional banking was invented by the Medici's. It was invented by the Catholic Church. And so it's been around for 500 years. In fact, the, one of the first banks ever created was Monte di Paschi di Saniya, which is in Siena, Italy, still in existence today. It was founded in 1472, and the folklore is, is that they turned down Columbus, financing him to the free world, and then he had to turn to the Queen of Spain as well. But point is, banks have been a tremendous facilitator of credit intermediation. You know, getting money to people that need it versus money that don't need, the people that have it and want an interest rate.

• 50:09Speaker 02

  It has done wonders for the human experience for the last 500 years. Now, I'm fully open to the idea that there might be a better way to do it. And crypto and DeFi is exploring those opportunities of finding different ways to do it. But to blow that up in 90 days is a very dangerous thing to do for the, for the economy. And as far as Ben's argument, as far as, you know, by saying that you're going to create a bank run, let me back you up to Wednesday, March 8th. That was the day that Silvergate Bank failed. Right after it failed, you had Liz Warren, Democrat from Massachusetts and Sherrod Brown

• 50:51Speaker 02

  at the House, or the Senate, excuse me, Financial Services Committee, both tweet out basically dancing on the grave of Silvergate. You crypto bros, you gotta learn your lesson. This is, uh, you know, that, uh, and that they were happy that a United States bank failed. That might have been the first time that a congressman in the United States ever celebrated a bank failing. Then the next day, Silicon Valley Bank realizes a $1.8 billion loss and the gates of hell open up. Did they inspire that? Did they put a sour taste in everybody's mouth by saying, "Congressmen like it when banks fail? And now we've got another bank suggesting that they have a problem?" My point is, now, of course, if Liz Warren was here with us,

• 51:36Speaker 02

  she would be ripping my head off for saying it, but the point is, you don't want to go there. You don't want to go there because the whole financial system operates on confidence. And if confidence is broken, it is very difficult to get it back. So, just a quick word about this long system. It's worked. There might be a better way to do it, but exploding this thing is not going to be the right way to go about it. Now, to your question about treasuries, you're right. Interest rates, treasury to interest rates. Interest rates are still at 4% or 5%. They're still yielding less than the inflation rate, the inflation rate, which is around 6% right now. So, if you put your money in a safe instrument like

• 52:18Speaker 02

  a treasury, you're getting less than the inflation rate. Your real purchasing power is getting eroded. And so, this is going to be a problem. I do think that over time, as this yield farming thing becomes more popular, you eventually will get some positive rate and inflation might come down a little bit more. Uh, so you might get some positive rate, but you're right that this is a concern. And if you want to turn it around, maybe I'm not getting enough in a 4% money market fund with a 6% inflation world, but sure, better than two basis points that I'm getting at Chase. So, that is an incremental movement

• 53:02Speaker 02

  that you're seeing people. But if the question is, where do interest rates go next? Let me answer the question this way. A month ago, you had me on a month ago, I would have said...

• 53:13Speaker 02

  The economy is doing okay. Interest inflation is probably going to continue to be sticky. The Fed's going to raise rates to 6%. That's where I was a month ago. And all the evidence was pointing towards that. And even Jay Powell, in his testimony earlier this month, before the banks failed, was even strongly hinting at that. Now you've got this banking thing. Now you've got this question about deposits. Now you've got a credit crunch. That could be changing that whole scenario towards now the economy is going to slow. The Fed's going to have to cut rates. For the bulls on Wall Street, this is the worst reason to cut rates. Cause everything's going down the crapper. You wanted them to cut rates because you thought inflation was going away and there was no need for high rates,

• 53:58Speaker 02

  which meant you could have had a bull market and trad high risk assets. But instead, you might see the Fed cut rates because things are getting deteriorating and getting worse. Unemployment's going up. Business activity slowing down. Can't get credit from a important part of the business. The collective of all of the regional banks. That is the concern that I think the Fed has. And everybody else is, in fact, if you listen to the Fed, whenever they talk about the banking system sound, usually the next sentence out of their mouth is they're still lending. Because for them, they're not as concerned about whether or not you get your money back or I get my money back. They're more concerned that lending, lending, lending, lending. And that lending occurs in a predictable and easy to see ways.

• 54:40Speaker 02

  Because without that, the economy is in deep trouble.

• 54:46David Hoffman?

  Well, the way that I'm hearing this is that the people, the crypto people and the risk on people aren't happy. Because even though we're getting, you know, interest rates cut perhaps. Uh, it's, it's like you said, happening inside an environment, an environment where the economy is suffering. And it sounds like the Fed isn't really happy because uh, they don't get to kill inflation and they have to cut interest rates anyways. It sounds like it's a movement where no one's really happy, which actually kind of for some reason makes it seem to make sense. Kind of.

• 55:15Speaker 02

  Yes, yes. And that's why you're, that's why you're seeing within the traditional markets, the volatility and interest. Is it some of the highest we've ever, ever seen? Some of the movements in the two-year note yield in measures of volatility in the bond market, which is called the move index, which is like the VIX of the bond market, just missed an all-time high, all-time high last week. And it's because of this uncertainty. Is the economy going down? And is the Fed going to have to aggressively cut rates? Well, there's an argument, a strong argument to be made there. But what if the economy doesn't go down and we just stimulated an already overstimulated economy? Man, we're going to have an even bigger problem. There's the move index. This is like the VIX of the bond market. March 15th, which was last week,

• 55:59Speaker 02

  it hit one of the highest levels we've ever seen. That would be like the VIX in the stock market being at 80 is where the bond market's equivalent is. If you're familiar with the VIX in the stock market, that's like where we were in March of 2020 or where we were in the middle of the financial crisis in 08. In fact, you could see the only other time that we saw that the VIX has ever been higher was October of 08 in the middle of the financial crisis. So the bond market, like I said, on the one hand, it's saying, yeah, I see the story. The economy is going to go down. The Fed's going to have to wheel around and cut rates aggressively. But then there's also this other story that, no, we're just extra stimulating and creating more inflation. When this is over, this, this banking crisis is over, the Fed's going to have to raise rates even more aggressive.

• 56:44Speaker 02

  So you, since you've got these two wide tail outcomes, you see this wild volatility in the bond market right now because the market is unsure as to what to expect next. And so it's trying to vacillate between those two scenarios. And it really comes down to, what do you think about the banking crisis? Is it a crisis or is it not? Some people still think it's going to go away in a couple of weeks. Maybe, you know, you never know. I still think it's going to be like this dull drip of money just continuing to hemorrhage, not hemorrhage, but bleed out of the banks. I, I don't think it's going to be a hemorrhage where people are panicking and banks left and right are going to have to close by the day.

• 57:29Speaker 02

  But you can't rule that out either. But if it is that dull drip. It does pretend the idea that the Fed will be cutting rates. If it goes away, they're going to have to raise rates even more aggressively. There's no middle outcome here. So it's like one extreme or the other, and we're kind of caught in the middle. Where we're not going to get anything. This is just showing you the blue line here is what's called the terminal rate. This is where the market thinks the Fed is going to stop raising rates. And the orange line is the actual funds rate. And for the first time since they started raising rates, they've converged. So the market is starting to price in the Fed's done. That there will be no more rate hikes.

• 58:06Speaker 02

  But it's all predicated on this banking thing is gonna last and gonna be a bigger problem than the Fed thinks. But maybe not as big a problem as biology thinks. So there's somewhere in the market, somewhere in the middle with this right now.

• 58:21David Hoffman?

  So Jim, I remember the, when we had you on during the, the pivot, the big pivot, March of, of 2022. I remember seeing a tweet of yours prior to, to bring you on. You talked something about like a phase change in the market. It was like a new, a new paradigm for even though that, that, that phrase is, uh, means a lot of things to a lot of people.

• 58:40Speaker 02

  It's very overused.

• 58:42David Hoffman?

  Yeah, it's very overused, but a phase change, I think, was really, really the, the phrase that, that stuck with me. Uh, and then for, for all of people like me who hadn't really experienced interest rates in the way that we have in the last year. Uh, fast forward to where we are now, and I now really, really know what that phase change really means. And, and so for the last year, the whole entire crypto industry and most of all of Wall Street has been like, when's the pivot? When's the pivot? When's the pivot? And what I'm hearing from you is like, that's no longer really the big question. And even though that perhaps we are signaling that the end of the heightening interest rate cycle is here. That's not really the, the, the, the moment that we're all looking for, right?

• 59:23David Hoffman?

  But it does kind of seem that aside from that, that we are doing a, a phase change thing. As in, we are going from one type of market structure to a new type of market structure. And I think if the listener just went back and listened to this episode that we just recorded all over again, they would understand what that phase change means. But I'm wondering if you could really just summarize it for us in a really punchy, just like a summary, a TLDR. Like what is this phase change doing for the market?

• 59:52Speaker 02

  The marketplace for the last year was hoping for a pivot, meaning that the Fed would stop raising rates and cut rates, because they were hoping for it to be a positive reason. The inflation is done, inflation's going down, things aren't as bad, Jay, as you think they are, stop raising rates. And so they celebrated every idea that the Fed would pivot for a positive reason. What we might be doing is phase changing to a negative reason. The Fed's going to give you the pivot, but they're going to give you the pivot because we've got a credit crisis in regional banks, hurting the economy, causing businesses to lay off people and reduce activity and responding to that.

• 1:00:35Speaker 02

  That's not a good reason to be pivoting. That's not a reason to be buying stocks if that is the reason that we're pivoting. What is coming out of this is something that I've been, probably in all three of the previous episodes I've been on with you, I've said, I really want to see the crypto space decouple from TradFi. That if it wants to be an alternative way of managing money, you know, through DeFi, a currency to control inflation through the cryptos, then start acting like it and don't act like a levered version of the ARK fund. Well, that started to happen now in this recent period.

• 1:01:20Speaker 02

  The correlation between the NASDAQ and Bitcoin, to use one metric, has gone away. And if this continues to be the case, and I hope it is, you could point to crypto to say now they're finally starting to show that they're independent, that they are somewhere you go in periods of stress. It isn't just, like I said, you know, if you're bullish on, if you're bullish on the stock market, you'd really like, you know, buying ARK and you'd really love owning Bitcoin, all for the same reason. Well, now the reason to own Bitcoin is different than the reason to own the stock market. That in the long run is really good for crypto. It's finally starting to break and hopefully crypto will continue to show itself as an alternative

• 1:02:06Speaker 02

  and not just a levered bet of the existing system. So this is part of what this phase change is doing. At least in making people rethink interest rates, but maybe rethinking the role that crypto has. And thank you that it's not just a 3X version of the art fund anymore and that it's something more than that.

• 1:02:25David Hoffman?

  I think this is kind of the interpretation I've really gotten out of this whole just banking crisis thing. And also this episode is that now, now that we are doing this whole, we're, we're at the end of the heightening cycle for interest rates. And things, things just seem much more real as in the Fed has to respond to the actual real decline in the economy that's threatening it. Crypto has to actually answer to this new perspective that so many people have about what it means to be Bitcoin or what it means to be a bearer asset. And I think just because where we're at in the market cycle, I think if we want a bull market in our assets, it's no longer going to be because of an easy money paradigm.

• 1:03:10David Hoffman?

  It's going to be because that asset class earned it and earned it on real terms. And for some reason, it just kind of feels that the last three years of me doing this podcast with Ryan, we were just talking about the disconnect between the stock market, the Wall Street and the actual economy. Those were just two different games. And like my gut instinct here, Jim, and I want you to check me on this, is that that paradigm is, that phase change is ending. And start, we are starting to actually respond to the real parts of the economy, the real GDP, the real signs of health in our financial assets. Am I naive in that kind of gut instinct?

• 1:03:49Speaker 02

  No, that's, that's the hope. That's the hope of that what's happening here is we're starting to see the problems within the TradFi world. You know, I said something nice about banks, but also keep in mind, two things can be true at once. They've been a fantastic tool for credit intermediation, but they're also levered. A fractional reserve system is, you know, you give me a dollar and I turn that into $11 of loans and securities. So I'm inherently levered. So they're inherently unstable. So for that 500 years that we've had banks, we've had bank runs and bank failures and bank crises. It was the 1907 financial crisis that was the catalyst for the creation of the Federal Reserve. We

• 1:04:32Speaker 02

  invented central banks. The Swedes invented the first central bank in 1668. Yes, 1668, because they needed a backstop for a levered fractional reserve system. Well, this is part of the problem that we're maybe remembering, that while banks are necessary for loans and they serve an important purpose, more than being a money warehouse, they're also inherently unstable. So two things can be true at the same time, which is why we have to have a crisscross of regulators and a Federal Reserve with a money printer to back them up. And now we're starting to say, is there a better way to do this without it always being like we're always perpetually one foot on the banana peel, waiting to slip and fall? And that's where crypto and DeFi are

• 1:05:14Speaker 02

  waving their hand over here and saying, we got a better way. And the benefit might be 2022, because you might say, yes, but your prices all went down and you had all these problems with 22. Yeah, but the main DeFi protocols, the Uniswap, the Aves, the balancers, the curves, the makers, they just worked. You didn't like the prices, they worked, they didn't need a bailout, they didn't go down, they didn't stop, they didn't crash, they just worked. Isn't that what we want out of our financial system? Is it just works? It's a utility that's always there. It's like the lights on. I don't have to worry about You know, the transmission lines or the power plant, I just turn on the lights. And that's what I want out of my financial system.

• 1:05:57Speaker 02

  It's just there when I want to do a transaction, when I want to swap my money. I don't have to think twice about it. But for 500 years, while we've had this banking system that has been great at credit intermediation, we've constantly had to think about what if it has a problem? And so that is a positive that could come out of last year with crypto. It just works and we proved it because we we put it through a stress test last year. In the first problems of stress tests, after 500 years, we still can't get the traditional banking system not to have problems. So this is going to be, I think, very positive for crypto going forward because it just raises its hand. Go, I got a different way here. I got a different way and take a look at it from that perspective.

• 1:06:40Speaker 02

  And I think that's what we might be seeing, which is why the, you know, we're starting to see the divergence with TradFi.

• 1:06:47Ryan Sean Adams?

  So Jim, this has been tremendously helpful. Can't thank you enough for for coming on and help us make sense of this this journey of episodes. We've been on to try to understand this. I have I have one last question for you. So in this new phase change, Jim, like, what are you doing from an asset allocation perspective? Like, what has changed for you? Part of Balaji and Arthur's message to us is is very simple, right? Balaji was buy Bitcoin. That was his message. Arthur was you don't want to have inside money. You want to have outside money and inside money. To him, his definition was inside of the banking system, the fiat regime, all that debt. You were just talking about the banks have accrued. That's inside money. You don't want to be left holding the inside money bag.

• 1:07:31Ryan Sean Adams?

  So you want to exit, right? So hard assets was a part of his play. What do you think in this new new phase chain? How a phase change? How are you positioning?

• 1:07:41Speaker 02

  Well, you know, I've got my my, I've got my standard crypto holdings and those haven't changed for a year and a half. And these those won't change for the next year and a half. Everything from Bitcoin to Ethereum. Hell, I even have some still have some of my people tokens and my ENS drop. And I've got all kind of other. All kind of other fun stuff. You know, one of the, one of the problems with crypto is I, I was just looking at my Zapper account going, man, I forgot about that wallet. You know, I got some damn wallets. You're one of us. Yeah, I got, I got somebody and I, I had to add it to my Zapper account to make sure it was being properly, uh, cause it's so easy to create a wallet. But within the TradFi world, I'm a yield farmer right now. I have got almost all of my money in a safe.

• 1:08:27Speaker 02

  Four and a half to 5% treasury bill, money market fund, or therefore equivalent. The only money I'm keeping in the banking system is money I need to meet immediate expenses. I'm not doing that. Cause I'm afraid of the banking system. I'm doing that because I'm like, I'm not giving Chase two basis points. Or I'm not going to allow Chase to give me two basis points. I want more out of my money. And now that I see a very unsafe world, I'll take my four and a half, 5%, thank you very much. Uh, and I'll wait until I get some clarity on what's going to come next i- in the market. The long-term return on stocks is supposed to be 9%. That's what at least the academics have told us.

• 1:09:11Speaker 02

  I can get five with a money market fund or a treasury bill with zero risk, zero risk. Again. Yes, it's a treasury bill. Oh, but the treasury is not going to pay. Okay, fine. We're back to the barter system and it's, you know, some version of a Mad Max movie. If the treasury stops paying us, but if you accept that, that over the near term, that's not going to happen, near term being the next couple of years. That's a pretty damn good place for a TradFi person to be. You're going to get 60% of what you would expect out of the stock market with no risk. Um, whatsoever, while you wait to see some clarity in what's going to come next. So that's. Pretty much where I've been and I have some other screwy things. I still have some gold and I think I've still got that from the, from the George Bush administration.

• 1:09:56Speaker 02

  I've owned it there for that long and I've got some other, uh, types of deals as well. But the big thing that I've done is I've become a yield farmer like I've described. And I probably started it like a lot of other people did around this late summer or fall, when I started realizing. Why do I keep all this money in a bank when it's giving me nothing, when I can move it into a money market or buy a T bill and get, or, uh, and get a lot more?

• 1:10:17Ryan Sean Adams?

  That is super interesting. So Jim there with the dry powder sitting in the hottest yield farm around, which is the good old fashioned money market, not in crypto anymore.

• 1:10:26David Hoffman?

  I always wanted DeFi summer to return.

• 1:10:29Ryan Sean Adams?

  It's TradFi this time, David.

• 1:10:30Speaker 02

  It's TradFi. It's TradFi spring.

• 1:10:36Ryan Sean Adams?

  Jim, this has always been a lot of fun. Thank you so much for enlightening us on all of these things. I feel better, David. I don't know how you feel, but this world is making a bit more sense after this exchange.

• 1:10:45David Hoffman?

  Yeah, yeah, we should have just gone straight for Jim the first time.

• 1:10:48Ryan Sean Adams?

  No, we had to take this journey.

• 1:10:50David Hoffman?

  Had to take the meandering route, yeah.

• 1:10:51Ryan Sean Adams?

  Thank you so much. We appreciate you.

• 1:10:53Speaker 02

  Thank you. I appreciate it.

• 1:10:55Ryan Sean Adams?

  Bankless Nation, of course, got to end with risks and disclaimers. None of this has been financial advice. Crypto is risky. So is DeFi. So is the banking system. Your good old savings account ain't what it used to be. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.