171 - What Causes Bubbles? with Edward Chancellor - "The Price of Time"

Edward Chancellor is a financial historian, journalist, and author of, "Devil Take the Hindmost: A History of Financial Speculation" and his latest, “The Price of Time: The Real Story of Interest” The two books link together the history of money and finance, and human culture. In today’s episode we explore the ways in which money and finance is embedded deeper in our lives than we may have previously thought. ------ ✨ DEBRIEF | Unpacking the episode: https://www.bankless.com/debrief-edward-chancellor ------ ✨ COLLECTIBLES | Collect this episode: https://collectibles.bankless.com/mint ------ 🪂Airdrop Alpha is waiting for you on Bankless 🪂 https://bankless.cc/AirdropAlphaIsOnBankless ------ We’re living in the era of Central Banker Capitalism, low interest rates and everything bubbles. Is this a new era? What does history tell us will happen next? Edward Chancellor is going to help us answer these questions. And along the way, you’ll learn timeless lessons about interest, debt, and the time value of money. ------ BANKLESS SPONSOR TOOLS: 📣 SWELL | Stake with Swell https://bankless.cc/Swell ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🧠 AMBIRE | SMART CONTRACT WALLET https://bankless.cc/Ambire 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap 🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask ------ TIMESTAMPS: 0:00 Intro 8:24 Edward’s Book Overlap 19:32 Speculative Bubble’s Inevitability 26:27 Interest, Debt, & Loans 31:15 Debt Jubilee & Inflation 35:05 The Necessity of Inflation 41:55 The Natural Rate of Interest 53:35 The Everything Bubble 1:04:10 The Price of Time 1:07:38 Devil’s Take the Hindmost 1:10:40 Have We Learned From Past Bubbles? 1:17:30 Austrian vs. Keynesian Economics 1:21:20 Edward’s Thoughts on Crypto 1:38:50 Predictions: What Happens Next? 1:42:27 Closing & Disclaimers ------ RESOURCES: The Price of Time https://www.amazon.com/Price-Time-Real-Story-Interest/dp/0802160069 Devil Take the Hinemost https://www.amazon.com/Devil-Take-Hindmost-Financial-Speculation/dp/0452281806 Primitive Money https://www.elsevier.com/books/primitive-money/einzig/978-0-08-011679-2 Digital Chicago Plan - Column In Breakingviews https://www.breakingviews.com/columns/digital-chicago-plan-fixes-many-financial-woes/ Irving Fisher 100% money https://mises.org/library/100-money ----- 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.

• 0:00Speaker 00

  Time is money. Once you realize that time has value, then it should start becoming immediately clear that taking interest rates, the price of time, down to zero is highly unnatural. It would be like depriving an animal of oxygen. And taking them to negative becomes almost insane.

• 0:28Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. We're living in this era of central banker capitalism. We have low interest rates, everything bubbles. Is this new for humanity? What does history tell us might happen next? Today, we have financial historian Edward Chancellor, who's going to help us answer these questions. And along the way, we learn timeless lessons about interest, debt, and the time value of money. A few takeaways for you, Bankless Nation. Number one, we talk about what causes bubbles. Is it low interest rates or the madness of crowds? We've certainly seen a lot of both in our crypto journey.

• 1:13Ryan Sean Adams?

  Number two, can we get away from bubbles? Are they just part of our DNA? Number three, what happens when that natural rate of interest becomes unnatural? Number four, after decades of studying the history of money and finance, who does Edward think is right? The Keynesians or the Austrians? Number five, what does Edward Chancellor think of crypto? How do they relate to central bank digital currencies? Really spicy takes near the end. And number six, what happens next? That's what we're all trying to figure out. David, what's the significance of this episode? What should folks get out of this?

• 1:47David Hoffman?

  For Bankless listeners that have been paying attention, I've brought up this book, Devil Take the Hindmost, throughout a handful of Bankless podcasts. Edward Chancellor is the author of Devil Take the Hindmost. So one of my favorite books about money and finance that I think teaches us really important lessons. And he's also written a more recent book called The Price of Time, which is a study of interest rates. And I really think these two books are yin and yang. They're two sides of the same coin.

• 2:15David Hoffman?

  Today on Bankless, where we talk about the frontier of money and finance, we're actually talking about the history of money and finance up to this point. And I think really why this episode is so significant and why Edward, as a financial historian, is so significant is that it's about money, it's about finance, but it's also about humans. It's also about the interest psychic layer of what makes these things happen. Because again, money is just a story that we tell ourselves. Finance exists in the minds of humans. And so Edward does a great job just running through history and watching humans try to contend with these things that we've created, these naturally emergent phenomenon like interest rates and financial bubbles.

• 2:59David Hoffman?

  And so I think without a complete picture of understanding money and finance that goes down into the human level, the sociological level, it's actually an incomplete story. And so I think Edward can probably give us, I think he gave us, the most comprehensive, unabridged articulation of the progress of money and finance because he adds in that social layer. And then when we get to the end and we ask him about his current opinions in the modern day state of things, state of affairs, including this new player in the game, crypto. He is an older historian. He's seen some decades, but he really resonates with the crypto story. And I thought that that was particularly interesting.

• 3:41Ryan Sean Adams?

  It's very cool. He resonates particularly with this idea of money as freedom technology, which is when we get it right, that it can bring freedom to the world. And that's certainly something that the crypto story resonates with. Also, David, he's just a delight to listen to. You mentioned he's from an older generation, a generation that uses words like skullduggery and knaves. So just an absolute delight to listen to and talk with. And as usual, all Bankless citizens have access to the debrief episode, which is the episode that David and I are about to record, record it after this episode. David, I'm really excited to get into this topic with you. I know you are a huge, you're a super fan of these books and there's so much that Edward unlocked that I want to talk to you more about. Of course, you can be

• 4:24Ryan Sean Adams?

  If you click the link in your show notes and access the premium RSS feed, well, you get access to that debrief episode and all of our special bonus content that we only put out on the premium feed. Guys, we're going to get right to our episode with Edward, but before we do, we want to thank the sponsors who made this possible, including our number one recommended crypto exchange, Kraken. Go check them out.

• 4:46David Hoffman?

  Kraken Pro has easily become the best crypto trading platform in the industry. The place I use to check the charts and the crypto prices, even when I'm not looking to place a trade. On Kraken Pro, you'll have access to advanced charting tools, real-time market data, and lightning-fast trade execution, all inside their spiffy new modular interface. Kraken's new customizable modular layout lets you tailor your trading experience to suit your needs. Pick and choose your favorite modules and place them anywhere you want in your screen. With Kraken Pro, you have that power. Whether you are a seasoned pro or just starting out, join thousands of traders who trust Kraken Pro for their crypto trading needs. Visit pro.kraken.com to get started today. Bankless is launching the Bankless Token Hub. At Bankless, we've been studying the crypto markets ever since 2017, and all of our research has led us to this,

• 5:30David Hoffman?

  the Token Hub. You're a one-stop shop for alpha to help you navigate through the crypto markets. Have you ever wished for a trusted resource that would share their thoughts, ratings, and their opinions about tokens? Boy, do we have the product for you. The Bankless Token Hub is where we provide Bankless citizens with the alpha on the hottest tokens in crypto. We do the research, so you don't have to. The Bankless Token Hub includes the Token Ratings, where our team shares their research and outlook on the hottest tokens in crypto. Also, the Token Hub includes Bankless Bags, our own internal investment club. Bankless Bags is where we put our money where our mouth is. And for the Bankless power user out there, you can access the analyst team 24/7 inside the Bankless Nation Discord. You can ask them questions and learn from a group of people deep in the weeds of crypto investing.

• 6:14David Hoffman?

  The last feature of the Token Hub is the ability to upvote or downvote token ratings. The Bankless Token Hub lets you learn from your fellow citizens to rate these tokens yourselves. The Bankless Token Hub is launching right now, and it's already been beta-tested by your fellow Bankless citizens. So stay tuned in the Bankless Discord for updates. And if you're not a Bankless citizen, well, you better sign up if you want. Access because this corner of Bankless is available for citizens only. I'll see you in the Discord. If you haven't experienced the superpowers that a smart contract wallet gives you, check out Ambire. Ambire works with all the EVM chains that are out there. The layer twos like Arbitrum, Optimism, and Polygon, but also the non-Ethereum chains like Avalanche and Phantom. Because of the power of smart contract wallets, Ambire lets you pay for gas and stablecoins, meaning you'll never have to spend your precious ETH again.

• 6:59David Hoffman?

  The web app has numerous fiat on-ramps to make it easy to dump your fiat for crypto. And if you like self custody, but you still want training rules, you can recover a lost Ambire wallet using an email and password, but without giving the Ambire team any control over your funds. Check it out at ambire.com for the web app experience. But also, the Ambire mobile wallet is coming soon for both iOS and Android. And if you want to be a beta tester, you can sign up at ambire.com/app. And since you stayed to the very end of this ad read, you should know that Ambire is airdropping its wallet token to early users for simply just using the wallet. So if you want to get started with Ambire, all the links that you need are in the show notes. Bankless Nation, I would love to introduce you to Edward Chancellor. He is a financial historian, a journalist, and an author of two of my favorite books,

• 7:44David Hoffman?

  Linking Together: The History of Money and Finance and Human Culture. The first book, Devil Take the Hindmost: A History of Financial Speculation, I've brought up a handful of times across other podcast episodes. And this one explores the history of financial bubbles and their underlying causes. And Edward's newest book, The Price of Time: The Real Story of Interest, is a similar book in which it explores the story of interest from its roots to the modern day, and how our relationship with interest has developed. So today, on this episode, we are going to explore in which the ways of money and finance is embedded deeper into our lives than we have previously thought. Edward, welcome to Bankless.

• 8:22Speaker 00

  Pleased to be with you.

• 8:24David Hoffman?

  Edward, these two books, Price of Time, Devil Take the Hindmost, they focus on different things. But I want to start and open up this conversation about where they actually overlap. One is about financial bubbles. The other is the story of interest rates. But if these were two Venn diagrams, how would you define the overlap between these two things? What do these two books have in common?

• 8:46Speaker 00

  Well, the overlap is most clearly in the area of financial speculation and bubbles. The first book, Devil Take the Hindmost, deals with a With a looks at a variety of different bubbles over time and examines them in in different ways, what generates the bubble. For instance, you might get new technologies or you might. Technology is the most obvious example, but there are other types of bubbles you get, real estate bubbles and so forth. And that was written in the nineteen nineties when the tech bubble, the dot com bubble was beginning to take off.

• 9:29Speaker 00

  The second book is exclusively about interest and the role that interest plays and and what happens when interest rates in particular fall to very low levels. And what I that also has a lot of discussion of speculative bubbles historically and and and up to the recent day. And what I argue in the second book is that you can you could you could the focus on speculative bubbles from an academic perspective in the last twenty odd years has been on behavioral finance, people going crazy, the what you call the madness of crowds.

• 10:12Speaker 00

  What I'm trying to draw attention to in the in the new book is how very low interest rates are a main cause of speculative bubbles. So it's I don't have any discussion really of speculative of of behavioral finance or of irrational exuberance in the new book. I simply go back and look at some of the same cases I do in the first book, such as the tulip mania or in Holland of the sixteen thirties. And what I hadn't realized when I wrote the first book is that actually the in Holland in the sixteen thirties was was a period of falling interest rates and of a massive

• 10:57Speaker 00

  increase in the Dutch money supply created by the central bank.

• 11:05Speaker 00

  The Dutch had a central bank who's at the time called the Wiesel Bank, which was founded at the beginning of the of the 17th century. And the Wiesel Bank actually issued notes, paper notes backed by gold currency. So in principle, it couldn't create credit. But its its notes were so popular that foreigners brought their money to Holland. And the and and so you saw an increase in the paper supply of money and falling interest rates. And that coincided with this great speculative bubble, the first great speculative bubble in tulips. And then I look at a series of other bubbles in the second book, most notably, as you

• 11:49Speaker 00

  know, the and in most detail, the the bubble created by John Law, the Scottish adventurer who founded the Mississippi Company in France in the 1710s and who also established the first French central bank that issued a pure paperback currency and lowered interest rates. We can talk about that a bit later. And then really, the discussion of speculative bubbles and interest rates in the second book goes right up to what we've been living through in recent years, the the so called

• 12:28Speaker 00

  everything bubble, which, as Charlie Munger, the Warren Buffett's partner, said back in 2020, was the most extraordinary episode in the history of finance. And I've read quite a lot of the history of finance over the years, and I'm inclined to agree with with Munger.

• 12:49David Hoffman?

  We're definitely going to zero into that part of the conversation towards the end of this podcast. But first, I want to articulate to you why these books are so meaningful to me and get your reflections on it. But to me, both of these books are about like natural financial phenomena. Interest rates is like a naturally occurring phenomenon. And same thing with these financial bubbles. I think anyone who reads Double Takes the Hindmost. Will immediately realize that humans will create financial bubbles when you leave them to up to their own devices. And so to me, the your journey in writing these books has always been to explore like, once upon a time, humans created money and finance.

• 13:31David Hoffman?

  And the progression of money and finance has been like us trying to figure out what to do about that. And slowly iterating towards the future by making many mistakes along the way. But then inevitably do like making progress in the world of money and finance. That's my interpretation of of these books. How would you reflect on that?

• 13:51Speaker 00

  Yeah, I think that's a reasonable way of categorizing it. Are speculative bubbles inevitable? And the answer is probably yes. And I think in particular, say, when you get a new technology whose whose outcome is uncertain. And there's a need to try out different sort of business models that need to draw in a lot of capital to explore the new technology.

• 14:25Speaker 00

  And the new technology doesn't probably doesn't have the the cash flow that you can in the a cash flow that you can latch upon to ascertain what its fundamental value will be. So I think what I say in the first book is that the speculative bubbles bring on the new technologies such as railroads in the 19th century or motor cars or radio in the in the 1920s and internet technology in the in the tooth in the 1990s, early 2000s. But it doesn't tend to be a very good deal for the investors or speculators in the new technology.

• 15:10Speaker 00

  And it tends to, once the bubble has has collapsed, tends to really result in a transfer of wealth from the speculators to the consumers who get the new.

• 15:23Speaker 00

  The new services of the technology at, if you will, a discounted price. And that book was published, Devotee the High Miss, published in ninety nine. And so the dot com bubble, T M T bubble, as we call it, technology, media and telecommunications bubble hadn't hadn't quite come to an end. It had about had about sort of eight, nine months left to run. But there you we have quite a nice case that demonstrates the argument of the book. Because if you remember, there was massive investment in fiber optic cables that were

• 16:01Speaker 00

  necessary to carry the new data, the internet data. And that was based on, at the time, the late nineteen nineties, on forecasts for data traffic growth that were massively exaggerated. And we had tremendous overinvestment in fiber optic cable. And shortly afterwards, there was then a slew of telecoms bankruptcies, including the massive WorldCom bankruptcy.

• 16:40Speaker 00

  And we were left with ninety five percent excess capacity in fiber optic cable. And that really was, you know, as I say, not not a great deal for investors, but pretty good for people who were starting up tech firms and consumers of of internet technology in the early two thousands. So you could say it's a misallocation of capital, but it also provides the backbone for the new technology to take place. So there's a case in which, if you will, the the bubble is serving a function, but just not serving the speculators' specific financial requirements.

• 17:21Speaker 00

  Go as to the nature of interest. As you say, this is a. This is something that is natural to man, mankind. And I argue in the book, as you know, that interest arises right at the dawn of history. We have records of interest being charged five millennia ago. And in fact, if you look into the ancient languages, you find that the word for interest in most of the ancient languages of the Near East was related to the offspring of livestock, of cattle, of sheep and goats.

• 18:03Speaker 00

  And what that suggests is that the early farmers in prehistoric periods were lending out their livestock and their grains and demanding an interest payment. So the fact that interest is just so much older than even money is telling you how fundamental it is to human activity. But we also, a great body of the study of interest has been around what economists call time preference. And time preference is the notion that human beings are naturally impatient.

• 18:48Speaker 00

  We are mortal and we prefer to have things today rather than at some stage in the future. So the reason I called the book The Price of Time is because really what interest is, is the difference in value between a dollar today and a dollar in a year's time. And you can see that, you know, in finance, we talk about that as discounting. And the sort of discounting of future pleasures is an inherently psychological phenomenon. It seems to be, again, a natural phenomenon.

• 19:32David Hoffman?

  So going into the details of the price is time, at the beginning, it tells a story like the very beginning of interest, as in like humans discovering interest, humans were skeptical. We called it usury, right? And this, the idea of it was, it was closer to the, it was closer to exploitation than it was alone. So I'm wondering if you can kind of illustrate why humans had this like distrusting relationship with interest in the early days and as our relationship with interest progressed, how we got over that obstacle?

• 20:06Speaker 00

  Well, we haven't really completely got over it, as I point out-

• 20:11David Hoffman?

  Well, that's funny, because that's where my next question was.

• 20:15Speaker 00

  You know, the, as I point out in the book, you get criticisms of lending at interest, for instance, in the, in the Bible, the Greek philosopher, philosophers such as Aristotle, said that interest was illicit. He said that money was to be used in exchange, but not to gain through lending. And that criticism then informed the sort of the early church period, and then, you know, the medieval church through to, let's say, the, you know, the early modern period, birth of capitalism. Why is there such dislike of interest? I think

• 20:57Speaker 00

  it's legitimately, if you are in a, in a traditional rural society and economy that has no economic growth, then the lending at interest, at high rates of interest, quickly takes people into a position of over indebtedness. And in the ancient world, that could lead to people being taken into debt bondage and ultimately slavery. And in fact, there's some argument that lenders deliberately-

• 21:38Speaker 00

  Lent in order to enslave people through their high interest loans. And then there's this, the, the problem of, of compound interest, that interest, that of debts accruing at a high compound rate over a number of years. And that also, that's really what gets people into, to deep trouble. Co- compound interest over a long period i- i- is a, is a phenomenon that's impossible to overcome. There is, I think in the eighteenth century, um, someone, a, a British um, statistician calculated

• 22:18Speaker 00

  that if a, a, a gold sovereign had been lent at the time of our Lord and compounded at two percent a year or thereabouts, by the mid eighteenth century, the, the gold would have grown to two and a half globes the size of the earth. So you can see that you can't really compound, um, you can't really compound loans at even a relatively small rate over a long period of time without the debt becoming insufferable. So in the, in the, in the ancient world, they had these things called, called debt jubilees, which is the forgiveness of debt. Uh, uh, the Israelites, I think, had debt jubilees every fifty year. The Greeks had occasional jubilees.

• 23:02Speaker 00

  The famous uh, Athenian law giver Solon uh, actually came to power at a time when uh, lenders were, had taken a lot of, had more, had, had taken a lot of land through mortgages and he forgave the debts. And in the, in, in Babylon, new rulers would, um, would, would forgive debts when they came to power. So the jubilee is, is a, or the forgiveness of debts that have been compounding was, was a feature of the ancient world. But you still need interest.

• 23:39Speaker 00

  I mean, you may have it too high, but Aristotle got it wrong. When he said that interest, you know, money is not to increase through loan. He doesn't consider what I just mentioned before, the time dimension of the loan. It's quite clear that if I was to give you a dollar and ask for it immediately back, it would be exploitative and unjust to demand more than I'd given. But if I give you some money and you give it back to me after a period of time and you use that loan to buy a house or engage in a business or whatever that is profitable to you. It's perfectly reasonable that I should demand some share of the profit.

• 24:24Speaker 00

  And in fact, without interest, there are so many things you can't do. You can't fund businesses. For instance, in the ancient Near East, merchants' voyages were funded with loans. The real estate market in Mesopotamia was funded with loans. So you need the interest in order to provide quite basic functions. And of course, I forgot to mention that, of course, in the ancient Near East, loans of grain were also used for agricultural purposes, just as farmers borrow today to farm. So you need it. And then eventually, by, let's say, the 16th century,

• 25:08Speaker 00

  capitalism has become so well established in Europe with merchants trading across Europe and using credit instruments that embed a rate of interest, that it becomes really futile to continue with these religious strictures against interest. And at the time of the Reformation in the early 16th century, there is a shift in the religious attitude towards us. Martin Luther actually was rather old fashioned in this respect and continued to denounce lending at interest.

• 25:52Speaker 00

  But John Colvin in Geneva.

• 25:57Speaker 00

  Not surprisingly, Home for Bankers was actually favorable towards charging interest. And so from the 16th century, the argument is not so much whether interest is legitimate or not, it's just there's some, there then continues an argument, I suppose we can, my book continues it up to the current days, is what should the rate of interest be? Not should there be any interest charged, but what should the rate of interest be?

• 26:26Ryan Sean Adams?

  That is the question, and I think that's a very modern question as well. It's one we grapple with and want to come back to this idea in a minute, Edward, of the kind of the everything bubble, because this might be, I think you are hinting at, this might be an interest rate problem. But just back on that kind of line of thought, it seems like what you're telling us is, interest is deep, it's fundamental, it's necessary for society, it's even an earlier form of social technology than money, which is something we've talked about a lot on Bankless. So, society recognizes throughout the ages, it needs interest. And yet, we also recognize that after a certain amount of time, it kind of, its utility erodes

• 27:08Ryan Sean Adams?

  or needs to be kept in check because of this network effect of compounding interest, maybe some other effects. So, power and wealth accrues to a degree such that a society can no longer tolerate it. And so, we have things that we've embedded in our social protocols, like debt jubilees, just wipe the slate clean. We also have religious protocols that just say, no, that interest thing, we've tried that before, it's bad, it's morally wrong, so let's try to limit it that way. So, there've been ways that societies have tried to contain it into a box. And there's this recognition that interest can go wrong, and it can go wrong after some period of time, in many different ways.

• 27:50Ryan Sean Adams?

  I want to ask you the question, Edward, do you feel like we are living in a time where interest has gone in the wrong direction? I mean, it seems like societies and civilizations across history have had to hit the reset button, or have had to do something to kind of rein in interest. After one particular time, and maybe I'm using the wrong word, maybe what I really mean is debt rather than interest, but these two terms are kind of interrelated. So tell us about like the modern times we live in, in this, in this everything bubble. I mean, you indicated that it was maybe caused, this everything bubble is maybe caused more by low interest rates rather than the madness of crowds that is very popular to, you know, to ascribe these things to, the meme stocks and that sort of thing.

• 28:34Ryan Sean Adams?

  Anyway, link these together for us and tell us, is the everything bubble a symptom of interest gone awry?

• 28:40Speaker 00

  Um, yes, but let's get back to the earlier point you were making about interest and debt and jubilies and debt Jubilee. One definition of interest is the pretty obvious, the price of leverage, the amount a person pays on a loan by definition. And as interest comes down, you get more leverage in the system. So the, the problem isn't the compounding of interest at a time of falling interest. The problem is the compounding of debt.

• 29:19Speaker 00

  And we have been living through a period in which debt has continued inexorably to rise. And some people refer to this as the debt super cycle. And the debt super cycle has been interrupted on occasion by various financial crises and busts, of which the most, the latest and most severe was the global financial crisis of 2007, 2008. And after each crisis, we have taken interest rates down lower.

• 30:01Speaker 00

  And after each crisis, debt has continued to rise higher. And that is problematic for society. There has been a, a shift. In the, in who is responsible for the debt and the sort of creditor base since the GFC. The GFC was largely a, an, created by the collapse of private sector credit and revealed excess indebtedness of the private sector, particularly, you know, starting with US households, but, but also, you know, Wall Street banks and so forth.

• 30:44Speaker 00

  In the subsequent period, there'd been some reduction in private sector debt relative to income, but a massive increase, as you know, in the government debt. So the overall debt has increased, but the portion of public debt has massively increased. What is the end point in a, in the mod, in the modern world, a world of fiat currencies is not a debt jubilee. Debt jubilee is a bit too complicated, a bit too bold for our modern world. Too many vested interests are directly attacked if debt were forgiven.

• 31:28Speaker 00

  And I suppose it would, you know, lead to widespread and rather uncontrolled bankruptcies. So in the modern world, we have an alternative to debt jubilees, which is inflation. And the inflation reduces the real value of the debt over time, and that becomes the adjustment process.

• 31:51Ryan Sean Adams?

  Inflation as the modern example of debt jubilee? That is so interesting. The slow jubilee. So, so a debt jubilee in civilizations past has been you completely wipe the ledger. No one owes anyone anything anymore. All debts go to zero. Can, can you link this? Because, you know, the term inflation is misunderstood. How is this similar to debt, debt jubilee, Edward?

• 32:21Speaker 00

  Well, it's a, inflation just quietly erodes the value of debt. So, you know, they say it's a thief in the night. There is, the economists have a term for this, financial repression. And financial repression is when the rate of interest is held below the level of inflation and that serves to erode the value of the debt. Now, for instance, after the, really after both world wars, we had periods, well, after the First World War, in Europe, in certain countries in Europe, France, Germany, Austria,

• 33:03Speaker 00

  Hungary, we had high inflation in France and hyperinflation in these other countries that wiped out the value of the debt. After the Second World War, you again had inflation in Europe and in Japan to wipe out the war debts. But the British and the Americans went through a prolonged period of financial repression in which roughly half their war debts were paid off by inflation rather than through repayment of the debts or by growth in GDP. It was, it was the eradication of debt through inflation. And that, I think, is the norm of the modern world.

• 33:47Speaker 00

  And if you think about it, over the last year, people have been pointing out that interest rates are rising. But if you actually look at a chart of real interest rates, real interest rates have been lower in, over the last year than they were ever were during the so-called Great Inflation of the 1970s. So, that, you know, so already that process of financial repression.

• 34:18Speaker 00

  Is kicking in and the debt burden will start to decline. And I'm not saying inflation is difficult to predict, the path of inflation is difficult to predict. But I think the base case for thinking about our, you know, our future, the current debt burden is that it will mostly, to a large extent, be paid off via inflation, through an inflation debt jubilee.

• 34:45Ryan Sean Adams?

  I think there's two ways that you could kind of listen to this. You know, one is you can kind of listen to what you're saying, Edward, and plan for the future as a result. Make sense of the world around you and kind of what's happening with the financial markets and with society, knowing that there is this inflationary type of debt jubilee that is in process right now. But another question I have from, I guess, maybe your historical perspective here is oftentimes inflation is painted as the enemy. And I'm wondering if your perspective, you know, paints inflation in a different light. Is it like necessary that we have inflation for the functioning of society and kind of

• 35:28Ryan Sean Adams?

  wipe parts of the debt every so often? Is that kind of the macro picture of things like what would you do without inflation? Society would not be able to function. What's your take on this?

• 35:39Speaker 00

  So, yeah, no, I agree with what you say. I think, you know, I'm no great friend of inflation in itself. I would like, you know, to have a stable money. I'd like to have a stable financial system for that matter. However, at different times, people's approach to inflation varies. If you're starting from a position of high debt, let's say, high public sector debt that can only be paid off through either economic growth or higher taxation, and let's assume, forget about the economic growth for a while, then let's just say the debt

• 36:23Speaker 00

  is going to be a burden on the taxpayer and the interest payments burden on the taxpayer. Then obviously, there's an interest in the taxpayer not being overburdened. In recent years, there've been

• 36:36Speaker 00

  The beneficiaries of the extremely low interest rates have been the corporations whose profits have grown, whose profit share has grown relative to the labour share. So corporations have done better relative to workers and older people have done better relative to younger people because older people tend to own their own houses, tend to have collected, done the bulk of their savings and as interest rates fell, the assets the older people owned rose in value. The low interest rate environment has benefited people in the financial sector, bankers and

• 37:19Speaker 00

  professional investors who've generated more fees relative to workers and to executives in what you might call the real economy. But obviously the low interest rates also through the enhanced value of stock-based compensation benefited senior management. So you can see that a period of higher inflation accompanied by rising interest rates, but not so high that they actually bring the system down and that not so high that they actually make it difficult to pay off the debt. But higher inflation and slightly higher interest rates would benefit different parts of society.

• 38:01Speaker 00

  So I'm thinking that, you know, we're already seeing the low wage people having earnings growth exceeding levels of inflation and the better paid people, their real earnings income is beginning to decline. We haven't yet seen this feed through into falling corporate profits, but it's quite likely we'll see falling corporate profits at some stage. And, you know, obviously last year, massive sell-off in the bond and global equity markets. And so again,

• 38:42Speaker 00

  Valuations become lower and that means that younger people who are starting to save, they're going to get higher returns on their savings at the expense of those who already had it. So there are a number of ways in which inflation will benefit quite large and influential sectors in societies. One way of seeing inflation is really a battle among groups of society for a larger slice of the cake. And there's a great American economist called Mankiw Olson, who wrote a book called The Rise and Decline of Nations,

• 39:26Speaker 00

  in which he says inflation comes about through what he calls distributional struggles. I think, so that's the early stages of inflation. I think once inflation has sort of done its tricks, say paying down the debt, and once inflation has run out of control, then it becomes unpopular with a broader and broader section of the population until at a certain point the political will is there to bring inflation to an end. I mean, go back to, say, German hyperinflation. The whole thing happened in a relatively brief sort of two-year period. But at the end, they just had a monetary and fiscal reform in November 1923,

• 40:11Speaker 00

  and inflation just stopped dead in its tracks. If you think of the late 1970s, Paul Volcker, the Fed chairman, jacked up inflation to, sorry, jacked up the Fed funds rate into the mid-teens. And there was two pretty severe

• 40:33Speaker 00

  Recession in the US, but but there was really a consensus that that was necessary to get the inflation out of the system, but they only wanted to get the inflation out of the system by the time US government debt had collapsed to, I don't know, less than 30% of GDP or whatever. So so it just takes time. So I mean, people, I think, look on inflation in a rather simplistic way as if it's always unfair, but but it presumes that the situation, the distribution of of of income and wealth when inflation starts is fair, and that's often not the case.

• 41:15Ryan Sean Adams?

  So it's never been fair. We're just squeezing out where the unfairness lies through different kind of populations and demographics.

• 41:21David Hoffman?

  Taking turns of unfairness.

• 41:23Speaker 00

  I think so, yes. I mean, so look, famously, you know, I mean, John Maynard Keynes knew, it points out the problems of inflation, but he also, at a certain stage, famously calls for what he calls, what he says is that the euthanasia of the rentier, the rentier being the bondholder. And, you know, the bondholders often have no no friends. So a bit of euthanasia is sometimes in order.

• 41:53David Hoffman?

  There's Edward, a theme in the Price of Time book that is about the tug of war between what you call, what we call the natural rate of interest, and then the implicitly, the implied unnatural rate of interest. There's this natural rate that's set by the market, and then there is this rate of interest that the financial operators of an economy can divert away from. So like, as a concept, can you just define the natural rate of interest for people and then illuminate the patterns of economies that go forth when the natural rate of interest is diverted from?

• 42:32Speaker 00

  Okay, so I really have two ideas of how you might define the natural rate. One is just, as you alluded to earlier, the market rate of interest. And the market rate of interest would really appear in a world in which the money was constrained in supply, and therefore, like any other, like any other good, and therefore

• 43:00Speaker 00

  The rate, the market rate of interest would be the price for transferring a limited amount of loanable funds, and it would reflect supply and demand for loanable funds. And I think that's probably what you had, let's say, before the beginning of, of modern banking, let's say, in the sort of, you know, mid, mid seventeenth century. Trouble is that, um, once, as you, as you know, banks, what we call fractional reserve banks, they take in a deposit and then they lend out the deposit. And through the act of lending out the deposit, they actually create a new deposit, and that

• 43:45Speaker 00

  new deposit creates new money. So the, there is no, um, fundamental restriction on the growth of the money supply. And then that's rendered more complicated when you get into a world of modern central banking, when you sever the connection of central bank reserves from a, um, from gold, from a limited commodity, precious metal. So then you get really two forms of, of, of, of fear of created money, the credit money of the banking system, and the fear money of the central banking system.

• 44:27Speaker 00

  So now money is no longer really constrained. So if money's no longer really constrained in its supply, what then is the market rate of interest? Does it reflect really people's time preferences and companies' marginal return on capital? Probably not, it just reflects the activities of the banking system. So does the, then, you know, in a modern economy, does the market rate, does it, do the rate of interest, rates of interest that, that prevail, are they reflective of the natural rate, you know, what, what, what the ideal rate of interest would be? And I would say no.

• 45:10Speaker 00

  Um, and I, I think one of the, one of the points the book tries to make is that there is a The conventional wisdom among monetary economists and central bankers is, oh, we know where the natural rate of interest is. It's the rate at which there's no inflation and there's no deflation. It's the sort of sweet spot between those two positions.

• 45:37Ryan Sean Adams?

  Edward, this is central bank monetary policy. They want, you know, 2% CPI inflation, basically, and they're trying to adjust their thermometer, you know, in terms of monetary policy to accommodate that.

• 45:50Speaker 00

  Exactly. And during the last decade, as you know, the central bankers took interest rates down to the lowest level in history, massively expanded their balance sheets with quantitative easing, and engaged in a whole number of other sort of tricks, hocus pocus, you know, operation twists, whatever, in order to manipulate both short and long term rates to the level, to the level at which they could meet their inflation target. And they did more or less throughout the post crisis period in Europe and the United States, inflation was sort of roughly around the 2% target.

• 46:33Speaker 00

  And so the central bankers would say, you know, we did a good job. We, we brought the Great, the Great Recession to an end. There was no repeat of the Great Depression. Unemployment came down and we, we met our inflation target. So, you know, what's, what's wrong? What's not to like? And I would say, well, actually, hang on a sec. Perhaps this inflation target is, you know, not all the, not all that it seems. And for that argument, I go back to a critique of

• 47:10Speaker 00

  The earliest iteration of inflation targeting that occurred in the 1920s, which was then known as price stability, and that was really just sort of 0% inflation, but sort of roughly the same thing. And the young Austrian economist Friedrich Hayek, who was at the time, the early 20s, was actually starting his PhD thesis on central bank policy, the Fed's central bank policy, at NYU. Hayek made this, what should really seem like a pretty obvious point, is that in an economy

• 47:49Speaker 00

  with productivity growth, with new technologies that actually deliver productivity growth, that improve efficiencies of production, then the natural tendency of the price level would be to decline. And so, actually, at a time of productivity growth in a modern capitalist society, you should see a mild, or possibly sometimes even stronger decline in the price level, just like we used to expect, you know, computer prices to come down every year. And what Hayek then argued is, well, if you aim at stable prices, and you can stay in

• 48:31Speaker 00

  the argument to the modern day, if you aim at a 2% inflation target at a time of productivity boom, and we could also, sometimes people refer to it not so much as a productivity boom, but as a benign supply-side shock. And that, you know, in recent decades, the great supply-side shock that brought prices down was globalization, and in particular, the entrance of China into the global trading system and its massive growth in export share. So you would normally have expected during this period, when world traded goods prices were inexorably declining,

• 49:14Speaker 00

  That the price level should be declining, but yet nevertheless, the central bankers with their fixation on this 2% inflation target and their fear of deflation, but that what they feared was what Hayek would have called the good deflation that comes from positive supply shocks and rising productivity. So the central bankers acted against that declining price level and they and in the process doing so, they brought the interest rates down very low. And then you get, what did you get? You've got the succession speculative bubbles, you've got, as I argue, misallocation of capital, you had a huge amount of risk

• 49:57Speaker 00

  taking, you had a buildup of leverage. So and then in fact, actually, what's quite not amusing, it's tragic, is that buildup of leverage prior to the global financial crisis, which to my mind was induced in large measure by the Greenspan Fed's easy money policies after the dot com bubble, that then creates genuine deflationary problems when when the when the banking credit bubble bursts. So I don't think, and one of my points in the book is I don't think this narrow inflation target targeting to discover the

• 50:41Speaker 00

  natural rate of interest is actually useful. I say, well, I don't say, but I was talking to an economist friend of mine the other day, and apparently there's a late medieval school of economists called the School of Salamanca, whose main protagonist says, "The real rate of interest is known only to God." I think that's probably true. But then, but then you see, if it's not, if the real rate, if the natural rate of interest isn't revealed just by inflation or deflation, then I think what I say in the book is, you know, when you haven't got the natural rate of interest, when you know when the rate of interest is

• 51:23Speaker 00

  wrong, is that's when you're getting these asset price bubbles, or this excessive risk taking, or this buildup of leverage. So these are, there are other There are other indications that the interest rate has been set wrong. And I could, I mean, at this stage, I could just introduce another idea, which we haven't really discussed, which is a point made by a Yale economic financial historian called Bill Goetzman. He says interest is the most important invention in the history of finance because it allows transactions to take place across time.

• 52:06Speaker 00

  Now, Hayek in the 1920s started to play around with this idea of what he called intertemporal disequilibrium. An intertemporal disequilibrium is frankly when you're, you know, when there is an imbalance between the present, your present activities and your future required activities. So if you have too much debt, you have an intertemporal imbalance. If asset prices are overinflated, that's another form of intertemporal imbalance because the returns on the assets when they're superinflated are not going to meet the requirements of

• 52:51Speaker 00

  investors who purchase those superinflated assets. They're going to lose money. So my argument is that, I mean, I suspect to go back to this question of what the natural rate of interest is. It may not be discoverable, but it would be a rate at which there is an intertemporal balance between current borrowing, saving and investment and future consumption. And I think I'm pretty, pretty, pretty convinced that we, that we have got our financial system and economies into a state of pretty acute intertemporal disequilibrium.

• 53:34Ryan Sean Adams?

  So we are living in a place, of course, only God knows the natural interest rate. And Jerome Powell is not God, of course. I don't even think he would think that. But we are living in a time of unnatural, an unnatural rate of interest set by central bankers of the fixation on this 2% interest. And it's causing this intemporal balance, this kind of distortion of the present and a disequilibrium with the future. And you're saying some of the symptoms of this are maybe, I'm linking this to the earlier part of the conversation, the everything bubble. What's interesting about the kind of the everything bubble that we're in right now

• 54:17Ryan Sean Adams?

  is you look at phenomenons that have happened over the last couple of years, like you look at cryptocurrency, of course, has shot up in price and different kind of, you know, NFTs. And there's, there's value there, of course, but there's a lot of memetic value. It seems to be caused by sort of low interest rates. You look at meme stocks, that is another symptom of this. You look at the asset prices everywhere that have completely swollen. And I think there's a tendency of media or just kind of a gut reaction to blame the madness of crowds as causing the bubble. It's like, this is another tulip mania or something. And you're saying it's more a symptom of this low interest rate environment.

• 55:00Ryan Sean Adams?

  Yes, speculative bubbles are inevitable, but this one in particular, at this point in time, does it seem like it's fueled by this low interest environment, this unnatural interest rate that we're living in? Can you link this up for us, Edward?

• 55:17Speaker 00

  So, as you know, in the book, I have a chart somewhere which shows US household net wealth, which is the data that the Fed has been collecting since 19, early 1950s. And what we see over the last 25 years is quite clearly bubbles appearing in household net wealth, coincident with the bubbles we've been living through. So you see a little sort of hillock of a bubble with the Dot com bubble and then a somewhat larger increase in in net wealth to GDP by

• 56:00Speaker 00

  two thousand and seven, coming down in two thousand and eight. And then you see this Everest of a bubble forming and peaking in twenty, at the end of twenty twenty one, at which point US household wealth is roughly a hundred points of US GDP greater than its long term average. And what's quite interesting is that I didn't mention in the book, but I I did run the numbers with with an analyst a few years ago. And what we found is that

• 56:40Speaker 00

  in the old days, the increase in household net wealth would actually coincide with with actual savings in the US system. And then it became completely divorced from savings. And so the bubble then appears to be growing, and I show this in the chart, that at each cycle of these three bubbles, the Fed funds rate has been lower and lower and lower. So as the interest rate came down over the course of the cycle, household wealth got higher and higher. And that's, you know, that's all household wealth aggregated together. Now

• 57:22Speaker 00

  go to the everything bubble. Yeah, there's obviously, you know, the, there are other factors at play, you know, the, all the, the autists and retards on the Wall Street bet subreddit. And, and, you know, then, then You are familiar then. Yeah, I am. I was, I was early on to that. And then, you know, and then they're rushing, you know, off to Robin Hood, the Robin Hood app, where, where the, you know, where the, where there's, you know, stock trades are gamified, as the Massachusetts regulators complained. And, and then, you know, high turnover, and then you get this, and one

• 58:03Speaker 00

  of the themes, if you remember from Devote the High Most, is that changes in communications technology feed through to speculative bubbles. And so that the, that one aspect of the

• 58:16Speaker 00

  Of the of the everything bubble would would really probably have occurred under a different monetary environment. But, you know, one of the things, as you're probably aware, that that every that Robin Hood offered its loyal, long term investing clientele was 2% margin loans. Or if you paid them, you know, if you were a premium customer paying them, I don't know what, $60 a month or something, you actually got free margin loans on Robin Hood. So you could lever the hell out of the mean stocks that you were buying. And, you know, and as you saw at the time, US margin loans in aggregate were, you know, at a peak high during the everything bubble.

• 59:01Speaker 00

  There is a point I make in the book, and it's pretty obvious anyone who's done any finances, that long dated assets, sorry, assets with, whose returns are in the distant future, you might call them growth stocks or whatever, obviously benefit more from a reduction in the discount rate than than stocks that, you know, that have a shorter payback period. So what we find, and what we saw in the, you know, in the period running up into the everything bubble is that so called value stocks, short duration stocks, investments did relatively poorly, and growth stocks and long duration investments did well.

• 59:45Speaker 00

  And then I argue that assets with no income at all did best of all. Yes, they did. And so you could say, as people, you know, as some wag said in the 1920s, that the market was discounting the future and the hereafter. By the way, so yesterday I was, I read somewhere, you remember the SPAC king, Chamath? Yes. And so yesterday, have you seen, have you seen his, I read a comment by by Chamath where he says, this is to prices, he says, "The mathematical truth of higher interest rates is that it renders your company valueless."

• 1:00:27Speaker 00

  That is sort of slightly giving the game away, isn't it? So the SPAC bubble, you know, of companies that basically, under anything approaching a normal rate of interest, were were valueless, according to one of its, you know, most prominent expounders, you know, something to behold. And as I, as I say, those, that, you know, those SPAC companies look very much like the, the bubble companies that appeared in Britain during the South Sea Bubble of 1720, another period in which interest rates had been declining and you had this, you know,

• 1:01:09Speaker 00

  semi-fraudulent and outright fraudulent companies floated in the, in the coffee houses of the city of London. The most famous one being a company of, what was it? A company of great advantage, but no one to know what, what it is, which is your, almost a perfect definition for a SPAC, a SPAC company.

• 1:01:31David Hoffman?

  Learning about crypto is hard, until now. Introducing Metamask Learn, an open educational platform about crypto, Web3, self custody, wallet management, and all the other topics needed to onboard people into this crazy world of crypto. Metamask Learn is an interactive platform with each lesson offering a simulation for the task at hand, giving you actual, practical experience for navigating Web3. The purpose of Metamask Learn is to teach people the basics of self custody and wallet security in a safe environment. And while Metamask Learn always takes the time to define Web3-specific vocabulary, it is still a jargon-free experience for the crypto-curious user. Friendly, not scary. Metamask Learn is available in 10 languages with more to be added soon, and it's meant to cater to a global Web3 audience.

• 1:02:15David Hoffman?

  So, are you tired of having to explain crypto concepts to your friends? Go to learn.metamask.io and add Metamask Learn to your guides to get onboarded into the world of Web3. Arbitrum One is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web3 landscape. Hundreds of projects have already deployed on Arbitrum One, producing flourishing DeFi and NFT ecosystems. With the recent addition of Arbitrum Nova, gaming and social dApps like Reddit are also now calling Arbitrum home. Both Arbitrum One and Nova leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM compatible. On Arbitrum, both builders and users will experience faster transaction speeds with significantly lower gas fees.

• 1:03:00David Hoffman?

  With Arbitrum's recent migration to Arbitrum Nitro, it's also now 10 times faster than before. Visit arbitrum.io, where you can join the community, dive into the developer docs, bridge your assets, and start building your first app. With Arbitrum, experience Web3 development the way it was meant to be: secure, fast, cheap, and friction-free. You know Uniswap. It's the world's largest decentralized exchange with over $1.4 trillion in trading volume. You know this because we talk about it endlessly on Bankless. It's Uniswap, but Uniswap is becoming so much more. Uniswap Labs just released the Uniswap Mobile Wallet for iOS, the newest, easiest way to trade tokens on the go. With the Uniswap Wallet, you can easily create or import a new wallet, buy crypto on any available exchange with your debit card with extremely low fiat on-ramp fees, and you

• 1:03:45David Hoffman?

  can seamlessly swap on mainnet, Polygon, Arbitrum, and Optimism. On the Uniswap Mobile Wallet, you can store and display your beautiful NFTs, and you can also explore Web3 with the in-app search features, market leaderboards, and price jars, or use Wallet Connect to connect to any Web3 application. So you can now go directly to DeFi with the Uniswap Mobile Wallet: safe, simple custody from the most trusted team in DeFi. Download the Uniswap Wallet today on iOS. There is a link in the show notes. There's a lot to talk about with the relationship of time and financial bubbles and also interest rates, right? And one of the, I think, the special things about the Price of Time book is that if you really summarize like what is interest, it's summarized in the title of the book.

• 1:04:26David Hoffman?

  You've done a fantastic job summarizing the entirety of the Price of Time book into the title.

• 1:04:33David Hoffman?

  Yeah, do you want to say something on that?

• 1:04:34Speaker 00

  Yeah, I mean, look, I mean, obviously, when one's writing a book, one has a spread, one has a file open saying, what the hell am I going to call this book? So I did play around with the title for a while. And there are, you know, so many different definitions of what interest is. But the important thing is, as I say, to to mention the the time dimension and then to bear in mind that all our economic and financial activities take place over time, necessarily. And then, if you think about it, once you understand that that time has value, as as Ben Franklin said, time is money.

• 1:05:16Speaker 00

  Once you realize that time has value, then it should start becoming immediately clear that taking interest rates, the price of time, down to zero is highly unnatural. It would be like depriving an animal of oxygen. And taking them to negative becomes almost insane. And what it does is a negative price of time actually starts moving the clock backwards.

• 1:05:56Speaker 00

  And what we saw in at the peak of the everything bubble is that we had entered into a financial wonderland in which the craziest things were happening. I mean, so one example of that is that as interest rates were falling ever and ever negative, the bonds were delivering tremendously good returns because you get capital gains on the outstanding bonds as the rates fell negative. And so people were actually thinking, at a time when, say, 18 trillion dollars' worth

• 1:06:38Speaker 00

  of bonds were trading at negative yields, that you bought bonds with negative yields for capital gains, whereas you hold stocks for income. I mean, I don't know, there are so many different areas in which, when one looks back on, you know, 2020 to 21.

• 1:07:01Speaker 00

  That what was happening there was was quite surreal. And and and I think, yes, I think that this this zero negative rate of interest, the lavishness with which the central banks borrowed, and I think roughly so globally, eight or issued eight trillion dollars worth of of of reserves during that period to buy securities. That that I'm pretty sure is, you know, the the the main mover of of these crazy markets.

• 1:07:36David Hoffman?

  Yeah, the the articulation that when interest rates go negative, that part in the book where, just like you said, people would buy equities for the revenues that the company would make, the the value of the dividends, and then people would buy bonds for the capital appreciation. It's like, well, like you said, the your the negative interest rates are making the clock go backwards, and they're also making the role of bonds fill the role of equities, and the role of equities fill the role of bonds. Like, everything is just upside down. I thought that was just like a great articulation of of the whole of the whole of the whole book. I'm wondering if you could do a similar unpacking of Devil Take The Hindmost, just as a title. Why is the book titled Devil Take The Hindmost?

• 1:08:21David Hoffman?

  Like, why that title?

• 1:08:23Speaker 00

  Um, so there is a theory of what's called the rational bubble. If you come across the rational bubble theory, which was, which is that it may, it's rational to buy an asset, provide, even if it's overpriced, if you can be assured that there will be a sucker to buy it off you at a higher price. I've never been, you know, picked a fan of the of the rational bubble the theory, but the greater the greater fool theory. But what I've found, you know, reading the history of of financial speculation, is that is that people who engaged in in the bubble in speculative activity.

• 1:09:09Speaker 00

  Had that sort of, you know, obviously had that sort of mentality out. It's a, you know, if you will, it's your pyramid scheme, your Ponzi scheme mentality of, I'll buy it and pass it off to someone else because I'm in an early stage of the pyramid scheme. And what, what, um, what one speculator in, um, in the South Sea Bubble of seventeen twenty, the English South Sea Bubble of seventeen twenty says is, when the rest of the world is mad, we must imitate them in some measure and let the devil take the hindmost. And the devil take the hind, the devil take the hindmost is actually, I, there's actually,

• 1:09:54Speaker 00

  there's a legend, a Spanish legend that the devil would arrive, I think, in the Spanish city of Salamanca, uh, and, and he would, there would be a race of the, of the young priests of the seminary. And the idea is that the devil would take the priest, the young priest, the seminarian who, who, who was slowest. And, you know, that is, there's clearly a, an element of that in every speculative bubble, which is, hey, you know, I'm sort of, I'm smarter than the suckers. I spotted this earlier. The truth is, you know, obviously at some level, a speculative bubble is a transfer of wealth between speculators.

• 1:10:38Speaker 00

  And if you are in early and out early, then, you know, the game's worked for you.

• 1:10:42David Hoffman?

  Edward, one thing that's, that's clear to me, both after reading both of your books, is that we keep on, we as a, as a species, as a society, run through the same things over and over and over again. And I think by the time I was, when I was going through devil take the hindmost, I had gotten to the nineteen twenties and I was already like facepalming about like, oh, we're about to do this all over again. And that was, and that was the nineteen twenties, right? We still had a number of financial bubbles ever since. And so it's interesting to take. The position of a historian and an author and a researcher when looking at these things, and I'm wondering if you could just like, I don't know, audit the human species,

• 1:11:23David Hoffman?

  the human, a human society as like our ability to navigate these interest rates and speculative bubbles in financial markets. How, how much have we been able to learn from our ancestors and, and lessons of old? Because it seems to me, not much.

• 1:11:39Speaker 00

  Are we getting any better at this?

• 1:11:41David Hoffman?

  Yeah, are we getting any better?

• 1:11:43Speaker 00

  I think we're, I'm afraid to say, I think we're getting actually a great deal worse.

• 1:11:48David Hoffman?

  Oh, no.

• 1:11:50Speaker 00

  The, the, first of all, I mean, it's a, it's a platitude to say that human psychology doesn't change. And Jim Grant, you know, financial journalist, historian, says, I think he says somewhere that in, in science, engineering, progress is linear, whereas in finance, it is cyclical. We learn from our mistakes as a society and as individually. So that's fair enough, but why, why might things be getting worse, which is problematic? First

• 1:12:34Speaker 00

  of all, I think that the technology brings larger amounts of players into these, into these games, if you want to call them that. And so, as you see, as we mentioned earlier, Robin Hood and, and, and, and in China, you know, stock brokerage is founded, you know, with tens, you know, tens of millions of speculators playing, playing the game. So I think the technology broadens things. I think it makes it easier to create these information cascades, these little bubbles. And if Twitter would seem to be a perfect place for forming.

• 1:13:18Speaker 00

  Bubbles, there might be speculative bubbles. I mean, my view is that to a great extent, the fears of the pandemic was a sort of fear bubble also generated by social media. So I think that's, you know, that's one reason why problems might be getting worse. And then we've got the attitude of the authorities. In principle, if you're going to learn from your mistakes, you should suffer some pain and loss. But if the authorities' response to each one of society's financial failures is to

• 1:13:59Speaker 00

  underwrite the losses and to encourage the reemergence of the exactly the same type of behaviour that got you into trouble in the first place, whether speculating or over leveraging or whatever, then you're not really going to learn from your mistakes. In fact, you may even have a situation in which the sort of evolution of the sort of player speculating population will actually suffer from adverse selection. And for instance, you know, in the early part of the last decade, I was working for

• 1:14:42Speaker 00

  this firm called GMO in Boston, a sort of value driven investment firm. I was in the asset allocation team. We like to think of ourselves as not buying assets that were overvalued relative to their historic norms. And it was a very difficult environment, as you can imagine, in which to operate. You saw after 2009, with interest rates taken to zero and large amounts QE, the markets came back very, very quickly, financial markets.

• 1:15:21Speaker 00

  US market actually went to a high valuation relative to its historic norm and then continued compounding at 10% a year.

• 1:15:32Speaker 00

  For a decade and by, you know, by the end of 2020, 2021, by the end of the everything bubble, the US dot market, as you probably know, was in the highest valuation on any number of different valuation measures, but I'm let us stick with the cyclically adjusted price earnings ratio, sometimes called the Schiller B E after Robert Schiller, who collects the data at Yale. And what you see is that that was the second highest valuation of the US dot market in 2021, except for the just last, last gasp of the dot com

• 1:16:10Speaker 00

  bubble. And, and, and yet, it was very difficult for an investor not to be sucked into that bubble, because by being sucked into that bubble, you, if you didn't get sucked into that bubble, you would underperform and your clients would tear assets away, which is why my old boss, Jeremy Grantham at GMO, says that the really, he thinks the biggest driver of markets, he's not particularly interested in my whole interest stuff, he thinks the biggest driver of markets is what he calls career risk, which is if you try and battle a bubble, you will be sacked. And, and he often cites a comment of, of

• 1:16:53Speaker 00

  Keynes from the General Theory, where Keynes says, in, in the world of professional investment, it is better to fail conventionally than to succeed unconventionally. And so I think I'm just veering a tiny bit away from the original question, but my point is that if we don't learn from our mistakes, and if the authorities, if you will, reward us for making mistakes, then obviously our, we will, our mistakes are going to get bigger and bigger.

• 1:17:30David Hoffman?

  So Edward, as a result of just doing just deep research across like hundreds of years of examples of humans engaging in speculative behavior and financial operators turning into financial manipulators, you do a great job writing your books, maintaining a decent amount of like neutrality and objectivity and simply just telling the story. But I'm wondering if you just have developed your own personal opinions about like what makes good economics. So in at least in the crypto world, we have debates about fiat money versus commodity money versus commodities. We have debates about Austrian economics versus Keynesian economics. I'm wondering just like, how have you landed in the world of economic debate?

• 1:18:17Speaker 00

  So the crypto world, I take it is is quite sympathetic to Hayek's idea of the denationalization of money. And my book has quite a lot of Hayek in it. I mentioned earlier the the Hayek's comments on on whether you know, on targeting on on on targeting monetary policy on on movements in the price level. And then towards the end of the book, I I sort of discuss Hayek's notion of the road to serfdom. And what I argue is that

• 1:18:58Speaker 00

  if interest rates are constantly manipulated by the authorities, they will weaken the economic system, they weaken economic growth, and they will require the central bank to play a larger and larger role in the allocation of capital and that we were, we appeared to be moving in the in recent years into what you might call a period of central banker capitalism, in which the central banks were the main determinants of what was going on, both in the financial world, but also in the real economy. And this was a creeping process, which would then undermine.

• 1:19:43Speaker 00

  A capitalist system based on free enterprise and individualism. So I think that Hayek is a major influence on that book. If you want to know, David, one difference between Devil Take the High Most and this new book is when I wrote Devil Take the High Most, I hadn't actually read Hayek, which is sort of probably pretty standard for most economists nowadays. They haven't read Hayek either. And then I got into Hayek just over 20 years ago, when I started, you know, roughly 20 years ago, when I started sort of looking at the credit bubble that was forming in

• 1:20:25Speaker 00

  2003 and wondered and then started, that's when I started reading a bit of Hayek. And this book has recently been awarded the 2023 Hayek Prize. So that was, you know, very gratifying for me because the morning I received the prize, I was reading my wife extracts of the price of the Road to Serfdom, saying, darling, this is all so relevant to today. Anyhow, so yes, Hayek is definitely an influence.

• 1:21:02Speaker 00

  And I don't know if you, did you pick up in the last paragraph of the postscript? And I think this might be an interesting place to take, to move the conversation. I discuss the idea of whether a cryptocurrency or a central bank digital currency might replace the fiat currencies of the current world, the fiat currencies and the bank-created, if you will, fountain pen money.

• 1:21:37Speaker 00

  And by having a currency that was truly limited in supply, we would then get back to discovering what was the natural rate of interest or market rate of interest. And if we were able to make that transition.

• 1:21:59Speaker 00

  We would then, we would then, once we had a market rate of interest that was closer to people's time preferences, for want of ever word, better word, then we would have less buildup of debt, less speculative bubbles and sounder financial markets and probably stronger economic growth. So that, I didn't, I didn't elaborate at that point in great detail, but that was my sort of parting shot.

• 1:22:28Ryan Sean Adams?

  Can you elaborate a little bit more? So that's very interesting. Yes, you are right. The crypto community is very, very big fans of Hayek. It quotes him often. So how do you see crypto at this place in time? It sounds like maybe what you're alluding to is we have this bank-created fountain pen money. You know, money printer go brrr is what we in crypto say, and it's leading to unnatural interest rates. And are you saying, Edward, that you see crypto, this non-state, non-central bank-controlled monetary unit, do you see that as kind of a check on power, a way to maybe restore balance and get us closer to something that looks like a natural interest rate?

• 1:23:08Speaker 00

  Possibly is my answer. I'm, you know, I, I don't, I don't profess to know as much about the crypto world as you do, but my, my intuition, when I was finishing the book in late 21, was that there was, you know, a lot of skeduggery in the crypto world. And there were a lot of, you know, what appeared to be sort of Ponzi schemes operating in the crypto world. And that seems to have been somewhat borne out by the crypto winter

• 1:23:53Speaker 00

  ensuing last year and the, you know, the failure of, of, of Sam Bankman-Fried's misanous activities.

• 1:24:03Ryan Sean Adams?

  You heard about that one, did you?

• 1:24:06Speaker 00

  I did. I actually wrote a piece. I was one. I I I wrote a piece in which I said that I I thought that actually that that SBF wasn't actually conducting a fraud but a spoof. Because if you look at his interviews, he actually seems to be telling his interviewers and the public that, hey, that this whole thing is really corrupt. You can't really value anything. And then, of course, you know, that that famous advertisement with Larry David, where he's just saying, you know, hey, this doesn't work. Well, actually, it didn't work.

• 1:24:37Speaker 00

  So anyhow, um, so that, so my my thought was that probably as things stood at the early stages, that, you know, and perhaps not early stage any longer, but of crypto is that it was it didn't really have the um, you know, didn't really have the wherewithal become an alternative currency or or money. And I think in particular, as you know, there you know, there are some, one definition of money is as a social network. Fair enough. You can have, I mean, all number of different things have been money historically, I think. I've got an excellent book by someone called, I think it's called Paul Einzig. Have you seen it called Primitive Monies?

• 1:25:22Speaker 00

  You've seen that, which is a great book, which you must read if you're interested in money, because he just lists all the various primitive monies and including, I think, rat traps. Wow. Form of currency in one. Rat traps? Rat traps. Anyhow, so but the thing is that for a for a money to be accepted, it not it mustn't be only accepted by by, you know, a community of users, but also has to perform the sort of state money function. And what we clearly know is that the the money, the monetary, the governments are not going to give up their monopoly on legal tender without, you know, a bit of fight.

• 1:26:05Speaker 00

  I I read a piece last week for the column I write for Reuters Breaking Views, which was based on a conversation I have with a a friend of mine who called Thomas Meyer, who's who's a a German economist, used to be chief economist of Deutsche Bank. But Thomas is a is a very

• 1:26:28Speaker 00

  Keen Austrian economist, but and although the Austrian Hayek is associated with private money, Thomas has this idea that a central bank digital currency, if it was if it was issued to increase at a certain rate, the sort of protocol to increase at a certain rate in line with your average nominal GDP growth or whatever, over a certain period of time, that if that CBDC were to replace bank deposits, so that banks were no longer in the business of creating money, and that banks would no longer be subject

• 1:27:11Speaker 00

  to bank runs, then you could have a sort of, I think, what I call a digital Chicago plan, or digital narrow banking. Now, Thomas says, you know, when I was talking to him, he said a couple of things about his, this, you know, Thomas's digital Chicago banking. First of all, he said it wouldn't necessitate getting rid of paper currency. So that fear, and I think quite legitimate fear, that if you issued a CBDC, the central bank would be tracking every one of your actions. And I mentioned that in the book, you know, the

• 1:27:53Speaker 00

  CBDC is a digital panopticon, that could be somewhat abated. And Thomas also says that in his world, you could have your CBDC and your narrow banking, but you would, there would also be room for competing cryptocurrencies to operate. So it would, I mean, Thomas is really suggesting a way in which you could harmonized Hayekian's denationalization of money idea with, if you will, the sort of state theory of money idea of what's called George Knapp.

• 1:28:36Speaker 00

  And it's an idea, I mean, what I think is quite interesting about it, as you know, the the central banks now sitting on masses of bonds as a result of their QE and they don't know what to do with them and those bonds are on a mark to market basis, starting to produce losses. But the banks are also sitting on massive reserves with the central banks. Now, if you want to introduce a a central bank digital currency along Thomas's line, and this is very much along the lines of the Chicago Plan mooted in the 1930s by

• 1:29:17Speaker 00

  the likes of, well, of Irving Fisher and Chicago economists like Frank Knight, what you need to do is the banks need to surrender their bonds to the central bank to be issued with reserves that then become your narrow banking. So we're sort of, you know, believe it or not, and it is quite weird, we're sort of halfway there with, or even three quarters of the way there, without any one planning. And then another really interesting thing, which I hadn't really understood about the

• 1:29:58Speaker 00

  original Chicago Plan, and I've actually got on my desk, I've got Irving Fisher's book, Hundred Percent, it's actually worth reading you the full, I don't know if you've come across this book, this is Irving Fisher's Hundred Percent Money, which is his Chicago Plan. It says, Hundred Percent Money, Designed to Keep Checking Banks One Hundred Percent Liquid to Prevent Inflation and Deflation, Largely to Cure or Prevent Depressions, and, wait for it, to Wipe Out Much of the National Debt. And the reason you wipe out much of the national debt? Is that when you issue, and you probably, I mean, I tell me if you're familiar with all of this,

• 1:30:42Speaker 00

  but when you issue, when you move over to the Chicago Plan, the central bank soaks up all the government bonds and issues its new state-backed money. But the state-backed money doesn't actually pay interest. And so because it doesn't pay interest, there is a one-off enormous seigneurage gain for the currency issuer. And that, according to Thomas Mayer, that would amount in Europe to roughly, within the eurozone, to roughly half of the outstanding European government debts. It would wipe out $6 trillion of government debt. And I'm going to get the number slightly wrong,

• 1:31:27Speaker 00

  but I think that sort of holdings of the ECB are roughly, I'm going to say roughly $3 trillion. As I say, you're halfway there towards making the conversion. So I, and I, I mean, I don't know what your views on 100% money are or on bringing an end to fractional reserve banking. But what it occurs to me is that anyone who's thought about the problems of finance for long enough eventually comes to the conclusion, just, you know, we cannot have fractional reserve banking,

• 1:32:09Speaker 00

  you know, running amok and destabilizing the financial system time and time again. And what's interesting to me, when I start reading about the Chicago Plan, is you find economists of very different persuasions. You know, the Keynesian economists like James Tobin, Nobel laureate, or monetary economists like Milton Friedman, coming to, coming around to the same plan. So potentially that, you know, that solution. As for this, as for the

• 1:32:44Speaker 00

  As for the cryptos, the way I see it is this, is that if we have a badly designed central bank digital currency, and the chances are we probably will do, and if embedded in that badly designed digital currency is either an inflationary tendency or the sort of digital panopticon aspect in which all our actions are being followed, then I think that one type of cryptocurrency will then establish itself for a lot of transactions, that transactions that people don't wish to have surveilled by the state. And I'm

• 1:33:29Speaker 00

  not saying that just necessarily is sort of drug running and terrorism, but just that people, I think, are happier, or you tell me, but I think people are happier, frankly, that Visa or Mastercard should see their credit card transactions than that an arm of the state should actually be able to create a profile of everything you're doing. Perhaps anyhow the NSA is already creating such a profile, but they don't really want to see the state engaged in that. And as I say, go back to Hayek, somewhere he says

• 1:34:08Speaker 00

  the invention of money is the most powerful instrument for freedom ever created. And I think that the Chinese digital currency, central bank digital currency plans, the digital yuan, or whatever you want to call it, that I think is the strongest totalitarian instrument that has ever been conceived. And when you bring it together with Xi Jinping's

• 1:34:44Speaker 00

  What's it called, you know, the credit, credit system for rewarding good behaviour, punishing bad behaviour, social credit. If you put, merge it with social credit, then you actually have a much stronger, as you, this, you're familiar with all of this, but you have a much stronger control of your population than, than was really offered, that no communist or fascist society in the past would ever have been able to control people. So, so, you know, with, with, with such a strong rod. So, yeah, I, I, I think, you know, I think going down that route, there is a, you know, a crypto future.

• 1:35:29Speaker 00

  And then, you know, as, no doubt, as, as the crypto folks have all been saying since the run on Silicon Valley Bank, is that, you know, the run on Silicon Valley Bank is not just showing the sort of instability of the banking system, but it also shows the central bank, the Fed and the, and, and, and the federal government through the Pension Benefit Guarantee Corporation, taking on more and more responsibility, writing, you know, underwriting loans, underwriting deposits.

• 1:36:05Speaker 00

  And, and when that is taken too far, you move closer to a collapse in the monetary system. And it's at that time that then, frankly, alternative stores of value become attractive. It's, it's what you had during the German hyperinflation, there, there was something they called.

• 1:36:34Speaker 00

  Flukt, it's quite a good phrase. Flukt in die Sackwerten, which means flight into things of real value. Now, you know, I think then you just have to conceive what real value is. And, you know, perhaps because I'm a bit older than you guys, you know, I have a bit of sort of the gold bug about me.

• 1:36:57Ryan Sean Adams?

  It's coming back, Edward.

• 1:37:00Speaker 00

  Yeah, yeah, yeah. So I have, you know, my friend Felix Martin, who's fairly sort of financial historian, right? He refers to gold as man's oldest bubble. And I'm quite attracted to man's oldest bubble. And, and yeah, and that's one way. And, and as I say, a well-designed crypto would be an alternative.

• 1:37:24Ryan Sean Adams?

  Edward, it's been an absolute pleasure to have you on the show and for, for giving us so much information, for, for giving us your knowledge. I, I guess a couple of comments on what you just said. This idea, I think, I think you are one of us in, in some core ideas. This idea that money is a freedom technology, that's a Hayekian idea. It's also a deeply embedded crypto idea. And this idea that we are converging towards a central bank digital currency. And so, you know, maybe the end of this decade, maybe a little bit longer, maybe sooner, there will be two forms of digital money. There'll be a central bank digital money, which is not as free, is kind of the crypto prediction, and an alternative money that is free, which is, which is crypto.

• 1:38:08Ryan Sean Adams?

  I would love the idea of a digital Chicago bank to come to fruition that, that protected citizen rights, that didn't give away our privacy, that didn't have an, you know, inflation as a seniorage fee attached to it. I just, with the central banker capitalism that you've rightly identified, it's hard to imagine that that world exists, but we'll be pushing for that as well. Anyway, there's so much more we could, we could talk to you about. And I feel like as this progresses, this is one of the most interesting times, I think, in monetary history, at least in, in recent times. I don't know if this is the most interesting in your decade, but like we're. We're in your lifetime, but we're really seeing new things come arise this in like in

• 1:38:51Ryan Sean Adams?

  years. I mean, and so I feel like we should have you back on again to talk us through that. But I want to end with this last question. Do you have any predictions on what's going to happen next? Just general predictions, given what you've seen across time with other societies and other civilizations and the place we are now. As David said earlier, when he was reading Devil Take the High Most, and you guys in the 1920s, he smacked his head. And I've because we're going to do it again. And I feel like now is the 2020s. I feel like this is a head smacking moment. I feel like we're about to do something again. What do you think that thing is?

• 1:39:30Speaker 00

  So, well, perhaps we are in the late 20s. But the we've gone beyond 29. I mean, if we were the 20s, then we're in 1930. What I think is this, and just just stick to the sort of main thrust of the book, the new book, The Price of Time, is that a huge, the entire financial system and the economy itself became adapted to these extraordinarily low interest rates. And that as that begins to change with inflation coming into the system and

• 1:40:15Speaker 00

  interest rates rising, then the house of cards begins to collapse. And so far, you know, we've seen a big crash in the UK gilt market and the near bankruptcy of of the UK pension funds. We saw, you know, the crypto winter that we've mentioned, and then the regional banking banking crisis kicked off with the collapse of Silicon Valley Bank. Now, my, you know, my strong thought is that this has further to go, that we're not, you know, that we're not at the end of the process. It's not, you know, in baseball, in baseball terms, we're not in the ninth innings. We're not in, I don't think we're in the eighth

• 1:41:00Speaker 00

  innings. And so the, I think that are, you know, going to be very

• 1:41:09Speaker 00

  Long, prolonged and difficult period of transitioning out of where of this of this ultra-low interest rate environment and go back just finally to that point I made about US household wealth. I looked at the data from recently published by the Fed and it really has hardly come down a lot. It hasn't really come down very much from its highest level in 2021. So I think there is going to be a large evaporation, shall we call it, not destructive, there can be a large evaporation of wealth. I think that a lot

• 1:41:54Speaker 00

  of that evaporation of wealth will come from nominal assets, paper wealth in the claims, fixed income, securities and the like over the recent year, over the following years as we get this financial repression. So that I think is going to be a challenge for investors to retain their wealth. But you know, it's not impossible that people who position themselves prudently shouldn't, you know, more or less retain their purchasing power.

• 1:42:26Ryan Sean Adams?

  Edward, what a great way to close. Thank you so much for joining us on on Bankless today.

• 1:42:32Speaker 00

  My pleasure.

• 1:42:34Ryan Sean Adams?

  Bankless listener, I reminded of that quote as we close that those who forget their history are condemned to repeat it. I must feel like even those who remember their history are also condemned to repeat it. It feels like we're going through the cycle one more time. And of course, we'll be with you in this cycle, this new monetary experiment that's being run both in crypto and in the world of fiat. Some action items for you today. The first is go pick up the book, The Price of Time. There's a link in the show notes. Absolutely fantastic book. Also, Devil Take the Hindmost was one of our formative books in kind of learning about speculative bubbles. These things apply directly to crypto. All right. So very important historical lessons. Yield and bubbles. Yes, yield and bubbles. That's what this, that's what this whole.

• 1:43:18Ryan Sean Adams?

  Thing is, we also have some links to Primitive Money, The Digital Chicago Plan, which was the column in the Irving Fisher book 100% Money. Some of these I have not taken a look at, so I plan to go do my homework after this episode. Got to end with this, of course. None of this has been financial advice. Fiat, economies, interest, finance markets, it's all risky. So is crypto. You could 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.