“Nothing Stops This Train” | Lyn Alden on Fiscal Dominance

✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-the-lyn-alden-interview ------ Bankless listener, if you want to survive this decade as an investor, as a market participant or even just as a citizen, you have to tune in to this episode with author and investor, Lyn Alden. We’re entering a new era. “Nothing Stops this Train” as Lyn would say. We’ve entered the Era of Fiscal Dominance. - What era is this? - Who will be the winners and losers? - What about capital controls? - How can you prepare? - How will Crypto perform? We get into all this and much more in what is a must-listen Fiscal Dominance Masterclass. ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku 🌐 CARTESI | APPLY FOR A GRANT https://bankless.cc/CartesiGovernance ------ TIMESTAMPS 0:00 Intro 5:25 Nothing Stops This Train 15:15 Fiscal Dominance vs Monetary Dominance 34:23 A World of Fiscal Dominance 46:39 Federal Reserve Role 50:34 Fiscal Dominance Indicators 1:08:06 Winners & Losers 1:18:29 Living in a Fiscal Dominance Era 1:24:16 Capital Controls 1:33:06 Federal Reserve Signals 1:36:14 How to Prepare 1:40:19 How Will Crypto Perform? 1:42:52 Closing & Disclaimers ------ RESOURCES Lyn Alden https://twitter.com/LynAldenContact Lyn Alden Newsletter https://www.lynalden.com/ ------ Not financial or tax advice. 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.

• 0:00David Hoffman?

  What these technologies do is they allow people more freedom of choice in whatever country they're in. They're able to go outside of their borders and get assets or get monies that they can't get just purely internally. Basically, the biggest tool we have against basically a complete kind of replay of prior fiscal dominance periods or the effectiveness of capital controls. And I think it's worth defending.

• 0:28Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of fiscal dominance. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Bankless listener, if you want to survive this decade as an investor, as a market participant, maybe even just as a citizen, whatever jurisdiction you're in, you can't draw on the last 40 years of financial history. That is the lesson today. We have entered something different. Lynn Alden calls this fiscal dominance. David and I think this is absolutely key to understanding both crypto and the new world we've entered. A few topics we get into today. Number one, this new era of fiscal dominance. Why is it inevitable? Number two, central bankers and Fed interest rates, do they even matter anymore? Number three, how this world of fiscal dominance

• 1:13Ryan Sean Adams?

  will feel? What assets to hold? What assets not to hold? And number four, how will crypto fare in this new era? What about capital controls? Are they coming to take your crypto?

• 1:22David Hoffman?

  We check in with Lynn every now and then just to get an update on the macro world, what's going on out there. And if you pay attention to Lynn's Twitter timeline, you will have noticed just a reoccurring meme show up on her Twitter timeline called "Nothing Stops This Train." And I think after maybe the 20th or 30th time, I saw a Lynn Alden tweet talking about how nothing stops this train. I was like, hmm, maybe I should ask Lynn about what the hell that means. And so that's how we got to this podcast here today. What is that train? And why is nothing stopping it? Was basically the motivation for this episode. And this 90-minute masterclass in fiscal dominance was the answer. So I feel very educated, like I always do anytime Lynn Alden comes on the podcast. So let's go ahead

• 2:05David Hoffman?

  and get right into that conversation with Lynn Alden, all about fiscal dominance. But first, a moment. To talk about some of these fantastic sponsors that make this show possible, especially Kraken, our favorite place to get out of fiscal dominance. If you do not have an account with Kraken, consider getting out of fiscal dominance with Kraken today. There is a link in the show notes to getting started. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Kraken, one of the longest-standing and most-secure crypto platforms in the world. Kraken is on a journey to build a more accessible, inclusive, and fair financial system, making it simple and secure for everyone, everywhere, to trade crypto. Kraken's intuitive trading tools are designed to grow with you, empowering you to make your first or your 100th trade in just a few clicks.

• 2:47David Hoffman?

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• 3:31David Hoffman?

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• 4:15David Hoffman?

  on your bankless journey. It's also one of the hardest things to get right with huge consequences if you don't. If you want help going bankless, talk to Casa. Casa helps you take custody of your crypto assets. So you don't have to wonder whether you're doing it right. Casa is a one stop shop for doing self custody the right way. With Casa Vaults, you can hold Ether, Bitcoins, stable coins, all with one simple app and multiple keys for the ultimate peace of mind with a support team to help you every step of the way. But it doesn't stop at self custody because even though crypto is forever, you are not. We all plan on making life changing wealth in crypto, but with Casa's inheritance product, life changing wealth can elevate to generational wealth for your kids and your loved ones who don't know anything about crypto. With Casa, you won't lose your private keys and you won't accidentally take them to the grave either. Click the link

• 5:00David Hoffman?

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• 5:25Ryan Sean Adams?

  Bankless Nation, we are excited once again to introduce you to Lynn Alden. She's one of our favorite recurring guests on the Bankless program because every time we bring her on the podcast, I know we're going to get into a subject in some exhaustive detail, get educated along the way. And once again, coming to this episode, we've got a big question for Lynn to help us answer. Lynn, welcome back to Bankless. Thanks for having me back. Happy to be here. So Lynn, I think David and I want to explore this topic by way of meme, if that works for you. So this is a meme, I'm showing it on screen right now, that you posted on Twitter. I don't know if you traded this meme or you sort of seeded it around and really popularized it, but it's got kind of two panels. And so if people haven't seen this before, it's kind of the classic, there's a bus going over a train track and there's a train. So the top frame is the bus like going over the train track and there's a

• 6:10Ryan Sean Adams?

  train sort of like in the like just about to hit it. And the second, of course, is where the train just plows right into it. And the first frame with the bus going over the train track says, how markets trade for the past 40 years. Second, the train is called fiscal dominance and nothing stops this train. So this is like the imagery of we are about to get hit by a train and we have to get out of the way. So Lynn, can you explain this meme? Because I think that the framing of this entire conversation is based on a train that's about to hit us. This train of fiscal dominance. So what is this train? What is fiscal dominance?

• 6:47Speaker 02

  Sure. So, you know, market regimes go through these long periods of time where they trade a certain way. And there are certain forces that impact them. And so over the past 40 years, the United States and much of the rest of the developed world has been in monetary dominance. And the kind of the simple way to put that is that monetary policy is very effective at either kind of re-accelerating or slowing down an economy and impacting inflation. And most of the money creation is coming from bank lending, basically credit creation or credit contraction, which is why those monetary levers are powerful. But in fiscal dominance, that situation becomes reversed, which is that very large debts and fiscal deficits,

• 7:29Speaker 02

  specifically public debts and then fiscal deficits, those are bigger drivers of inflation or disinflation or rate of nominal economic growth and those sort of things. And the central bank, in this case, the Fed in the United States, starts taking a backseat. Their options become constrained by what's going on on the fiscal side. Because when they raise or lower interest rates, it doesn't impact the fiscal side in the same way that it impacts bank lending, credit creation, that kind of thing. And so, you know, a lot of people, they have these backtests. They have, you know, here's what happened over the past 20, 30, 40 years. For example, that stocks and bonds are often universally correlated, for example.

• 8:09Speaker 02

  But going forward, people that were looking at those metrics, they were super important during a monetary dominant era. Those metrics are less relevant is what that kind of that meme means. That basically all these kinds of ways of doing things, all these expectations that people developed, they made sense over a period of time. But if it's true that we are entering a different type of market environment and developed countries have been in this in the past, just not in anyone's current trading lifetime. And emerging markets go through this on a more regular basis, you know, kind of more frequently. But developed countries have not been in this for a long time. And so a lot of people's mental models are kind of. Tuned around monetary dominance and not around fiscal dominance. So that's what the meme means. And that's when we began to unpack what some of that means.

• 8:53David Hoffman?

  To put it in its most simple terms, is it accurate to say that monetary dominance is simply the Federal Reserve interest rates, whether we're cutting or increasing them, just like whatever the Fed is doing? And then fiscal dominance is whatever the government is doing, whatever like more top down control about like who should get what, who should get tax cuts, who should get subsidies? And so like one is the Fed, one is the central bank, that's monetary dominance. And the other is the government. Is that like a simple way of understanding this?

• 9:20Speaker 02

  Yeah, pretty much. And I guess the one thing I would add is that monetary dominance is the combination of the central bank and then the broader banking system, the commercial banks. Their rate of lending or not lending, as well as different things the central bank is doing to try to accelerate the amount of lending that's happening, or trying to slow down the rate of lending that's happening. That's all monetary dominance. And then, as you said, basically all the fiscal side, all those different things, that's fiscal dominance. And fiscal, you know, when deficits are lower, when public debts are smaller, monetary dominance tends to be occurring, that basically all those monetary forces are bigger. Whereas when you build up 100% or more debt to GDP, specifically on the sovereign level, and you're running above target deficits that are not really one-time things, they're

• 10:03Speaker 02

  more structural, that starts to override the power of that whole monetary side, both the central banks and then even the broader banking system.

• 10:11David Hoffman?

  So that bus that Ryan described in the meme, how markets trade for the past 40 years. I've heard this take from a number of different people that really the whole entire investment strategy over the last 40 years or so has just really been one trade, which is the debasement of currency, the dilution of the US dollar. And really it's a matter of like how fast or slow the Fed is doing that. All other investments have really been downstream of that. And this is what you're saying is actually coming to a close. This is like the market structure that has defined the last era of anyone's like trading memory. And you're saying that this era is likely coming to a close soonish because fiscal dominance is coming to replace it because something about fiscal dominance is not stopping this train. That train is not stopping. This is kind of like the summation of this meme.

• 10:56Speaker 02

  Uh, yeah, more or less. I think the thing I would add is that it's not just debasement per se, because debasement happens under fiscal dominance as well. It's really about that kind of 40 years of declining interest rates, and then the tailwinds that that provides to a number of different asset classes. So, we kind of started from this high point in this current era of very high interest rates. And then you go through 40 years of every time there's a recession, you can cut rates. Generally, inflation is on, you know, it's still positive. It's declining from what used to be a high level to, well, eventually by the 2010s, you got to a pretty low level, at least for consumer price inflation. There's obviously different ways to measure inflation. But declining inflation rates, declining interest rates, and basically, all that was offset by rising debt to GDP. So, you know, over

• 11:40Speaker 02

  time, more and more debt piled up on households, more and more debt piled up on the public ledger. And that was offset by the fact that interest rates were declining. And it kind of fed on itself, because lower interest rates allow more debt to accumulate. And then, higher debt levels tend to slow down economic growth, and kind of pressure a lot of things, which ends up kind of pushing interest rates down. That's kind of one of those tools that they use to kind of kickstart the next expansion out of recession. And the problem is, when you run into zero, and then you kind of start going sideways to up in terms of interest rates, you no longer have that offset for all those debt levels. And private debt levels peaked around or shortly after the global financial crisis, whereas public debt levels are still going up. And when you look at history of how these

• 12:23Speaker 02

  kind of really long-term debt cycles play out, so not just the cyclical debt cycles, but these kind of more generational debt cycles when they play out, it does tend to happen in that one-two punch, where first you kind of hit some private sector maximum, and then you start rotating that onto the public sector. The debt starts getting transferred. So, for example, you know, you bail out the banks, you kind of recapitalize them, and push a lot of the debt more on the sovereign level. And then same thing with the response during and after the pandemic and lockdowns. A lot of the more private debt was kind of indirectly transferred to the public level. So you have a little bit of deleveraging on the private side, but that gets pushed up to the public level and that eventually comes out in currency debasement and fiscal dominance issues.

• 13:06Speaker 02

  And so basically, I think the era that's behind us is that ever lower industry environment, the structural disinflation from a high level environment. And now we kind of go forward in an environment that really hasn't been seen in the developed world since the 1940s. Japan's been in it kind of first in this cycle among the developed world. You see it occasionally or pretty frequently actually in the emerging world, but it's not something that a lot of developed market participants have a lot of experience with, you know, in kind of their current careers because it's all been one trade, which is industry rates keep going down, valuations of both bonds and stocks keep going up and they tend to be counter cyclical, you know, they tend to be inversely correlated with each other, but that environment is messier going forward.

• 13:48Speaker 02

  In more inflationary environments, stocks and bonds tend to be more correlated. And also generally during fiscal dominance, you get a rise of capital controls and other issues like that, which for example, in this industry can manifest in attacks on privacy tools or self custody or basically the ways to move around capital. So there's overlap there and that's just an environment to be aware of. And I would argue that there's not a moment in time per se where you go from monetary dominance to fiscal dominance. Like you're not in a hundred percent of one and zero in the other. It's this kind of changeover that happens. And I would say there's different ways to analyze it, but I would say at least since 2019, the US has been in fiscal dominance, more or less. And when it starts to, you know, go over, there's like, you know, a year or two where

• 14:31Speaker 02

  you're kind of in fiscal dominance and maybe you're briefly out of it again, then you're back in it until it gets so strong that you're more persistently in it. So ever since early 2023, we've been in it probably more persistently, but kind of this whole. Covid era and even just a little bit before it, this has been a multi-year kind of transition toward fiscal dominance.

• 14:50Ryan Sean Adams?

  Lynn, there's so much here to unpack and I think we're just like peeling back the layers of the onion here, but I want to make sure that listeners get kind of their econ 101 definitions of fiscal dominance versus monetary dominance by way of maybe example, right? So fiscal dominance, both fiscal and monetary policy is what governs the money system of any sovereign country, right? So we understand that there's these two pieces. And in order to identify like which is which, when we see things like quantitative easing or buying of bonds or interest rate increases or decreases, all of the Jerome Powell Fed type of activity, that's going to be more of the monetary policy type controls.

• 15:34Ryan Sean Adams?

  Whereas on the fiscal side, when we see things like you mentioned like Covid, the Covid stimulus or the PPP loans or even like more recently, the Inflation Reduction Act, kind of like congressional, we are spending this amount on X program, that is more on the fiscal side of things. Would you say that's accurate? What are some like examples in each so that listeners can good at identifying the differences between monetary and fiscal?

• 15:59Speaker 02

  That's accurate. I think we can make the example more clear by referring to time periods. And so, for example, when people think of inflation, they often think of the 1970s. The 1970s was a very inflationary environment. That was mostly inflation from bank lending. So there's two main ways that new broad money enters circulation. One is fractional reserve bank lending and then the other one is monetized fiscal deficit. And you can quantify the size of what's happening there. So in the 1970s, I mean, they were running deficits, but if you look at kind of how much new bank loans are created each year, that was a larger number than the size of the fiscal deficits that year.

• 16:41Speaker 02

  And especially when you kind of look at that over any, say, rolling five-year period. So basically more money's coming because banks are lending. And the reason that was happening, there's a bunch of reasons, but basically the baby boomers were entering their home buying years. So you had a big demographic surge, a lot of people kind of hitting their period of peak credit formation. And back then, houses were cheaper, so people could buy homes earlier. They bought them often in their twenties or, you know. Sometimes early 30s, but they could start buying homes on average earlier than people do today. So this big generation's coming into their home buying years, their family formation years, this kind of peak credit formation. Banks are making a lot of loans. You have money supplies going up very quickly. And then you ran into price inflation because you had that higher than normal rate of money creation at the same time as you had obviously

• 17:26Speaker 02

  constraints in oil supply. And we're also running some background deficits that weren't helping, even though they were a smaller force. And the way to get that under control was that Paul Volcker, the head of the Fed, raised interest rates to the highest level they've ever been in the United States. And the reason that was effective was because, you know, the federal government only had 30% debt to GDP. So there was not a lot of debt on the public sector, and there really wasn't even a ton of debt on the private sector. But he was able to raise rates super high. And what that did was that slowed down borrowers wanting to borrow money. You know, who wants to borrow money at double digits, especially if that's much higher than the inflation rate. So real high nominal rates and real high rates compared to the, you know, kind of measures of inflation. And so

• 18:11Speaker 02

  that really slows down the ability and the desire for people to borrow money. And it slows down that rate of bank lending. It kind of pushed the economy into a credit contraction recession. But you kind of wash out some of that inflation from the system. You kind of reduce demand enough to allow supply to catch back up to it. And so that's an example of monetary dominance in action, both the cause of inflation, and then the response to having that high inflation. Whereas another big inflationary period in the US was the 1940s. And people don't really think of that decade when they think of inflation, but that was roughly on average as inflationary as the 70s. But that was the last time we were in fiscal dominance. And so in the 40s, banks were not lending much at all. That was not a period of rapid bank lending.

• 18:56Speaker 02

  Instead, the obvious context was World War II. And so they'd already gone through the Great Depression. So they already had the big private debt bubble pop and they started rotating that more to the public ledger. They kind of got stuck in this period of stagnation. But then, you know, as populism grew around the world, partially because of economic reasons, war broke out. And when it came to war, they did these massive fiscal deficits, the biggest deficits relative to GDP we've ever seen. They were even bigger than what happened in the 2020s. And, you know, a lot of that goes to fighting the war, but you know, that's going to commodity development, that's going to manufacturing. When the GIs come home, you put them through college and technical school and subsidize their mortgage and it's- Big government spending programs, basically. Exactly, yeah. Really big stimulus in various ways.

• 19:40Speaker 02

  And a lot of the bonds they issued to fund all that, because it's a tremendous amount of bonds, they were bought by the Federal Reserve, increasing their monetary base. Then they were bought by the commercial banking system on fractional reserve leverage. And so you had this huge spike in the money supply, but it was not because banks were lending, it was because these really big monetized fiscal deficits were plowing money into the system. And the Federal Reserve, they were basically captured by the Treasury. So they kept rates low, despite the fact that inflation was very high, because if they raised rates, it wasn't going to change the decision of Washington. You know, they're not going to not go fight this battle because of what the Fed's doing. They're not going to change any of that. And so it's entirely different toolset around that.

• 20:23Speaker 02

  And so eventually after the war, they pivoted more toward austerity. And they had a number of kind of things in their favor to grow out of that problem. But that's an example of fiscal dominance at its kind of its most extreme, whereas the 70s was more so a monetary dominance. And today in emerging markets, you see often there is fiscal dominance happening. Probably the clearest case of fiscal dominance today is Japan. So they have over 250% debt to GDP. You know, bank lending is not at a very high rate at all, some of the lowest rates of bank lending in the world. Their money supply increased, it is still fairly slow, but the increase that does happen is largely because the government's running deficits and then the central bank is helping to monetize those deficits.

• 21:06Speaker 02

  And so higher interest rates have a mixed success record of dealing with that because it's not like they're going to change their government spending much based on what the central bank does in the same way that the private sector responds. And so I think that's kind of a good baseline to set it is, is where's the money creation coming from? And what tools are able to slow down or not slow down that money creation?

• 21:28Ryan Sean Adams?

  I think this is great, and I think that no one listening has really lived through a fiscal dominance era. So we're going to have to bring in some of those examples later in the episode where you talk about the US in the 1940s. And like, what was that like? Or Japan today, or like an emerging economy, an emerging country? Like, maybe we can draw parallels there. But I want to ask you another point on the timeline that is probably closer to lived experience for the listeners to this podcast. And that is something we all remember, which was 2008 and the big bank crisis. Now, applying what we kind of like just learned here, Lynn, and you check me. We were squarely in monetary dominance territory. And the tools to like fix the financial system that was utterly broken and like plunging us towards the deepest recession,

• 22:11Ryan Sean Adams?

  maybe depression since the 1920s and 1930s was a monetary intervention. And it was almost squarely monetary intervention where rates dropped down to like, you know, zero. And there were the bank bailouts, of course, quite famously. And that's where like some of us started to learn this like very esoteric term called quantitative easing. These were all monetary policy instruments. I don't recall much of any fiscal policy intervention. In fact, that was some of the criticism here. And there was like an entire social movement, Occupy Wall Street, for instance. Why? You bailed out the bankers, use your instruments of monetary policy. But there was no fiscal policy intervention.

• 22:52Ryan Sean Adams?

  Like, people didn't get stimulus checks, like, you know, Main Street didn't get bailed out. And so check me on that. Was that purely monetary policy intervention? Like, if so, why didn't we use more fiscal policy at the time or like some combination of both?

• 23:06Speaker 02

  So that was kind of the beginning of where fiscal started to become relevant. So that was a mix of monetary and fiscal response, because that was a private sector debt blow up for the most part. And so the biggest response there was monetary, mainly in the form of cutting interest rates to zero and then you keep doing quantitative easing. There were some fiscal components, but as you pointed out, they were more targeted on banks. So some of the bank bailouts involved a combination of monetary and fiscal policy, because they did things that the Fed is not authorized to do on their own. And so some of that was actually injecting solvency into the banks, not just liquidity, but the other part was monetary. To the extent that there is fiscal support to the rest of the economy, that was pretty minimal. So for example, there was things like cash for clunkers. I do remember this. It was a government program to like buy your used car. Is that

• 23:51Speaker 02

  what this was? Yeah, incentivize people to, you know, get rid of their older car and buy a newer car, try to help them out while also helping out kind of industry. But that was, you know, that's like basically laughing stock in terms of size compared to the things we saw in these recent years. They're also, I mean, they gave a little bit of a boost to seniors. It was like a tiny little stimulus check. If you were unemployed, your benefits were a little bit higher than normal. So around the margins, there was a little bit of fiscal support, but more of the fiscal support was directed at the banks to recapitalize them. And then it was a very large monetary response. And another way to phrase it is, what is the fiscal support relative to? So for example, during that kind of 2008, 2009 period, a lot of

• 24:32Speaker 02

  loans went bankrupt. So they defaulted. And one of the few ways to really destroy money in the system is to default on a loan, or pay back a loan and don't refinance it, actually pay it back. Those are methods to, you know, either rapidly or slowly reduce the amount of money supply in the system. And so during that period, because of loan defaults, the money supply would otherwise have shrunk a little bit. And the fiscal support that they did was about the same size as the loan defaults. And also just the slowdown of lending that occurred. And so they basically balanced it in such a way that instead of getting deflation, we just had like zero inflation or like really low inflation. You might have had like a couple quarters of, you know, the way they measure it, deflation. But it wasn't like some gigantic

• 25:17Speaker 02

  huge thing that was way bigger than the amount of loans being destroyed. Whereas when you fast forward to say the 2020s, the stimulus checks were, you know, order magnitude bigger. The stimulus checks, the childcare tax credits, the PPP loans, the turn in a grants, the corporate bailouts, the, you know, down the line, all these kinds of things that happened. And the magnitude of those was way bigger than the loan defaults. And so that was a net huge increase in the money supply in a way that did not happen in 2008. So 2008 was like hints of fiscal, still mostly monetary, whereas by the time we got into the 2020s, monetary policy is still a present force, but the fiscal side is so much larger.

• 25:54Ryan Sean Adams?

  Lynn, is this too simple an explanation? So both the fiscal and monetary policy interventions like increased generally always like in the direction of increasing the money supply. It's just a matter of kind of who gets it. And when policy tends towards monetary policy intervention, then asset prices get inflated. Right. And we certainly saw that from like the time of, you know, the interventions in 2008, like onward, just massive run ups in stocks and all sorts of risk on assets. And on the other side, when there's a fiscal policy intervention, that tends to go towards kind of like, I guess, more directed to Main Street and wage increases or direct stimulus checks, and that causes inflation of a different type, which is a bit more of the consumer price index, CPI type inflation.

• 26:37Ryan Sean Adams?

  So is that oversimplifying the explanation of saying monetary policy equals asset price inflation, fiscal policy like intervention increase equals consumer price index CPI inflation?

• 26:49Speaker 02

  I would say for the most part, I mean, fiscal can do both. I mean, fiscal, when they use it is probably, it's generally a more powerful tool than monetary. So it can actually impact both asset price inflation and consumer price inflation, whereas monetary policy is generally more impactful on asset prices. There are some levers, of course, where monetary policy can impact CPI. You know, for example, if a currency has negative real rates, nobody wants to hold it, if they raise interest rates, it could convince more of the foreign sector to go and hold that currency, which helps it find a floor. So it stops devaluing and therefore it can, you know, say, put a lid on energy prices or other import prices. So both of those types of policies can affect.

• 27:30Speaker 02

  Asset prices or consumer prices, but it largely depends on who's being stimulated. So if you're mainly stimulating banks, for example, that's not going to contribute to too much CPI growth, whereas if you're sending money to households, you are going to impact consumer price inflation at a higher level. And another factor that's kind of worth clarifying here is it's not just the size of the deficits or the monetary policy intervention, it's also the amount of aggregate debt that's on the public ledger. Because that's why if it builds up enough, it starts to kind of invalidate monetary policy. So an example of that is during the seventies, federal debt to GDP was 30%, right? So when they raised interest rates, when Volcker raised interest rates, it put downward

• 28:14Speaker 02

  pressure on private sector lending, but at the same time, it put upward pressure on interest expense from the government, which is ironically kind of stimulatory. That's money, that's fiscal deficit that's flowing out from the government to whoever holds those bonds. And so basically, one hand, you're pushing down, the other hand, you're kind of stimulating. But because federal debt was low and most of the money creation was coming from banks, the downward pressure was a lot bigger than the upward pressure, which is why it was effective. Whereas when you go to today, when you have over 100% debt to GDP, the problem is that when they raise rates, they do put downward pressure on the private sector lending. We've seen that in the current data, lending is slower than it was a couple of years ago because rates are higher, people aren't rushing out to buy homes or, you know, releverage

• 28:59Speaker 02

  their homes and, you know, corporations with high debt are running into issues. So it is putting downward pressure, but the problem is that the interest expense that it increases for the federal government is like four times bigger when you're at 120% debt to GDP than 30% debt to GDP. And that is flowing to entities. You know, if someone has locked in a fixed rate mortgage, they have money market funds or T bills or whatever, every time the Federal Reserve raises interest rates, the government is now paying them more money, whereas their mortgage is locked in. So they actually have more spending power. And there are corporations did the same thing. There were corporations that just termed out debt for 10, 20, 30 years. That doesn't get affected anytime soon. You know, every year, a little bit of it matures, but it's not a big deal.

• 29:43Speaker 02

  Whereas any sort of big cash position they have in T-bills or whatever else they're holding it in, that's paying them more every time the Federal Reserve raises interest rates. And so that's one of the key reasons why structurally fiscal dominance starts to take over and limit the options of monetary policy, because what we normally think of as what central bank should do in the face of inflation is they should raise interest rates. But then after a certain point, you go through that looking glass where, you know, you're raising interest rates and it's only moderately effective because you're stimulating as much as you're pushing down. And if you go far enough, like if you get into Japan's case, it's so lopsided at 250% debt to GDP and almost no bank loans, that interest rate increases would almost certainly

• 30:25Speaker 02

  be somewhat stimulatory for inflation, ironically.

• 30:29Ryan Sean Adams?

  I've heard people describe like monetary policy in that condition as like pushing on a string.

• 30:33Speaker 02

  Yeah.

• 30:34Ryan Sean Adams?

  It's just like you keep pushing and just nothing happens.

• 30:36Speaker 02

  Yeah, and that's kind of the transition you go through. That's also why it's not 100% versus another, you know, 0%. It's like as you kind of get more and more debt on the public ledger, there's no magical line where that starts to switch over to fiscal dominance. It partially depends on, you know, different countries have different policies for like what kind of mortgages they have, right? So a country with more long-term fixed rate mortgages can enter fiscal dominance at maybe a lower level than a country where all of those are adjusting upwards quickly, right? So there's no one magic number. But over time, as you kind of move more and more debt to the public ledger, all those fiscal size starts to take over and then even the monetary policy tools that are meant to slow down inflation become less effective and in rare cases even counterproductive.

• 31:20Speaker 02

  And again, there's always multiple forces. So for example, if they raise interest rates, let's say the Bank of Japan raised interest rates, it would make more of the foreign sector maybe want to hold yen, which could slow down the yen descent and therefore, you know, kind of slow down the increase in oil prices in yen terms. That's one of the disinflationary factors it would have, but it would also increase the deficit more because all that 250% debt to GDP would start maturing into higher and higher yielding assets and they're not going to let this sovereign default. So they're, you know, the central bank's literally going to increase their balance sheet to kind of facilitate, you know, all those monetized fiscal deficits, which at the same time is increasing the money supply at a faster rate. And so that's really where fiscal starts to take over compared to the monetary.

• 32:05David Hoffman?

  So after the last like two and a half years of my education in the macro space, I've gotten a pretty good grasp around the Federal Reserve. I remember hearing about the rising interest rates in like 2022 and I'm like, hmm, I wonder what that's about. And then by the end of 2022, I had just exactly figured out what that was about. And so like, I think my and bankless listeners' understanding of what the mandate of the Fed is and how it impacts interest rates and just overall its goals. I think we have a pretty firm grasp on this now in the year 2024. But now it seems like my understanding of that is mostly moot because we're no longer in a monetary dominant world, or at least that's what we're learning. We are now in a fiscal dominant world. And so now like the goals and objectives for whoever is controlling these dials,

• 32:50David Hoffman?

  now I don't know anymore. Now it's like another kind of blank slate. And so if now we are in a world of fiscal dominance, who's got the levers? Who's got the dials? Like, what's their mandate? What's their objective? Who's got the power here and where do they want to take us?

• 33:05Speaker 02

  So the answer basically is the combination of Congress and the president. They're the ones that authorize spending that happens, including tax changes or spending changes. But probably the scary answer there is kind of no one is driving the train because if you have a highly politicized, a polarized environment, right? So Congress is gridlocked. You know, one side doesn't want to raise taxes, one side doesn't want to cut spending, or you know, even in many cases, both sides don't want to cut spending, or at least certain types of spending, right? So right now in the US, for example, neither side particularly wants to cut social security. Neither side particularly wants to cut Medicare, especially the recipients of those are the demographics that vote. And so basically, a lot of that spending is locked in. So a lot of times when people hear deficits, they think, you know, is it Trump's fault?

• 33:50Speaker 02

  Is it Biden's fault? Whose fault is it? But it's actually accumulated decisions. Some of that is, you know, a lot of it was during COVID and after COVID and all these kind of current things that are happening, that is a factor. But even things, for example, part of why we have so much debt is the Iraq war, right? But people forgot about that. That's, you know, it's two decades ago since it started. And then even before then, it's kind of the, the construction of these entitlement systems. The fact that, you know, as, as kind of more and more of that, now the baby generation, as they enter their retirement years, they're on the receiving side of, of more of these things. The US also has the highest healthcare spending per capita in the world for multiple reasons, and that feeds into it. So all these things are kind of, to varying degrees, locked in and, and developed over the course of decades. And

• 34:35Speaker 02

  so the process of, of trying to rein that in is kind of outside of any one person's control. It would take massive reforms, whereas monetary policy tends to be more centralized. There's only a handful of people that are involved in those key decisions. That's kind of why I use the meme, nothing stops this train, because it's not like a handful of people can get in the room and be like, okay, we're going to fix these things now. There's so many moving parts, so many people that disagree, so much stuff, this legacy built up, accumulated problems, that fixing it is nearly impossible in any sort of investable time horizon, which is kind of a challenge. So it's like, they sped up the train, and then they kind of broke the lever. So there's no one that can really stop it.

• 35:14David Hoffman?

  Feels healthy. So we were talking earlier about kind of the de-strengthening, the weakening of the tools of the Fed. And that's a result of just having a very high debt to GDP. If you have very high debt to GDP, and you raise interest rates, you're actually just like stimulating the economy because you're injecting more money into the economy because the interest rates are coming out of the fiscal side. And so the vibe is that there is kind of a nerfing of the Federal Reserve, the control, the powers, the levers that the Federal Reserve has. And like, my gut is like, well, that's a boon, that's a strengthening to the fiscal tools. What are those fiscal tools? And since no one is meaningfully like at the helm of those tools, right? Like, just this, this accumulates

• 35:57David Hoffman?

  over decades. What are those tools? What's getting stronger? Like, what are the impacts upon the economy that are now like stronger? If the Fed is weaker, like what's going on on the other side of the equation that's stronger now?

• 36:08Speaker 02

  So partly what's stronger is that the overall deficit as a percentage of GDP is just structurally bigger. So even putting aside monetary policy, just, there's a larger deficit that's flowing into the economy. Which are a type of stimulus, at least nominally. You know, they might not boost the real economy, depends on what they're spending on. But they do tend to boost the nominal economy, which is, for example, if you boost social security, the money that they receive, they can go out and buy more things. Or at least there's more dollars chasing things, which can drive the prices of those things up. Right? So that's why it's complicated between nominal and real. But basically, it's a type of nominal stimulus. And so the main levers that fiscal can pull is they could choose to raise or lower taxes. That would have, you know, probably a bigger impact on inflation than monetary policy decisions.

• 36:51Speaker 02

  They could choose or not choose to do certain spending actions. Right? So things like, you know, the Inflation Reduction Act are kind of ironically named. It's a form of deficit spending. Decisions whether or not to alleviate student loans. Decisions on, you know, military financing support abroad. Right? Which a lot of that actually gets spent domestically. It goes into the military industrial complex, kind of circulates that way. Right? So all these different levers of either spending or taxing, those are things that can be impactful. And one thing, when you have fiscal dominance, you have a bigger than normal dislocation between different sectors. And so, for example, commercial real estate right now is in a world of hurt because not much of the fiscal deficits are flowing to commercial real estate.

• 37:33Speaker 02

  But they are impacted by the fact that the Fed is pretty tight right now. Right? So they have over 5% interest rates. It's a very leveraged industry. They were impacted by work from home and just kind of shifting needs of office space. So it's kind of a perfect storm of things that is putting downward pressure on commercial real estate and not really assisting them in any way. So as an industry, they're still under monetary dominance. Whereas, for example, if you're doing restaurant or travel type of things, you're less industry rate sensitive. And, you know, people that are on the receiving side of social security and upper middle class and, you know, hold a lot of money markets, they're the ones traveling and eating out and doing all these kinds of things. So that's good for the American Expresses of the world. That's good for the, you know, booking dot coms of the world.

• 38:18Speaker 02

  Anything travel related that's, that's kind of, you know, pretty strong in its niche is generally more on the receiving side of the fiscal deficits, or at least their customers are. And they're not really on the harmful side of the monetary policy. That's kind of what you get. And then it becomes in fiscal's control, like basically Congress, the president, where they can direct that fire hose of money. To whatever they want. They, you know, in the 1940s, they directed at kind of the the younger side of the population. There were the GIs fighting the war, manufacturing capacity, energy capacity, the highway system. That's kind of where they directed that money. At the current time, a lot of that's directed toward social security, Medicare, military stuff. That's where a lot of that's flowing. A few years ago was flowing more broadly,

• 38:58Speaker 02

  it was flowing to, you know, almost everybody. And one of the challenges is how opaque it is. So for example, people, when they think of stimulus, their first thought is stimulus checks. Whereas I keep pointing out how powerful the PPP loans were and how kind of corrupt a lot of those were because, for example, you know, when they look at the numbers, something like two thirds of it, you know, the vast majority of it went to the top 20% of the population. So it's like, you know, a person down the street got a handful of, you know, four-figure stimulus checks. They got, you know, like 600 here and then like, you know, 1,200 here. And then they got childcare tax credits. It added up to, you know, several thousand, four figures. Whereas, you know, there were like law firms or investment firms or technology firms that were never really planning on laying anyone off. And they would

• 39:43Speaker 02

  just get like a million dollars. And that would just go to the bottom line of the owners.

• 39:48David Hoffman?

  P and L, right?

• 39:49Speaker 02

  Yeah. And they would, they would just buy a house or, you know, buy whatever the case is. And of course, some of them were so outrageous, they got prosecuted for fraud. But a lot of them, they followed the letter of the law, but it's still just, it went to the bottom line of the business. And that's kind of, there was upper middle class or kind of wealthy class spending, which was, that was stimulatory for things like upper class homes or other luxury items, right? So across the spectrum, wherever the fire hose goes, tends to be the recipients that are doing pretty well.

• 40:17David Hoffman?

  Okay. So fiscal dominance is, I like how you said at the beginning, there's a difference between nominal versus real. And fiscal, I think, from your answer, I think is really in the nominal side of things. It's not really impacting the broad economy, but fiscal dominance is giving the tools to Congress, the president, whoever is in charge, the power to kind of like pick winners and losers in the economy as the fiscal policy deems fit. And so the strength of the levers is increasing for the politicization of what sector of the Economy, we want to give a boon to and what sectors of the economy we want to like depress or suppress or whatever. And so there's not any sort of like rising tide that lifts all boats kind of phenomenon that's happening. But really, the strengthening of fiscal dominance just means

• 41:01David Hoffman?

  that like whoever's in charge gets to kind of determine that fire hose of money. And that is like just decided in Congress by our elected leaders. Is that kind of the answer?

• 41:11Speaker 02

  Yeah, yeah, that's pretty much it. And rather than kind of giving them the power, it's more like over time, the fiscal side kind of elbowed its way through until it took the power. You know, it's not even necessarily intentional. It's more just like accumulated debt level is what eventually causes it. So when you have that 40 years of declining interest rates and higher debts, every time there's a recession, you get a little bit of a transfer of private debt on the public ledger. And after four or five of those recessions or more, and you get interest rates all the way to zero, at that point, you've transferred a lot to the public ledger. And that's where it starts to snowball. So it's not like one Machiavellian decision to kind of do that. It's like a bunch of accumulated decisions led to that point. And then the monetary policy gets more restricted because it's like, well, you know, there's times where they have to increase their balance sheet,

• 41:56Speaker 02

  even though they prefer not to because they're made, they have to kind of keep the sovereign bond market liquid. So maybe they prefer like early 2023, when banks were kind of choking on treasuries and running into some issues, you know, they wanted to help fight inflation, but they went back to multiple months of providing liquidity because banks were dealing with an overflow of treasuries and falling treasury prices. And so the Fed kind of had to accommodate what's happening on the fiscal side. And now at this point, for example, the New York Fed is already forecasting that probably by 2025, they're going to go back to gradual balance sheet increases. And you know, the narrative could get pretty awkward if inflation is still above their target and they're going back to no longer shrinking their balance sheet and increasing their balance sheet. And that's what you see,

• 42:40Speaker 02

  you know, if you look at most emerging markets today, you know, let's say Egypt, for example, they currently have an inflation problem, and they're also increasing their monetary base. Their central bank is doing what is a kind of a form of QA, despite the fact that they have above target inflation, you see that regularly. And the US can enter that type of environment where The Fed is providing liquidity, kind of because they have to, to facilitate these large debt deficits, even though they prefer not to. And most of their tools are geared toward accelerating or decelerating bank lending, but that's now a much smaller force than the size of the fiscal deficits.

• 43:16Ryan Sean Adams?

  Yeah, for the people at this point in the conversation, like, saying, well, you know, like, this is Biden's fault, this is Trump's fault, this is Congress's fault. You know, I think to the comment that you were making, like, I mean, yes, all of those things are true. And certainly with things like PPP, there's a headline I was just reading, most of the 800 billion in PPP loans did not go to workers.

• 43:33Speaker 02

  Yeah.

• 43:33Ryan Sean Adams?

  You know, 77% did not actually get to workers and paychecks. So obviously, when you're talking about fiscal policy, where you point the fire hose into whom, there's a tremendous amount for Congress and the executive branch to, like, you know, take accountability for that, and they totally should. And also, the reason I think you're saying, Lynn, that the lever on the train is broke, like, you just can't stop the train, is because I don't think that there is an official who could get elected right now on a plan of austerity. So imagine the Republicans come out and they say, look, you know, like, austerity plan, we're going to raise taxes, and like, we're going to cut social security, and like, you know, any party that did this would not get elected, right? And so that's

• 44:15Ryan Sean Adams?

  why we're in sort of this representative democracy sort of trap, where, like, those in power, even if they wanted to, like, even if they wanted to, they couldn't get elected on an austerity platform. But one thing that still doesn't quite make sense to me, and I'm wondering if you'd translate this, is it feels like Jerome Powell acts like he's, like, driving the train, or driving the bus, or driving something here. And here was a comment from the last Fed meeting, somebody asked him, are you satisfied, Powell, with 3% inflation? He goes, of course, we're not satisfied with 3% inflation. 3% can't be in the same sentence with satisfied, is what he said. Why is there this act? Is, like, Powell not aware that he's no longer in as much control over that 3% inflation number

• 44:58Ryan Sean Adams?

  as he once was? Or is this all an act? Like, that part, to me, still doesn't make sense.

• 45:02Speaker 02

  Well, it's hard to get in what his personal headspace is at, but in general, Central banking is partially a confidence game. So some of their levers have real power, but another big chunk of it is setting expectations of what's going to happen. So for example, you know, we've had an environment where if an inflation print comes in hot, the dollar index goes up because the market says, well, that means the Fed's going to have to be even more hawkish, right? And so you get that kind of loop where that works for a period of time. Whereas if the market loses confidence that the Fed or the fiscal side can get this under control, you can start getting nonlinear outcomes where people say, I want to hold anything other than the currency of what's happening here. Right? So, and right now I'd say it partially works because, you know, a large part of the market

• 45:46Speaker 02

  still thinks they got this under control. This is fine. Nobody wants to sit there and say, my job is less important now because I'm getting overridden, right? It's supposed to, everything's kind of set up around the idea of an independent central bank. And so they still have to kind of maintain that illusion. And in addition, I mean, it's not like those levers don't matter. It's just that they're diminished. So for example, Powell decides to cut to 2% interest rates, that would really impact the commercial real estate sector. Whereas if he decides to hold interest rates where they are or hike them, he keeps kind of the slow moving kind of train wreck that's happening in the commercial real estate space happening. So he still has impact. His decisions do around the margins still matter. It's just that they are a much smaller percentage of the equation than the fiscal side and

• 46:30Speaker 02

  his toolset is diminished because of the fiscal side. But that's, that's not something you're, you won't really hear a central banker mention that kind of out loud.

• 46:40Ryan Sean Adams?

  That's play their part.

• 46:41Speaker 02

  Yeah. It kind of goes against the narrative of how we constructed things.

• 46:44Ryan Sean Adams?

  Lynn, what do you say to people who hear this argument? They say, yeah, I understand what you're saying, Lynn, but like the train is still off in the distance. Maybe we can hear kind of like the distant choo choo sound, but like we still have some time around this. I'm wondering what indicators you kind of look at for this. One you keep going back to is like debt to GDP and we're at around 120% now, but it has burned hotter in Japan. It got all the way in the 200s.

• 47:06Speaker 02

  You can get more debt.

• 47:07Ryan Sean Adams?

  You know, Japan's still working, right? I guess, I think it is. I haven't been there recently. Another maybe is we keep going back to like a higher deficits. So every year, like you probably see the headline. Like X trillion dollars in deficit, you know, like that. I would imagine fiscal dominance era would be dominated by large deficits. And you also have gone back to the interest payments on the loans that basically the government owes the world and like at some level maybe owes itself. And I was just looking at this because I was paying my taxes here recently as one does. And this is an infographic I'm going to share on the screen. Where does $1 of US tax dollar go? Let me just share this really quick for us. And here it is, we got some candidates you'd expect. 22 cents, social security, 14% Medicare.

• 47:51Ryan Sean Adams?

  Wow, that's a lot on healthcare that the US pays. National defense, about 13%. You know, it's very costly to maintain the large military. But look at this one. 11 cents on the dollar in net interest. Net interest, 11 cents on the dollar. So you give a dollar to the IRS, 11 cents of that is in the form of an interest payment. Right? And that's not going to any sort of entitlement program. Like no one receives the benefit of that. Aside from those that own T bills, it's certainly not going to defense. You're like certainly not going into infrastructure investment. That's what you're talking about. And that number gets that 11% number or 11 cent number gets larger and larger as the Fed increases its rates. And that's why it's so high at this point in time.

• 48:35Ryan Sean Adams?

  Anyway, just broad picture strokes. What are the indicators besides those that I mentioned that we are in the fiscal dominance territory for you, Lynn?

• 48:43Speaker 02

  So yeah, debt to GDP is definitely one of them. I think probably if I had to pick one metric, it'd be the one I mentioned before, which is when fiscal deficits are larger than the rate of new bank loan creation. And probably I would actually add an extra hurdle, which is the bank loan creation plus net corporate bond issuance. And so when the fiscal deficits are bigger than those on a fairly sustained basis, not just a one off, you know, say in 2008 or something, but actually on a sustained basis. That's when you've kind of crossed over to fiscal dominance. And then kind of adding on to that is when you have that really high debt to GDP level. That's where, when they raise interest rates, when the monetary policy tries to reassert itself. The problem is that because there's that really big stock of debt, not just the annual

• 49:26Speaker 02

  fiscal deficits, but the stock of debt, when that gets refined into those higher rates, that tends to offset with larger deficits, any kind of downward pressure you put on bank loan creation. So obviously, there's two factors together. And to your prior point about how the trains in the distance, one thing I would generally agree with is that this is normally a very long-term process. Like I said, I'd argue that we've been in fiscal dominance on and off since 2019. So it basically means we're five years in. I think five years from now, we're still going to be in fiscal dominance. And probably five years after that, I think this is a fairly long-term transition. Japan's been in it for well over a decade. But different countries entered at different speeds. And then how

• 50:08Speaker 02

  they respond to it and what their details are really matters. And so, for example, Japan entered it during, say, the 2010s decade, and they entered it from a state of they have structural current account surpluses. So there's more money flowing in from the combination of they have really good trade, and also they've had so many decades of trade surpluses, they actually own a lot of foreign assets. So they own more foreign assets than foreigners own of their assets. So basically, you can think of it as interest and dividends are just flowing to Japan all the time. And so that really helps kind of set a floor under a currency. And they have their pretty strong industrial base. So those factors kind of allow them to push further, I would argue, than most other countries would be

• 50:51Speaker 02

  able to push. That's kind of an extreme case for they had so many kind of things supporting them, that they could get up to well over 200% of their GDP before it started becoming an issue. Also, the 2010s, that was a structural commodity bear market, because in the prior decade, there was this over-investment in commodities, and then, of course, the global financial crisis slowed everything down. And so you had this glut of commodities, you had the shale revolution, so you brought a lot of new oil to market. All these things are disinflationary. And so Japan's policy gives a really long timeframe before inflation starts to become an issue. So most of that Kind of fiscal dominance era just transitioned into higher asset prices in Japan. Not a lot of inflation.

• 51:34Speaker 02

  And so it wasn't showing up at the gas pump, for example. But when you're still doing those policies and then you enter geopolitical issues and lack of investment in energy. And, you know, there's inflation elsewhere, so they have to raise rates. And then you're stuck in fiscal dominance where you can't, you know, raise rates. Or if you do, it's going to be somewhat counter effective. And everybody wants to sell the yen now. So some of those things finally started to materialize. But it took a long time because they entered it from a position of strength and they entered it during a commodity bear market. Whereas if countries go through that kind of more together and during a commodity bull market, that could turn out much faster. So I think that all those variables kind of matter in terms of kind of understand the magnitude of the speed. And they're not always predictable in advance.

• 52:18Speaker 02

  So for example, in 2022, when the Fed started raising interest rates, I was like, okay, we're looking at potential recession here. I doubted they'd be able to get them over 3%. And for all of 2022, we were seeing recession indicators. So purchasing managed indices were rolling over, multiple things were kind of slowing down. Growth was decelerating, asset prices were doing poorly pretty much across the board, except for energy. And so all those signs were playing out as expected. And what's hard to know in advance is when does something start impacting? So by the time we got into like late 2022 or early 2023, that's when I started noticing that the fiscal dominance was reasserting itself. That basically the government debt, because it's on average shorter duration than the private debt in the US. Because that was starting to refinance and blow out the deficits.

• 53:02Speaker 02

  I was like, okay, we're actually, we're showing signs of kind of bottoming here. And we're actually kind of entering more kind of acute fiscal dominance. And so it's a combination of having that outlook, kind of that structural idea of what's happening. But then paying attention to what's actually happening in real time. Because that can affect timing, rather than everything being a theoretical problem or something down the road. It's like, no, this is starting to happen right now. And so that shifts the base case for how quickly that plays out. So I mean, You know, I would argue that Japan's in fiscal dominance now. They're kind of finally having downsides of that. And the US is in fiscal dominance. Europe, less so, but that's a whole messy situation in and of itself. And when more countries reach that together, it's a problem.

• 53:45Speaker 02

  So for example, when Japan entered fiscal dominance kind of alone, it still had all these disinflationary offsets from China. You know, China was increasing their manufacturing and and there was still kind of this period of globalization and kind of no major geopolitical issues. But when we kind of fast forward a decade and now there's geopolitical issues and, you know, just kind of more uncertainty around that. And now China's population's kind of flatlining, right? So they're maybe not going to be the disinflationary offset for manufacturing that they once were. These things start to change over time.

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• 57:06Ryan Sean Adams?

  Yeah, and the picture of the train smashing into the bus. Just to add to that, so what you're saying, Lynn, very clearly is this is a train accident that happens in slow motion. This is not sort of an overnight bam. People will look at this and say, hey, Lynn, next month, nothing's happening. This kind of looks the same. That's not what you're saying. You're not saying this is going to be an overnight thing. You're saying this is going to happen in slow motion, could play out over many months and years.

• 57:30David Hoffman?

  Well, the meme that Lynn had was the way that the markets traded for the last 40 years. So I'm sure it happens in a blink of an eye from the perspective of 40 years, but from like a human lifespan perspective, it's not happening inside of a acutely like one or two years.

• 57:43Ryan Sean Adams?

  Yeah, yeah, it's a multi-year timeframe. And basically, I think the way it starts to manifest, and it's been manifesting, is higher baseline inflation.

• 57:52Speaker 02

  Higher baseline money creation and things are somewhat less cyclical because the fiscal deficits are not as cyclical as those cycles of bank credit creation. And so emerging market recessions, for example, they look somewhat different than developing market recessions. You know, and as we go forward, when developed markets have recessions, they could have some emerging market characteristics, basically that they could be more stagflationary than outright disinflationary, for example. And so, you know, it's hard to have an outright recession if you're already pre-stimulating by $2 trillion a year in deficits. Or to the extent that you have recession, it's probably going to look different. Or like I said before, you're going to get very big sector differences. You know, it's like literally commercial real estate's in an outright depression.

• 58:36Speaker 02

  Or at least office and parts of commercial real estate, a lot of that is an outright depression. Whereas other parts are booming. So the number of people that are going through US airports is currently at record highs, for example. And so you have that wider than normal difference between different sectors. And that's characteristics of being in fiscal dominance. It's kind of like how when emerging market has a currency crisis, it's often the case that exporters are doing great. Because they're earning, you know, foreign currency and they're paying, you know, a lot of things in local currency. So they're booming. And maybe the tourism industry is doing great because, you know, the currency is cheap now. So more people want to go and travel there. So there are certain sectors that are doing fine, if not more than fine.

• 59:17Speaker 02

  Whereas other sectors, like mainly around consumption or imports and certain other things, they're the ones that are really suffering their recessionary or currency inflation effects. And I think that as the US kind of continues along this path, that's kind of the type of thing that we'll see.

• 59:32David Hoffman?

  Since one of the main indicators of whether we're in monetary dominance or fiscal dominance is debt to GDP. It kind of feels like as a gut take that it's mostly a one-way street. Because as you have a high debt to GDP, it becomes harder and harder to pay off your debts because your interest rates are so large. And so at some point, there's some sort of like window of inflection point where the debt payments to our own debt are just so large that we can't facilitate them and we just literally get smothered by a mountain of debt. So like as there's a gut instinct, it kind of seems like as we enter into fiscal dominance and we stay there for longer, it gets harder to get out of it. It kind of seems like it's a one-way road where once you enter fiscal dominance, you don't really come back out. That's my intuition. Is this true? It's like a train track, David.

• 1:00:15Speaker 02

  Yes, pretty much one way. Historically, the way that they get out of it is these really big, dramatic currency devaluations and resets. So for example, in the US, they broke the gold peg in the 30s. And then in the 40s, they did financial oppression. So they held interest rates at zero. The long end, they even capped at 2.5%. So a 10-year Treasury was capped at 2.5%, while inflation averaged 6% for the decade. And so they basically grew nominal GDP faster than the debt accumulated after a certain point. And they were able to kind of combination of real growth and nominal growth and basically inflating their way out of it, they're able to do that. You know, that was hard enough to do back then. It's actually, now you have social

• 1:00:56Speaker 02

  media, now you have a polarized, you know, political environment. Those things are a lot harder to do now. I think a way of kind of putting it is that when you enter deep into fiscal dominance, default becomes increasingly inevitable, and it just becomes a question of how do they default? So if you print your own currency, you're unlikely to default nominally. But you do things like break gold pegs, or do financial oppression. And so those bondholders might get paid back every currency unit that they're owed, but they'll be worth less purchasing power compared to if they held other assets or other investments. And so I think that's kind of the tailspin that they go through. And that's why it can take a long time, because at least in the 40s, they had, you know, they could point to external threats and be like,

• 1:01:40Speaker 02

  that's why we have to do these extreme things. And here's the endgame for how we get out of this. Whereas if fiscal dominance is largely caused by accumulated entitlement issues and kind of accumulated military industrial complex stuff on wars that didn't help anyone, right? If it's all those things, it's less than an external enemy to point to. And there's less of a clear kind of catalyst to get out of it. And so I do think it takes a very, very long time to get out of it, and it ultimately ends with bondholders. Not getting their purchasing power back.

• 1:02:09Ryan Sean Adams?

  So let's talk about this. So we've so far in this conversation described a slow motion train wreck, like a train like speeding and just like hitting a bus. And so let's talk about like what that feels like and who's going to get hit because no one listening kind of like has lived through this type of an experience. And we've talked about the 1940s, we've talked about like emerging economies, we've talked about Japan. It feels like it might have flavors of all of those and yet, you know, be somewhat different. I guess my first question, Yulin, is like, it probably is different based on who you are. So let's segment this in a few ways. Like, one way to segment this is by country. So there's sort of like the developed world versus everywhere else, or maybe there's kind of like the West versus, you know, like China, like Russia, other countries. That's

• 1:02:54Ryan Sean Adams?

  one way to look at it. Also, I'm curious about demographics, right? So who carries the disproportionate burden of this? Does this benefit those on kind of the lower tier from an economic perspective, or it just, does it go back to the wealthy yet again? And how about generations? So there's the baby boomers who are right now the recipients of the entitlements. And then there's kind of younger generations, right? You know, Gen X even, and particularly millennials and Gen Z. So can you talk about during this era of fiscal dominance, what your expectations are based on kind of like demographics of who's going to win, who's going to lose?

• 1:03:25Speaker 02

  Yeah, that's where details really matter. So for example, in the 40s and 50s, a lot of the deficits was flowing toward the younger side. And for example, social security, the age of receiving that was not that different from the average life expectancy. And so the amount of time that the average person would spend in that state of kind of receiving those benefits was lower. Obviously, there's big variance. Whereas now, on average, life expectancy is a lot higher than social security. And there's a big chunk of demographics that moved into it. And so in the 40s and 50s, you had declining wealth concentration. There's also, they did extremely high tax rates in that period. And so a lot of the bondholders were wealthy. They were getting devalued. A lot of the wealthy people were paying very

• 1:04:06Speaker 02

  high taxes. And a lot of those stimulus things were, you know, putting GIs through technical school.

• 1:04:12Ryan Sean Adams?

  And Lynn, when you say extremely high, we're talking about like 90% plus, right? For the highest income, like wealth tiers, yes?

• 1:04:19Speaker 02

  Yeah. So most people would not be paying 90%, but yeah, on that marginal high dollar, yeah, they were very high tax rates. And so that's kind of what they went through at that time. So it was like, there was a really draconian for people who held bonds, held cash, or made a lot of money. And that it was beneficial for anything on the receiving side of some of what was happening. Whereas in the current time, you know, as you showed from that chart of where our money goes, a lot of it's going to social security, a lot of it's going to healthcare, and a lot of it's going to the defense, the military industrial complex, right? So that's generally going to older, wealthier demographics. You know, it's not really going to the younger side. And so that kind of fuels ongoing polarization. It fuels more and more kind of wealth concentration. Whereas in Japan, you have somewhat of a different case.

• 1:05:04Speaker 02

  They have lower wealth concentration because if you look at where their deficits are going, it's not really going to defense. It's not really going abroad. It's mostly going to things like healthcare and things like that. And they pay something like a third per capita on healthcare of what we do in the United States, even though on average they're older. So basically that money is kind of less kind of thrown everywhere and less kind of thrown in ways that are kind of politically unpopular. And so that's another reason why they're able to stay in a state of fiscal dominance for longer is because they're kind of doing it almost as effective as they could, given like all the demographics issues they face. You know, they have a lot of kind of tailwinds that help them. Whereas in the US, you know, we're paying three times as much for healthcare.

• 1:05:47Speaker 02

  You know, our military spending, you know, relative to GDP is bigger and a lot of it's more foreign. And so those are things not really going back to people in the same way. So it really depends on those details.

• 1:05:58Ryan Sean Adams?

  How about the differences in countries and sort of where you live? So far, we've been talking about this from the US perspective. And like I just broadly understand that like most of the EU is in kind of like a similar place, although you had said maybe Europe is not in full fiscal dominance, but certainly from a debt to GDP perspective, like, you know, similar. And they also have like, you know, places like China, which have a lower debt to GDP right now. But the entire world operates on the dollar as the reserve currency status. So as we go through this period of time of this slow motion train wreck, how do different nations feel it or different regions of the world?

• 1:06:31Speaker 02

  So that I think partially depends on what state of fiscal dominance that we're in. So as you point out, mostly it's the developed world that's in fiscal dominance to varying degrees now. And when that starts to become more and more apparent and gets more and more extreme, that probably starts to benefit those other countries. But at the current time, it's not really benefiting them yet because the market still kind of fully thinks that the Fed has this under control. And so, for example, right now, the dollar index is fairly strong. And that hurts countries that have a lot of dollar debt. You know, like Latin America, for example, they're in an environment where they have a decent amount of dollar debt. And so when the dollar strengthens, their liabilities are getting harder relative to the cash flows that they're earning. And so you generally see depression like

• 1:07:14Speaker 02

  characteristics, you know, their like real GDP in dollar terms starts going like sideways for like

• 1:07:19Ryan Sean Adams?

  So it's like when Volcker was squeezing the US and like increasing interest rates, he was absolutely like devastating emerging economies around the world.

• 1:07:27Speaker 02

  Yeah, that's kind of the dark side of what he did is that so he did slow down loan creation and these other factors, but also by spiking the dollar, he basically put Latin America into a depression. If you look at their oil consumption, it like flatlined for like a decade. And so that alleviated some of the supply issues for the United States. So basically, over time, they try to push that problem to someone else. And one thing that kind of builds up over time, this is like another one way train. So the US as the world reserve currency is running these structural trade deficits, which over time means more and more countries accumulate reserves relative to their external debts. And so our ability to crush areas gets kind of weaker over time. So back then, we had basically all the cards. We could just crush other countries and that wouldn't ricochet

• 1:08:12Speaker 02

  back to us very quickly. And then in the 90s, we could do it again, but a little bit less powerfully. And now, a lot of these countries have built up such big reserves that they're more resilient. So for example, Brazil and China and India, for example, a lot of these countries are able to kind of hold on in the face of a strong dollar better than they could have, you know, in the prior strong dollar cycle, like the late 90s or the one before that in the 80s. Now, there's still individual countries that get caught out. So for example, Turkey and Argentina and Egypt and a bunch of countries in Africa. Some of these countries that are not even classified as emerging, some of them were classified as frontier, whereas ones like Turkey are obviously, you know, more developed.

• 1:08:54Speaker 02

  But either way, those are the ones that have run into issues in this cycle. But that's a smaller percentage of global GDP than if you manage to say catch China or catch Brazil again, for example. And so because these really big economic blocks, they have more reserves relative to their external debts and they're in a position to weather through this. It slows them down, it hardens them, it kind of pushes problems onto them, but they're able to kind of stand against it. I think where the next phase happens is let's say in 2025 or, you know, give or take, you know, a year or so, if the Federal Reserve has to go back to increasing its balance sheet, even when inflation is maybe still on the hotter side, that's when you could get a meaningfully weaker dollar

• 1:09:38Speaker 02

  index and that could cause a boom in places like Latin America or elsewhere that had been pressured during this kind of strong dollar environment, but that have been able to get through it. So that's when you could start to see that rotation of who's harmed and who's benefiting. But basically, it's every country that's in fiscal dominance, it depends where their deficits are going. And then geopolitically, it depends on who has more debt than assets in terms of their foreign exposures.

• 1:10:06Ryan Sean Adams?

  Yeah. So but like generally fiscal dominance, is that going to, I know, not right away, but like lead to a weaker dollar for, you know, like, and that could be good for many emerging countries around the world. But is that sort of the trend in the trajectory?

• 1:10:18Speaker 02

  I think once you get to that switch over point. So right now, somewhat counterintuitively, fiscal dominance has benefited the US. If you can run a combination of loose fiscal policy, but tight monetary policy, that actually can strengthen a currency temporarily. That happened in the 80s and that happened kind of in recent years. But when eventually that kind of runs its course, because you can't run that combination together for very long, eventually, you know, we're already seeing, for example, the Federal Reserve is tapering their rate of balance sheet reduction. And the next step is probably to stop balance sheet reduction. And the step after that would be going back to some of your mild balance sheet expansion. So in the past two years, where they could run fairly tight monetary policy with that loose fiscal policy, that's actually, it's strong dollar, it's

• 1:11:03Speaker 02

  negative for emerging markets, it kind of puts pressure on them. But when they kind of fully relent and the balance sheet starts going back up structurally, and people get increasingly aware that it's going up because of the fiscal debt, that they're kind of forced to monetize, that's when I think you could see. A bottoming of the economies of Latin America and certain other regions.

• 1:11:23Ryan Sean Adams?

  It's crazy because all of these things do have like political implications, of course. And if you can imagine putting yourself in like a position, if you're a listener in the US, and you already think unelected officials make too many monetary policy decisions. And like, you didn't sanction this person. Imagine you're somewhere in Latin America. It's not even your central banker. It's not even a person in your country. It's like in a country, if you like, in another place in the world that's actually making these monetary policy decisions, like, that has to be so infuriating and could lead to, like, I would imagine, lots of instability. I want to ask you, though, Lyn, let's put ourselves in the position of somebody who's living in a more developed country, maybe like somewhere in the US. How will it feel to live through this period of fiscal dominance? So I have no feeling of how life might have been in like the 1940s.

• 1:12:07Ryan Sean Adams?

  But of course, there was like a major war going on at that point in time. So we don't have that, thankfully, yet. You also mentioned capital controls. So this is like maybe FDR executive order type stuff where like, American citizens turn in your gold. I don't know if that's a common characteristic of fiscal dominance and what we might expect to see. Also, the 1930s were a period of like riots, a period of revolutions, depending on where you lived in the world. So I'm getting this picture of like, expect some instability. Expect maybe even like, in the worst outcome cases, some chaos. But do you have any sense of, like, how can you flesh out how it'll feel to live in an era that is dominated by fiscal dominance? Is it all negative or there's some positives to it?

• 1:12:49Speaker 02

  Well, so that's where the details of the politics really matter. Generally, those periods are characterized by rising populism. But populism can take very many shapes. So there can be right populism, left populism. There can be kind of rational populism where it's like, hey, you know, we've kind of pushed everything up to the, we've done all these things that kind of benefit the military-industrial complex and benefit Wall Street. How can we kind of pull some of this back? That's kind of rational populism. Whereas then you can get irrational populism, like extreme nationalism, or at the worst case fascism, right? So it's generally characterized by some degree of rising populism, which is what we've seen throughout the world, really. I mean, Europe has rising populism. The US has rising populism. Multiple emerging markets do. Japan's kind of avoided that issue. It's, you know, specific, the way they're handling it and what their culture's like.

• 1:13:34Speaker 02

  So it's kind of a different, that's why. The politics matter. Right now, for example, Turkey and Argentina are in fiscal dominance. Now, those are emerging markets going through fiscal dominance. I mean, they are G20 countries. And Argentina used to be one of the wealthiest per capita countries in the world many decades ago. And so those are kind of tastes of how it can go. Now, those are a little bit different because they both have external debts in currencies they can't print. So they experience that generally to a more extreme level than what you see in developed countries when they go through fiscal dominance. So it partially depends on how self-contained is that country? How extreme or broken is the political situation relative to how put together is it? Right? So, you know, potentially Japan, that's why they can take on a higher level of fiscal dominance

• 1:14:18Speaker 02

  before it really starts to become an issue, because some of those other pieces are still kind of in place and held together pretty well. Whereas the US, you know, likely, and I think we're already seeing, experiences issues at a lower level of fiscal dominance because we go into that with a structural trade deficit and we go into that with already higher wealth concentration and we go into it with higher degrees of political polarization. And so generally what happens is in fiscal dominance, you have political populism of varying shades, you have above-average inflation, and you could have years that are better or worse than others, but generally higher baseline inflation. Who's benefiting depends on where those deficits are going. And then you generally get capital controls, which can take, they can be mild or they can be extreme.

• 1:15:00Speaker 02

  So extreme is saying things like, you know, you can't bring any money in or out of the country, or you can't own gold. Those are extreme things. More mild ones, for example, like Turkey implemented policies like kind of restricting the types of entities that could take on debt. Because what they don't want to do is have people take on debt and then say buy dollars with it. They don't want people to short the lira by taking out debt and buying the dollar because that can exacerbate what's happening. So they start to kind of close pieces of the capital account. They kind of close the financial borders or the types of lending that places can do. And then, yeah, they can get fairly extreme. They can go after, say, Bitcoin and stablecoin privacy tools and crypto privacy tools and things like that. They can put more restrictions on self-custody of these assets.

• 1:15:45Speaker 02

  They can, you know, in Nigeria, they put pressure on exchanges. So they put pressure on peer-to-peer marketplaces. There's different levers that they can pull, but they generally are ways to slow down capital that wants to get out of that, you know, kind of financial repressed system and go to other jurisdictions or go to other assets that are holding it better. They try to close those exits. And again, that could be draconian or it could be kind of around the margins. Like, well, you can't do this type of lending, but otherwise you're still fairly free. And that's where even things like legal defense matters, right? So if those things start to materialize, the more educated the population is on it, and the more organized that they are resisting it, and kind of the more independent the court

• 1:16:27Speaker 02

  system is in a given country, the more success they might have at pushing back some of the most draconian capital controls. And, you know, to some extent, it's inevitable, but they can at least kind of defend against the worst-case scenarios.

• 1:16:38Ryan Sean Adams?

  By the time capital controls are in place in their most aggressive form, I think it would be pretty hard for anybody to argue that we're in this period of fiscal dominance. Right now, it still feels like the entire tenure of this conversation is that a large portion of the market and the government who just kind of like denies it, like, or just doesn't see it right now. But like, it even started to feel in crypto, Lynn, that we are under a tremendous amount of regulatory and governmental pressure in the US. Like, I mean, you mentioned it, there have been open-source privacy developers, cryptocurrency developers who actually have been arrested at this point in time. We've got five different companies based in the US, you know, like, we're talking about Coinbase and Kraken and like, you know, non-custodial wallets like Uniswap and MetaMask, even Robinhood most

• 1:17:20Ryan Sean Adams?

  lately, and they all have lawsuits. Now, all of that is under the auspice of, you know, going afoul of securities law and like, you know, running afoul of OFAC sanctions and, you know, national defense and all of these sorts of things. But you start to wonder if some of this might verge on the edge, on the edge of some type of capital control. And what it would look like, at least for the cryptocurrency community, an asset that wasn't available in the 1930s, I guess the closest analog would probably be some sort of non-custodial store of value, like a gold that you'd hold in your own home. But what that might look like if we started facing more severe or To severe capital controls in the US. And could that mean like the restriction of non custodial wallets? Or the software around it?

• 1:18:04Ryan Sean Adams?

  Do you think that we might actually enter that sort of regime? I mean, I even hazard to ask the question because it feels very alarming to even sort of surface this that the country that you live in could actually ban like non custodial custody of crypto assets. But I sort of have to ask because I mean, if we're going to enter this world of fiscal dominance, we should enter it with eyes wide open.

• 1:18:24Speaker 02

  Yeah, it's a good question. I mean, in Europe, for example, there are countries like France where like you can't pay over a thousand euros or whatever the number is for something that you're technically on the gray market. If you're a business that is allowing customers to pay you in cash above a certain amount because they want to be able to surveil it. Or for example, in I think it was 2020, Germany did a new rule that if you buy more than like 2,000 euros of gold, you basically KYC it on that.

• 1:18:49Ryan Sean Adams?

  Yikes.

• 1:18:49Speaker 02

  Which is kind of crazy. So the first step is kind of surveillance. They want to know where the flows are going. So it's sort of increasing levels of kind of surveillance for starters. In the US, we recently saw escalation where they're going after non custodial privacy tools. So they're trying to expand the definition of a money transmitter to include coordinators. They're basically, you know, helping message services for non custodial entities to transfer value and kind of have privacy rather than actually taking custody of the funds, being able to control them. So we'll see how that works out in courts. So those are kind of early signs. Another thing to always keep in mind is that capital controls generally come with a narrative for why they're happening. So for example, in a country that's trying to, you know, stop people from taking out loans to buy dollars

• 1:19:34Speaker 02

  or making it hard to get dollars, they're often phrased it as, you know, speculators are attacking our currency. We have to stop the speculators. Or there's foreign powers going after our currency and that's why we have to, you know, take these.

• 1:19:45Ryan Sean Adams?

  Or in the 1930s, a lot of it was framed as like greedy hoarders.

• 1:19:48Speaker 02

  Exactly. Yeah.

• 1:19:49Ryan Sean Adams?

  Like hoarding all of their wealth in gold.

• 1:19:51Speaker 02

  Exactly. They're hoarding their wealth in gold or look at these Bitcoiners. They're boiling the oceans and you know, their Bitcoins going up, but you know, we gotta, you know, take that back. Right? That's the kind of, if you can kind of point to a problem. Or an imaginary problem? A scapegoat? Yeah, scapegoat. Same thing like wage and another characteristic you sometimes see is wage and price controls where inflation is happening. So they're like, well, the problem is these like grocery stores, they're raising prices on us, right? And so that becomes another narrative. It's the corporation's fault. Or in Europe, you already see, for example, there are politicians saying, we have to slow down wage increases because that feeds inflation. That doesn't go over very well politically, but that's another thing they try to do. So it's always like scapegoating

• 1:20:32Speaker 02

  different areas and trying to then do that and basically blaming that group. And it's always better if you can blame outsiders or the wealthy minority or this unpopular group. I mean, the more, and that's where you get some really dark outcomes, depending on how far you go. But basically, it comes out to those capital controls, starts with surveillance, then gets to control, and then it goes to trying to justify why you're doing that. If you're a government doing those, now when I say, well, we're going to take power from our people, it's no, it's like, okay, we're doing this to save you from these other people. That's how it's always usually constructed.

• 1:21:08Ryan Sean Adams?

  Lynn, can I ask, so I guess maybe my sense is that the tighter they squeeze on a capital control perspective, the challenge for them or whoever wants to implement capital controls is it sort of exposes that the emperor has no clothes. And so, you know, like my sense is the tighter they squeeze on something like Bitcoin or other cryptocurrencies, the more people will be like, oh shit, this is why we need cryptocurrencies. And like the price of these things will kind of escape the capital controls and continue to rise. But I want to check that against the past. So in the 1930s, what happened to the price of, let's say, gold when they implemented these capital controls? Did it decrease the price of gold? Did it increase the price of gold? Like, yeah, what were the effects of capital controls in past fiscal dominance eras?

• 1:21:48Speaker 02

  So back then, gold was pegged. So you couldn't really see it manifest in price. Generally, what happened was there was very low enforcement of the gold ban because it's expensive to enforce. Anytime you enforce something on banks, that's cheap because you only have to tell a few thousand banks what to do and they, of course, comply overnight. Whereas when you're trying to enforce things on the individual level, now you have millions of enforcement points. And so they mostly just did really big kind of scare tactic sentences, like you can go to prison for 10 years, but then there are a fairly small number of people doing that. And there were people that literally just hodled gold for decades because that ban lasted for about four decades. But mainly what it did was it killed liquidity in the market, right? So even though individual people could still technically

• 1:22:30Speaker 02

  find ways to hold gold, it reduced the amount of like usefulness you could get out of gold because if you want to then sell some of your gold for value, you got to basically go on to like the black market to do it. You got to do like these underground gold agreements. And so there are countries today where like, you know, like it's illegal to own Bitcoin or crypto or stable, whatever the case may be. And brokers are like, you know, kind of off the market or in some of these countries, you have like physical cash dollars. There are brokers that are basically gray market or black market kind of street brokers for dollars. And so people can still get their hands on dollars if they're in a repressed environment. But the liquidity, like if you're a billionaire or a multimillionaire trying to move around a lot of money, it's a lot harder than someone who's just kind of small

• 1:23:13Speaker 02

  and well connected. So a lot of what they do is they damage the liquidity of those things. But it also does draw attention to it. And so, and it also kind of weakness feeds on weakness. And so, for example, if a country implements capital controls, well, every outside investor is like, why would I ever invest in that country again? Why would I ever, I'm not going to put money in, I'm not going to get it out. And so you can actually go into a spiral until eventually something changes. Now, an entity like the US or China can get potentially away with more capital controls than say a Turkey, right? It's kind of the bigger, more powerful you are, you have a longer runway of being able to implement that kind of thing. Now, the US has the benefit of, you know, fairly independent

• 1:23:54Speaker 02

  court system. So it's hard to just kind of do like a top down thing. That political polarization can start to work on your favor because political polarization prevents some of the most extreme outcomes, as long as it holds. So for example, during the gold ban, you know, one party in Congress had a super majority. They had over two thirds. So they could bypass almost every check and balance because you had a gigantic wave of political shift. Whereas it's much harder to do those things in a polarized republic, for example. Generally, authoritarians can do it, or republics where they manage to build some sort of narrative or some sort of supermajority, those are where you get, usually those more extreme outcomes.

• 1:24:34David Hoffman?

  In the typical macro podcast formula, which is why we don't do them, because they're kind of a formula, we just ask you to come on once, maybe twice a year, is that you would like run through all the macro conditions and then you would end the podcast with like, all right, well, is the Fed getting a cut? And when is the Fed getting a cut? And so that is my question to you, like, when is the Fed getting a cut? But also first, does that question even matter anymore? Now that we are entering the world of like fiscal dominance, like the whole like magnifying glass that everyone has over the Fed, is that just not important as it once was anymore? And so like, what signals are you pulling out from the Fed? Is it even an agency worth watching?

• 1:25:11Speaker 02

  So it's certainly important for some sectors, like I mentioned, commercial real estate, for example, that'll really be impacted by whether or not the Fed chooses to cut or not. But overall, I think that rates are a less important variable than the markets become accustomed to in recent decades. So my base case is we'll probably see a steeper yield curve, either from higher long end on the bond yields, or some cuts on the shorter end, or both. So probably steeper yield curve. So I'm not particularly bullish on, say, owning long duration bonds. If I'm going to own any of them, I'd rather own short duration ones or kind of mid duration ones. But the thing I watch at the Fed right now is liquidity. And so their rate of balance sheet reduction, I think is going to matter, because eventually

• 1:25:54Speaker 02

  they got to a point where they're no longer able to run their shrinking balance sheet playbook, because they've run out of resources, like they'll run out of reverse repos, they'll run out of other balance sheet space to absorb those bond issuances, and then they'll have to go back to balance sheet increases. And that is potentially a big narrative shift when they have to get to that point. I paid attention very closely when they, back in 2019, had to go back to balance sheet expansion. And that was an investable thing. Basically, it was pro most types of assets when it happened. And so I think that liquidity variable, that balance sheet size variable matters more than the rate variable. I also look at things like what's going on on the fiscal side. Is

• 1:26:36Speaker 02

  there anything on the horizon that can accelerate some of the fiscal deficits? Or is, for example, if a meaningful tax rate starts to make its way through Congress and is somehow going to get bipartisan support, that'd be a huge variable that I'd be paying attention to, as well as anything revolving around capital controls or anti-self custody or these types of things. So those are the variables that I monitor in a fiscal dominant environment or that I'm looking to monitor that I have been monitoring more so than what's the Fed going to do at their next meeting? Are they going to go up 25 basis points or down 50 basis points or hold steady again? That becomes less relevant than Fed liquidity, fiscal deficit size, and any of these other kind of capital controls.

• 1:27:17Ryan Sean Adams?

  Lynn, this has been an absolute masterclass in fiscal dominance. I just want to thank you on behalf of Dave and myself and the bankless community for this. And I think maybe we just have two questions as we kind of conclude this, which is kind of like the preparation type questions. But so, you know, one is, what will things look like on the other side? So this new world, what does it look like? Is the US still the reserve currency? Or has it lost that in the process of dealing with this? And then what do we do to prepare? Are there assets to buy? How do we brace for impact here?

• 1:27:46Speaker 02

  So I think what it looks like on the other side partially depends on how long it takes. My base case is to see a more multipolar world. And you asked before, for example, what does this look like for other countries? Well, partially depends on how effective they are at getting out of the problem. So to the extent that, for example, China can buy oil in its own currency allows them to escape some of the downsides of US fiscal dominance, then if they were stuck buying oil in dollars while the US is running a fiscal dominance playbook. And so over time, I think you probably would see more kind of bilateral trade agreements between large foreign countries, other economic blocs. But I don't expect, for example, any one of those currencies to become larger than the US currency. They're

• 1:28:28Speaker 02

  either, I mean, the only economy at the same scale of the US is China, and they've closed capital, you know, kind of on their border. And generally, they're not a super trusted kind of global partner. And so it's not that one other big currency takes over, but you have a little bit more diversification of currency pricing or what kind of reserve assets central banks hold. So you get maybe less treasury purchases and more gold purchases because that's a market that they're used to. It's pretty big. You know, over time, we'll see, for example, what happens to the size of the Bitcoin market in five or 10 years or whatever else is happening here. Stable coins are an interesting variable because even as you have top down, countries are trying to de-dollarize. You know, at the bottom up, people generally still want dollars. That's kind of their fiat currency go-to.

• 1:29:11Speaker 02

  And so stable coins are a way to basically get dollars in the hands of people, even as their top level is trying to de-dollarize. So stable coins can actually extend the extent that the US is able to maintain some degree of kind of globals or status. And people can think that's good or bad, but it's just kind of a factor that potentially extends it in the face of that kind of top-down de-dollarization. And so that's all the kind of big moving parts there. But basically, it kind of shifts to a more and more multipolar kind of reserve asset and bilateral trade agreement world. As far as what assets to own, generally, where possible, you short fiat currency, especially if you locked them in before rates went up, and then you own things that are scarcer. And then if you want to avoid tail risk, you diversify because, for example, you don't

• 1:29:54Speaker 02

  want to have everything in one asset and then your asset became the scapegoat that got like an 80% tax put on it, for example, right? So it's not about, maybe the asset itself does fine, but maybe you, in your jurisdiction, don't do fine with that asset. And so you either pay attention to what's happening in that area or you own, you know, for example, you might own your own house. You might then own Bitcoin. You might own a little bit of gold. You might own some energy equities or you might own various equities that have locked in long-duration rates and then they have variable pricing power. And that could be in almost any industry. And so you own kind of this playbook that can get through things. Maybe if you're older and you want to have lower volatility, you own things like T-bills or intermediate-term TIPS rather than owning long-duration bonds.

• 1:30:39Speaker 02

  Those are all kind of the different levers that someone can pull depending on where they live, what is their volatility tolerance like, what is their willingness to kind of concentrate and take on risk of that concentration? Which could come politically as well. But basically, yeah, you want to own scarcer assets and be very careful about owning anything that's kind of just purely paper based.

• 1:30:58Ryan Sean Adams?

  I think the bankless listenership is disproportionately long on cryptos is one of those scarcer assets. And interestingly enough-

• 1:31:03Speaker 02

  We tend to not invest in paper.

• 1:31:05Ryan Sean Adams?

  Yeah. Interestingly enough, Lynn, I think you just presented the most compelling case I've heard to actually diversify out of crypto because like my general impression is like crypto does quite well during this era of fiscal dominance being a scarce, you know, non-sovereign asset. But actually I had not considered that it could be scapegoated and it could be like subject to the 80% type of taxes that you're talking about. And I would not put it past the current US government regime to do something like that. So maybe there's a case for diversification. But just the final ending question, are we safe in crypto assets? And, you know, I know you advocate a three pillar approach and, you know, you talk about profitable equities and owning some cash equivalents and that sort of thing. But like, how do you think crypto fares in this whole fiscal dominance era?

• 1:31:47Speaker 02

  So I think that, for example, Bitcoin and stable coins are a big tool against this, right? So in developing countries, the fact that people can like, you know, a Nigerian graphic designer could hold up a QR code on a video call or send me a payment string, an email or a DM and have me pay her in whatever currency she wants, right? It goes around her local banking system, right? So that's a super powerful tool. One, that's infinite value density through ports of entry and that's infinite value density peer to peer rather than through decentralized gateway. So that is, you know, basically the biggest tool against this is basically, you know, holding those assets, being able to transfer those assets is super important, which is also why then you have to pay attention to jurisdictional risk. So I think that, I mean, that's why part of my kind of case for being structurally long

• 1:32:32Speaker 02

  Bitcoin is this fiscal dominance environment. And then I do also pay attention to stable coins, especially in that kind of emerging world phenomenon, because everybody wants to go up the stack. Right? So if you're in Turkey, you want dollars or gold or Bitcoin or whatever the case may be. If in the US, you have dollars, so stable coins are less of an issue. But what these technologies do is they allow people more freedom of choice in whatever country they're in. They're able to go outside of their borders and get assets or get monies that they can't get just purely internally. And so that is basically the biggest tool we have against basically a complete kind of replay of prior fiscal dominance periods or the effectiveness of capital controls. And I think it's worth defending.

• 1:33:14Ryan Sean Adams?

  There we go. Crypto is the biggest tool we have towards resisting these things. Lynn Alden, thank you so much for joining us. This has been a pleasure.

• 1:33:20Speaker 02

  Thanks, Lynn.

• 1:33:20Ryan Sean Adams?

  Thank you. Bankless Nation, if you are not already subscribed to Lynn Alden's awesome email, you need to go do that. So we'll include a link in the show notes to that. It is a free investing newsletter. You can keep up to date on all of her latest thoughts. And of course, I got to end with this. This new era of fiscal dominance is going to be risky. So is crypto, I guess. 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.