Why Raising Rates Would Actually Calm Markets | Jim Bianco

The Fed may no longer be a one-person institution, and markets are not ready for the consequences. Jim Bianco joins David Hoffman to unpack Kevin Warsh's emerging 12-voter Fed, the end of forward guidance, and the counterintuitive case that higher short-term rates could actually pull long-term yields lower. They also explore sticky inflation, why balance sheet reduction cannot happen overnight, how AI capex is reshaping the economy, why the AI bubble may look more like 1998 than 2000, and why Bitcoin needs more strong crypto rather than deeper dependence on Wall Street and Washington. --- 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium --- BANKLESS SPONSOR TOOLS: 🔓NEAR | TRADE CONFIDENTIALLY, GET 20% BACK https://bankless.cc/near-pod 🔑BITKEY | GET 10% OFF USE CODE: BANKLESS | #bitkeypartner https://bankless.cc/bitkey ✈️COINBASE ONE CARD | EARN 5% BACK IN BITCOIN https://bankless.cc/coinbase-one-card 📊BITGET | TOKENIZED STOCKS 2.0 https://bankless.cc/bitget-stocks 🎯THE DEFI REPORT | ONCHAIN INSIGHTS https://thedefireport.io/bankless --- TIMESTAMPS 0:00 A New Fed Takes Shape 4:34 Warsh's Good Family Fight 10:16 The End of Forward Guidance 17:07 Markets Learn to Price Ambiguity 22:29 Why Rate Cuts Raised Long-Term Yields 26:42 Inflation Changes the Vote 30:42 Rates or Balance Sheet? 35:00 The Case for Higher Rates 41:07 AI Capex and the Economy 49:17 Warsh's AI Deflation Bet 53:51 The Bubble Comes Later 1:02:00 Gold, Bitcoin, and Debasement 1:07:04 Strong Crypto vs Weak Crypto --- RESOURCES Jim Bianco https://x.com/biancoresearch Jim’s podcast https://www.youtube.com/watch?v=mhq-IKbzpDs&list=PLdyJxdkS1yBU --- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

• 0:03Speaker 00

  Bankless Nation, we are joined once again with a friend of the pod, Jim Bianco from Jim Bianco Research. Jim, it's good to have you back.

• 0:09Speaker 01

  Thanks for having me. Looking forward to the conversation.

• 0:12Speaker 00

  There has been a structural transformation at the Fed. I think these are the right words to describe what's going on with the incoming new Fed Chair Kevin Warsh. And there's so much to talk about. There's whether it's hawkish or dovish or neutral Fed. We got to talk about the increasing rates, the long end of the curve, the inflation regime, so much to talk about. I don't really know how to start off this interview other than asking the big broad question, which is when you look at the Fed and you try to read Kevin Warsh and what the Fed is up to, what's your first reaction? How are you reading the Fed?

• 0:50Speaker 01

  So I think you're right. There has been a big change at the Fed. And that change is that usually what we think about with the Fed is the way you structured the question. How do we read the chairman? What does the chairman think? There's 12 voters. What about the other 11? And for decades, they didn't count. You know, they did what the chairman told them to do. Now, behind the scenes, they could kind of, you know, make their case to the chairman in quiet. But when it came to the vote, everybody fell in line and voted with the chairman. I think that's changing right now. And I think that if you wanted to use an analogy, they're going to be more like the Supreme Court, that, you know, we don't hear,

• 1:34Speaker 01

  we wouldn't as Americans tolerate for one second if the Supreme Court heard all arguments and then they retired to their cloakroom and they all looked at Chief Justice Roberts and go, so boss, how are we voting on this one? You know, but that's essentially how the Fed has been working. Now, what's changed is that I think it's Trump's incessant attacks on the Fed and the Fed worrying about their independence, worrying that Trump's appointees are going to do his bidding. And how does the Fed maintain its independence if it has a bunch of people that just do what the president wants them to do? And what the Fed is starting to wind up being is 12 independent voters.

• 2:19Speaker 01

  And so we've seen this now. We've had 10 dissents this year, more than any time in the last couple of decades. The last meeting on July 29th, we had three dissenters all in the same direction to raise rates, nine to not raise rates. That's the most dissenters in the same direction. Sometimes you get them two-sided, some to raise, some to lower, and then some in the middle. But the most in the same direction in 10 years. And we also saw going into the July 29th meeting that the Fed Fund Futures, or Calci or Polly, if you want to look at those, because they kind of say the same thing, had a 35, 40% chance that the Fed was going to hike rates.

• 3:02Speaker 01

  And we've always been comfortable with this idea that, or used to, I should say, this idea of going into a Fed meeting, that the probability of a move was either 2% or 98%. And so this is kind of in the middle. So what I think has changed about this Fed is it's 12 voters. And Fed watching, I've been arguing, is a vote-telling exercise. Listen to their speeches, put them in the hike holder cut column, and then the day before the meeting, which one has the majority? That's the way they're going to vote. Now, one last thing. You're always going to have Fed officials that are in the middle, you know, could be persuaded either way. So the chairman's going to have a lot of influence.

• 3:45Speaker 01

  So when it comes to, I'm 50/50, I could go either way. Then if the chairman says, I'm voting this way, they most likely might want to vote with the chairman. So he's still going to be the most important voice, but he's not going to be the only voice. And then finally, don't forget that Jay Paul is still a Fed governor. He didn't leave. And Jay Paul said, I'm going to fold into the background, meaning he's not going to give any speeches, and he's going to vote with the chairman. So the chairman kind of walks into the meeting with two votes, right? His and Paul's vote is what he does. So he's still important, but he's not nearly as important. So to understand this Fed, you have to understand the dynamics of how everybody is viewing things

• 4:29Speaker 01

  and how everybody is voting.

• 4:31Speaker 00

  How much of this transformation is a strategic intentional choice by the new Fed Chair Kevin Warsh? And how much of it is a reaction to what you were saying, where we don't want the Fed to be, you know, under the direction of Donald Trump? And so maybe because the Fed is a board of governors who vote is somewhat democratic, maybe the Fed is reacting to, it's being anti-fragile and it's reacting to the potential corruption of Donald Trump, and it's doing something to, you know, protect its legitimacy, protect its sovereignty, and that's good. Or is it more at the direction of Kevin Warsh of saying, this strategic ambiguity and the removal of the key man importance

• 5:16Speaker 00

  is actually an intentional direction that I want to set the Fed in? Which one of these rings more true to you?

• 5:24Speaker 01

  Can I weasel out and say both?

• 5:26Speaker 00

  Sure, sure.

• 5:28Speaker 01

  Explain why I say both. I think it started off as to protect the institution against a president, let's write it general, a president, it's Trump now, it could be a future president, that wants to appoint his own people to the board and tell them how to vote. But I also think that when Warsh got there, he basically said, you know what, I'm fine with this. And he calls it the good family fight, is what he refers to it as. So he was predisposed to say, if that's the direction that the Fed was going to go anyway, I'm okay with it to begin with. So he wasn't about to push back or try and fight against it in any way. And I would argue, to get kind of in the weeds a little bit, there's a different Kevin,

• 6:13Speaker 01

  Kevin Hassett, that was also being considered to be Fed Chairman. I would argue that Scott Bessin, the Treasury Secretary, and Donald Trump understand that this board is more independent, and Trump has basically said that even in the last week, that he said, I know what, he said, I know what Warsh wants, but I also know that the board might want something different, effectively to those words. Kevin Hassett was early on considered to be a frontrunner or under strong consideration to be Fed Chairman. Kevin Hassett, Harvard-trained economist, very, very well-qualified to be Fed Chairman, but he's kind of one of those congenial academic types.

• 6:57Speaker 01

  And Bessin and Trump said, you know what, if this is going to be, you know, herding the cats, we need a little stronger personality than a congenial academic type. Not that Warsh is a bully, not like Trump is a bully, but Warsh is a bully. But I think that he's more of a forceful personality than Hassett. And I think that that might be one of the deciding reasons that Warsh got the job. And like I said, he's okay with them being a little bit more independent, but he's okay with standing in front of them and, you know, kind of making his case and trying to convince people to vote with him instead of just dictating like the Fed used to do.

• 7:39Speaker 00

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• 10:39Speaker 00

  Maybe when we put so much legitimacy and power and emphasis into the single Fed Chair, it was never supposed to be that way? So we're going back to an older version of the Fed, a more original version of the Fed. The market needs to adapt around that new status quo. Investors who are looking at the Fed are going to be receiving different data, different information from the Fed. How would you explain just the difference in signal coming out of the Fed to the market these days? What's the qualitative difference in that communication signal from the Fed to the market? And how is the market reacting?

• 11:20Speaker 01

  Right. So a quick anecdote about how the Fed used to work. And it got to its most extreme during Greenspan about 20 years ago. So when the Fed meeting occurred, Greenspan would walk into the room and he'd welcome everybody to the Fed meeting and they had an agenda. And they would start the agenda and the meeting runs four to six hours. And Greenspan would hardly ever speak during those four to six hours. And then after, towards the end, he'd say, okay, enough. And he'd reach into his bag and he'd pull out the Fed statement, which he personally wrote the night before the meeting and said, everybody agree to this and we'll put it out and we'll be done. And it's like, what was the point of the meeting? If you already decided the night before what everybody's going to do. So we've come a long way from that.

• 12:04Speaker 01

  But along the way, the Fed developed these two fancy words, forward guidance and reaction function. And I think that that's really where the market is struggling. Forward guidance, that's a fancy word for signal to me what you're going to do next. You're going to raise rates, you're going to hold, you're going to lower rates. Kind of give me a smoke signal here, so I know what to expect. Now, Warsh has been dead set against forward guidance. He did one venue for forward guidance. The Fed puts out this dot plot where they tell you where they think the funds rate's going to be at the end of this year, next year and the year after. And he did not submit a dot and he wants to do away with the dot.

• 12:44Speaker 00

  All the dots, everyone's dots. Cause the governors get the dots.

• 12:48Speaker 01

  Yeah, all the, he wants to do away with the whole exercise. I am one that agrees with him that this forward guidance should be done away with. Why? Because too often the market takes forward guidance as a promise. The Fed says, you know, we're getting ready to hold and we're going to not move rates. And I'm going to think of 2021 and inflation is transitory. Okay, they're not going to move. And the inflation rate goes to four, to five, to six. And the Fed keeps saying inflation's transitory and they feel boxed because they told the market, we're not going to raise rates. And if we raise rates, we might upset the market. So you wait till March of 22 before you raise rates.

• 13:32Speaker 01

  And incredibly, the inflation rate was 8.6% when they finally started to raise rates. You wait way too long because you promised them or you told them you weren't going to do it. And the market takes it as a promise. And so you wind up with the wrong policy is what you wind up waiting way too long. Or you go back to 2013. That was what we referred to as the taper tantrum.

• 13:54Speaker 01

  Bernanke was the Fed chairman and he said the same thing. We're not going to move, we're on, we're steady, we're not going to move. We're not going to change the size of the balance sheet. And then in May of 2013, he comes out of the blue and says, we might change the, the, the size of the balance sheet. We might reduce it. We might, you know, stop the money printing and start you doing quantitative tightening. And the market freaked out and the 10 year yield went up 140 basis points in four months in 2013. Point I'm trying to bring is forward guidance. For every instance, you say the Fed tells you what we're going to do and everybody relaxes and then they do it and it's seamless and painless and nobody notices. It creates another problem.

• 14:37Speaker 01

  So it, it also blows up markets because you, you know, to use the crypto term, you rug them, you told them what you're going to do and then you do something else. Or it forces you to do something you don't think is right to do. So I'm all in favor of getting rid of forward guidance and Warsh desperately wants to do it. The other fancy word is reaction function. Reaction function is give me the rules of the road. You don't have to tell me what you're going to do in September, but tell me what data you look at, what you think constitutes data that would be a hike, a hold or a cut. And then I'll just follow the rules of the road. Now, Warsh isn't offering reaction function. And I disagree with that. I think he should.

• 15:20Speaker 01

  But the reason I think he's not is he's got all these task force. One on inflation, one on communications, one on the size of the balance sheet, one on the labor market, you know, and, and the like. And he's waiting for them to come back because I think you're asking for, what are the rules of the road? What data should I be looking at? How should I react to it? And he's saying, I might change that in four or five months. So I don't want to give you some rules now and then say, now you can forget those rules. Here's a new set of rules. I think he should. But I'd also point out, if it's 12 different Fed people, 12 different voters, it might be 12 reaction functions that you need.

• 16:03Speaker 01

  Obviously, three members of the Fed voted to hike rates at the July 29th meeting. They have a different reaction function than Warsh, who did not vote to hike rates. Lisa Cook is a Fed governor. That's the one that Trump wants to fire. She gave a speech in Anchorage last week and said in the speech, I stand ready to raise rates. She might be a fourth reaction function. So there's also going to be, it's, I think Warsh owes us his reaction function. His will be the most important one, but it's not the only one. We're going to have to get everybody else's. So what I'm trying to tell everybody is this Fed is in a state of flux. It was one way, it's becoming another way.

• 16:48Speaker 01

  I don't think the new way it's becoming is necessarily bad. It's just that transitions are always messy and that's what we're in right now. We're in a transition.

• 16:59Speaker 00

  I think the big question that I wanted to get you on the podcast to answer is the market's reaction to that transition. If we're going from, if we're doing a phase change, we're going from A to B with the Fed regime, the market is going to be different. Once we go from A to B, maybe it's a marginal change, maybe it's a very big change. My, my gut reaction is that if the Fed, the Fed seems to be withholding information somewhat strategically and it's, it's saying less. It's being more mum, it's reducing the signals to the market. And what we do know about markets is that markets like clarity. Markets like promises, they like to be able to look into the long term.

• 17:41Speaker 00

  And it seems that the behavior of this new Fed is to reduce some of the clarity that it's, it perceives its job it is to give to the market. And so it wants to de-scope its role about giving information to the market. And the market was previously getting some amount of clarity, getting some long-term planning from the signal from the Fed that it's not getting anymore. And if we understand that markets don't enjoy ambiguity, but the Fed is supplying some amount of ambiguity, or at least withholding some amount of signal, it seems to be that markets might trend slightly more conservative. We, maybe we go away from risk and the market trends towards being a little bit more conservative in the market.

• 18:26Speaker 00

  Do you agree with that assessment? Or what other data do we have about the market's reaction to this new Fed regime?

• 18:32Speaker 01

  No, I agree with that assessment. And I would argue, you know, what I said before, that we had a 35 to 40% chance the Fed was going to hike rates and it wasn't 98 or two. And I saw on social media, when I was pointing that out, people are like, are you out of your mind? They're not going to raise rates. Of course they're not going to raise rates. And I'm like, this is not the 98 or two world anymore. There was a 40% chance they were going to raise rates. They didn't. But you know, because it's a binary outcome, don't assume that, yes, it was always a 1% chance that they were going to raise rates. No, it was 40 and get used to that. Because I think every meeting as we go, not every meeting, but most of the meetings, if you look at Polly or if you look at Kalshi, if you look at the Fed Fund Futures,

• 19:17Speaker 01

  it's going to be somewhere between 33 and 66% for most of those meetings. And it's going to be a closer call than we, than we think. And we need to kind of get used to that. Now, why does the Fed want to do that? Another phrase they like to use, moral hazard. Moral hazard is the, the term that the Fed likes to use to say that all of those promises create problems. You want an example? I would give you Silicon Valley Bank. Silicon Valley Bank, now let me be clear, they screwed up. It's their fault. But they said, look, we were long bonds, big time, without a hedge because the Fed promised us they weren't going to raise rates.

• 19:59Speaker 01

  And then the Fed finally caved after saying transitory inflation and started hiking and hiking aggressively. Bonds sold off hard. We lost so much money, the bank went bankrupt. Now, yes, it's their fault, they should have known it. But there is some truth that if it, they're an extreme example that people take this forward guidance that the Fed used to use and say, that's it, I know what the Fed's going to do, leverage to the maximum. And this is what causes problems over and over again in markets is that there's too much risk taking. So if they want to back off and say, look, we might raise rates, we might not raise rates. You have to make an independent adjustment, assessment. And you have to, you know, consider all the probabilities.

• 20:44Speaker 01

  That walking into this meeting, it's not a 2% chance that we're going to hike rates, it's a 40. So make sure that your positioning is for a 40% chance that we're going to hike rates. And so they want to reduce those blowups and extreme movements and the like. So I definitely think that this is what we're going to have to get used to with this Fed. And like I said, I don't think it's a bad thing as well. And then finally, the Fed wants the market to go back to a basically reacting to the data and how the data looks as opposed to reacting to how's the Fed going to interpret the data?

• 21:28Speaker 01

  Now, I get that, that's the one I think that the Fed's going to have the hardest time with. It's easy to say, you know, that's the phrase that he uses, you know, play the ball, not the referee. Yeah, I understand what you're trying to say, but you're still pretty damn important. You know, as far as you're more than a referee, you're also a partial player. Maybe you're not a total player like you used to be, but you're a partial player in this game as well, too. It's going to take a while before you become an objective referee. So part of what the Fed wants is they want the market to assess. They want the market to price in various scenarios. So they could look at the market and start to look at and start to say,

• 22:11Speaker 01

  the market thinks this and that, and that's an important input in our process. As opposed to the market just guessing what they're going to try and do.

• 22:19Speaker 00

  Has the question of whether the Fed is hawkish or dovish or neutral, is the nature of that question different now? In the sense that like, maybe I could just ask you the question, Jim, what do you think if the, do you think the Fed is hawkish? But now that there's a little bit more of a democratic process to the Fed, maybe your answer is like, well, there's a hawkish bias in these governors, but that could change very quickly. And so maybe the question is less relevant. Is the nature of that question different now?

• 22:51Speaker 01

  Yeah, I think it is. And I'll give you a great example because let's go back to September 18th, 2024, right before the election. The Fed cut rates by 50 basis points. That was their first rate cut. And they've cut rates six times for 175 basis points. They cut them 50 at the first meeting and then 25 at every, at every one after that. The last time they cut rates was December of last year and they've been on hold ever since. Now, normally, and I was even tweeting about this yesterday and people were kind of cognizant, dissidents, not listening to what I was trying to say. Normally you'd think if the Fed was cutting rates 175 basis points, interest rates would fall.

• 23:34Speaker 01

  But on the 10-year and the 30-year yield, they have not. The 10-year yield, roughly speaking, right now is about 95 basis points, almost 1% higher than it was in September of 24. The 30-year yield is about 1 and 1/4% higher than it was in September of 24. I got 55 years of data, that's why I was tweeting out yesterday. There's no, there's no other example of the Fed cutting this much, this long, and rates going up. Now, why was that? Because Jay Powell, for most of that, was the Fed chairman. He met with the staff. They met and made a decision, we're going to cut rates, we're going to be dovish.

• 24:17Speaker 01

  And I think that the market was signaling to the Fed, we don't agree with your policy. We're a little bit more worried about inflation. We're a little bit more worried about some other things. We think the appropriate path for interest rates would be higher. And I've used this line, this old bond line, bond traders can stop panicking when the Fed starts panicking. And what I've argued was if you are uncomfortable, remember that the 30-year yield, we're recording on Thursday, the 30-year yield made its 19-year high on Tuesday, two days ago. If you're uncomfortable with that and you want that yield to go down, don't scream for the Fed to keep cutting rates because they have been and it's been going up.

• 25:02Speaker 01

  Maybe if the Fed panicked a little bit about inflation, then the bond market would calm down. And you'd actually see falling yields. I'll give you an example. In 2022, when the Fed started raising rates, they were going by the summer of '22, 75 basis points a meeting. But interest rates, even though the inflation rate was going to 9%, interest rates settled down a little bit. Why? Because the Fed was in full froth panic about 9% inflation. As a bond investor, okay, if you're going to shit the bed about it, I don't have to. And that's basically the way they were. Because before that, they were saying, if you don't care, then I'm going to worry.

• 25:45Speaker 01

  And that's a, we're getting a low-grade version of that now. You're not worrying about inflation, so I'm worrying about inflation. So if you start raising rates and worrying a little bit about this, long-term yields will come down. As I try to explain this, like I said, the kind of this is everybody come back to me, are you crazy? If they raise rates, no one will be able to afford a house and, you know, it'll choke off the economy. And I was like, I just said if they raised rates, I think long-term yields would come down, not go up. And that's where I think people are trying to, you know, trying to understand how this Fed works. The market has been saying for two years that this rate-cutting policy has been wrong by seeing higher rates. So if you raise rates, maybe then those long-term yields will reverse and start coming down.

• 26:29Speaker 00

  Let's talk about the inflation regime right now. Inflation has been above 2% for 64 months, ever since the Zerbera. It's been really sticky at 3% to 4%. I think we're at 3.4% right now as this latest month. Are we tolerating 3.4% these days? And what do you think Kevin Warsh and this new Fed regime thinks about this like 3% sticky inflation?

• 26:53Speaker 01

  So let me take the last part first. Warsh has given a couple of speeches right now, a couple of press conferences. And at the end of the month, he'll give his Jackson Hole speech as well. And in those speeches, he said about, you remember, the Fed has a dual mandate, high employment and low inflation. And he said regarding the employment data, you know, the payroll report that we always look at, that he referred to that as echoes of the history that's only good on the third revision. Meaning, I don't think it's a very good report. The third revision is 18 months later, that maybe by that point, it's fairly accurate, but it's only telling you what it was like a year and a half ago.

• 27:36Speaker 01

  And so he's been dismissing the methodology of that report. And he's got a task force that's going to work on trying to find what he called more realistic or real-time measures, excuse me. But he's also at the same time said that the inflation data seems to be more important to him than the employment data. So he's really focused on the inflation data right now. And he's talked about that even there, he's talked about potentially looking at different ways to measure the inflation data. That wouldn't be out of precedent. Jay Powell invented a thing called Supercor, which was core inflation, less housing services. That was the measure that we referred to as Supercor.

• 28:20Speaker 01

  That was invented by Jay Powell and the Fed. It's still out there. We don't look at it as much right now, but they were looking, they were, that was very important about two or three years ago. So if Warsh wants to invent a new measure, he can invent a new measure. It wouldn't be unprecedented. But I do think that as far as the inflation measures go, the Fed itself is getting more worried about it. Three people wanted to raise rates at the July meeting. As I said, Lisa Cook has already said she stands ready to raise rates. I will offer an opinion in that Chris Waller, another Fed governor, who hasn't given a speech since July 29th. He probably will before the September 16th meeting at some point.

• 29:03Speaker 01

  And I would guess that when he does, he too very well might be in favor of raising rates in September. And then we're talking about five people ready to raise rates in September. Seven, we either have said no or we're still unsure because they haven't given a speech. So this Fed is definitely more worried about inflation. That's why the odds were 40%. Because I think the market is thinking that that's kind of where the Fed is right now. And that's why the odds are like 40, 40, 50% right now on the September meeting. Because that's kind of where we are with this Fed. There is an inflation problem. As you pointed out, we have been above 2% for 64 months. By the way, if you go back to 2010 to 2020,

• 29:47Speaker 01

  we were only above 2% like three or four months out of that entire decade. And now we haven't been below it in over five years. So I do think that there is an inflation concern in the market. It is not, as I like to joke, an 810 Zimbabwe worry about inflation, but it is a low-grade 3% to 4%. Well, if it is low-grade 3% to 4%, that means that interest rates might should be in the 5 range. Maybe some of them should be closer to 6%. And that has a lot of people worried that if rates go up, what does it mean for housing? Does that impair the economy? I don't think it does. But I do think that the path for interest rates is higher because of this inflation fear that we have.

• 30:25Speaker 00

  Is raising rates or tinkering with rates the primary tool that this Fed is going to use to fight inflation? Because there's a, there's a, some, just thinking, there's a tweet that I remember reading out on the Bankless Weekly roll-up not terribly long ago, about how Warsh might allow the Fed to fight inflation through balance sheet reduction rather than rate hikes. What are the main tools that you see the Fed using to fight inflation? And is it the normal ones or are we doing something new here?

• 30:52Speaker 01

  No, those are the two major tools. It's either raise rates or reduce the balance sheet. Now, let me mention something about the balance. Let me say it this way. Raising rates is the immediate thing you could do in September. Reducing the balance sheet is far more complicated for the following reason. Going back to Dodd-Frank, I'm sorry, going back to the financial crisis in 2008, we passed a law called the Dodd-Frank Bill, after Barney Frank and Chris Dodd, the Senator and Congressman. That was thousands of pages of regulation on the financial system following that crisis. In that bill, we identified the funding markets, the overnight repo market, and secured overnight funding rates or sulfur, which is what we call it now,

• 31:37Speaker 01

  as being sources of concern. So we've choked those markets from growing. Federal debt keeps going up, but the size of the funding markets as a percentage of federal debt is at the lowest levels since the 1990s. In other words, the funding markets are too small is what I'm trying to say. We've made up for that difference by having the Fed provide funding every day for the markets through its massive balance sheet. The amount of bills that are traded and everything, they would step up and do it through reverse repos and the like. So in 2025, the Fed started to, or let me back up.

• 32:17Speaker 01

  In 2019, the Fed made a pass at saying it's time to reduce the balance sheet. And when they started to reduce the balance sheet, what they said was we're going to get out of the business of funding Wall Street. But Wall Street couldn't expand to meet that missing funding. So you had a repo crisis in September of 29. The repo rate rocketed to 9% because there was a shortage of funding and it created havoc on Wall Street. Okay, the Fed increased the size of their balance sheet and the like. In 2025, they tried again, or 2023, they started to reduce their balance sheet. But by 2025, we started to see more volatility in the funding market because as they reduced

• 32:59Speaker 01

  it down to a certain level, Wall Street could increase the funding market as well. So the point I'm trying to bring up is, is it more effective to reduce the balance sheet to deal with inflation? It might be, but they can't do that in September. They can't do that in October. They need to have their, their task force come back and say, here's how much you can reduce the balance sheet. If we want Wall Street to take up that, that missing Fed part of funding, we need to change the rules in order to allow Wall Street to get much more into the funding business. The Fed is not the arbiter of those rules. The Treasury is, and they refer to that as the, as the new Fed Treasury Accord between

• 33:44Speaker 01

  Besant and WASH. And all of this is complicated and the board has to approve it. So what I'm trying to say is reduce the balance sheet. Fine, that'll happen in a year, maybe in two years, when they get the ability to do it. So right now they got one tool if they want to deal with inflation and that's raise rates. And that's why that tool might have to be used now, maybe in the second half of 27 or 28, if they could get the ability to reduce the balance sheet, they could back off that tool. So I hear a lot of people say, well, they could reduce the balance sheet. Yes, but they're, they can't do it now. If they reduce the balance sheet now, you wind up risking a shortage in the funding market, repo rates spike, Wall Street can't get funding.

• 34:28Speaker 01

  It creates all kinds of systemic problems and you don't want to do that. You have to adjust the rules. You have to approve all of this and that's going to take time.

• 34:38Speaker 00

  It's a, my read from you is, tell me if this is correct, is that you actually think that higher interest rates, at least like, you know, marginally moderately highest, higher interest rates will actually calm the bond market because the bond market will understand that bonds will be safer over the long term because inflation will be lower? Is that, is that your read?

• 34:59Speaker 01

  Yeah, because remember that as a bond investor, they're called fixed income securities because that's what you get. You get a coupon that is fixed. You get a certain amount of cash flow. I don't want my cash flow devalued by higher inflation.

• 35:18Speaker 00

  In real terms.

• 35:19Speaker 01

  Yeah.

• 35:19Speaker 00

  Right.

• 35:19Speaker 01

  Yeah, I don't want it devalued by higher inflation. So inflation or the devaluation of your dollars, same thing, is the enemy to any bond investor. So either the Federal Reserve use its tool to raise interest rates, raise their short term interest rates and pull back some of the pressure on interest, on inflation, or will do it by, in the way the bond market will do, well being the bond market will do it by saying, since nobody cares about inflation, I'm out of here. I'm just going to sell my bonds and I'm going to leave and that pushes the price of bonds down and that pushes the yield up.

• 36:02Speaker 01

  So if somebody, like I said, if somebody's panicking a little bit about inflation like the Fed, oh, good. As a bond investor with a fixed income, even if there is a little bit of inflation, they're working on it and I can relax a little bit. I don't have to sell my bonds. But if they keep coming out and giving me another reason and another reason and another reason that there is no inflation, I don't have to worry about it. We're not going to raise rates. As a bond investor, I might say, no, I disagree with you. Going to sell my bonds and leave. And that's why we're sitting at 5.2% on the 30 year, which is just a handful of basis points away from the 19 year high, which was set two days ago.

• 36:38Speaker 00

  The, if you, tell the typical investor, like the typical response, perhaps even the naive response is that if we watch the Fed and the Fed increases rates, me on the risk side of the investment spectrum, I get scared. It's like, oh no, they're raising rates, like my risk assets are going to go down. But hearing what you're saying is like, well, maybe that happens as like, you know, a spinal reflex, like a gut reaction. But if the bond market is happy, I actually feel safer as an equity investor. Would you agree with that assessment?

• 37:10Speaker 01

  Yes. And if you want an example of that typical investor that just has that knee jerk reaction, you could just replace that word with Donald Trump because that's the way that Trump has been, you know, saying that he constantly demands that the Fed cut rates and he constantly thinks rates should go to zero.

• 37:30Speaker 00

  Right.

• 37:30Speaker 01

  You know, I, I tweeted out last night.

• 37:33Speaker 00

  The shot in the arm right before the midterms.

• 37:35Speaker 01

  Right. I tweeted out last night, United Wholesale Mortgage is in a world of hurt right now because they didn't hedge against rising interest rates. United Wholesale Mortgage is the largest mortgage company in the world and they didn't hedge against rising interest rates, according to a CNBC story, and they've lost billions of dollars. Their stock price is down by 50% and they've run into trouble. And I, and I tweeted out about that and I said, if there's one thing to take away from this interview, never, ever, ever take your interest rate advice from somebody in the real estate business because everybody in the real estate business always thinks that interest rates are too high and they should go to zero to 1% always under any circumstance in any environment.

• 38:19Speaker 01

  And oh, by the way, what was the business of the president before he became president? And what does he think interest rates should be at? He said they should be 1%. Every real estate person thinks that as well. So yes, everybody thinks like that, right? Trump has done a very good job of making everybody think that the way you look at interest rates is down on yields is always good for any reason whatsoever and up is always bad. And I've argued that's wrong. That's not the way to look at interest rates. They're more nuanced, they're way more nuanced. There's a fair, they're the cost of money. Money shouldn't be free. It should approximate some metrics in the economy, how fast your economy is going, how

• 39:01Speaker 01

  much inflation you have, how much debt you're borrowing should be your cost of money. I think that the cost of money is drifting higher. If interest rates drift higher with the cost of money, we'll be fine. Two days ago, we made a 19 year high in the 30 year yield. We're also at an all time high in the stock market. It's not bothered by it. Now, if they go too high, that's a problem. It could choke off the economy. If interest rates are too low, Trump doesn't think, or any, a lot of people, I shouldn't just pick on Trump. He's too easy. It's easy to pick on Trump. But everybody thinks that if interest rates are too low, that's a problem too. It encourages mindless speculation and poor investments. If I can borrow 1% and I can buy an investment that yields three, I can make money on it.

• 39:46Speaker 01

  But if the economy is growing at six, that means the average investment returns you 6%. That's what the economy's growth is. But I can make money at a 3% investment. I encourage people to do bad things, to do stupid things, and that slows the economy down over time. So if the economy is growing at five or 6%, the appropriate interest rate is five or 6%. You should break even with the average investment. You should be incentivized to look for an above average investment. You should be penalized for having a below average investment. That's the way interest rates should be. If the economy is moving up, which I think it is, then interest rates should move up and it's fine. If they get too high, it's bad. And if they get too low, it's bad.

• 40:30Speaker 01

  That's way more nuanced than Trump is, down is always better and we're the best country in the world and we should have the lowest interest rates. It's a simplistic view, which I don't think is correct.

• 40:41Speaker 00

  Well, if you tell me that you're interested in slowly increasing higher interest rates because that's what the bond market is signaling. My next question goes to the economy and can the economy support higher interest rates? And if the answer is yes, I'm pretty stoked about that because that means the economy is strong, you know, it has, it has room to pay higher interest rates while, while still growing. I'll look at the AI industry and the AI capex numbers and I'll say like, well, man, if it wasn't for AI right now, would the economy actually be strong enough to pay higher interest rates? Because what if, there's a bunch of things to talk about with AI and

• 41:24Speaker 00

  how the AI industry, the AI revolution is impacting the economy. And the only thing I can say with any sort of assurances, confidence, is that AI capex spending is very, very high. And that's giving us a shot in the arm. And any sort of like positive other effects of AI, second order consequences, like, you know, AI productivity disinflation, or, you know, AI job loss. I don't know anything. The only thing I know about AI is that there's a lot of capex spending. And so I'd be excited to see higher interest rates because the economy can support it. Without this AI, I don't want to call it a bubble, but AI pocket of growth, I don't know if the economy can support it. What do we know about the health of the economy?

• 42:08Speaker 01

  Oh, you know, you're right about the AI spending in that it is a significant part of the economy, but also it isn't going away. I don't think it's going away anytime soon. Now, let me just say this upfront. I am of the opinion, I am a big AI bull. Don't confuse that with saying, run out and buy SpaceX and, you know, and stuff like that. That might be a different argument altogether. I do think that AI is the biggest technology we have seen since the railroads 150 years ago. It is bigger than the PC. It is bigger than the internet. It is bigger than mobile. It is bigger than the cloud. It is the biggest technology. That's why you're seeing mind-bogglingly

• 42:52Speaker 01

  large numbers of capex spending. A lot of people agree with that assessment. And I'll give you two fun facts about how mind-boggling these numbers are. Alphabet Googles capex this year at $190 billion is more than Russia is going to spend on the Ukraine war. And all the hyperscalers at 1.2 trillion is bigger than the Defense Department's budget. That's how massive this spending has been. Now, real quick, what is it about AI? I've argued in very simple terms. We sit in front of computers all day long. Modern, modern jobs are you and I and everybody else, sit in front of a computer with about 15 different

• 43:33Speaker 01

  software programs, whether it's your email, it's a spreadsheet, it's some kind of quote, it's a browser, fill in the blank, you know, you might have a customer relations monitor, you might have security software and everything else. And your job and my job is none of this software talks to each other. And we always juggle everything. I take stuff off the internet, I put it into a spreadsheet, I transform it, I make it into a PDF, I put it into an Outlook, and then I'd send it to seven people. You know, and I spend all this time because I can't, in a context window, just tell my computer, go get this data, make this table of it, and send it to David. And there, I'm done. I'm done. It took me 15 seconds to do it. That's what AI is going to do for us. And so we're going to not have to use as

• 44:15Speaker 01

  much software. And so that's why it is such a transformational technology, because all of our jobs are sitting in front of a screen, juggling software. Even if it's your phone, you're trying to, you know, order something from Starbucks and order something from Amazon and read an email and answer a text. That's four different software programs. They don't all talk to each other. You can't just in one sentence say, order my favorite drink, buy this from Amazon, answer David's text, you know, and send Ryan an email saying this, all in one sentence, and your computer just does it. You have to do each one individually. AI will do that for us. That's why I think we're going to see such a big transformation

• 44:57Speaker 01

  in this. So what I'm trying to argue is, this AI revolution is here, and it's going to stay, and it's going to stay for a while. Now, every technology, every technology ends in a bubble. This one will be no different. I don't think we're there yet. I don't think we're at the bubble stage. What is the bubble stage? I lived through the 90s with the internet. And I remember Greenspan in 96 saying irrational exuberance. Man, these stocks are out of control with this internet thing. It's just a glorified fax machine. I don't get it. Why is everybody all worked up about the internet? By 2000, everybody was so sure that the internet

• 45:37Speaker 01

  had infinite demand, that there was so much overcapacity built because we were willing to fund anything. Right now, I don't think we're at that. We have a compute problem, right? We don't have enough compute. We don't have infinite compute. So I do think we're going to continue to see this go. So the economy is continuing to expand. The data center build out, the AI build out, the capex is real. A bunch, right now, there's more data center building going on than there is office construction. If you are a plumber, if you are an electrician, if you are a concrete, if you are a roofer, you're getting jobs, and you're probably getting jobs building a data center. So it does, it does be, it

• 46:22Speaker 01

  is part of the economy right now, and it is leading to higher interest rates. What about housing would be the answer that everybody screams at me. What about the poor homeowner who's going to have to suffer through higher mortgage rates because of higher interest rates if that's the way we're going? I'll point out that, according to the National Association of Realtors, the latest data we got for June is the average home price in the United States is $440,000, an all-time record high right now. And the thing about this is, we have to remember that housing is a complicated thing. Everybody, there's 180 million people that live in an owner-occupied house. They live in the house they own. They

• 47:05Speaker 01

  want the price to go up. There's 140 million people that rent. They want the house price, they want home prices to go down so they can afford a home. So affordability is a big problem. So, so far, these high mortgage rates that everybody's complaining about hasn't stopped home prices from going to all-time highs. They've been advancing. Now, if we get higher mortgage rates and home prices stall, yeah, there's going to be a lot of homeowners that are going to be very mad about it. But there's going to be 140 million renters going, wow, now I might be able to afford something. And this has always been the conflict with the housing market when it comes to interest rates. Trump summed

• 47:49Speaker 01

  it up perfectly earlier this year. If you own your home, we're going to make sure we have policies that are, I'm sorry, I'm saying it backwards. He said, if you're a renter, we're going to build homes, we're going to make homes affordable, we're going to make sure that you can get into a home, you can start a family, you can live in the neighborhood you want. And then he caught himself, but if you own a home in that neighborhood, it's going to keep going up too. Well, wait a minute, Don, how can everything, everything's, you could get a cheap home next door to me, but my house will keep going up in price. How's that work? You know, and by the way, we tried that, you know, 20 years ago, we said, well, we'll come up with negative amortization mortgages and adjustable rate mortgages. And we almost blew up the world with the financial crisis by 2008. So this is always

• 48:30Speaker 01

  the conflict. So whenever I talk about higher rates are okay, people will scream at me, you're going to kill the housing market. Well, first, it's at an all-time high. Second of all, if home prices stall, I got 140 million renters that are okay with that because they want to be able to afford a home, and it's a little bit out of their reach right now.

• 48:48Speaker 00

  Would you say that this is congruous with Warsh's model of the economy? Because it seems that Kevin Warsh has an actual, like, opinion about the economy, has a model of the economy. He's talked about AI-driven deflation. He's talked about, you know, a handful of these subjects. How would you say, how would you describe what Kevin Warsh's model of the economy is? And how, how much do you like it? Like, do you agree with it?

• 49:15Speaker 01

  Yeah, I think if you took my model of what I said about AI, he's even more strident about it than me. And that he thinks that AI is going to be so transformational that it's going to produce disinflation and deflation. And I don't disagree with him. The only quibble I would have with him is, we're not there yet. And we might not be there for several more years. You and I are not ready to say, you know what, I could get rid of Microsoft Office, I could get rid of Windows, I could get rid of Outlook, I could get rid of Chrome, my web browser, I could get rid of Salesforce customer relations monitors, I can get rid of whatever I use to get quotes on financial markets, and replace it with a little context window, and just yell at my computer, give me this, give me this, give me this, and

• 50:00Speaker 01

  it just produces all that stuff. We'll get there. I think we will get there someday. We're not there now. But what we are right now is we're in the massive build out to try and get there. So that means more, higher prices for construction, higher prices for chips, semiconductor chips. That means higher prices for tokens. That means a lot of demand for a lot of this stuff. And then, once we're there, we'll get that disinflation. For the next few years, I think we're going to have that higher inflation. And then, maybe by 2030, once we've fully integrated into this new system, we might then say that that 10-year cycle of inflation that started in 2020, when we started to see inflation, you know,

• 50:44Speaker 01

  go to 29%, started in 2020. It was a 10-year cycle and it was over. So I think where Warsh's, he would argue, that disinflation cycle is going to come a lot faster than where I think it's going to come. I'm more worried that this demand to reorient our economy towards AI is going to Is going to take more time, it's going to take more spending and it's going to take higher levels of inflation. If you try and convince the market to say, yeah, but we're eventually going to get to disinflation, bond investors will say, fine, you can get there without me. I'm going to sell my bonds and I'll, because I think the immediate, the immediate being the next couple of years is going to be higher inflation and that could produce an overreaction

• 51:27Speaker 01

  of interest rates going up too much. So he's in that, definitely in that deflation camp for it, for AI because of massive productivity gains. I might actually be too. The difference is I just don't think it's 26, 27 or 28. It's out there, but it's not quite immediate.

• 51:44Speaker 00

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• 53:17Speaker 02

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• 53:19Speaker 00

  Yeah, it seems what you're saying is that all of the productivity gains, the real growth in the real side of the economy as opposed to just capex spending is, is real, is going to happen. The, maybe the optimistic, the bull case is that, you know, we are going to bubble, we bubble, the railroads were real and they bubbled anyways. There was still like a financial crash despite the railroad build out. Maybe that's the same thing that happens with the AI build out. And so everyone gets a little bit too exuberant, spending gets a little bit too high, we go into somewhat of a bubble, but the real productivity gains catch us on the other side. So, you know, maybe, maybe the bubble pops, but there's a softer-ish landing because

• 54:01Speaker 00

  the real productivity gains starts to actually positively impact the economy. That's maybe the optimistic case of, of, that's my, I feel optimistic saying that. I don't know if you agree with that.

• 54:12Speaker 01

  No, I agree. In fact, if you Google Gartner hype cycle from the Gartner Group, there's a chart that they have that that's exactly what we're describing. It'll get overdone. In 2000, I'll give you a quick anecdote about 2000. By the time we got to 2000, people thought that the internet was so limitless, there was a company called Global Crossings. And what they were doing is they were labeling fiber optic cable around the planet. They laid 100,000 miles of fiber optic cable. To 2026, they don't, let me back up. Most of their fiber optic cable by 2000 was dark, meaning it wasn't being used. 2026, 26 years later, we're only using a fraction of it. That they laid like more fiber optic cable than like humanity might ever need. But

• 54:54Speaker 01

  at that point, by that, the hype was so much that there wasn't such a thing as too much fiber optic cable, because we thought that the demand for the internet was infinite. We overdid it. We might do the same thing with AI before we get there. And we'll overhype it and then we'll have a big correction. Remember the NASDAQ fell 83% from 2000 to 2002. And then we started to state reality. We still got Google, we still got Meta, which was called Facebook at the time. We still had Amazon. And today, you know, the, the NASDAQ is 10x higher than it was even, you know, at the peak in 2000. But we overdid it. We had a massive correction and then we had,

• 55:34Speaker 01

  you know, the sustainable path on the way up. We'll overdo this with AI and we'll have a massive correction. My only difference is I hear a lot of people screaming that we're at that peak of inflated expectations right now and we're about to crash. I still think that might be two or three years away and there might be, you know, a lot more to go on the upside before we get there. But also, I'm trying to also say, at the same time, when that crash comes, it's going to be very painful for a lot of, for a lot of people because it'll come at a point where you'll think that AI is limitless. There's nothing it can do. There's no amount of, of constraint on

• 56:14Speaker 01

  the demand that we will need for, because everybody's life will be about a context window, asking your computer the most complicated or simplest questions. You know, simple question, order me my favorite drink, done. Complicated questions about math or science or whatever, and it gives you an answer on those two. And we'll think it's limitless. And that's when we'll get it to the peak of inflated expectations before we have the crash.

• 56:39Speaker 00

  Are you arguing for an equivalent in the size of these two bubbles? Because the 2020, the 20, excuse me, the 2001 tech bubble was massive. And I know we had actual real productivity catch up eventually, you know, Amazon, Facebook, like all these companies eventually showed up, you know, six, eight, 10 years later, but the actual crash was massive. And the time it took for, you know, real productivity gains of the internet, it also took, you know, the better part of a decade, if not a whole entire decade. That's not my expectation for the AI-driven bubble. The AI, like people were being conservative and are conservative about the AI bubble,

• 57:22Speaker 00

  calling it a bubble even before it got started. And so my, my take is that it's not going to be so bubbly and it's going to be less of a crash and more of a correction, simply because investors have more data these days, we have more information, information travels faster, markets are probably more efficient these days. And so I'm, I'm not in the camp that this thing is going to be nearly as violent as 2001. What, what, what would you respond to? How would you respond to that?

• 57:50Speaker 01

  You see, the, the difference, I think really what's, why we're talking about AI being a bubble, why we're afraid of AI is these astronomically large numbers. Like I said, you know, we're spending more than the Defense Department's budget on, on capex build out. The other measure you might have seen is that the AI and AI-related stocks, that would be the semiconductor, the capital equipment, the MAG7, you know, and the like, is like half the stock market. It's half the S and P's 500 capitalization, it's more like 45% to be exact. But there's like 50 stocks in the S and P are, are half of the stock market and 450 stocks are the other half. And those 50

• 58:30Speaker 01

  stocks are all related to AI. So we look at the massive size of this thing and we get worried about it. In 2000, we never saw these kind of numbers. You know, even at the peak, we didn't see these types of numbers. So you got people screaming that this has to be a bubble because of the size. And I would argue, this is what's holding us back, is we're afraid of the size, but the size is justified because of the massive impact this technology would have. In the 1880s, 1870s, railroad stocks were 70 or 80% of the stock market at that point. Because that was,

• 59:09Speaker 01

  remember, before the railroad, before the transcontinental line, it took you four months by covered wagon to go from St. Louis to San Francisco. After that, after that railroad line was put in, it took you five days. And that was a huge transformation of the US economy. Our way of life changed because of the railroads. And I, and this could have that kind of impact. That's why we're worried about job displacement. We have kids walking out on graduation ceremonies. We've got politicians like Bernie Sanders calling for moratoriums on either data centers or LLM advancements, because we're so worried about how big this is. So I do think this could wind up

• 59:54Speaker 01

  being as big a bubble as 2000, if not bigger. But if you want me to put it into these perspectives, this is like 97 or 98. Right now is where we're at. We're not at 2000. And in 97 or 98, there was a lot more to go. And then we got to 2000 and then it, you know, like I said, fell 83%. The problem you're going to face is, yes, it's like 97 or 98. I can make 300% in the stock market if I buy the AI stocks, maybe. And then if you hold too long, you'll give it all back. And that, and how do you know when we've hit that peak? That's going to be very hard because the history has shown is that you'll get 30 or 40% corrections along the way and you'll be immune.

• 1:00:37Speaker 01

  You'll be thinking, ah, this is just another correction. This is another correction. And then before you know it, you go, what happened to my five years of gains? They're all gone. And that's the, that's the thing that you're going to have to be careful of. It's not going to be easy to make that money. But I do think that we are in the process of building this. Getting back to your original question, AI isn't going to go away. It's going to continue to be a major part of our economy. It's not going to pop and stop being a part of our economy. So when people say, when people say,

• 1:01:07Speaker 01

  You know, AI is, what's the economy like without AI? It's kind of like saying, how much do I weigh without my left foot? Well, I can't take my left foot off. It's part of the, it's part of me. It's part, you know, AI is part of the economy. It is part of it. It's not going away.

• 1:01:23Speaker 00

  One last question, Jim, before I let you go. The debasement trade. Gold is making some new highs. Bitcoin is not. We have the 30 year yield at a 20 year high and the 10 year yield is, is higher on it, on it, on its range. Where do you think the debasement trade is right now? Especially as it relates to Bitcoin, because like at least half of this podcast listeners have, own at least Bitcoin. It feels like, it always kind of feels like it's looming on the horizon, the debasement is, but it never actually here. Like, what, how would you assess the state of debasement right now?

• 1:01:55Speaker 01

  I don't think there is a debasement trade. I think that the dollar goes up, the dollar goes down, gold goes up, gold goes down. And there are fears, like last year around Liberation Day, that there was fears about debasement in the market because Trump so angered our allies by trying to impose a tax, a tariff on them, that people were starting to worry. And that's why gold took off in the dollar weekend. But then we had the Iran war. And whether or not we started it or didn't start it, or Iran started it. Everybody said, you know, when the world gets messy and uncertain, everybody hides in the dollar. And then the dollar recovered and like, so I don't necessarily think that there is a debasement trade.

• 1:02:39Speaker 01

  Gold is rebounding, but it's still working on a retracement right now. Crypto. I think that the problem with crypto, and to be honest with you, I kind of got it from you guys at Bankless, watching you guys. You know, in the summers, in crypto summers, you get too much Dgen speculation. And in the crypto winters, you get building, you get development. And I think if there's a problem with Bitcoin that is causing it to be down, is your technology is 17 years old. And you need now to be showing that you've built an entire alternative financial system around it. ETH has kind of done that with DeFi and some of the other things.

• 1:03:23Speaker 01

  Bitcoin has been a little bit slow. It's not enough to just call it, you know, to just call it permissionless decentralized money. That's good, but it needs more than that. It needs an entire ecosystem around it. And that it's been slow at developing. And I think that that has been the problem with it. And I'll go you with, I don't know how much this would be for you for an outside the box view, but I look at things like the Genius Act and I look at things like the Clarity Act. And I think that those are the wrong things to do. Is that the, the strength of crypto is decentralized and permissionless.

• 1:04:05Speaker 01

  And you're on bended knee at Washington, asking for permission with those acts. And asking to be in, because it seems like for a while there, we kind of gave up. Instead of trying to build an alternative financial system, we all got excited because Larry Fink built, put IBIT out there and said he was going to get all the boomers to buy 5% in their wealth management accounts. And that was going to be all we needed for Bitcoin to go up. And it, it worked for a while and then it kind of reversed. So I think if the crypto crowd wants to get back to the old highs and stuff, build an alternative financial system, something else. Don't be at Washington on bended knees going, please, please, please, plastic clarity act.

• 1:04:50Speaker 01

  Because then we, you will anoint us as being okay. And I'll give you one other quick anecdote. If you were in Venezuela right now, the Venezuela boulevard, their currency is trash. And everybody wants to trade in dollars. What is the place that you go to get a quote on the Venezuelan boulevard to dollars? It's probably to a crypto exchange to exchange it to Tether. It is not to change it to hard currencies. Afghanistan, after we pulled out in 21, we saw the same thing too. Is that when, when countries dollarize now, they dollarize to a stable coin on a crypto exchange. That's your business right now.

• 1:05:33Speaker 01

  There is a billion plus people that live in Asia, in Latin America, in Africa, in the Middle East, that have unstable financial systems and have devalued currencies. That's who desperately needs crypto. Who doesn't need crypto is who they've been chasing for the last couple of years. We need the rich guys from the Greenwich Country Club to tell their wealth manager to put 5% of their money in IBIT. And that worked for a while, but it's not going to work. So if you get back to building, you know, a financial system, a decentralized, and they need decentralized permissionless because they don't trust their financial systems or their governments. So they can't take it away from them. Yeah, crypto's, sky's the limit.

• 1:06:15Speaker 01

  But when we stop doing that and we start degenning ourselves, then it works for a while and it winds up around tripping.

• 1:06:20Speaker 00

  Phrase that I've used to, I think, describe the idea that, that you're talking about, Jim, is there's strong crypto and weak crypto. Strong crypto is the F you to the banks, F you to the government version of crypto. It's like decentralized identity, it's DeFi, it's, you know, permissionless. This is what the cypher punks wanted. That's like strong crypto. And then there's weak crypto, which is we are ledger technology backend for BlackRock and the banks. And we're just a vassal of Wall Street. And it was always, we're always going to be like good at doing that. But it's about strong, this whole story about crypto is strong crypto. And I think what I'm hearing from you is that there's not enough strong crypto to, to be,

• 1:07:01Speaker 00

  to meet the expectations that we had as crypto investors five plus years ago. So that's not my right?

• 1:07:07Speaker 01

  I'm a, I'm a cypher punk at heart and it will always be. And I believe that that's where we want to go. And by the way, for those that want weak crypto, I love your term, weak crypto. And you want the, the Clarity Act to pass. Look, blockchains are hard. Let's just go the whole way. Get rid of the blockchain and let's just run it on a server at the New York Fed. You know, and then you've completely defeated the purpose of what you're trying to do. But that seems to be the path that they seem to, because all they want is, you know, I, there's too many people in the crypto market to go, if we just run it at a server at the New York Fed, they almost want to come back to me and go, yeah, that might get the boomers to buy more IBIT. I was like, you've lost the plot. You've completely lost the plot if that's the way you're thinking about this stuff.

• 1:07:50Speaker 00

  Jim, I always appreciate your wisdom and perspective. Thanks for coming on the show today. You've got a new podcast, so you've started a new podcast. I think you might be number two, or even beating Vitalik as number one as a Bankless repeat guest. So we appreciate you coming on all over the years. Listeners clearly enjoy you. Every time you come on, we always get some chatter in the Discord. If people want to hear more of you, tell them about your new podcast.

• 1:08:13Speaker 01

  Yeah, so it's Rational Dissent is what its name is. It's on all the podcast platforms. Our fourth podcast, our fourth weekly forum is coming out tomorrow. So it just started a month ago. You can also follow me at Bianco Research, that's kind of my day job business, on all the socials, on, on YouTube, on X, on X Twitter and on LinkedIn as well.

• 1:08:37Speaker 00

  Jim will get all of those links in the show notes for the listeners who want to follow you there. Thanks for coming on the show, Jim.

• 1:08:42Speaker 01

  Thank you, appreciate it.

• 1:08:43Speaker 00

  Bankless Station, you guys know the deal. Crypto is risky, but that is why we are here. The institutions have landed, so we are going even further west. It's not for everyone, this is the frontier, but we are glad you were with us on the Bankless journey. Thanks a lot.