294: Cullen Roche Explains The Ultimate Breakdown Of The Federal Reserve

Cullen Roche is the Founder at Orcam Financial Group, a financial services firm offering research, personal advisory, institutional consulting and educational services. In this conversation, we discuss how the Fed works, what is the most common misconceptions, whether we will see deflation or inflation in the future, the consequences of not having recessions, how markets would look with no QE, and what he thinks about Bitcoin & gold. =============================== Blockset by BRD is your hosted blockchain infrastructure. Blockset enables enterprises and developers around the globe to deliver high-quality blockchain-based applications in a fraction of the time, at a fraction of the cost. Using the services provided by Blockset, businesses can build professional custody solutions, accurate and near real-time portfolio management solutions, auditing platforms, commercial block explorers, and much more: blockset.com =============================== Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link http://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. =============================== Pomp writes a daily letter to over 45,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at www.pompletter.com

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

• 0:00Anthony Pompliano?

  This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast. Simply the best podcast out there. Let's kick this thing off.

• 0:11Anthony Pompliano?

  Colin Roche is the founder at Orcam Financial Group, a financial services firm offering research, personal advisory, institutional consulting, and educational services. In this conversation, we discuss how the Fed works, what is the most common misconceptions, whether we will see deflation or inflation in the future, the consequences of not having recessions, how markets would look with no QE, and what he thinks about Bitcoin and gold. I really enjoyed this conversation with Colin, and I think you guys will as well. Before we get into the episode, though, I want to quickly talk about our two sponsors. The first is Blockset by BRD. If you're building in the blockchain space, you got to know these guys. Their goal is to enable the next wave of developers and business leaders to build amazing applications. They offer accessible data from all the major chains through a

• 0:56Anthony Pompliano?

  single, easy to use API. It's kind of like Amazon AWS, but for blockchain services. Go sign up for a free developer account at blockset.com and start building today. Blockset is built by BRD, the first wallet in the App Store from 2014, and one of the largest in the space today. They've taken the architecture and knowledge they've gained over the past six years to create Blockset, a robust, reliable, and strategic B2B offering for developers and enterprises. Go check out blockset.com today. Our second sponsor is crypto.com. Crypto.com is a huge improvement over some of the legacy infrastructure. Crypto.com is an all-in-one platform that allows you to buy, sell, store, earn, loan, and invest crypto, all from

• 1:40Anthony Pompliano?

  one place. See how much stuff they do? Buy, sell, store, earn, loan, and invest. I could probably make a song out of it. You can join over 1 million users that are doing all of those things in the crypto.com app. Go to the App Store and download it today. They have a vision to put cryptocurrency in every wallet, which is frankly why we are all here. The crypto.com app offers a full range of financial products with competitive pricing, well-designed user experience, and high security. It is the best place to buy, sell, and pay with crypto. These guys have been very, very long time The Pomp Podcast and they keep launching new product after new product. So do yourself a favor and go to crypto.com to check them out. Again, crypto.com, the place where mass adoption is occurring.

• 2:21Anthony Pompliano?

  Lastly, don't forget, I write a daily letter to over 50,000 investors about business, technology and finance. I break down the complex topics of the day into easy to understand language while sharing opinions on various aspects of each industry. You can subscribe at pompletter.com, pompletter.com or go click the link in the description. All right, guys, let's get into this episode with Colin. I hope you guys enjoy this one.

• 2:46Anthony Pompliano?

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:13Anthony Pompliano?

  All right, guys, bang, bang. I'm super excited about this. I feel like we are going to, one, explain what the hell the Federal Reserve is and why it's important. And then we can get into all the nuances of this crazy, chaotic economic time that we're in. So thanks so much for doing this, man.

• 3:32Speaker 01

  Hey, Anthony, how's it going?

• 3:34Anthony Pompliano?

  Doing all right. How are you? You're in San Diego, right?

• 3:38Speaker 01

  I am doing great. It's, uh, it's getting beautiful here again, so I'm hoping that, uh, I'm hoping what they say about this weather thing is true, this stupid virus that, uh, you know, the nicer weather kind of has at least a little bit of a positive impact on everything, so.

• 3:54Anthony Pompliano?

  Absolutely. So for those that don't know who you are, let's start with background and kind of what you've done in your career, and then we can get to a lot of the stuff that's happening now.

• 4:05Speaker 01

  Yeah, gosh, I mean, I started my career at Merrill, so kind of started a big brokerage firm, managed a lot of money on a big team there, left the firm, I just didn't agree with, you know, a lot of the philosophy of the big firms, and ran a hedge fund basically for like six years during the financial crisis, and in the last like, I mean, really what happened with my career was odd in that coming out of the financial crisis, I wrote a lot of research about what the Fed was doing, and basically, mostly what quantitative easing was, what all these big programs were, and what they might, the impact they

• 4:46Speaker 01

  might have on the bond markets primarily, and I ended up doing a lot of like non-discretionary portfolio management for big banks and portfolio managers who were trying to basically navigate the interest rate environment, because back then, a lot of the work that I was doing, a lot of the research I was doing was kind of counterintuitive to the, a lot of the mainstream narratives, I was basically saying back then that QE would actually cause a little bit of deflation, that it would make interest rates go down, so it was, a lot of it was kind of counterintuitive, and luckily ended up being, you know, mostly right, but my whole career kind of transformed coming out of the financial crisis because of that, and

• 5:30Speaker 01

  so my focus now is mainly conservative, sort of fixed income based portfolios, really still focused on trying to help people navigate the interest rate environment going forward, which has only gotten, you know, more and more difficult, so.

• 5:50Anthony Pompliano?

  Yeah, so let's talk about 2008, 09 crisis first, and then we'll get to kind of what's going on now, so in 2008, obviously there was the housing crisis, the government stepped in, created a ton of monetary stimulus, every single person who's ever read any economics book immediately says, if they print a bunch of money, we're going to go to inflation, maybe even hyperinflation.

• 6:12Speaker 01

  Right.

• 6:12Anthony Pompliano?

  Why did you think that QE potentially could cause deflation, and how does that actually work from a mechanism standpoint?

• 6:22Speaker 01

  Well, it was interesting. Back then, I actually knew a bunch of guys that worked, friends of mine, family friends and a couple of other friends that worked in Nomura in Japan. And it was interesting, when they first started ramping up all these big programs, I started talking to these guys in Japan, because they had been doing QE for like 15 years at this point. So, kind of trying to go back through history and trying to understand that it's sort of an operational level. I talked to these guys and they're basically like, "Look, this thing doesn't do any of the stuff that a lot of the mainstream narratives imply. It doesn't, it's not like printing money. It doesn't make inflation go up. It won't necessarily

• 7:07Speaker 01

  make the stock market go up." Their argument basically was that it is marginally deflationary, because what they're basically doing, the Fed is creating money, okay, so they're creating central bank reserves, and basically swapping, they're purchasing like a treasury bond or a mortgage-backed security from the private sector. And what that basically is, is it's a clean asset swap, basically. The Fed prints a reserve, swaps it for a treasury bond, but the crucial thing is that they take the treasury bond out of the private sector economy. So, it's almost as if the treasury bond has been unprinted to some degree. The Fed takes

• 7:49Speaker 01

  it and puts it on their balance sheet, and the Fed's balance sheet is, it's like a black hole. It's just this nebulous thing that doesn't exist in the real economy. I mean, we could see the accounting of it, it's there, but it's not like, the Fed isn't going to Walmart and buying things with their balance sheet. So, it's like, it's almost like they take the money out of the, or the treasury bonds out of the private sector, and they bury them in the backyard or something. But the kicker with it was that what they're really doing when they do this, is they're taking interest income out of the private sector. And so, the private sector's incomes actually go down. So, in a sense, it's kind of like... It's like they've swapped a checking account for a savings account,

• 8:32Speaker 01

  expecting there to be like some sort of big rush to go, you know, now use your, your, your new checking account to go buy goods and services. So the whole, the whole program in my view is sort of misguided and I'm, you know, it's funny, I, I know you're a critic of the Fed and, but I'm, I'm weirdly also a critic of the Fed in the sense that I basically think that the Fed and a lot of what it does is not nearly as impactful or important as a lot of the mainstream narratives make it seem. So the Fed to me, it engages in a lot of this funny business with the economy that doesn't really do all of the things that a lot of people seem to think it does.

• 9:17Anthony Pompliano?

  So, okay, this is interesting, right? Because I actually think that, uh, we may agree on the funny business. My perspective is just like, they shouldn't do it. I think your perspective is like, hey, they're doing it, but it doesn't have the impact everyone thinks it has. Would it be fair to say that you agree they should do it? Or you're in the camp of they should not be doing that stuff?

• 9:39Speaker 01

  It does depend, I think, but like I would have said in, um, in 2008, I actually thought that QE1 was somewhat important and that what they were doing was they were really trying to shore up the banking system. And the banking system was such a cluster at that point that you needed to do something because the, I mean, that's the Fed's primary purpose. And I think this is another thing that some people, I think, misunderstand about the Fed is that the Fed is basically just clearing house. So they clear payments for banks. They're the banker for the banking system, basically. And in periods like 2008, the banking system starts to shut down.

• 10:21Speaker 01

  And that becomes problematic because if me and you can't clear a payment because JP Morgan and Bank of America are scared of each other, then it causes all these negative knock on effects that, you know, like your business could start to fail or, or, you know, potentially shut down. For periods of time, just because the banks are scared of each other. And that's it's idiotic, the way that, you know, that can even happen. So the Fed is just basically a public clearinghouse. That is, it's always open. They never shut down. So when JP Morgan and Bank of America get scared of each other, the Fed comes in and says, don't worry about it. We're going to clear payments and we're going to make sure that Anthony and Cullen

• 11:03Speaker 01

  don't go out of business just because Bank of America and JP Morgan are idiots and scared of each other. So that's the Fed's primary role. And they do all this other stuff that is sort of tangentially supportive of the banking system, but isn't really always necessary. Like, I would say that QE2, QE3, all the other iterations, I would say even the version they're doing now, probably a big waste of time. Probably not having a very big impact on anything, really. And probably, to some degree, not necessarily a waste of money,

• 11:41Speaker 01

  but sort of an unimportant or, yeah, a waste of energy to some degree. Just because there are things that they can do to support the economy. And QE just isn't one of the things that's very effective.

• 11:56Anthony Pompliano?

  So I, I think that a lot of people understand, you know, central banks basically have these two tools, right? They can manipulate interest rates and they can print money or quantitative easing. And it feels like, over the last, you know, really kind of 12 years or so, but, but even a little bit before that, the idea of quantitative easing has not only become accepted, we went from emergency measures to now it's, hey, this is part of what they're going to do at certain times. And I guess the big question most people have, right? So some of the listeners have zero clue how the Fed actually quote unquote prints money and then injects it into the economy. You talked a little bit about that.

• 12:38Anthony Pompliano?

  Maybe just explain the actual mechanism of injecting that liquidity. And then we can get to the impact of what that does to an economy in times of recessionary periods.

• 12:47Speaker 01

  Yeah. Well, the Fed in its simplest manner is just a really big bank. And banks have the ability to create money from thin air, literally. So if you and I go into a bank and we get a loan, that bank doesn't, they don't create the new loan by having deposits necessarily or multiplying their deposits or anything like that. They're literally creating a new loan agreement from thin air. And so that deposit, a loan creates a deposit from thin air. And it's only backed by whatever the agreement underlying that is, that we have some income and maybe some assets that are backing the loan or whatever it is.

• 13:32Speaker 01

  But the loan itself and the deposit, the new deposit that is created, is created from thin air. It is a new financial asset and a new financial liability for each of us. And so the entire sheet of the entire economy grows a little bit when that loan is made. The Fed does the same basic thing. They're, they basically just create these, these financial agreements from thin air wherein the kicker with the Fed is they have all these private banks that are basically required to make markets for them. So when the, when the New York Fed goes out and they start implementing quantitative easing, they go in and they basically order the primary dealers,

• 14:17Speaker 01

  who are the big banks that basically make markets for the, for the Fed, they're basically ordering them to go out and purchase bonds. And the Fed is giving them reserve deposits, creating reserve deposits within the banking system. And the banks are, are basically going in and buying the bonds and swapping those bonds with the new deposits that the reserves resulted. So the Fed sort of forces the private banking system to be its market maker. And that's how they create all this new money that ends up basically being swapped for the treasury bonds.

• 14:55Anthony Pompliano?

  Got it. And so I think that right now, the general idea that people have in their mind, whether they're right or not, is, okay, we had the coronavirus, which is a health crisis. That then led to a lot of fear, uncertainty, and kind of this liquidity crisis. Everyone sold off assets because they wanted dollars, right? So you get a strengthening dollar, you get asset prices that fall. The Fed then has to step in and try to stabilize markets and drive a recovery, right? And the way that they've done that is obviously they dropped interest rates, and then they basically came in with these monetary, you know, really bazookas, if you will, where they just started to say, hey, we're going to print trillions of dollars, right? And there's two schools of thought.

• 15:37Anthony Pompliano?

  One is, in the short to medium term, we're going to stay in a deflationary environment, and that deflationary environment will suck up all the liquidity, and we, there's no chance of hyperinflation, or really any inflation. The second school of thought is you can't print trillions of dollars without causing inflation. How do you evaluate the merits of those two arguments? And do you agree or disagree that that is kind of the number one debate in finance right now?

• 16:05Speaker 01

  Oh, for sure. I think the impact of all of this is the, the most hotly debated thing going on. Weirdly, I increasingly find that people seem to have this view that it's virtually impossible for the government to create inflation. I think that we sort of have it burned in our brains after, you know, the impact of the, the financial crisis and just falling interest rates in general for 30 years, and, you know, ever-rising national debt, that the, everyone sort of seems to be in this mindset that we, we somehow can't create inflation. And I think there's kind of two things going on here. There's the Fed's programs, and then there's the Treasury programs. And they're, in my mind, they're distinctly different things,

• 16:48Speaker 01

  because I think a lot of people think that, they have this view of the Fed where they think the Fed has to finance the Treasury's spending. And I just don't, I don't really think that that's very accurate. The, the Treasury, the way that the Treasury decides to finance its spending...

• 17:08Speaker 01

  It doesn't really matter, in my view, whether they took... The Treasury could literally, if they wanted to change some rules in Congress, the Treasury could go out and print all the money they wanted to. I mean, the actual printing press is in the Treasury. It's part of the Bureau of Engraving. So it's not even part of the Federal Reserve to begin with. The Fed just kind of distributes the money that Treasury creates. So if the Treasury wanted to just go out and dump a trillion dollars in the middle of Constitution Avenue, they could go do that. They don't have to sell bonds. Under the current existing structure of the way that the legality of the institutions work, we technically have to finance it by selling bonds.

• 17:52Speaker 01

  But to me, in this environment, there's no lack of demand for bonds in this environment, especially the way that they're financed, because most of the bonds are basically bills. So you're basically, in my mind, the difference between a Treasury bill and a US dollar is very, very minimal. There's no signs of a lack of demand for Treasury bills. If anything, I think that, given that the US dollar is the reserve currency, there's an extremely high demand for liquidity and bills and currency in general. So the whole financing narrative, to me, is kind of incorrect. And it's important, I think, to understand that because what the Treasury is doing

• 18:35Speaker 01

  is humongous and potentially inflationary. The way that they're running their spending programs with a $4 trillion deficit, Pelosi introduced a new $3 trillion bill today. I mean, you could be talking about $7 or $6, $7 trillion deficit this year. That's... Those are huge, huge numbers. And so I think, over the course of the last, you know, six weeks or so, a lot of people have been focused on the Fed's lending programs, which are... They're mostly trying to support the banking system, for the most part. And I think a lot of people missed the fact that, well, the Fed was doing some big stuff. The Treasury was doing arguably even bigger stuff.

• 19:21Speaker 01

  And that's where I think the risk of inflation... If there's going to be a risk of inflation going forward, that's where it's going to come from. It's going to come from the Treasury, not the Fed.

• 19:33Anthony Pompliano?

  So if I remember the numbers correctly, I think that we were targeting like a trillion and a half dollar deficit going into the year. That was kind of the the general thought. Then once you get all the stimulus, now it's like, oh, we might get three and a half to four trillion. If they do more stimulus, that could run up, as you said, to six or seven trillion dollars. One of the big questions is just like, is it actually debt if you don't have a plan or an intention to pay it off? Like, how do you think about that deficit and the national debt?

• 20:06Speaker 01

  Well, that's one of the weird things. I mean, the so you have two sides of a balance sheet here. And in a healthy, normal economy, the private sector's balance sheet is always growing. So the assets are always growing, and the liabilities are growing. There's nothing inherently bad about debt in and of itself. I mean, if you're, if you're out there borrowing, and you're investing it in things that are productive and innovative and, you know, really useful sources of of production, then there's nothing inherently wrong with creating debt to do that. I think the the thing that people tend to sort of

• 20:46Speaker 01

  generalize about is that things like, like a high credit card debt is a revolving type of debt like that is is terrible in the long run, because it just it suffocates you. There's no way anybody can invent anything really that or is certainly an aggregate that is going to be able to consistently pay off like a 20% credit card bill. So I think a lot of consumers have it in their mind that that debt is always bad. And the reality is that a lot of debt is actually very productive, that a lot of debt is used for good purposes, and it helps create the assets that make the whole economy basically functioning and sustainable in the long run. I mean, the the whole reason the dollar is the reserve currency is because, for the most part,

• 21:31Speaker 01

  US businesses and US consumers and households have been incredibly innovative and productive over the, you know, the history of the United States. And so we've used money in a very innovative and resourceful way that has created, you know, the most output of any country in the entire global economy ever. And so that's the main reason why the dollar is the reserve currency and it's why there's so much demand for dollars, especially in times like right now, because it's backed by, you know, $25 trillion of output that is relatively safe compared to everybody else's resources.

• 22:08Speaker 01

  And so it's all, it's all kind of intertwined in this, in this sort of complex way. And what's weird about what the government does that is so different from what the private sector does is that the government debt also grows in aggregate over time. You look at that, like a trend of like household debt, it never goes down really. In the long run, it should always go up. I mean, household debt should basically always go up because the household's assets will also go up in the long run. So in the long run, the, the economy's total financial assets and total financial liabilities will basically be ever increasing.

• 22:50Speaker 01

  The big kicker with the difference between private sector debt and government debt is that private sector debt can sort of be creatively destroyed at times. Like during the financial crisis, you had a lot of, you basically had a big debt boom. So you had this sort of big real estate inflation and in the reactor because in to large degree, banks created too much money, it chased too few homes, you had this big boom. But then the kicker is that thing deflates over time. That doesn't always happen with the government because the government oftentimes isn't.

• 23:32Speaker 01

  Actually allowing any sort of market mechanism. There's no competitive force that forces the government to like pay down its debts over time. So that's why this is such a weird environment in my mind is because the government is basically going to print, you know, create four, five, six trillion dollars of new financial assets and liabilities that aren't necessarily supported by anything new. There aren't even new houses being supported by all of this. So this money is being created out of thin air and being spent and financed and it's

• 24:14Speaker 01

  basically, we're basically just paying people to sit around and do nothing for the most part, to stay home, literally. So it's a really weird environment to think about just because the, you have all these supply chains that are being cut off. Um, and the basic, you know, math of like, you know, any basic monetarist view of supply and demand here is that you inevitably there, I don't see how there can't be some inflation that comes out of this. I'm not, you know, I'm not like transitioning into like a hyperinflation sort of mentality, but I don't see how there's any chance that coming out of like, say 2021 or 2022, that

• 24:57Speaker 01

  if the economy is really rebounding, that we don't have three, four, five percent inflation. I think you could have the Federal Reserve chasing their own tail, raising rates and trying to catch up with all this stuff way after the fact. So.

• 25:15Anthony Pompliano?

  Yeah. What's interesting, I guess, is so if we go back to the deficit for a second, uh, there's almost this element of like, at the same time that they're going to drastically increase the national debt, they're also going to lose on revenue as well. So you see this much more at the state and local level, obviously, uh, but even at the federal level, there is some lost revenue there because just commerce has stopped, right? And so it almost exasperates the debt that is being issued because you're just adding to a deficit, uh, by simply on a, just a P and L standpoint, you're literally taking off one side, uh, and while raising the other side to some degree, right?

• 25:54Speaker 01

  Totally. I mean, so that's, that's weirdly, it's actually a big part of, economists would call it automatic stabilizers. What happens as the business cycle kind of ebbs and flows over time is a big part of government's support during downturns is that governments run bigger deficits in part because their tax revenues decline. So their revenues decline and their spending increases at the same time. So you see this in a huge way right now, especially with the way that the CARES Act was structured, that the government's running these, you know, $2,400 a month of extra uninsured benefits or unemployment benefits. And so what's happened now is that not only, yeah, the government's tax revenue is falling,

• 26:39Speaker 01

  but the, the spending is going way up because it sort of naturally does. Because more people just demand unemployment benefits and things like that. So, you know, over the course of a natural business cycle, you typically will get, the government's deficit will shrink over time because tax revenues rise. Even if spending stays stagnant, the tax revenues rising alone will create a smaller and smaller deficit. And then you get this explosion in an event like this. And so there's sort of a natural ebb and flow. And, and I would argue that, you know, to a large degree, I don't want to give people the impression that I think that all of this is bad.

• 27:18Speaker 01

  I mean, I think, I actually think that when the government imposes a lockdown on most of the private sector economy, I think they have a responsibility to, to pay people to some degree, to continue to be able to survive. And you can't, you can't tell everybody that the economy is now closed and locked down. You're not allowed to go do all this stuff and, oh yeah, and your economy is F'd also.

• 27:47Speaker 01

  So I think the government has some responsibility. The really interesting thing with this is, and this is the thing that I think nobody really can answer at this point, is how long will this thing last? How, so, and the kicker there is how deflationary is this thing going to be? Because if this thing lasts for like six more months or 12 more months and everyone's sort of locked down for that period. You're gonna have a really devastating economic impact because the whole financial system, it's just not designed for people to, for instance, not be able to pay their rents for like three or four months in a row. And you start having this big knock-on

• 28:30Speaker 01

  effect over time where you're not just gonna see the banking system start to kind of buckle, you're gonna see almost everything start to buckle to some degree because the whole financial system is based on, to a large degree, these short-term financial contracts, these short-term debt contracts, that they need to be serviced. You can't go three, four, five, six months without servicing these things without big knock-on effects. And so, I think the whole inflation-deflation debate still comes down to how long does this thing last? If it, if the lockdown is really over and this thing is really starting to go away as it kind of looks like it might be at this point, then I think you have a serious

• 29:14Speaker 01

  chance of three, four, five percent inflation in the next few years that the Fed is gonna be chasing to grapple with. Whereas if this thing lasts for another six to 12 months, all inflation bets are off. The government won't be able to spend enough money to offset the hugely deflationary effect of all the defaults.

• 29:34Anthony Pompliano?

  Yeah, so there's, there's a number of things there that I think are super interesting. The first is, there's this, I'll call it a theory or just a framework that I use to think about, that I call the economic circle of life. Right? It's the whole idea of like, you know, take manufacturing. Somebody creates the raw goods, they then put it to a supplier that supplies the goods to a business, the business sells it to an individual or a customer, they're able to then pay their rent to a bank and kind of the financing of the raw goods. And you just have this circular kind of component to the economy. And when the government steps in and mandates a shutdown of the business, what a lot of people understand is, hey, there is a downstream effect, right? All of a sudden I can't sell goods to a customer, right? And I can't pay my rent and kind of all of those issues that go downstream. But

• 30:19Anthony Pompliano?

  also, there's also an upstream effect. It's almost like a dam in a river, right? Because now- All of a sudden, your suppliers got nobody to sell to. They can't go actually buy the raw goods anymore. And you you get kind of a a bidirectional impact by simply shutting down or breaking that chain of that that circle. And so to me, it feels like that's what the government is trying to solve for. Right? They're stepping in and they're saying, look, I'm going to give you PPP loans so that you can pay some employees and try to save jobs. I'm also going to give stimulus checks. I'm going to beef up unemployment. Like, they're trying to almost triage the problem where it happens. But if they don't do that successfully in the short term, the problem then spreads across the entire financial system and they'll never be able to kind of fix the problem, right?

• 31:04Speaker 01

  Yeah, I mean, I. That's where this all starts to get really interesting is I think as a as a sort of like short term, almost a a bridge loan. There was a lot of there's it makes a lot of sense for the government to be, I think, highly involved in the short term. They shut down the economy. They basically tell everybody they can't operate. And they say, look, we're going to create a bridge basically here so that people will at least be able to sort of get by in this short term. But the longer this thing goes on, the just more and more damaging it all becomes for the the aggregate economy. And the less and less effective the government response is going to become.

• 31:50Speaker 01

  Um, I mean, they can't, you just you cannot prop up the entire economy just by paying people not to do anything. Because again, you get back to that fundamental problem of you have to have resources and output that supports any monetary system. And if you don't have that, then, you know, you operate in a lot of ways like a third world economy does. Where a lot of third world economies have problems with high inflation, not just because they have sort of corrupt governments. But in large part because they just don't have the underlying productive base to support the the increases in the finances that you often see in these countries. And so.

• 32:34Speaker 01

  The more, the longer and longer that this thing goes on and you're just sort of, you know, not producing the same quantity of stuff, but you're just sort of trying to, I mean, to some degree fictitiously prop everything up. I just, I don't see how that doesn't have an inflationary impact in the long run. Um, so I, but it's funny, I, I think we're getting to that point where people, I think people are starting to realize that maybe there isn't ever going to be a vaccine for this thing. Or maybe this thing is just going to be part of our lives for the rest of our lives. I don't know if it's going to maybe be some sort of seasonal thing.

• 33:17Speaker 01

  Or are these sorts of viruses going to be something that, you know, occur more and more often? I think people are starting to kind of consider that and say, look, to some degree, we, we're at the point where we now start to, we need to start weighing the economic impact of all of this, which is very, very real and very, very hurtful to millions and millions of people versus the reality that having any sort of functioning economy is going to have trade offs. And some of those trade offs are that people die in car accidents driving to work. And, you know, people get injured at work and things like that. And if you have a monetary economy like we do, that is the center of all of our lives,

• 33:59Speaker 01

  if you start to get to the point where we're all sort of thinking, you know, okay, this thing might be around for a lot longer than any of us are comfortable with, then it starts to become pretty reasonable for people to start saying, okay, we can do this methodically and reasonably, but a lot of us need to start getting back to, to life and producing stuff.

• 34:20Anthony Pompliano?

  How do you think about, and I'll caveat this, I know that this is highly controversial for a lot of people, right? But, but I do think it's an important conversation. How do you think about, uh, almost like the math equation between, uh, the loss of life and the economic impact? And I've seen people do everything from, you know, hey, there's a equation of how many jobs lost in exchange for. Or you know, the save uh saving of one potential life. I've seen things around GDP. I've seen people try to say, "Well, if you have X number of people unemployed, we know numbers around suicide and and drug abuse and and all that kind of stuff." Just how do you think about that? And and fully understanding like this is a moving target because the information every day feels like we're getting new information.

• 35:06Speaker 01

  Yeah. I don't know, man. I mean, that is,

• 35:11Speaker 01

  I I can get in trouble in a lot of ways answering this question.

• 35:14Anthony Pompliano?

  And I'm cap and I'm completely caveating the conversation because I actually don't think that there's a right answer. It's more of like, don't, I I'm not looking for an answer, more of like, what is the mental uh?

• 35:25Speaker 01

  Yeah, yeah. No, no, no, I I I get it. I um, it's funny, I've been trying to work through a way to write about that without, I mean, because here's the thing, I mean, when someone dies, I mean, it's just, it's obviously, it's so tangible and it's real and there's, you know, when someone is depressed or just, you know, down on life, you know, it's harder to quantify what is the the impact of that to society and all. So it's, in a weird way, the, this question is kind of like asking, you know, have living standards increased in the last fifty years? You know, I would argue that in a lot of quantifiable ways, they've they've surged.

• 36:06Speaker 01

  But in a lot of other quantifiable ways or non-quantifiable ways, they've they've gone down. Um, so it's, to a lot of people, it just depends on your perspective. I think that the, that we're we're getting to a point, I think, in this whole crisis where the the economic impact so far has not been that great, um, in that the.

• 36:35Speaker 01

  I think that the government has been able to build this bridge so far. Goldman Sachs put out a real, I tweeted this out the other day, that Goldman Sachs says disposable income in Q2 and Q3 is going to be positive. So the government's aggregate impact so far, they've floated most of the economy so far, and they will through Q3. So in the short term, the economic impact isn't that enormous, but I think the longer and longer this goes, the more and more this is going to start and feel like an actual depression. And the more and more it starts to feel like that, the more and more people are going

• 37:16Speaker 01

  to start to realize that, yeah, 50, 100 million people out of work is, that is a quantifiable, hugely disastrous, multi-decade damaging type of event that will have a meaningful impact that is maybe not the equivalent of people dying, but is at least very, very comparable to the way that we're all going to perceive our living standards going forward.

• 37:47Anthony Pompliano?

  Yeah, now I want to clarify one thing. Basically, what you're arguing is the economic impact, yes, there's 30-plus million people who lost their jobs and kind of all of those quantifiable things, but the government basically stepped in with like a life raft, right? And they said, hey, look, we're going to mitigate the actual impact on you. Yes, you lost your job, but here is unemployment plus an extra $600. Here's a stimulus check. You know, here's the PPP loan. These various kind of programs that they're putting in place for an individual, it may not completely mitigate it, but it at least allows them not to go from, I was employed to now I have zero income, right? And that's where you're getting some of that blunting of the economic impact.

• 38:30Speaker 01

  Exactly, yeah. So they're, you know, they're providing, I mean, in a lot of ways, it's sort of like a temporary, universal, basic income is what they're doing. So they're, I mean, again, they're telling people to stay home, they're giving people a paycheck. A lot of people are going to make more money on the unemployment benefits than they were before. So.

• 38:55Speaker 01

  Yeah, they're kind of floating the economy in the short term with the hope that this thing subsides and that we can kind of get back to living lives by, you know, Q4 and the early part of next year.

• 39:10Anthony Pompliano?

  Well, like, let's talk about that a little bit, right? Because I've heard this a number of times, and the math that I've seen at least definitely checks out, that there is a good portion of unemployed that are now making more unemployment than they would have if they had kept their job. And how do you think about, one, the ability for the government basically to say, okay, go back to your job where you make less money? And two, how does that change the incentive structure? Because to me, it's almost like, does that say more about our unemployment benefits or more about, you know, the compensation that people received before they were unemployed?

• 39:42Speaker 01

  Right. Well, this thing only lasts till July 31st. The extra, the federal, the $2,400 that they're giving in extra unemployment benefits per month. So, I don't know. I think it was like the Hoover Institution or somebody, I can't remember who, Brookings or somebody, wrote a piece saying that this was going to have a hugely negative impact on the economy. And I don't know. Honestly, I kind of think that's bogus in that the, I don't think there's a lot of people who are, who are going to quit their jobs to get $2,400 until July 31st with the certainty that when August 1st rolls around, they're not going to have any money coming in.

• 40:25Speaker 01

  So, but the, there is a weird thing where the longer and longer the government, you know, sort of guarantees everything. I find it hard to believe that the incentive structure doesn't change, assuming they do this for the long term. But so as long as the, as long as the programs are short term, I don't think that there's a huge change in the incentive structure, just because I don't think any rational person is quitting their job just to get, you know, 600 bucks a week from the government for two or three months.

• 41:03Anthony Pompliano?

  Where is that line, right? So like, one of the things I've thought a lot about is if they had, I think there's a proposal at some point to pay $2,000 a month, every month, until we got back to GDP levels that were pre-pandemic level. And so that could be literally two or three years of every single American getting basically a UBI check, right? They can call it whatever they want, but very much down the path of UBI. Is that a three months? And if they have a kind of a hard stop date, we're still okay, six months, 12 months? Like, how far can they go before they kind of run off the cliff and then it becomes a thing that you can't take back?

• 41:41Speaker 01

  I don't know. I mean, that's, it's funny, you know, I get in a lot of arguments with people like MMT people who are job guarantee advocates and, you know, Andrew Yang advocates who are UBI defenders. And I think what's so weird about a lot of these programs is that we don't really have any evidence to support, you know, the long-term impact of all of this stuff. Me personally, I find it hard to believe that you could, you could implement something like a job guarantee or a UBI and have no inflationary impact or no change in incentive structures.

• 42:25Speaker 01

  I just don't see how that makes sense. I mean, if you could make, if you could make a living wage and you could earn something, you know, like median income or 60, 70, 80 grand a year with, you know, like government healthcare packages and stuff like that, I don't see how that doesn't change the long-term incentive structure and meaningfully alter the potential course of inflation. And that's the, that's the big kicker, I think. You know, a lot of people, we didn't touch on this earlier, but one of my big views is that, you know, governments don't run out of money, especially big governments that have big underlying productive economies like the United States.

• 43:09Speaker 01

  The United States is not going to run out of money. So this, the whole idea- The government sort of financing its spending through bonds is is sort of misleading. The government finances its spending by having non-government creditors. And we finance the government basically at the rate of inflation. The rate of inflation is the cost of the government doing its own business. And so that's the important factor going forward. It's not can the government afford to spend $6 trillion? Of course, the government can afford to spend. I mean, they can afford it in a in the the sense that they they can create the money.

• 43:52Speaker 01

  You know, you and I can't just go out and create $6 trillion tomorrow. There's no bank that's going to take the other side of that trade. The government has its own bank that's going to take the other side of that trade. And so financing it from a, you know, do they have the money perspective is obviously true. I mean, they can finance, they could finance $100 trillion tomorrow if they wanted to. Treasury could print it up and dump it on the on the street. The the kicker is what is the cost of that in real terms? What is going to be the inflationary impact of that? And that's the that's the thing that is really hard to wrap your head around. Because it's it's funny, especially in the last like 10, 20 years.

• 44:35Speaker 01

  You know, especially mainstream econ. We used to sort of have this view that like, oh, you create more money. It creates more inflation and, you know, more money chases, you know, more goods or fewer goods or whatever. And you get inflation, and that's the basic gist of it. In the last 20 years, 30 years, the government has run ever perpetually higher deficits and debt. The Japanese government is spending, you know, colossal amounts of money trying to offset their deflation and disinflation, and they haven't been able to do it to a large degree. And so I think the weird thing is, I don't think anybody really knows what causes inflation.

• 45:15Speaker 01

  Or inflation is just so much more complex than a lot of people seem to make it out to be. And it's not just this simple mechanism where the Fed creates, you know, some money through QE or the Treasury runs a deficit and you automatically get inflation.

• 45:33Anthony Pompliano?

  So I want to talk about a couple of very extreme examples, right? And I'll start kind of on two different ends of the spectrum. There's a lot of people that would say, great, the federal government can print as much money as they want. They should do that. They're kind of centrally planned type economy. Print as much as you need, spend it how you see fit and help us be economically stable. But if you can print your own money, why do I pay taxes? Right? It's kind of like, remove one side of the balance sheet, if you will, or your P and L, and on the other side, just like, go at it. I'm assuming that you disagree, one, with that, and also, two, it's the long-term effect,

• 46:17Anthony Pompliano?

  which is kind of, how do you think about that extreme argument? And then we'll flip around and talk about the other side of it.

• 46:22Speaker 01

  Yeah, so this is like, one of the big pieces of, like, the MMT narrative that I think is very, very wrong. This idea that they, they like to claim that taxes don't fund spending, that because the government has a printing press, that they, they don't need underlying revenue sources. And I just think, they're kind of playing word games with a lot of this, I think. The, the tax revenue that a government generates is a function of its output. Okay? And any underlying economy needs output in order to have viable money. The only reason people want money is because they really want the stuff that they can get with money. They don't really want the money, they really want the stuff that money gives them access

• 47:07Speaker 01

  to. And so you need the stuff to make the money valuable. You know, you can't, it's putting the cart before the horse to get that backwards. And so, in terms of the, the government and its tax revenues, the government needs tax revenues because it needs underlying output that generates the income that makes everything valuable. So, it's like, um...

• 47:36Speaker 01

  You know, I like to think of the government basically like a big bank. The government can create money from thin air, just like a regular bank can. But the the bank needs underlying assets and income in order to be viable. Otherwise, nobody would trust that bank. That bank would have no creditors. And the government is really similar in that the government needs to have underlying resources and income to some degree that make everything viable, that makes everything work, and supports the underlying credit issuance. Because that's what the government really does. The government is just a big issuer of credit.

• 48:16Speaker 01

  And the essential aspect of credit is that people need to, to some degree, believe that that credit is valuable in the long term. Otherwise, there's no reason for them to want to hold it. And when you have an economy that starts to produce less or just, um, over time, starts to sort of stagnate and doesn't have the underlying productive resources, the credit system becomes inherently less valuable to the people who are using it. And what happens is you get a lower demand for money, which results in an increase in the rate of inflation.

• 48:56Anthony Pompliano?

  So if we then flip to the other side, there's a bunch of people who would argue, uh, the government is full of people who have no clue what they're doing, and they should allow the free market to reign. Don't step in, don't intervene, let boom and bust cycles occur, uh, and your intervention is actually, uh, causing bigger problems.

• 49:17Speaker 01

  Yeah.

• 49:18Anthony Pompliano?

  And so quantitative easing is not needed and kind of all of the other programs. How do you think through that argument?

• 49:24Speaker 01

  I, there's some truth to that, and it's probably, there's probably too many generalizations. Like, going back to the early example of why the Fed is a thing.

• 49:38Speaker 01

  Capitalist economies with private banking systems are, for the most part, over the course of an entire business cycle, very efficient. I mean, banks are much, much better issuers of credit and they have to compete and they have to be diligent about how they issue money because it has to be profitable in the long run and they have constraints that they have to be able to meet. And so, private banks are, for the most part, very, very good things because they oversee the credit issue that's in the economy in a competitive manner, in a way that the government

• 50:20Speaker 01

  doesn't or would not do if the government was running the whole banking system. The problem with private banking is that during periods like 2008, or the thing that really kicked off the Fed's creation was the panic of 1907, when the whole banking system crashed and the interbank system really crashed, the clearinghouses crashed, and that created this big knock-on effect that created a great big depression, basically because, again, the banks were scared of each other and it had all these knock-on effects that were super negative. And that just doesn't make any sense. So, banks in these very acute situations are bad at operating a banking system, basically,

• 51:05Speaker 01

  and it doesn't make sense to allow that banking system to exacerbate everything into a depression just because they get scared of each other. So, the Fed's core operational reason for existing, to me, makes a lot of sense, that in a period like 2008, the Fed did, basically, its core job really well. All the tangential stuff, the changing interest rates and the QE stuff, that was all tangential to the fact that they actually kept the banking system really liquid. So, they made sure that me and your businesses didn't fail because JP Morgan and Bank of America couldn't clear a payment. So, that core function is really essential.

• 51:49Speaker 01

  And I think that the government has a lot of varied operations that it does well because capitalists aren't willing to do everything all the time. Like, capitalists aren't willing to necessarily...

• 52:06Speaker 01

  Put out fires because putting out fires isn't very profitable. It's hard to make money, you know, putting your employees at risk in that way and getting people to collectively pay insurance to pay for a fire department and stuff like that. War is the same sort of thing. A war has an inherently negative net present value because it's expensive to build things that get blown up and, you know, go out and kill your workforce. It's hard to make money running an operation like that. So capitalists don't want to do these things that have a sort of negative net present value. And I think those are the, those are the instances where government makes a lot of sense. The government can do these things that a, a free market economy just, it doesn't have

• 52:51Speaker 01

  the incentive structure to do it because it's just too damn hard to make money doing those things. But the, where I think the government sometimes oversteps its boundaries is where it tries to, you know, start to do things that start to sort of impact the positive net present value business structure of, of the real economy in a way that starts to alter it to a degree that has a negative long-term impact. And I think that, you know, it's, it's funny, like going back to interest rates. Like I think that for the most part, the way the Fed changes interest rates, in my view, is, is for the most part misguided.

• 53:35Speaker 01

  I mean, I think that the Fed should basically, if I had it my way, I would take the Federal Reserve and I would basically, I would peg the overnight rate at like the core inflation rate. And I would say that that's just what it is. No more Jerome Powell saying, you know, what do I think the future of the world is going to look like? It would just be something automated. The BLS would come out with a CPI number and the overnight number, the overnight interest rate would change. People would earn a real interest rate, a, a real savings rate on something like treasury bills. Um, and the whole thing would kind of be automated.

• 54:14Speaker 01

  So there is, I, there's merit to these arguments where people say that the Fed is sort of, you know, sticking their finger in the air and kind of trying to predict things that they're not very good at predicting. And in a lot of ways, probably, you know, if they're not making things worse, they're not necessarily making things any better.

• 54:33Anthony Pompliano?

  I believe it to be true that the Fed has never successfully predicted the GDP of the next quarter. They've come close, but I don't think they've ever actually in like, you know, more than 100 times that they've done this. They've never actually successfully nailed it.

• 54:52Speaker 01

  Yeah, I mean, I don't know. Predicting predicting the future of the economy or the stock market or any of this stuff is super hard. So I don't want to be.

• 55:03Anthony Pompliano?

  It's impossible, these guys, but it's but yeah, to some degree, at some point, though, you would think that, um, you know, you look at some of this stuff and you see how bad some of these people are predicting these things. And you say, well, maybe we just shouldn't be trying to predict these things. Maybe we should. Maybe it does actually make sense to automate some of these things or, you know, take them out of the hands of people who, you know, just are never going to be capable of predicting these things in the first place. For sure. And so if we keep going down this thread a little bit, like, how do you think about the world if we didn't have QE in 08, 09, if we didn't have QE now? Like, what would the world look like if the government hadn't stepped in in these recessionary periods and interfered?

• 55:47Speaker 01

  It depends. I think if the Fed had done nothing in 2008, I think that the banking system probably would have undergone a colossally huge collapse that it would have had knock on effects that would have caused, um, I mean, I remember talking to one of my best friends in DC who is an attorney, runs a big practice out there. And he said that he almost lost his revolving line of credit. He has a revolving line of credit that he pays most of his employees with. He said he almost lost his revolving line of credit because Washington Mutual started

• 56:31Speaker 01

  going through all their turbulence. And he said luckily that the government stepped in and sort of, you know, kept everything afloat. But this is a business that, I mean, His revenues were probably up during the financial crisis, I bet. Because he runs a practice that is mostly injury related. So I suspect his business was probably more than fine. And so you have this solvent business that potentially becomes insolvent just because the banking system is in bad shape. And so I think the economy would have been in a lot worse shape.

• 57:11Speaker 01

  The hard thing to quantify is with all this stuff is the counterfactual. I mean, what is the, are you, are you better off in the long run by supporting these things and not letting things kind of, you know, get worse when they're, when you think they're going to get worse or when they are getting worse? Versus if you, if you actually, you know, support everything, does it, does it actually pay off more in the long run to, to help people a little bit get through tough times? But does it, does it end up in, like, are we exaggerating the, the boom bust cycle

• 57:51Speaker 01

  in the long run by supporting things when we, they should be going down and not letting the, you know, the creative destruction kind of occur that makes the economy to a large degree function? And I think there's merit to a lot of those arguments. I really think there is.

• 58:13Speaker 01

  I think that there's also merit to the idea that the government should support certain things, that the government, there's a rational argument for the government to support the banking system when JP Morgan and Bank of America just don't trust each other. You know, that shouldn't, you know, my friends shouldn't go out of business because JP Morgan is a bad business. So it, it's hard. It's, I don't really know, I don't really have a, a great answer for it because I, I don't know what the counterfactual would look like. And there's no way to prove it. My, my inkling is that.

• 58:50Speaker 01

  There a lot of it is good, a lot of it has good intentions and that in weird sort of knock-on effect ways, there probably are a lot of negative impacts in the long run that make things worse off and have a negative impact that makes the economy less efficient. And I mean, you see this regulations are probably the best example of things like that that have good intentions and probably hurt aggregate economic performance meaningfully in the long run. And a lot of government policies like that. So it's again, kind of going back to trying to quantify the, you know, the, the impact of all this, it's hard. It depends

• 59:34Speaker 01

  on what your, your value judgment is of a lot of this stuff.

• 59:37Anthony Pompliano?

  And so I guess when they do step in, right? Because I tend to think that what you're saying around like, there's no black and white world, it's just gray, right? So like them not doing anything at all is probably an extreme answer. Them doing everything and just giving money to anybody and everybody who wants it is probably an extreme example. So the truth is somewhere in between. How do you then think about who do they bail out? Who do they provide funding to? And like, is that process that they're currently going through and have gone through, does it make sense? Or is it just, you know, kind of like the Fed, they're just guessing as to what they think will work?

• 1:00:13Speaker 01

  Yeah, I mean, God, I, this particular environment to me is just so unusual because I, there's no, the thing to me is that there's no one to blame for this thing. So I think it's hard to look at people, even businesses that you might hate, like airlines. I think it's hard to even look at an airline and be like, you deserve to go out of business because of this thing. Or, you know, any business that, I mean, like, for instance, firms that did lots of buybacks. I think it's easy to look back at these firms in retrospect and say, you should have been more prudent. You know, the average American doesn't have more

• 1:00:58Speaker 01

  than two months of emergency funds in their, in their bank account, you know? Is it fair to look at everybody and be like, you should have saved more money in case a meteor hit the economy? And I, to some degree, it's a little unfair, I think, to look back with hindsight and say that.

• 1:01:17Speaker 01

  But at the same time, I mean, this environment is just so unique that I think the bridge loan type of structure that the government is trying to put together, I think it makes sense. I think that the government is basically making a bet that they hope this thing will be short term and that, you know, they can provide this bridge so that people, you know, don't all collapse into the river here and, and die economically because they mandated a shutdown from a virus that nobody caused. Um, the, but again, going back to the duration of this thing, the longer and longer this goes on, the less impactful the government is going to be in being able to support this big,

• 1:02:02Speaker 01

  the, the whole economy because you're, at some point, you're going to start losing the underlying resources that make everything work.

• 1:02:10Anthony Pompliano?

  Yeah. And I guess part of it to me, like, as I think through the bailouts, it's like, look, why are most companies immediately run to the government? It's because the government's kind of the idiot in the room, right? They're going to get better terms than anyone else. Uh, it's going to be a sweetheart deal. And when you look at the bailout structure, at least for like airlines, for example, it was like 65% of the money, uh, somewhere on average, actually was a grant. And then there was the low interest, uh, rate loans and things like that. And to me, I guess part of it is like, again, you're changing the incentive and the risk reward structures in a, what is supposed to be a capitalistic society by having the government step in in general. But even if they did step in and they said, hey, we're going to lend money or we're going to take

• 1:02:53Anthony Pompliano?

  an equity position, uh, and it's going to be on terms that are competitive in the market. Like, I still could swallow that, right? And then, okay, you know what? Like, that, that's fine. The part that just like they step over the line is when they just say, hey, you know what? We're going to give you $3 billion and get nothing in return. Right? And then it kind of just feels like, oh, okay, like, like that, one, where's the line? Two, how'd you come up with $3 billion? You know, and three, like, you're basically taking quote unquote taxpayer money, debatable, right? But you're, you're basically taking government money and just handing it and getting nothing in return. Like, how do you think through that?

• 1:03:28Speaker 01

  I, I think the criticisms of the airline bailout are really fair, mainly because...

• 1:03:36Speaker 01

  I think that that was a bridge loan that was probably just a bad bet. I mean, how many of these airlines are really going to survive this? I mean, let's be honest about this. Like, how many people are really going to be flying in six, maybe even 12 months? These entities, they're not going to be back at full operations for, I bet, years and years coming out of this thing. So I think in terms of the government choosing, you know, picking and choosing who to bail out, the airlines were probably one of the worst places to try to allocate funds just

• 1:04:15Speaker 01

  because, I mean, I would not be remotely surprised if in like six to 12 months, United Airlines is coming back to the government and saying, hey, we need your help again. And then the government's going to take an equity stake. And then the government's going to get the terms that, you know, they can get from like a GM. Like, the GM bailout, it made sense to some degree just because you got terms that were so good that, you know, even the government can make money when you're going in and buying a decent business with a lot of underlying assets for, you know, pennies on the dollar. This obviously wasn't that.

• 1:04:59Speaker 01

  The airline bailout was, again, they were trying to provide a bridge loan to an entity that is probably, it probably just can't be helped by a bridge, you know? They need their own like Golden Gate. I mean, this is something totally different just because the industry, I think, is so screwed.

• 1:05:20Anthony Pompliano?

  Well, here's my favorite thing, and I've almost tweeted this like five times and then deleted it just because I don't want to deal with all the trolls. But at the same time, at the best investor in the world in Warren Buffett selling the airlines, we literally have the government rushing in to give them money, right?

• 1:05:36Speaker 01

  It's a great point. It's, I mean, it's so absurd. I mean, I think Buffett was saying in like January, he'll never sell his airline stocks. And then he unloads all of it. So, yeah, I mean, look, I- Although I think that, I think the one thing that a lot of people missed about the bailouts is that I think a lot more of the money is actually going to individuals than people have given it credit for. And it wasn't just a big bailout of like the S and P 500 and the biggest companies in the country. A lot of this money is going to individuals. And, you know, I think, I started calculating it out, like, the average unemployed person's

• 1:06:18Speaker 01

  gonna get like, like, thirteen to sixteen thousand dollars over the next three, four months. I mean, it's, it's not just, they didn't just send a twelve hundred dollar check to people and say, hey, good luck with that. I mean, they, they're sending twenty-four hundred bucks a month to individuals who are unemployed, plus the twelve hundred dollar check, plus like four hundred bucks from state unemployment. So, it's a meaningful amount of money, and I think it's gonna be really helpful. And then, you know, you had some of these, these, the allocations that went to like airlines and parts of the PPP, obviously, were, were messy and disastrous, and went to the firms that never, you know, needed the funding or shouldn't have gotten the funding in the first place.

• 1:07:03Speaker 01

  So, it's imperfect. I keep saying that perfect is the enemy of the good during this whole thing, and I think there's some truth to that, just because it's such a, it's such an unusual environment that I think that, you know, it, being compassionate about the degree of pain that a lot of people are in during this thing, I think is, is the right default view, in my opinion, in the short term. Even if there are some mistakes, there's always gonna be mistakes in government programs, and I don't wanna like, you know, gloss over it and be like, oh, yeah, you know, we shouldn't, you know, be more judgmental and, you know, mindful of the way our government spends money.

• 1:07:46Speaker 01

  But, it's hard to pick winners and losers in an event like this.

• 1:07:51Anthony Pompliano?

  For sure. If you had to give the Fed a grade, like A, B, C, or D, in the 2008, 2009 crisis, what would you give them? And then what would you give them so far in 2020?

• 1:08:06Speaker 01

  Um, see, this is the thing. I just don't think the Fed is as impactful in terms of, like, the Fed tried to create basically growth and inflation coming out of the financial crisis. So if you're going to grade them on that scale, you've got to give them like a D or something. I mean, it's not a good grade. The growth coming out of the financial crisis was not good. They, you know, they create all these big programs that everyone thinks is going to create inflation. And, and what happens? And the rate of inflation is like one and a half percent on average coming out of the financial crisis. Like, you know, they didn't, they did not succeed by

• 1:08:45Speaker 01

  any meaningful degree, I don't think, in terms of, of helping the broader economy. Um, and here's the thing about the financial crisis that I thought was so, so bad in terms of the way they implemented all the policy was that I kept saying coming out of the financial crisis, if you're going to do something, you've got to fix the consumer debt problem because that was the thing that really torpedoed the US economy in 2008, 2009. It wasn't, the banking crisis was tangential to the consumer debt crisis. So consumers took on all this debt. They bought all these overpriced homes. And then when it collapsed, the consumer's balance sheet was destroyed.

• 1:09:28Speaker 01

  And to some degree, it's still destroyed. It never really, we never really got a, a big boom in, in household credit. In fact, I think, I can't remember, but if you pull up, um, like go on Fred and pull up, uh, CM debt, you look at household debt. That number year over year going into like last year, I think it was lower than like any recession prior. So we were still at like recessionary levels in terms of household borrowing coming out of, you know, 10 years after this thing. So I think they helped, they helped the entities that they're designed to help because that's what the Fed does.

• 1:10:08Speaker 01

  The Fed, the Fed is structured to help the banking system and they, I guess in terms of doing what they are designed to do, they did that well, but it had all these sort of negative knock on effects that.

• 1:10:24Speaker 01

  Were bad in the long run and so it in terms of you know did they help avoid a a great depression or like a financial panic that resulted in you know like I friends going out of business because of no fault of their own yeah they they probably had a beneficial impact in the aggregate because of that but in terms of helping the aggregate economy I think the US government failed pretty massively coming out of the financial crisis and I think they they probably made inequality worse um or almost definitely made inequality worse they didn't get money to the right people the people who needed it and um so yeah I mean on the on

• 1:11:07Speaker 01

  the whole I mean the Fed probably gets a D and the US government probably gets a who knows maybe like a a C minus because they did at least a few things that helped infrastructure a little bit and a few of these small programs that um you know got money at least to people who who needed it more than bankers did.

• 1:11:26Anthony Pompliano?

  And then what about uh so far this year?

• 1:11:31Speaker 01

  I think it's yet to be seen um that this test is gonna be a long one I think in that you know we have yet to see how long the virus is gonna last I think so far the um the government's gotten a lot more money to people who really needed it so this hasn't been we haven't just bailed out banks or anything like that the Fed's programs have been humongous but the I think again the thing that a lot of people have missed is that I mean the CARES Act was huge the deficit this year is gonna be four trillion dollars that's money that's going primarily to individuals it's gonna boost disposable income and it's gonna float people

• 1:12:15Speaker 01

  for a pretty decent amount of time here um so again I think that in the short term probably the right move um and probably beneficial to some degree um depending on you know the inflation there the kicker is in the long run.

• 1:12:39Speaker 01

  You know, let's say Pelosi passes her $3 trillion bill and you end up running like a $7 trillion deficit this year and we end up with 5% inflation in 2022. Then the whole thing, yeah, we saved, probably staved off a depression and we created, you know, a stagflationary environment that's probably going to last for a pretty long time. So pick your poison. They're both, neither one is a great, great outcome.

• 1:13:10Anthony Pompliano?

  Yeah. How do you think gold and Bitcoin do through all of this? Like, where do you kind of put them in this model?

• 1:13:17Speaker 01

  I'll be honest, I have no way of being able to value either of those assets. I think my, sometimes I sound really critical of Bitcoin and gold. I'm not so much a critic of them, just that I don't know how to quantify where their future value would ever be. Like, I can look at a 10-year Treasury bond and, you know, as crappy as that asset is right now, I can at least look at it and I can tell you, well, in 10 years, you're going to have X amount of dollars, almost with near certainty. Even with the stock market, you can look at the stock market and say, okay, you know,

• 1:13:59Speaker 01

  I like to think of the stock market like it's a 30-year high-yield bond, basically. And so, and it yields like 6% or so per year, something like that. If you hold that thing for 30 years, the odds of you earning your 5%, 6% coupon from that thing are probably pretty high. So, again, even with that thing, I can look at it and say, you know, corporations are probably going to earn, you know, a certain degree of profit and they'll pay out a certain portion of that profit to shareholders. And so, stocks will do, you know, fairly well over the course of a long-term time period. You can't do that with gold or Bitcoin. So I just, I mean, my gut tells me that anything that is sort of

• 1:14:45Speaker 01

  viewed as a hedge against government is likely to perform pretty well. But I'm not going to, you know, blow smoke up anyone's ass. I really don't know. I don't have like a high degree of confidence in in that bet, even though if I were, if I were building a really diversified portfolio, I would certainly feel, you know, more comfortable owning some things like commodities and inflation hedges, just because if if this thing does last for, you know, even a little bit longer than people expect, there's the real meaningful risk of inflation coming out of this.

• 1:15:25Anthony Pompliano?

  Yeah, and I guess how much of those assets doing well is dependent on inflation actually occurring versus just the fear of inflation? Right? Like, is the fear more important than actual inflation? Or do you have to have the inflation to get those assets to really perform?

• 1:15:44Speaker 01

  Not really. I mean, look, gold has done just as well as stocks have over the last 20 years, basically. So, you know, and inflation has basically been going down over that whole period. So, you know, I don't even think you you necessarily need inflation as much as you need.

• 1:16:05Speaker 01

  You do need a belief set to support these things more than if people believe that Bitcoin is going to become a really viable form of money in the future, then, yeah, people will bid it up.

• 1:16:21Speaker 01

  So there's, they're interesting assets to me in large part because they're

• 1:16:28Speaker 01

  They're almost more belief-based to some degree than they are, at least at this point, than they are fundamentally based. I mean Bitcoin's a good example because Bitcoin, you know Bitcoin does have a lot of use cases yet. It's not really hugely widely adopted as a form of money or anything. But if you believe that it will be, and it slowly does evolve into that thing that you believe it will become, it will become more valuable over that time period. The question is, is, you know, will, will those things actually unfold? I mean, at some point, the rubber meets the road, right? I mean, at some point,

• 1:17:13Speaker 01

  if you don't get inflation, then, you know, gold should not be viewed as a, as the hedge that a lot of people are expecting it to become. Or if you view Bitcoin as a, as a viable form of money, and it just never really takes off as a widely-used form of money, then, you know, the use case obviously has failed. So.

• 1:17:39Anthony Pompliano?

  Yeah, it, it's super interesting too, because you see central banks around the world really going after gold, right? And they've been doing that for the last couple of years. And one of the questions I have, and I don't know the answer, is at what point, if at all, do they say, hey, we should put some Bitcoin in here with our gold, right? Or do they just never get to that point? But, but those central bank reserves, it's really interesting to see who's stockpiling gold and who's not.

• 1:18:05Speaker 01

  Yeah. You know, the whole Fedcoin thing and the Bitcoin aspect of, of Federal Reserve seems kind of, I don't know, it's almost antithetical to me that for a central bank to start trying to use a sort of decentralized payment system like that, it just, the whole basis of, of like the Fed and, and really government-issued money of any type is that there's a central authority. There's a, you know, there are institutions underlying it that they give it a certain degree of credibility. There's a court system that supports it. There's a payment system that supports it. And these things are run by...

• 1:18:47Speaker 01

  Things are run by people. They're run by centralized institutions that, you know, people impose their opinions and views on, and they can manipulate them and they can alter them in meaningful ways that, you know, could have both good and disastrous impacts in the long run. So, I don't know, I don't think that, um...

• 1:19:10Speaker 01

  I, I think the two systems in the long run, they, they're, they're likely to, to exist in the same way that kind of gold runs as a monetary system that's parallel to like a government-run system right now, where you're not going to have one or the other necessarily win in the long run. Um, I mean, you're always going to have governments, you're always going to have court systems. People need to be able to enforce their payments. They do that by, you know, suing people in a certain denomination of, of currency or whatever. Um, so you're always going to have these systems, um, to some degree. So I think they kind of run parallel and, you know, I, I don't, I wouldn't be shocked if these decentralized systems, you know, gain more and more in popularity. I don't

• 1:19:55Speaker 01

  know what the value is going to be of that, but the, certainly the popularity of them will increase just because there does seem to be this trend, this growing trend towards the, the growth in the, the way that the government is increasingly involved in sort of everything that people are uncomfortable with.

• 1:20:17Anthony Pompliano?

  Yeah. The, the one thing you said earlier that, um, it took me a long time to kind of wrap my head around this, but when you were talking about the programmatic, uh, interest rates and, and kind of the lack of having to predict what happens in the future, um, one of the things that to me, uh, as I understood it better, made me even more interested in Bitcoin is this idea of kind of programmatic monetary policy. Now, the difference between what you described and what Bitcoin does is Bitcoin's not, uh, having that programmatic, um, or kind of automatic, uh, decision made tied to anything in the economy, right? It kind of is just operating on its own. Um, but the idea that, uh, it's got this Inflationary monetary schedule every four years and kind of all of these elements.

• 1:21:03Anthony Pompliano?

  I I always go back to this idea that I do think a major trend in our lives is that people will trust algorithms over other humans, right? And you see that with like, I trust Google Maps. I don't ask somebody when I'm lost in a city anymore, right? I trust Google will tell me the answer to a question, whatever. The question is, does that ever penetrate into money? Right? And and kind of monetary policy? And then what are the ramifications of that? But it just feels like that's where kind of the puck is going. The big question is just, is money, you know, along for the ride? Or is money so sacred and so much of a belief system that you need the full faith and credit of a government behind it?

• 1:21:43Speaker 01

  God, I mean, the trillion dollar question. You know, it's to me, the um. The big thing about a government based money that I think is really the most crucial aspect of it is that there is a court system behind it that people feel. They feel trusting in a in a government issued form of money to a large degree because they can sue somebody if somebody screws them over. And that gives people confidence in. I mean, at the end of the day, a lot of this stuff is, most of it is just contracts. We're, you know, like a debt agreement. A debt agreement is just a contract between two parties to,

• 1:22:25Speaker 01

  you know, pay someone X amount of dollars now with the expectation to pay them back at some point in the future. And that that contract is enforceable in a US court. And so the money, to some degree, has value because the the contract is enforceable. And that that sort of central mechanism gives money, government money value to some degree, just because people have confidence in the enforceability of the contracts that they're using.

• 1:22:58Speaker 01

  And that's what, you know, I think the thing that makes Bitcoin really interesting and.

• 1:23:07Speaker 01

  Potentially, I think, difficult to adopt as a form of money in the future is that you really need, you really need stable money to be able to transact in the short term. That to be able to get people to transact, for instance, in an overnight market, they need to know that one bitcoin is going to be worth one bitcoin tomorrow. And you've seen this with a lot of the stable coins that have come and gone over time, that it's really hard to create a stable coin. It's really hard to create parity, basically, in a monetary unit.

• 1:23:47Speaker 01

  And as screwed up as the government systems might be, the governments just have, in a lot of ways, they have such huge economies of scale, that they're able to create parity in a currency in a way that a lot of private entities just have trouble doing. I mean, a lot of, I mean, a money market fund, for instance, is a stable coin to some degree, or a stable monetary unit to some degree. And private entities run these things all the time, and they try to stabilize them, and they, for the most part, do a pretty good job, but they don't ever do quite as good as the government does, because they just don't have the same economies of scale,

• 1:24:30Speaker 01

  because they just don't have the same income streams, they don't have the same cash flows. And governments are just such big colossal entities, especially one like the United States, that they're able to create parity in a currency in a very, very liquid and somewhat easy manner, that gives people confidence that $1 is worth $1. I mean, in nominal terms. I mean, $1 is always going to be worth $1 tomorrow, and you don't really have to worry about that. And that's what makes, it's what makes the decentralized aspect really fascinating to me, from sort of a nerdy monetary aspect, is like, can a decentralized entity ever actually achieve that?

• 1:25:13Speaker 01

  Because I think it's such a crucial aspect of people having the confidence to utilize any form of money in the short term.

• 1:25:20Anthony Pompliano?

  Yeah, my favorite chart that I've seen in it is definitely a little bit of a troll magnet, if you will, on Twitter. I saw somebody sharing the S and P denominated in Bitcoin over the last couple of years, and it's basically, you know, down into the right at a 45-degree angle for the most part, right? But being denominated in Bitcoin obviously does that. When you then flip it around into an inflationary currency, right, it's obviously up into the right at a 45-degree angle. And the question then becomes, you know, the ramifications of an inflationary versus deflationary type currency. What is right? Can people survive? You know, can you have an economy

• 1:26:01Anthony Pompliano?

  that thrives on a deflationary currency? Like, all of these things, I think, there's lots of theories and people have their personal opinions. But at the other day, we actually don't know, right?

• 1:26:12Speaker 01

  Totally. I mean, that's one thing. Yeah, I will always wonder about that with Bitcoin. So like, if, um, let's say Bitcoin became really widely adopted. I wonder sometimes, would it, would it have an inherently deflationary, underlying basis to it still? Or would it, you know, if you reach sort of an equilibrium where it was really widely adopted, and let's say it's some, you know, value of like a million dollars or whatever it is, and, um, you know, you reach some sort of stability point with Bitcoin as a, as a form of money, um, would it continue to be

• 1:26:55Speaker 01

  an inflation hedge? Or would people utilize it then in the same way that they utilize a dollar? And that it would be viewed as a, you know, almost a stable monetary unit that you just exchange goods and services for? And that's the, I mean, that's the kicker. Why is, like, why is government money inherently inflationary? Because it's fixed at par. I mean, the government doesn't provide an inflation hedge. They basically say one dollar is worth one dollar, and the trade-off is, you know, you have to produce things in the short term that you have liquidity for. So we have a stable monetary unit that people can use in the short term. And in the long term, we hope to produce things that will

• 1:27:40Speaker 01

  Will basically protect us from some form of inflation in the long run. We have the underlying resources using these short-term contracts to protect us in the long run. And that's basically like a stock certificate is basically an inflation protection hedge. Because it's its cash flows are connected to the underlying resources that make the short-term money viable. So you like a basic premise of asset allocation is you want to own inflation hedges. Because you always need the short-term liquidity component of a portfolio. Everyone needs to hold cash to some degree, whether it's just for emergency purposes or, um, you know, stock buybacks or whatever.

• 1:28:26Speaker 01

  Um, but everyone needs a short-term part of their portfolio and you need to hedge that with the part that is going to have an inherent inflation hedge, which is the part that's attached to real resources to some degree.

• 1:28:38Anthony Pompliano?

  Yeah, well, and here's a part to me that, uh, again, this is an evolving kind of train of thought for me as I think about Bitcoin and kind of where it could go and what the ramifications of that are. Uh, but if you do have a deflationary type asset, uh, not only do you get a stable value, you actually get a value that has an opportunity cost of spending it, right? Because it's going to get more valuable over time. And so what you do is you have the exact opposite effect of an inflationary asset, right? Currency, the whole point of spending the cash is because it's going to be worth less in the future on a purchasing power basis, although it doesn't happen quickly. Well, if you reverse that and you say, actually, this thing you're about to spend is going to be worth more,

• 1:29:22Anthony Pompliano?

  then you you really change this from a consumption type economy to something else, right? And I think that that's where a lot of people point to something like the Great Depression and and kind of all of these different times where we've had deflationary periods. And, you know, it it ultimately comes down to, uh, I think money's a belief system and it is going to be what do you believe in, right? Do you believe in a government, the full faith and credit of it and the military power and kind of that that part? More value and all that stuff, or you end up believing in this kind of programmatic transparent monetary policy. It is a wild and somewhat out of left field or off the fairway type idea today. I think a lot of people in Bitcoin think, hey, that's going to become more consensus over time.

• 1:30:07Anthony Pompliano?

  But that's the risk you're taking, right, is that it may never do that. And therefore you end up in left field and everyone's like, hey, man, the rest of the financial system kind of continued on its way. Like, what are you guys doing?

• 1:30:18Speaker 01

  Yeah.

• 1:30:20Anthony Pompliano?

  Uh, listen, before we, before we wrap up, uh, what is the most important book you've ever read?

• 1:30:27Speaker 01

  The most important book I've ever read? That's a big question. Um.

• 1:30:35Speaker 01

  Gosh, financial or non-financial? I mean, I would say non-financial.

• 1:30:41Speaker 01

  God, I mean, my favorite book, just from a personal perspective, is, um, is probably Man's Search for Meaning. I just, to me, um, the whole Viktor Frankl story in Auschwitz and the, the thing that really, I think, had a big impact on me from that book was, um, this whole idea that no one else can really determine your mindset about things. That no matter what your circumstances are, you can, you still have the ability to choose to have a certain perspective about, you know, how good things are, how bad things are.

• 1:31:21Speaker 01

  And I don't know, for me, I think especially being in, um, in like the financial arena. You know, you have so many conflicts of interest and so many people that are sort of trying to create competing narratives and perspectives that it's, it's important to sort of be a really independent thinker and not necessarily get too attached to like any type of mentality and not be, not be really impacted or biased by other people's opinions too much and not let them steer the way you believe and view the world, you know?

• 1:32:01Anthony Pompliano?

  You could say that 10 times more so people hear you because I couldn't agree more. And it's, look, it's funny, right? I mean, look, I've had the pleasure of interviewing an incredible number of people on here. A lot of, you know, macro investors and things like that. And I tell people all the time that my two biggest takeaways are one, obviously, these people are intelligent, but also how clear headed they are, how much in control of their emotions and psychology. And when you talk to somebody who has that ability, what you realize is that's what ultimately gets them to original thought, right? And kind of independent thought.

• 1:32:39Speaker 01

  Well, that's one of the things that's interesting with people who really, at least I find people who really understand money and finance. They have a good perspective of how money is sort of tangential to the real world and the things that really are important in life. And because a lot of people, you know, weirdly think that money is the end and that the money is the thing that makes everything better. And a lot of people, you know, it's funny, just going through a whole, you know, career in finance and stuff, you just sort of realize that the money is just sort of a means to an end. And it's not necessarily the, you know, the end all that, you know, I, it's funny.

• 1:33:24Speaker 01

  I got into finance because my, I'll never forget it. I was at my brother's graduation and I hadn't picked my major yet. And he said, what are you going to major in? And I was like, I don't know, I might do like marketing or something. He was like, go into finance, it's where the money is. And I was like, okay. And then I get, so then I get into this business like, you know, just greedy and expecting to get rich and all this stuff. And slowly over time, you sort of, the more you start to learn about it, you're like, wait a minute, you know, like, not necessarily completely wrong, but it's a little bit backwards.

• 1:33:58Anthony Pompliano?

  I couldn't agree more, man. Where, where can we send people to learn about, more about you and kind of what you guys are doing?

• 1:34:06Speaker 01

  So my company site is OrCam Group. That's my asset management firm and I write usually once or twice a week on the Pragmatic Capitalism blog. It's pragcap.com and my Twitter is just Cullen Roche.

• 1:34:24Anthony Pompliano?

  Awesome, man. Well, listen, I appreciate you being so gracious with your time. I think people are going to learn a lot from this and I'm glad that Adam Singer suggested we do this because I learned a lot and it's one of these things where this system is so complex that every single time I speak with somebody, you learn more and also it forces you to kind of question every belief that you held before, right?

• 1:34:50Speaker 01

  Oh, the whole, yeah. I mean, that's the crazy thing about it. The whole business humbles you in the long run. I mean, I, you know, you get into this whole business arrogant and thinking you know everything and then the deeper and deeper you get into it, the more and more you realize you don't know anything.

• 1:35:08Anthony Pompliano?

  Could not be more true. All right, my friend. Thank you very much. We'll do this again in the future.

• 1:35:12Speaker 01

  Yeah, thanks a lot, Anthony.

• 1:35:14Anthony Pompliano?

  All right, guys. I really appreciate you listening to that episode. I loved it. Hopefully you found it valuable. Before I let you go, don't forget to go and subscribe on your favorite podcast channel to this podcast. Leave a review, leave five stars. Help me get more people listening to all this great information. If you also want, we publish these on YouTube in video format. You can just search my name, Anthony Pompliano, on YouTube and find the channel, subscribe there. I hope you guys are enjoying all this. I'm loving making it and so we will see you on the next episode.