Today, Cem Karsan sits down with Lyn Alden for a wide-ranging conversation on the forces quietly shaping markets beneath the surface. From the persistence of fiscal dominance to the role of populism, demographics, and global power shifts, they explore why the current macro regime may be far harder to reverse than many expect. The discussion moves beyond economics into politics, examining how inequality, globalization, and technological change feed into inflation dynamics and policy decisions. They also tackle the future of the dollar, the risks to its global dominance, and the complex role of crypto in a system defined by power, incentives, and control.

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Episode TimeStamps:

00:00:00 - Introduction to the episode and trading floor setting

00:01:28 - Cem introduces Lyn Alden and frames the macro discussion

00:02:23 - Lyn outlines her framework and the rise of fiscal dominance

00:05:31 - Multipolar world and shifting reserve currency dynamics

00:06:20 - Why debt cycles lead to persistent fiscal expansion

00:13:42 - Debate on debt, modern monetary theory, and dollar privilege

00:18:29 - Populism, inequality, and political drivers of inflation

00:24:25 - Trade deficits, globalization, and domestic consequences

00:30:20 - What happens if dollar dominance weakens

00:34:16 - Comparing today to the 1940s vs the 1970s

00:41:47 - Democracy, authoritarian drift, and rule of law

00:44:17 - AI, productivity, and inflationary policy responses

00:56:08 - Lyn’s views on Bitcoin, stablecoins, and crypto markets

01:03:34 - Debate on the long term sustainability of crypto

01:09:42 - Closing thoughts on power, money, and the macro outlook

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(Music)

Welcome to U Got Options, an exciting series right here on Top Traders Unplugged, hosted by none other than Cem Karsan, one of the sharpest minds when it comes to understanding what's really driving market moves beneath the surface. In this series, Cem brings his deep expertise and unique perspective, honed from years of experience on the trading floor, to candid conversations with some of the brightest minds in the industry. Together, they unpack the shifting tides and underlying forces that move markets and the opportunities they create.

A quick reminder before we dive in, U Got Options is for informational and educational purposes only. None of the discussions you're about to hear should be considered investment advice. As always, please do your own research and consult with a professional advisor before making any investment decisions.

Now, what makes this series truly special is that it's recorded right from the heart of the action on the trading floor of the Cboe. That means you might catch a little background buzz. Phones ringing, traders shouting as Cem and his guests unpack real world insights in real time.

We wouldn't have it any other way because this is as authentic as it gets. And with that, it's time to hear from those who live and breathe this complex corner of the markets. Here is your host, Cem Karsan.

Welcome back to another episode of U Got Options from the Cboe floor, brought to you by Kai Media and Top Traders Unplugged. Today we talk to Lyn Alden. She is known, obviously, for This Train Does Not Stop, and that fiscal dominance (absolutely agree with) but we test it a little bit with talking about authoritarianism, how it will play a role versus democracy; AI, will that make a difference; and of course, crypto, where does crypto stand in this? Where are we going in the broad scope of things?

I think you're really going to enjoy this one.

(Music)

Hey guys, and welcome to another U Got Options. I'm here with Lyn Alden - not only a fan favorite, one of my favorites. Her work has been kind of something that's led me through the last four years, really been reading a lot of her stuff, agree with a lot of it (from a different angle sometimes, sometimes different path). But one thing you can't argue with is the depth at which she kind of looks through these things, and the numbers, and analysis. It's always a pleasure. So, thanks for joining me today, Lyn. Excited to have a conversation today.

Happy to be here. Looking forward to it.

So, let's dive right in. I mean, what an amazing kind of time. The things I feel like we've been talking about, in terms of fiscal dominance and how you can't stop this train, and the broad macro. It just seems to accelerate every week and every month. For those that aren't as familiar with your work, and even for those that are, you might give a little bit of a kind of background on how you see us at this stage, maybe what's continuing to happen on path as you'd expect, and also what are some things that might be changing in the broad macro path?

This has implications for nominal GDP, wealth concentration, inflation levels, market performance. It's got a number of kind of economic, social, and trading, investing ramifications. And we have to really go back a long time, at least in the developed world, to see similar market conditions. So, a lot of the investing approaches of the past 40 years or so, we're not really geared toward fiscal dominance. And so, a lot of my work is kind of focused on that importance.

My initial background is in engineering, so I kind of have a systems engineering approach to capital flows. as well as focusing on the reality of some physical aspects, whether it's energy, whether it's supply chains as well, that kind of round out my view. And so, kind of my general view is that, because we're in fiscal dominance and a number of other things that kind of went into this situation, we have structurally high fiscal deficits in the US. That tends to keep nominal things elevated more than at least many bears would think, but just generally more than the market participants would think.

So, you generally kind of a run at a hot GDP environment. Nominal asset price is doing well. They might not do well versus another hard asset like gold per se, but they're doing well in currency terms, at least over a multi-year period. And then you kind of get into that sort of persistent situation. And so, I'm happy to kind of go where you want.

Another big thing I focus on is kind of that we're shifting toward a more multipolar world over time. I mean, some of the current headlines might be kind of along that path. But even just before the current kind of headlines, it's been kind of a structural approach that I focus on alongside the fiscal side. It's that kind of shift toward a more multipolar world. It's a gradual change in reserve currency practices. What does that mean, good and bad?

And I know my views, and I've read a bit of yours, but I'd love to talk about why you think it's fairly inevitable, why this train doesn't stop? Why is the fiscal dominance happening, and why is it likely to persist, in your view?

Sure. So basically, when we look at how debt cycles work in history, we're all familiar with the credit cycle, the five to 10-year typical kind of business cycle, credit cycle. When you string a lot of those together, especially in modern history, every time we have a contraction, you'll lower interest rates generally to a new lower low. You'll often have fiscal stabilizers kick in either automatically or due to intentional stimulus to kind of restart that next credit cycle. And when you string a bunch of those together over 40, 50 years, you get higher and higher debt levels relative to GDP, and you get lower and lower interest rates.

And generally speaking, when you get to that point, instead of kind of letting it all collapse, a country that controls its own unit of account and its own money will generally print. And so, you start to see a shift from the private sector. You kind of deleverage that through very large fiscal injections, backstops, monetization of debt when needed. And you kind of, over a period of years, rotate some of that onto the public sector.

We're generally kind of trained to think that the antidote to inflation is higher rates, which is sometimes true, and it has some hardening effects on the currency. But the challenge is, and what makes this very different than the ‘70s, and more in some ways like the ‘40s, kind of the last time we were in kind of a public sector debt bubble, is in the ‘70s, most of the inflation, the money creation we were seeing, was from private sector bank lending. And of course, we had deficits on top of that, but quantitatively, the private sector was the biggest component.

So, when you raise interest rates to slow down bank lending, that has a bigger downward push on money creation than blowing out the fiscal interest expense - the government interest expense. Whereas when you have over 100% or 120% debt to GDP, and you have a lot of money creation coming from fiscal deficits, monetized fiscal deficits, and less so from very quick bank lending, if you raise rates in the face of inflation, you do slow down bank lending to a certain degree, but then you blow out federal interest expense by an even greater absolute number.

And so, you kind of get into this loop that's pretty hard to slow down fully. And then on top of that, we have demographics issues. That's not new to everyone. But when you kind of lock that in, that's who votes, that's kind of where a lot of things are. A lot of people are trained to kind of think that aging demographics are disinflationary, which can be true if the older demographic is impoverished, if they're not consuming a lot. But if they're also backstopped by, you know, very high medical cost per capita, Social Security, all these other things, that can actually be kind of inflationary, at least for the things that that demographic consumes.

And so, a combination of basically just decades of debt accumulation and where that debt ended up, demographics and entitlements to support them. And then add on to that (it's kind of more unique to the US than, say, Europe and elsewhere), is that we're heavily financialized, meaning that can mean a number of things. But in this context, it means that our tax receipts are more correlated with asset prices than many other developed countries. So, if you're not kind of pumping the stock market with a 12-month lag or so, you're going to start to get materially weaker tax receipts. You actually kind of add fuel to the deficit fire. So, we have a bunch of kind of flywheels that are all very, very, very hard to slow down. I never quite say impossible, but nearly so.

We definitely agree on fiscal dominance, you can't stop this train. I think this conversation about why it's inevitable, I think we slightly disagree on this. I'd love to kind of dive in a little bit and think about it. And there's no right answer, right? We're trying to tease this out. But I do think the why is important, given how things are changing and how those whys might change.

And by the way, I also agree this is different than the ‘70s, even though I've highlighted the ‘60s and ‘70s as the most closely parallel recent time frame, and I'll get to why. But I really, I have a question that is kind of a leading question for you, which is, what do you say to people who, again, five years ago, you heard all about modern monetary theory, right? You heard about debts don't matter if you're at the exorbitant privilege of the US dollar (which is a big asterisk, by the way), which we'll get to a little bit later. But there is a theory out there, and I actually tend to think that's true, as long as you have the exorbitant privilege of the US dollar, that the debt itself doesn't necessarily matter. What is your view on that? And tell me why you feel that you don't agree with that, because it sounds like you don't agree with.

that.

Well, I think that it does matter. I wouldn't disagree that it matters. It's just that it's not a complete immunization of the issue. So, if you take two extremes, if you take a developing country that does not have almost any external structural demand for its currency, if they run very large deficits, especially monetized deficits or partially, they're very likely to rapidly devalue their currency. Whereas the US, I mean, you have trillions, or realistically 10s of trillions of dollar-denominated liabilities outside of the US, most not even owe it to the US. Mostly owe it to other countries, but it's still just inflexible demand for dollars. And all of that kind of represents a really big absorption for dollars, let alone just the demand for US assets, you know, kind of a demand to come and live here.

This is the exorbitant privilege of the US dollar to a great extent, right?

Yeah. And so basically, that's also why I'm not… The two sides of the ‘nothing stops the train’ view is that, one, there's very little method to slow down the deficits, but also that it's not going to completely go off the rails and just spiral out of control anytime soon, because it's actually also quite resilient to upside shocks. Because there is all this entrenched demand for dollars.

Maybe where we disagree is that the effects still happen. There still are effects of running those fiscal deficits. I mean, I think they have effects on asset prices. I think they have effects on, you know, the economy - winners and losers in the economy. They have effects on a matter of things, but they don't have the same effects as they would if, say, you know, the UK ran a similar playbook. And then especially if, you know, Egypt ran a similar playbook, there's a spectrum there for sure.

Yeah, I think obviously there's a dramatic difference, right? In a normal system, we obviously agree that prices of currency will adjust to take into account deficits and the issues at hand. But obviously, as we've seen, this is not news, right? If the Fed could at any point print all the money at once, fix the cyclical problems as we go, and then, at some point, just hit a button on a keyboard and make it monetize that debt, Is it really debt?

And I'm actually, generally, of the view, as long as (again, big asterisk) the US has the exorbitant privilege of the dollar, we really can, debt doesn't matter. Okay? Now, that's a big asterisk, and we'll have to kind of get to that in a second. But what it does mean is that the net result, I actually would argue, even more inflationary. I would argue that, ironically, the more that you can print to avoid cyclical downturns, it supports to a baseline non-deflationary path, as we've seen. You always have that tool that you can deploy at scale.

The big component I really think matters is populism. It's who the money is going to. In our system right now, and the reason that the ‘60s and ‘70s played out the way they did, in my opinion, is not just because of debts. I actually think debts are secondary in our system as it stands, with exorbitant privilege of the US dollar, it's about who's getting the money.

We keep doing… And you've talked about this in your papers. It's a very blunt instrument. Monetary policy and the Federal Reserve has a very limited ability to stop inflation when it gets going, because usually what's causing inflation is actually government sending money, or global conflict, and tariffs, and protectionism, things that are driven by governmental decisions that aren't free market, that are really driving kind of money to people who spend, right? And in my view, the incentives there are really about, like, political incentives. We were just talking to Neil Howe, actually, last month, which was, I think, apropos…

So, the reality, in my view, is that the bigger driver is this populist impulse, these bigger cycles. And we just had Neil Howe on here talking about the 4th turning and kind of generational political realities. But inflation, I actually agree with some monetary theory, modern monetary theory principles in the sense that I don't think as long as (big asterisk) you have exorbitant privilege of the US dollar, that debts really matter, right?

Debts matter when you're forced by the world to pay the price. But if we can print as much money as we want and drive outcomes, especially if we're driving it to capital. That creates a structurally deflationary force of technological development, globalization, right? All those things that we've experienced for the last 40 years.

But my view is that really that this populism, the political pressures that demand now money, fiscal goes to people, which has a velocity of 1, really can drive those structural inflationary pressures. And that makes, to your point, this train unstoppable. Because if people want it, politically, you better give it to them. How are you going to stop? Otherwise, you get knocked out of office.

I don't know. What are your thoughts about that? And do you agree with that? Or by all means, pick some bones with that view.

I agree with that view. I just don't view it as mutually exclusive. I think these things tend to feed on each other. One of the things I pointed out in a newsletter before is that the long-term debt cycles correlate with the 4th turnings. And there's build-up ahead of time in the kind of the second and third turning leading into that. And I view that as kind of like the quantitative backdrop to what's happening socially.

So, for example, I've read The 4th Turning because I find it instructive to know what's happening socially in addition to what's happening from that more kind of financial engineering perspective. And I think a specific catalyst for how this kind of came together was as you get those lower and lower interest rates, as you get that kind of rising private debt bubble, when they ran into kind of the end of that, leading into the global financial crisis, they had cut interest rates all the way to zero. They had banks about as leveraged as you can get them.

So, I mean, just generally speaking, if you look at total debt in the system, there was something like US$60 of debt for every US$1 of base money. And bank cash, banks had 3% of their assets as cash. And then the rest was mostly loans. So, they were taking on basically a greater proportion of risk. And you had kind of maximum fractional reserve in the system measured in various different ways.

It all kind of blew up, and then we had selective bailouts. And then I think populism started to build very quickly, especially from that point, because we kind of ran into financial bedrock. We ran into that peak of the private sector debt bubble, shifted it more to the public sector. And at that point, it's kind of everyone's problem, because now we're shifting it more toward the public ledger that we all care about.

And so, I do think that, ever since then, we've had rapidly rising populism. both fiscally, socially, across the board. It's not an accident that when we had COVID, we had a very different type of stimulus. Instead of just recapitalizing the banks, it was way more widespread because I think of where we are. I do take that populism into account.

But when we were in kind of the current - the Trump era of the Republican Party, for example, in the latest election, I think point 14 in the Republican platform was no cuts to Social Security or Medicare, right? And so that used to be a Democrat position just because it's a type of populism. We've kind of exited the era of fiscal austerity in the US because we have that more structural populism.

And I think, also, that the structural trade balances and things like that also contributed to it. So, I think the long-term debt cycle, the structural trade deficit, and then the populism component are absolutely an element of that.

But I actually would argue that it's all of it, and let me tell you why. I think all those things, the trade deficit as well, is driven by… If you're sending money to corporations, what happens? You get faster and faster technological development, right? It's A profit-maximizing machine. Clearly, that's going to lead to globalization.

Corporations don't care about the people of the US versus other countries, they don't. They're not incentivized to, right? And so, the massive globalization wave, the building of China over the last 40 years is not a coincidence that happened over the same time period. At the same time, you have global peace because if you're trading with other countries, you're helping them grow. This is the Pax Americana, right?

That's what drives peace. It's the lack of populism, sending capital to the top is what drives peace, globalization, and technological development. It's the free market system on steroids. And you could pump a bunch of oxygen into that system. And honestly, you could do it forever. What happened here in the Mesozoic era? We got really big dinosaurs. You could pump as much cash as you want into that system.

And honestly, if we were cogs, if you and I weren't human beings, we would do that. That system creates, in the words of Socrates, do you give the best violin players the best violins, or do you give the worst violin players the best violins? His answer was you give them to the best violin players because you get infinitely beautiful music. The natural system is a system that creates more advancement, evolution, survival of the fittest, if we pump more into it.

The problem with that is nature is raw in tooth and claw. And it doesn't care about you or I. And populism, at the end of the day, is when that system gets so out of shape, as human beings, life isn't fair, but we have a sense of fairness. We all agree there should be some type of fairness. And that, which is the left and right dynamic…

This is why, since Roman and Greek times, they've talked about left and right. This is why the political spectrum is populism, equality, versus this free market, winner-take-all evolutionary system. So, I think that's everything. It drives the lack of peace. It drives expansion and trade. It's also when commodities aren't scarce if we all trade and work with each other in a free world, right? There's enough for everybody to go around.

But when we break up that system and go talk about our people, protectionism has to happen. So, we get global conflict, we get commodity scarcity, right? Anyway, this is my view and that this is the connective tissue to why this train doesn't stop. And it's really political. And so, I really think it drives the whole thing. I would love to hear your thoughts.

Well, I agree. And I think, I mean, the way I would put it is, there are certain technological milestones that really matter. So, for example, as global telecom systems gradually kept improving throughout the 20th century, when we finally got to kind of the early stages of the internet and just, in general, fairly high bandwidth communications, that obviously made globalization a lot easier. It's much easier to coordinate around the world when you have very efficient ways to communicate with your off-site operations.

And then when you add to it. I mean, you had the opening of China from obviously very, very anti-market approaches in the early ‘80s. They were kind of opening that up to the rest of the world, late ‘70s, early ‘80s. Of course, the fall of the Soviet Union. You had all of this Eastern labor, Eastern kind of resources connecting with Western capital. And so, this was this kind of disinflationary globalization boom because you had all these kind of things that were segmented to come together.

And like anything else, there's winners and losers from that. I mean, prices go down significantly, you have all these efficiencies build up, but then you also have protected labor which now has a lot more global competition and that is perceived as quite unfair. And it kind of widens the gap between those with capital and those relying on labor. And I think that builds over time.

And then behind that, I do think, there are also these structural things that kind of build up these higher, higher debt levels, these lower and lower interest rates. The trade balance itself is fascinating because in order to run the global reserve currency, it means the whole world has to have access to that currency, that there's currency around that's being used.

And the way the US gets the currency out to the world is we run these structural trade deficits. And the demand for the currency kind of fuels those deficits because basically most currencies, they trade on things like interest rate differentials, current accounts, things like that. The dollar has this extra component where there's like this inflexible extra demand for it on top of all the normal things. We still have dollar cycles. and things like that. But on top of all the normal things that matter for currency pairs, there's just the fact that just, there's this constant kind of bid for it as a sovereign reserve asset, as the place to store longer term capital.

And so, compared to all these other dynamics, the dollar ends up kind of being overvalued. So, it boosts our input power. It hurts our export competitiveness, especially on lower margin stuff. So, you know, we become experts in exporting dollars, securities, high margin tech and healthcare, but it kind of eats away at our, say, manufacturing exports. And so, these dynamics kind of reinforce themselves for a while. So, we've seen a gravitation of wealth away from the Rust Belt and toward, you know, New York, and Silicon Valley, and all that, because these imbalances build up over time. As that happens, there also is that political element that grows. as people are disenfranchised and it fuels on itself.

Yeah, and this momentum effect, right, to everything, like you mentioned. You just mentioned three or four, but it goes across the board. It's the financialization, as you mentioned before, too. It's the leverage in the system. Everything is assumed that it will keep going as it goes. I guess my point is, it could if people weren't in the system and didn't demand fairness.

And so, that generation, who has only now seen one thing, they didn't see the ‘60s and ‘70s into early ‘80s. All they've experienced is this one-sided free market economic model, which isn't fair. And they're at 45% of the wealth creation and household formation of baby boomers, living at home. You know, 30% of them are living at home in mom and dad's basement. right? And that creates a lot of anger and populism.

Eventually, those people learn through what's coming, the cycle that's coming, that the opposite is also a problem. That even a more fair system then creates much worse economic outcomes, much slower growth, much slower technological development, global conflict, all the problems we're seeing, is kind of my view.

So, now the big asterisk, now that we've kind of talked through this (I think this is a great kind of back-and-forth conversation). I did say there's a big asterisk. I think it's more important than ever. I think maybe a year ago, or at least two years ago, before Trump came in the picture, I think we would have all said exorbitant privilege of the US dollar is not going anywhere anytime soon. I think it's hard standing here today, with what's going on in Iran, for example, to not releasing in the Strait of Hormuz, and we know about the petrodollar and the critical importance of that, of not least questioning that timeline might be shorter. Again, hard to say, right?

But now let's do a little thought experiment. I'd love to hear your thoughts about what does removing the exorbitant privilege of the US dollar do to this fiscal dominance, to the picture? What does this do to macro outcomes? I think we know some of the scary big answers to that, but I'd love to kind of walk through maybe how that changes everything.

Sure. I think, I mean, on the negative side, basically, if there's less external demand for the dollar, and you're running big deficits, and issuing a lot of debt to fund those deficits, it means a higher ratio of that debt has to be bought domestically. Which generally gives you the crowding out effect. It means more so you just have to buy debt instead of buying equity or making loans and things like that. Or you have the central bank buy it, in which case that can contribute to inflation. And so, it takes away that extra structural, or at least it reduces that extra structural bid for the dollar and kind of makes it so that the US starts to resemble many other developed countries in that regard.

The upside of it is that having the global reserve status is an exorbitant privilege, but it does come with costs. As I mentioned before, it means you have to supply the world with dollars, and the world has this extra bid for dollars. And so, if you're in the business of selling dollars, like the government is - government security, dollar securities; or you're in the business of selling private securities - New York, and Silicon Valley, and all that, that's great.

Basically, we're in the massive kind of dollar export business. But if you're in the business of making things, especially lower margin things, doing that in the reserve currency country is extraordinarily challenging because you're kind of competing with this artificially valuable currency against countries that are running more mercantilist type of playbooks.

And the math is against you because you can still… If you're like a top tier performer, you can still make it work, you can still make the math work. But structurally, one way or another, we are sending dollars to the rest of the world and it's primarily through trade deficits, which means that on a trade basis, we have more losers than winners. Again, if you're outside of that kind of dollar export business.

And so, another way of kind of looking at it is the dollar status, as currently structured, is really good for like America, the empire. I mean, when you can sanction any country, when we have the advantage that we can kind of surveil things. So, we can have this kind of global network of kind of financial surveillance that, you know, if Japan wants to do that, or the UK wants to do that, or especially if, you know, a country like Brazil wants to do that, they don't really have that capability. Whereas the US says, well, you're all using dollars, so as long as you want to play good with our system, you have to do these reporting requirements, for example.

So, it gives us a lot of power and insight into the whole global financial system. But then the cost for America the country, or America the republic, like our domestic economy, does have a cost to support that. It's kind of one way of thinking of it is that in order to maintain that system, we're kind of shipping off a little piece of our industrial base every year, which is not infinite.

And so, again, there's winners and losers of that system. And I think what happens when it kind of reaches its kind of stretching point, I think one thing that's happened in this part of the populism dynamic is we just kind of started openingly questioning, is running these structural trade deficits every year good for all of us, or is it good for a few? I think that it's not an accident that's become more elevated in political rhetoric. That's been a big component of both Trump administrations, to kind of highlight that more than other administrations have.

And so, I think that there's upsides and downsides to having the global reserve currency status, but the messier part is when it's kind of taken away from you unwillingly.

I would push back a little bit, just for the sake of being political here too. I would say, losing the exorbitant privilege of the US dollar would be a massive problem for the US. And I actually think the benefits, the mild costs there are (to your point), which is like trade deficits, etc., could in theory, if we print enough money, we could send it to rebuild that manufacturing base or to do any number of things, right? It's like that's the core input. It's the more dominant force, which is that we have pure power to create unlimited resources. It's the golden goose, right?

But I hear you that there are definitely general things that happen, as a function of being the reserve currency, that can undermine and have a momentum effect, like we talked about, that can undermine long-term kind of structural issues in the reserve currency status.

And so, I would argue… and you could argue it started a little bit before that, because even though things were officially kind of broken at that point in ‘71. It would have already started prior, but I think that's a huge difference. And just like if you take from the beginning of time, if kings could shave coins, they will. This idea of nominal illusion is important, politically important, right?

And just like people feel like, oh, the ‘70s and ‘80s weren't nearly as painful as the Great Depression, or sorry, the ‘60s and ‘70s, right? The reality is, in some terms they were… Actually, in a lot of terms, asset-wise, they were the same. So, I don't know, I'd love to hear your thoughts about that.

And because of that, I actually agree, if the exorbitant privilege of the US dollar is broken, I think this looks much more like the ‘30s and ‘40s, personally. I think the pressures were dissimilar in both (put it that way), and that things become much more deflationary structurally, things break without the stabilizing power of fiat and the exorbitant privilege of the US dollar in the dominant power in the world, which is obviously the US.

So, I think these two different scenarios are actually much more… I mean, there are other differences. I'm playing with the toy model here, but I think they're much more defined by fiat exorbitant privilege versus not necessarily, in that case, than anything. And I think that feeds into some of the analysis that you're seeing on the back end - how things played out. I'd love to hear your thoughts on that top level.

So, the UK system never looked like the US system does today. And going back from there to others, and to Spain, and to all that, none of that really looked the same as it looks today, where the government bond is itself the reserve asset rather than gold and proxies. So, that does put this in kind of a different environment than before.

And I think one thing I would highlight, that kind of goes along, because we might disagree a little bit about that trade deficit situation. One of the challenges is that these things are cumulative. And so, for example, as we run these structural trade deficits, when people kind of look at that on the surface, they say, well, it's a good thing because we're giving them devaluing dollars and we're getting goods and services. It seems like we're winning from that.

The challenge is that there's a second step to that, which is those foreign entities that get the dollars, or those that they trade those dollars to, then reinvest those into US assets. So, they buy our equity, they buy our debt. In some cases, they buy our real estate, they buy our private equity, whatever the case may be. And so, they actually buy, for the most part, our appreciating assets from selling us depreciating assets.

And so, the cumulative effect over time is that the foreign sector owns a greater and greater percentage of total US assets. Which also means their voting influence is material, their ability to influence things grows. And if that just goes on indefinitely, that obviously has a very...

Well, that breaks the exorbitant privilege… Sorry to interrupt you.

Yeah, at some point, yeah. So, I think that's a challenge that the exorbitant privilege, it exists for a time and a place. And there are certainly actions that can be done to prolong it or shorten it, but that it's kind of on this gradually ticking clock.

It's kind of like how, aging, right? Or like telomeres at the end of our DNA. I'm not an expert on that, but basically there's like a ticking clock that happens either way. And there's certain things we can do to like prematurely age or there's certain things we can do to like to layer aging. And I think that the current system we have in place is kind of like that where you can… yeah, that's how I view it at least.

So, I do think that while we can learn from history, we are in many ways in a different environment. And one of the closest comparisons, I think, is the US looks more like the UK in the ‘40s than the US in the ‘40s, because in the ‘40s in the US we were a rising manufacturing power, whereas in the UK they had already kind of hollowed themselves out industrially, in a similar way that we've kind of gradually hollowed ourselves out here. And it's just one of the challenges that kind of comes...

I love that aging metaphor. And let me just kind of put in my own words why. You know, entropy is the way of the world, right? And things will decay or break at some point without reinforcement or stabilization. Things that go faster and longer without a burning of the underbrush naturally create bigger and bigger structural unthought about problems, right? And we listed four or five of them, that eventually undo power going to foreign sources because the assets were running to them, right?

Like we went through the trade deficits and the hollowing out of the infrastructure. We could go through all of them again. But I think, to your point, the more that you accelerate, and avoid the business cycle, and kind of push to more and more growth, you ultimately kind of live faster and live shorter.

And I think there's some element of that. I think we have the Federal Reserve and fiat, the introduction of that, was created to smooth the business cycle. Our founding fathers of the US would be turning in their grave if they knew that existed. Because the whole point was you need crisis to bring people together to pass and reinvigorate the system, pass amendments and all kinds of other structural reinforcements so the system does an entropy. The system is… take a look. It's in entropy, right? And the reason is because of the Fed and monetary policy creating a smooth…

How much reinvigoration to the structures of democracy did we do in capitalism in ‘08, ’09 - zero, almost zero, and they lasted so short because the Fed swooped in and made it not a real problem. And so, I do think… anyway… Not to go on and on about it, but I do think that's an incredible metaphor and very relevant here, given where we stand. And I actually argue crisis is the best thing we can hope for at this point, because a short crisis might invigorate the system and make it go another 40, 80 years as it is.

I'd like to kind of jump to the next idea now, which is authoritarianism versus democracy, right? I think a lot of the smooth, if you look at 4th turnings and the smooth, like incredible, precise kind of in the US, cyclicality to it. A lot of that, I think, is tied because the political will, and this left versus right, and the fixing of the problems is translated to policy more smoothly because of the democratic kind of structure. And that was the whole idea to democracy. It's one of the benefits. There are lots of problems with it, but that's a huge benefit.

If we're moving to, potentially, a period of more authoritarianism and maybe just more broadly going to a more structural authoritarian regime here in the US, how does that change the potential cyclicality and the fact that, you know, maybe ‘nothing stops this trade’ is not the issue there. Maybe exorbitant privilege goes on longer or gets degraded. Let me know your thoughts about that.

I think it's an important part of the argument that people haven't thought much about because they assume that it couldn't happen, much like the exorbitant privilege of the US dollar. And I want to explore that, given the accelerations and issues we're seeing there.

Sure, and I think, of course, the challenge is that even authoritarianism and democracy can have kind of a spectrum. And so, along with these cycles we talked about, they're obviously all the going back to like Greek philosophers, there's these cycles where you have democracy and then it kind of slowly poisons itself and then you have a rise of like a tyrant, and then you kind of go through these cycles.

But even in the more mild sense, when you have this kind of like fraying situation and you get that rising populism, you're more likely to get, say, a landslide and you kind of consolidate power. And so, for example, FDR, you know, had unusual amounts of power. He had like 70% of Congress. You know, he basically had a supermajority. He could potentially stack the court. The press was under kind of fire. I mean, they banned gold ownership for 40 years, which is incredible in the land of the free. They could kind of just unilaterally do a lot of things. And once that kind of period was over, kind of that that power sort of decentralized again.

And in recent decades, we have had a strengthening executive branch, once again. And I do think that we've kind of entered a little bit more of a mild authoritarian aspect here, which is just more is happening via, say, the executive order. It actually is kind of like since the time of FDR, just the sheer rapidness of executive orders and kind of the challenge of the legal system and other things that kind of keep up with that. The fact that we can have just so many military operations without Congress declaring war, for example, which have massive effects. I think we are in that kind of more… It's not an accident that, as you kind of get that rising populism, those rising balances, you're more likely to get people to say, I don't care what if it's democracy not…

Burn it down, right?

Yeah, exactly. And of course, it depends on what way you go, that can obviously backfire tremendously in many cases. And I think another challenge, of course, is that the global structure, it's a very related but a slightly different thing than the authoritarian democracy spectrum, is the rule-of-law spectrum. Basically, in any given jurisdiction, how strong is the rule-of-law with say independent courts or just kind of like that the rules don't change suddenly. And as is often the case, a generally more democratic environment will have rule-of-law.

In an authoritarian environment, the rule-of-law is what the ruler wants. Whereas in that kind of more decentralized power, the rule-of-law is kind of the highest thing in the land. There are occasional kind of partial exceptions where you'll have something like Singapore, which has some authoritarian characteristics (again, because this is a spectrum), but they also are a very attractive place for capital because they generally do have pretty good rule-of-law. It's generally kind of among the closest you get to something like a benevolent type of authoritarianism.

And so, they're not like perfect correlates. But I think that what matters here is that one way or another, we do have a weakening of rule-of-law. In the US, I would say a big part of it, but also elsewhere (not everywhere equally). And that affects, one, where capital wants to be. It affects how quickly capital can form and how efficiently that capital gets allocated. And in those more authoritarian environments or in those more fiscally dominant environments, when the state is kind of running very big interest expense, when it's very indebted, it doesn't usually just let that happen passively. It starts kind of fighting back.

And like in the FDR era, we entered industrial policy. And now that's a term that's coming up a lot again recently. It's like running industrial policy, kind of just being more open about some of these things, and kind of taking on more industrial and mercantilist policies. I think it's not an accident that these things…

Yeah, I completely agree. I think another thing (to kind of shift gears here) that correlates, and I don't think it's a coincidence that people don't talk about very much, is the growth of AI. My view is that, you know, we've gone through this 40-year period, right, of monetary policy-driven, what I call, supply-side economics, right? Sending money to planet Palo Alto (I call it), which is a supply-side set of policies; borrowed money, QE, that goes to capital. And because of that, we've created massive technological development, right? That's part of what's driven the inequality.

This happens during every one of these supply-side periods. I think it's been on steroids the last 40 years. And so, since the introduction of the wheel, everybody will think, this time is different. But new technology and the speed of its development, once you get to this point where policy starts turning to more fiscal policy and populism, is exactly at the moment that technology is almost at its kind of unimaginable, like exponential ascent.

But its actual ascent is a threat (as all technology is) to labor. and to populism, and to people. And again, that's not a coincidence either. So, I actually see AI as this incredible accelerant right at the end of this cycle, to the populism that's already there. And again, one of those momentum things, we talked about, that is likely to actually undo itself.

And people, everybody will think first order thinking that AI is incredibly deflationary. It's going to create this deflationary force that's going to wash over everything we do. And yes, technology since the beginning of time is deflationary, and the growth of it is immensely deflationary. I'm not arguing that, right? But I think what too few people think about is how inflationary the response is to that deflationary impulse exactly at this moment where populism is front and center. And I don't think that's a coincidence at all.

So, I'd love to hear your thoughts on it again. Sorry to dominate that, but I want to get that thought out there and see your thoughts.

Whereas, if you look at the UK at the same time, the UK is already a developed country and you have a much tighter correlation between money supply and prices because there's no just massive source of just abundance. In a similar way, Japan, after World War II, hyper-productive, bigger than normal gap. Or Australia during the rise of China and their huge commodity demand, their nearby neighbor, Australia, that was happy to supply them all their commodities, they had this bigger gap between money supply growth and inflation because they basically, they have the China effect on them.

So, you're keeping costs down. You're keeping wages down, speaking of labor. And you're able to grow money supply a lot without that translating into a lot of price growth. Whereas, to finish up, the inverse of that, when you have either slow productivity growth, you've run into tech ceilings, for example, temporary tech ceilings where you're just not getting much better very quickly, or you have war, or shortages of raw material where you just don't have that abundance sink. So, when you grow money supply, you get price growth that happens about as quickly because you're not getting those productivity offsets.

And so what AI represents, the better it is, the more it is a productivity boost and it suppresses kind of that white collar wage and it creates so much more abundance in kind of white-collar type of services in a similar way that the automation wave and the off-shoring wave did for blue-collar type of work in the ‘80s and ‘90s. And it's a similar effect…

I think it's really interesting because it's one-to-one correlated too with the velocity of money. I mean, it's almost like, when you're talking about the productivity, it’s a magnifier to the velocity of money. Because if we send money to capital, that money doesn't trickle down really into the system, right? It does at first, very briefly. But then the velocity of that is almost zero, actually, some argue negative, deflationary, ultimately, over a longer time period. Whereas you send money to the bottom, it's one-to-one velocity of money, right? But where the money is going, also drives that productivity and that kind of magnifying force on top of it.

The 2 are, one-to-one, just a magnifier, they are one-to-one correlated, and the driver is who's getting the money at the end of the day? And so, I completely agree with you. Again, there are other factors. I mean, I'm oversimplifying, obviously, but we're talking about how the broad structures tend to work and the pressures in the system. So, I think that's the thing that most people don't think about.

Most people think about AI and technology. It's deflationary. It's first order. Like, this is going to change the world. But the reason that this is likely not to be that first order that everybody thinks is because actually it's a kind of a closed system with the pressures that then lead to the undoing of those exact pressures at the end of the cyclicality that we're talking about. I think that's so critical. It's interesting to hear. We really agree on a lot of things, but like, really kind of come to it slightly different. I think that's it's really powerful.

So, one of the last things I want to talk about here is one of the things you talk a lot about, right? A lot of your work is focused on crypto and its role kind of in this system. I'd love to kind of have you speak a little bit to a broader maybe audience about your views on crypto. And then maybe go back and forth a little bit because I have maybe some slightly differentiating views on that.

Sure. So, I kind of have two very different opinions on crypto, depending on what part of it we're talking about. So, there are two areas of crypto. One, for me, is that I'm actually bearish on most things in crypto. So, I've been, for example, structurally bearish on altcoins. I mean, occasionally they're tradable, but structurally kind of bearish on their overall use case, their overall kind of structural growth. I've written a number of pieces on that. Whereas the two areas that I have been long-term constructive on are Bitcoin and stablecoins, for somewhat two different reasons.

So, Bitcoin, basically I view it as, you know, the invention of a decentralized ledger. Which of course, when it comes into existence, the first question is, can it work over a sustained period of time? You know, have the kind of variables… Is this a system that's finally going to, you know, kind of function? Because there were some predecessors that, of course, didn't really last. And now that we're 17 years in, we kind of have at least some data on how it's working.

And there is a network effect aspect there, kind of like ethernet, kind of like USB, kind of like simple mail transfer protocol, kind of like TCP/IP, where once you win a protocol war, you get this self-reinforcing effect. It's like you can come out with an ethernet that's like a little bit more efficient. but you're competing with the fact that there are 10 billion devices that already have Ethernet ports, for example, or simple transfer protocol, or even just a human language. It's hard to say, okay, we're all using English now, but here's this more efficient language, we're all going to shift to that. It's like, well, you're chipping into a network effect.

And so, Bitcoin kind of has that self-reinforcing network effect of security and liquidity, as well as being just a kind of a simple design to the base layer that kind of maximizes for decentralization. So, I view, generally, Bitcoin as a structural winner, not without risks and challenges and of course massive volatility, but it has been something I've been kind of multi-year bullish on.

And then the other one is just stable coins, which is when you're running a ledger like this, you can have tokens that are proxies for things. And so, you can tokenize assets and tokenizing the dollar has of course been the popular one. Another way of putting it is that, for many decades, people have liked offshore dollar bank accounts. So, there are 180 currencies in the world. Most of them are not very good. Most of them lose value very quickly. Many people would like to store value in more stable areas. That's generally been accessible to the wealthy because of all the overhead costs and all this.

And stablecoins are kind of like, you use technology, you compress the overhead, you make an offshore bank account available to anyone with a smartphone. So, anyone can just hold dollar proxies. You have to trust those dollar proxies. You have to trust that the US is not going to sanction those dollar proxies. But let's say you're in Nigeria, and money supply is growing by 15% a year, and you'd rather hold dollar equivalents. You say, well, it's centralized, but it's not controlled by Nigeria. It's controlled by the US and these other entities. So, it breaks the borders of finance, to some degree.

And so, ever since the market cap of stablecoins was about US$30 billion, I've been bullish on it. I mean, now it's in the ballpark of US$300 billion. So, we've had like a 10X. And I still think it's got significant room to run. So those are the two areas that I've been constructive on, both as an investor and an analyst. And I work in venture, I'm on some boards for companies, so I also see in kind of the development ecosystem.

I love the nuance. And I'm going to add some other layers of nuance here and I'd love to kind of discuss. So, I would agree 100% that DeFi it's an incredible technology, allows for a much more efficient system writ large. Blockchain in general, I think, is a transformative technology, not just in finance, but across all. You know, it'll permeate all technology eventually. Like that ability to be truly secure (if that is true, by the way), we always have the other arguments that it may not, long term, be fully secure. But assuming that, and that they'll solve those problems.

And by the way, I am also bullish of Bitcoin and the core cryptocurrencies in some short to medium-term, meaning a couple years, maybe five years. And that is more, though, a function of this demand by this generation, as I mentioned, who has one experience, which is technological advancement, inequality, right, and a belief that a system should be more fair. I think that's what's led to its rise, and they're rising to political dominance over the next decade, you know, about when they peak. And I think so over the next 5 plus 10 years, I think that the demand, and growth, and political will to accept these things is strong enough to, in a sense, support it politically.

My biggest concern, long-term, and I do think it structurally has major problems as a currency or sort of wealth, because it threatens power. Right? We just talked about the exorbitant privilege of the US dollar, and how critical that is to the US and its standing power, in my view.

You, I think, have a little bit nuanced view. You don't think it's all good, all bad. I definitely think if the US loses exorbitant privilege of the US dollar, it loses its power, its greatest source of power in the world, is my strong opinion there. And Bitcoin threatens that.

And so, yes, we currently have a president who, for a number of reasons, which we won't get into, supports crypto, and it is politically popular to do so as well. But I do believe there is a core, and this is why China has had problems with it. And by the way, if China becomes more dominant, crypto will also take a back seat to the system, to be clear. They’ve already kind of signaled that. They want that exorbitant privilege. Everybody wants that exorbitant privilege.

Kings and queens want the ability to shave coins. They want the ability to control these financial outcomes; to tax the people around them. So, I think long-term, meaning 10 plus years, I think the power and the growth of crypto actually, Bitcoin, undoes itself as a currency. So, I think its use case as a currency ultimately will undo itself. I think in the short to medium-term, meaning five years, which is a pretty long term (that's all that matters now), I think supply and demand wise and given the regulatory current pathways, I think it's a structurally positive path for it. But I do think long-term it has a major problems as a long-term currency. Unless you believe a utopia can happen. Unless you believe that power, the law of the jungle ultimately won't hold true and that those with power won't want to use their power ultimately in the world.

It, in a sense, castrates power in the places where it exists. And that's kind of the whole point. That was the whole idea. That's why it had political power to begin with. And I think that is, in my opinion, a wonderful ideal, but doesn't really live well in the real world. I'd love to hear your thoughts.

And so, to the extent that a government says… At the end of the day, Bitcoin is basically a decentralized Excel spreadsheet backed up by energy instead of just like a centralized thing. So, when a government kind of finds itself saying a decentralized spreadsheet challenges us, it's really hard to sell that narrative to the people. And one of the most bullish things is when China will ban Bitcoin mining a dozen times, and there's still a non-trivial amount of Bitcoin mining in China, for example. When China has trouble fully banning something, it's actually kind of resilient.

And Bitcoin, because it's kind of got this decentralized, kind of self-rebuilding, self-correcting aspect to it, it can kind of route around to wherever the biggest friction points are. So, you'd have to have a very coordinated attack on it and sustain it and get buy-in from the people so that it doesn't just become this massive gray market thing. In a similar way that many countries try to make it illegal to own dollars or add frictions to their citizens from owning dollars, but dollars still get in there and still get used.

And so, I think that kind of like gold, kind of like dollars in emerging markets. It's going to go through a test. I totally agree that many… I mean, in Europe one of the phrases is we have to ban self-hosted assets, self-hosted digital assets. It's basically saying that it's too dangerous for you to memorize 12 words representing your seed phrase. That’s too much power for our people to have. We don't want that.

And of course, though, the narratives they will try to use is say, okay, it's used by terrorists, so we have to make…

There's always a narrative to sell it. That's what I was going to say. Yeah.

Yeah. If you can convince enough people. Right? So, if you have an environment where a lot of people, they really want that security over that freedom. They really do trust their leaders to a significant degree. Then yeah, they can make it much harder for Bitcoin enthusiasts or any sort of digital asset enthusiasts to be in their jurisdiction. And if you do that, if the top five countries manage that pretty persistently, it takes a lot of liquidity and size out of the network.

But at that point, say five to 10 years from now, they'd be going up against a pretty big network, most likely. I think the smart ones… And I think the most likely outcome here is that they target more… Because the biggest attack they have on it is they don't like privacy on digital assets because that makes it harder for them to trace it and tax it. They'll rarely say that. They'll focus on the terrorism aspect, or they'll focus on that kind of thing when they talk about privacy. But what they also really mean is they want to make sure they know if someone owns it so they can tax it.

Because, from their perspective, if someone's a Bitcoin billionaire equivalent, when they sell it or when they transfer it, as long as the government's kind of getting its cut, I think that's where it's easier for them to have the battleground than to try to make it so that you get China-like draconian bans on it in an environment where we have the Constitution, or we have countries with some degree of rule of law. It's just really challenging to get kind of broad buy-in. I think they're going to try.

Yeah, I think the reality is, look, prediction, for me, has always been a function of incentives. Right? Show me the incentives, I'll show you the outcome. And I'm just saying that the incentives of those in power are both from a tax perspective, and a tracking perspective, and a control perspective, as well as from the perspective of controlling money supply. Again, exorbitant privilege allows you to get better outcomes versus adversaries if you can control your currency.

Countries lose that control. That's actually the whole point of Bitcoin. That's why it's so popular, right? Those two reasons, the anonymity and the flexibility and ability to move and not be completely… As well as not being subject to the the fiat kind of constraint.

So, I think ultimately that, unfortunately, it's a cynical view and it's a pragmatic view, but it's also a realistic view in my mind. But we agree that there's still some time for that. Hopefully we'll be talking in 5, 10 years, and we'll get to kind of, Lyn, discuss where we are at that point.

But a wonderful conversation. Thank you so much for coming on. I think we covered some really interesting points, and I look forward to chatting more and having more conversations over time.

(Music)

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