WBD262 Audio Transcription
Why a Currency Devaluation is Likely with Lyn Alden
Interview date: Tuesday 22nd September
Note: the following is a transcription of my interview with Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to Lyn Alden, a macroeconomist and founder of Lyn Alden Investment Strategy. We discuss the current state of the economy, monetary and fiscal policy debt cycles and if we should expect currency devaluation.
“There is a pretty asymmetric reward for holding Bitcoin.”
— Lyn Alden
Interview Transcription
Peter McCormack: Hello, Lyn, how are you?
Lyn Alden: Hey, I'm good. Thanks for having me.
Peter McCormack: No, thank you for coming on. I've been a distant observer of some of your work recently, but it keeps popping up in my timeline. And then, there was a very gushing tweet the other day from Nick Carter; did you see it?
Lyn Alden: I think I know, yeah. I had a two-podcast with him. Yeah, he's really sharp.
Peter McCormack: He's really sharp. He's been on the podcast a bunch of times, but he said, "Is there a clearer macro thinker than Lyn Alden today?" He posted your article and I read it. It took, I think, two sessions to go through it and then obviously, I wrote to you and said, "Hey, Lyn, I like this article, can we talk about it? But, I'm going to be honest; I was good for about 80% and then about the last 20%, I got a bit lost. So, we're going to cover that today. Are you okay with that?
Lyn Alden: Yeah, absolutely.
Peter McCormack: Can I tell you about what my summary kind of was from the article?
Lyn Alden: Sure.
Peter McCormack: My reading between the lines of it all was, the main problem that we have with the economy is politics and election cycles.
Lyn Alden: To some extent, but it's because it's very short-term focussed. It definitely doesn't help.
Peter McCormack: Yeah, all the interference and either kicking the can down the road, or policy decisions with elections coming up, it feels like that's one of the biggest problems. Is that fair though?
Lyn Alden: I think that kind of gets down to that quote like, you know, "Democracy's the worst system, except all the rest", right? So, we have all the benefits of democracy but yeah, one of the downsides is that because we frequently elect our politicians, they're always optimising for whatever their election term is. So, depending on the particular brand, that could be two years, four years, five years, depending on where you are.
Peter McCormack: Yeah, it's funny you should say that. My brother keeps saying that to me, because I keep going to him and telling him about Bitcoin and anarchism and he's like, "No, democracy's the best we have because everything else is worse". Was it Churchill who said that?
Lyn Alden: I think so.
Peter McCormack: I think it might have been, yeah. Well, listen, you should see my other screen here, I've got so many questions for you. Right, okay. So, we're really going to go through your article step by step.
Okay, so the big debate between fiscal and monetary policy, or inflation versus deflation. But, for people listening who don't really know, don't really understand how the economy works, or how central banks and governments work, can you just explain what fiscal policy is, what monetary policy is and how they differ?
Lyn Alden: Sure. So, fiscal policy is what elected officials can do. So, it's spending bills passed by Congress, signed by the President here in the US. Each system, of course, has their own different process for how that goes, but it's basically the authority of the sovereign government to spend money into the economy, essentially. It's also their tax policy, so how much tax they remove from the economy. So it's things like how big their deficits are going to be; what kind of tax policies or spending policies they're going to have; are they going to do, say, infrastructure stimulus; are they going to do tax cuts; are they going to send out cheques to everyone, that sort of thing. That's all kind of a fiscal decision.
And then the other side, monetary policy, is what central banks do. So, that includes controlling interest rates; that includes doing quantitative easing; and, that can include buying other types of assets. So, it's all kind of -- that tends to be mostly appointed officials, so in most countries those central bankers are appointed by politicians. So, it's kind of off the public radar more so, whereas fiscal policy is more front and centre.
Peter McCormack: Okay. And we couldn't be at a clearer time where the kind of work you're doing, it couldn't be more important. I've certainly only ever lived through two kind of economic crashes that really stand out. Obviously, the 2008 financial crisis was quite an interesting time, because I bought a house about a month before it happened. It was perfect timing! And then, obviously what we're going through right now with the pandemic. But, they actually feel quite different in different ways.
But, your article is very interesting, because you obviously wanted to look at the long-term cycles at play here and kind of looked at the history of what happened. But, before we go to the long-term cycle, let's cover the short-term cycle first. You originally talked about the kind of five- to ten-year credit cycles. Is this like the traditional boom and bust that I studied in economics?
Lyn Alden: Yeah, exactly. It's the way our system works. People often describe it as like a forest fire, so you have a period of build up, then you have a forest fire, you clear some stuff out and then you build up again. And, that's kind of the classic boom and bust cycle, you know; you start off the cycle; businesses invest; people consume; you get more and more leverage building up. But then eventually, it kind of hits a kind of euphoric stage. You hit overinvestment, overconsumption, overleveraging and then either it kind of just deflates naturally, right, the bubble will kind of pop for no reason; or, you can have external catalysts come along and because the system's so fragile, it's easier to unravel at that point. So then you have a period of deleveraging and you have classic recession.
But then, you know, monetary policymakers come in, they cut interest rates, which makes it easy to refinance debt and take on more debt and then usually, fiscal policymakers often have inbuilt fiscal policies, like unemployment insurance, that are already kind of pre-decided, so they kick in. And then usually, there's some kind of deliberate stimulus as well. It could be a little infrastructure stimulus, it could be an extra unemployment benefit; something to kind of kick the economy back in motion.
So, what that does, usually that deleveraging effect, it doesn't deleverage all the way. With the lower interest rates, you start from a higher leverage point and then you start building up the next cycle from there. So over time, you kind of get higher and higher leverage in the system through business cycles, and that's what leads up to the longer-term business cycle.
Peter McCormack: Is it all basically human greed?
Lyn Alden: Pretty much, yeah. I think our natural tendency is to try to push things pretty much as far as they can go. So you don't just say, "Okay, we're going to look ten years in advance and make sure leverage doesn't get this high"; it's, "We're going to push it until it breaks and then, we're going to try to fix this as fast as possible and then push it until it breaks again". And it's kind of very rare to have an economy that doesn't follow that approach.
Peter McCormack: Well also, there seems to be little reward for those who are a little bit more conservative with their money?
Lyn Alden: Yeah, I mean it all depends. So for example, businesses that have been classically conservative and cyclical do get rewarded. For example, Warren Buffet has that famous approach where he tends to build up cash when things are expensive and then when things get cheap, he deploys that cash and kind of buys up businesses, and that's kind of helped. This has been an unusual cycle, because when you reach the end of that cycle, if you get to the long-term debt cycle, it almost becomes that the people that were kind of cyclical do get punished, because you have currency devaluation or bailouts that come quicker for those that are struggling.
So, there's kind of a sweet spot. If you're struggling too much, you go bankrupt so fast, you don't get helped. But, if you're kind of in that middle ground where you're not really worse than anyone else, but you're just as bad as anyone else, that's when you benefit from that bailout because the bailout's kind of for the whole system.
Peter McCormack: All right. So, another thing that really stood out to me, because you talked about 2008 and 2020, what's happening now, and obviously two cycles that I've lived through. I experienced 2008 and it had an impact on myself and my family; and 2020, I'm watching it now and what's just happened here. And what I couldn't figure out is like, it felt like 2008 itself should or could have been the end of a long-term debt cycle, and it hasn't been. And I was trying to figure out through your article what the reason for this is. I got to the point where you talked about, essentially you have international competitors now and it's kind of a game of chicken; who's going to blink first? Should 2008 have been the end of a cycle itself?
Lyn Alden: I think they definitely could have done more at that point. One thing that I showed in the article was that the last time this long-term debt cycle played out, you know like in the 1930s and 1940s, they actually had a two-period spike as well. So, you had the banking crisis in the early 1930s and then you had the fiscal crisis, and of course the war, in the 1940s. Whereas this time, we had the banking crisis in 2008, 2009 and then it kind of spilled over into Europe in many places in the years after that, where they had that sovereign debt crisis and that banking crisis, and that was kind of stage one. And then now, in 2020, we're kind of having that second part where actually, it looks a lot more like that late 1930s or the 1940s, you know, obviously without the war; but, we have the pandemic and we have the fiscal deficits that haven't been -- we haven't seen deficits like this since the war.
So, in many ways, this is the period after that banking crisis, right. So we already had, in some ways, a private deleveraging in the sense that debt, as a percentage of money supply, has gone down from its all-time peak, so we kind of had the end of that cycle. However, now we're kind of in the sovereign phase of it, so we've pushed all that up to the sovereign level. One thing that's different compared to last time is that by the time they did it last time, in the 1930s and 1940s, they did deleverage the private system a little bit more by the time they had that sovereign debt bubble; whereas this time, they've deleveraged it less compared to that. So, we still have very high private leverage, while we also have very high public leverage.
Peter McCormack: Right, okay. I think we should go back a step. We should probably just work through what happens in these cycles, so people listening understand. Because, I guess the goal of an interview like this, Lyn, is for me to get to the point where people fully understand what's happening in the economy, fully understand what's potentially coming so they can help prepare for it. And my summary from it was that some kind of devaluation is coming, likely inflationary, and therefore it's a pretty good thing I hold Bitcoin, but I need to be prepared for that potential eventuality; yet, it might not be coming as soon as I think it is. That was kind of, it was almost like some people expected this to happen right now but I think from reading the article, you were saying that this is something that may happen across the whole decade?
Lyn Alden: It's usually a process, yeah. So, I guess to go back to that short-term debt cycle thing, so those short-term cycles keep building up and you keep building more and more leverage. Usually the end point to that kind of cycle is where interest rates reach zero, right, because the central bank can't keep doing that process where they get lower and lower rates in each cycle. So, they run it to zero and then they switch over to quantitative easing, so they create bank reserves to buy treasuries, mortgage-backed securities, sometimes other assets. So, then you kind of go into that route. But, there's not a lot of kind of stimulus effort that the central bank alone can do at that point, and that's when it really shifts over to the fiscal side.
So, what makes the long-term debt cycle different than a short-term debt cycle is that there's so much debt in the system, and monetary policy pretty much runs out of ammo. And then, it shifts over to the fiscal policy, and that's when you're more likely to get an inflationary outcome or a currency devaluation, which often go hand in hand. As we go forward, my premise is that whether or not there's going to be inflationary -- well eventually, I think, there will be. But, the timing of that will largely depend on fiscal decisions. So for example, in the United States, we had a big fiscal boost in March and then they were kind of expecting to have one in August/September, but they've been in gridlock, right. So now, we're kind of back in that more disinflationary period, because there's not a lot of stimulus coming down that pipe.
And so, if you look forward, that's generally how these things play out, when you have so much debt in the system; we're at the zero bound; monetary policy's out of ammo; it comes down to kind of these massive deficits that the central bank monetises and then, one of the outcomes is that sovereign bond yields remain below the inflation rate generally for quite a long time. So, anyone holding currency or bonds usually loses purchasing power over a long period of time. And it can happen quickly, or it can happen gradually, and part of that depends on some of the assets that that place has. If they have a lot of productive capacity, if they have a lot of financial assets, they can kind of have that play out more gradually; whereas, if you get kind of a bigger shock or a bigger system change then, yeah, you can have a very brief inflationary outcome.
Peter McCormack: Is that by design? Do they keep bond rates below the inflation level by design, or is that a natural occurrence from what's happening in the economy?
Lyn Alden: Oh, yeah, that's by design. So, if you look at the 1940s for example, which that's the only other time -- I often use the US as my example, but this cycle plays out throughout the developed world. So, in the United States during World War II, we were running just absolutely massive deficits and we brought debt to GDP up to over 100%. What the Federal Reserve did was first, they started buying some of the treasuries, because there are so much treasuries issued that the private sector couldn't absorb it all, so they bought some. But then they also said, "Okay, we're going to lock interest rates across the treasury duration spectrum at 2.5% or less". So, the short end was locked at 0.38% and the long end was lock at 2.5%. So, they pegged rates at a very low level.
Then, they defended that peg by saying, "Okay, every time that yields try to go above those levels, we'll just buy treasuries; we'll buy as many treasuries as we need with printed money, essentially, to keep that peg intact". And so, in the 1940s, you had several inflation spikes, right, because you're running very large deficits; you had a couple of supply shocks here and there because you're amassing all this production for the war; and so, you had certain years where inflation was higher than it was in the 1970s. We all think of the 1970s as the inflationary decade, but in the 1940s the cumulative inflation was almost as much, and it came in three kind really big spikes. But, if you look at the chart, treasury yields were still locked at 2.5%.
So, by the time the decade ended, anyone holding treasuries, of course, they got all their money back, they got their interest back, they made a nominal return, but they actually lost about a third of their purchasing power based on standard measurements for that because their yields, they were not keeping up with inflation, and that was a specific decision by the central bank and the Treasury working together.
Peter McCormack: Right, okay. And, is that on old bonds they would have sold previously, or would they be selling new bonds and continuing that practice on? Doesn't that create -- isn't there like a ratings agency that rates the creditworthiness of the bonds and therefore, these just sound like they're junk; like, who would be buying these?
Lyn Alden: Well, yeah, it's definitely challenging because this time's going to be different. So back then, of course, you had a much less sophisticated financial centre around the bonds, you had less real-time information, so there wasn't a lot of widespread information about how bad these bands were.
Peter McCormack: No internet.
Lyn Alden: Yeah, no internet. And to answer your question, it applied to all treasuries, right, so new, old, so all ten-year treasuries were locked at 2.5% or less and the Federal Reserve would print money as needed to buy those.
If you go forward to now, we're actually seeing that play out a little bit in certain countries, so Japan's doing the yield curve control, Australia's doing yield curve control on I think their three-year treasury. And, the Federal Reserve, they started talking about potentially doing yield curve control again in 2019, even before the pandemic, but then in early 2020 when they had to buy a ton of treasuries, we had that big liquidity crash, they kind of revived discussions again about doing yield curve control. And they cited Japan, they cited Australia and they cited 1940s USA as different examples where that could play out.
Now, the current kind of situation in Japan and Australia, they don't have these big, giant double-digit spikes in inflation, right, so it's not this egregious thing where inflation wants to be 10% and they're locking the yield at near zero. So, it's currently kind of a subtle move on the market. It's kind of saying, "Okay, you might want to fluctuate a little bit, but we're not going to let you; we're going to hold it down to this level". But, if you do get more and more fiscal, that could become more and more apparent.
Peter McCormack: Right, okay. It's really confusing, I'm going to be honest. For someone like me, I look at this and I'm like, one of the things that comes back to me when I think about it, Lyn, is the economic system and set of rules that govern our economic system, are they themselves functionally broken? Do you look at it and do you think the entire economic system, the Dickensian way of doing things, is completely broken, or do you accept this is the only way to run an economy?
Lyn Alden: No, I think there are better ways to run it. I think the thing that's funny is that a lot of it is human nature, so some of it is that kind of specific decisions but if we were kind of in a different system, we would probably have similar problems, but they might be more muted, they might be more counteracted by smarter policy. But for example, if you look back literally thousands of years in history, we have debt jubilees, for example, happen every few generations, because it's a natural tendency for wealth to build up and concentrate and it's kind of natural to build up debt until something really forces you to deleverage. So, these sorts of things tend to be partially linked to human nature, but then yeah, I think specific policy choices can certainly exacerbate that rather than counteract it.
Peter McCormack: Yeah, because you had it in your articles, at 600 BC in Athens, what was happening there, but it's mainly the social impact of wealth inequality, what happens. And I think I'd have to dig it out in your article, but it's a brilliant quote, but there was like a fear of -- yeah, here we've got it, "The disparity of fortune between the rich and the poor had reached its heights so that the city seemed to be in a dangerous condition, and no other means for freeing it from disturbances seemed possible but despotic power". That's like, you either have to head for tyranny or some form of levelling the playing field.
Do you know what it made me think of? I was in Santiago in Chile, just before the pandemic, and a very similar situation was happening there. There's a massive rise in wealth inequality; they've had a change to the pension system, which essentially screwed a whole bunch of people out of pensions, and they were seeing social unrest on the streets. And, I think we're starting to see this social unrest spread into, I mean we've seen it in Iraq, we've seen it in Lebanon, we've seen it in France, we're now essentially seeing it in the US. So, there's a social impact on wealth inequality.
Lyn Alden: Yeah, absolutely. And in that same book that I cited, it's showing that basically -- because, that's from Lessons of History.
Peter McCormack: I bought it.
Lyn Alden: It's a really good book. It's like 100 pages, it's a really good read. And one of the things that points out is that this is a pattern that does keep repeating. One way I describe it is that basically, capital compounds exponentially, whereas labour compounds linearly, right. So, in that kind of natural way that will play out, as wealth tends to concentrate, it then tends to more easily keep concentrating. So you tend to get more and more concentration of that wealth into smaller and smaller hands, and that usually makes the economy weaken, because then you have the middle classes overleverage and their incomes aren't going up, so you kind of have that stagnation.
Every time you get to the end of that long-term debt cycle, that's when society has a decision point. Sometimes, they do policies to try to counter that effect a little bit, so they try to do policies to help the middle class, the working class, and to kind of alleviate that. If they fail to do so, that's when sometimes you get outright revolutions, right. So it's like, if they don't respond in a moderate manner, then they face a more severe measure. And in the one of the way book describes it is that you can either distribute wealth somewhat, or you can distribute poverty, which is if you kind of go the revolution route, usually no one wins really in that kind of route, at least for a long time.
Peter McCormack: Yeah. So, do you think that's what's happening right now? So essentially, we've got massive social unrest, especially what's happening in the US now. And we've seen, like these BLM protests; I think a lot of us realise they aren't really about Black Lives Matter, especially when you start to see some of the more kind of Marxist rhetoric. Do you think this is a similar situation; do you think this is what's happening? Because, I think we also saw, and I forget the report I read, but with the stimulus packages, the impact that actually had on wealth inequality itself, that saw just a massive rise in wealth inequality; so, do you think that's what's happening, that's what's playing out here right now?
Lyn Alden: Absolutely. I think that there's definitely an economic kind of context or background behind some of this because when people are happy, when things are going well, they tend to overlook some of the other issues. But then, when they're already economically suffering, when they can't work, when they feel like they're reliant on external forces that they can't control, then of course they get more frustrated and things come out more violently, even in terms of just peaceful protests, depending on different people, of course, do it in different ways.
And I know you had Luke Gromen on your show the other week?
Peter McCormack: Yeah, Luke's great.
Lyn Alden: I know the chart that he's citing, because I've cited it before too, which is basically that if you chart the United States, the middle class, what percentage of their paycheck has to go towards essentials, right. So back in the 1980s, it was half their paycheck; that slowly got up over time until now, income's failed to keep pace with the growth of essential goods, especially healthcare; that's been a really big contributor to the problem. And then by now, it's at the point where the median kind of male income no longer covers the essentials.
And of course, that's when you get more and more populism, you get more and more frustration and then the challenging thing is that a lot of people don't know where to direct it. They don't know if they want to direct it at one political party, another political party; do they want to direct it at immigrants; do they want to direct it at China outsourcing? There's so many different paths that they could direct it to. Some people direct it entirely at the Fed, for example; some people direct it entirely at the fiscal side; and, it's very challenging for a lot of people to break down. What is the specific problem; where's it coming from and where's the solution? So, you kind of get all these different groups that are really polarised, and they all have a different conception of what the problem is and how to fix it.
Peter McCormack: Okay. Can we point at Steve Mnuchin?
Lyn Alden: I think you can definitely. He didn't start it, but I wouldn't say he's helping it. This process has been in place for decades, but he's definitely one of the places where people can point to now and say that he's certainly not helping.
One thing, for example, in this particular crisis, just kind of the way that stimulus was structured in many countries, including in the US, it's been kind of top down almost. So you had, in some cases, people got stimulus cheques, people got unemployment cheques, whereas people running a small business often got million dollar injections, right, and some of them didn't even need it. There were firms that were pretty much unharmed by this and they get a million dollar PPP loan that turns into a grant, right, so it's kind of like --
Peter McCormack: I know. I found out about that recently; these people, they don't actually have to pay them back?
Lyn Alden: Yeah, most of them don't get paid back, and they even said ahead of time that the ones under $250,000 would barely be scrutinised at all. So, some of the bigger ones, like the $2 million to $5 million range, they would get a little bit of scrutiny to make sure there's no outright fraud. But yeah, those loans essentially get forgiven, as long as they met certain -- they had to keep their existing number of employees on for three to four months; they had to meet a couple of basic requirements which, especially if your business was not struggling in the first place, was really easy to accomplish.
So, there are plenty of firms that didn't need them and still just got literally a pure capital injection, and that goes right up to the top of the company, right, so the owners of that company, they get that kind of half million, million dollar injection, depending on how big their company was.
Peter McCormack: Apart from that dude in Florida who got caught buying a Lamborghini; did you see that?
Lyn Alden: I think I heard about that. I know that there was one athlete that got caught, and there was another business heir that got caught. I haven't tracked all of them, but yeah, there were a couple of egregious cases that got flagged. But, the more subtle case is just someone didn't break the rules, but their business didn't really need it and there's no way to kind of prove their business didn't need it, and then they just get that injection. They don't go out and by a Lamborghini; it just never gets addressed.
Peter McCormack: Should have waited a couple of years to get that Lamborghini; he could have probably got away with it!
But, it just feels like this system is a big mess. It feels completely unfair, it doesn't seem to be rewarding the right people. I'm not an economist in any stretch of the imagination, but it's really obvious to me that -- but then you know what, Lyn, I think is this just systemic; is this a problem that is like something you can't escape from if you're going to have an economy run on these models which are, you're saying, are happening all across the world in different countries; is this just a natural occurrence? Or, is there just a fundamentally different way to run the economy? If we had a standard, like the gold standard, would that make a difference?
Lyn Alden: Well, the gold standard was in place in, say, the 1920s for example into the 1930s, and that was broken because the spike they had in the gold standard, they still were able to basically print money and have that standard kind of visible, until underneath the surface it was crumbling. So, they couldn't support it anymore, but it was still technically there. And then, when you get that big banking crisis, it all kind of breaks at once, even though it really kind of broke gradually leading up to that point.
This sort of dichotomy comes up in multiple systems, so for example it used to come up more in aristocracy, right. So, if there's centres of power that have wealth and that wealth gives them more access to political influence, and you have that play out a bit; if that gets too egregious, that's when you have a revolution. So, it happened in France obviously, it happened in Russia, you have these pushes against the aristocracy.
In today's system, in most developed countries, we don't have any aristocracy at all, or we don't have powerful aristocracy, but then you have in place of that a crony form of capitalism. So, instead of that healthy form of capitalism, you get that build-up so that people that get more and more wealth can then influence politics more and more in their own favour, so it kind of accelerates that concentration; rather than having a healthier system of boom and bust. Another way that I've seen it described is socialism for the rich and capitalism for the poor, which is one of the worst possible versions of that system. You want kind of a level playing field.
Peter McCormack: Yeah. Do you know Travis Kling?
Lyn Alden: I've heard of him.
Peter McCormack: So, he's been on my podcast a couple of times, and he said, "Quantitative easing is universal basic income for rich people".
Lyn Alden: Yeah, pretty much. I mean, it does kind of play a role in boosting up asset prices. So a lot of people thought it would be inflationary outright, and it's not super-inflationary outright because it doesn't go through that fiscal route; it doesn't really encourage banks to lend more. But, it does seem to have a pretty strong effect for reflating asset prices, at least to some extent.
Peter McCormack: So, do we have a new aristocracy here then, where we have Wall Street infiltrating the White House, we have Goldman Sachs at the right hand of Mnuchin; is this essentially the new aristocracy?
Lyn Alden: Yeah, I think if you have a sufficiently cronied-up capitalism, it does start to kind of mimic a lot of the aspects of an aristocracy, it definitely can.
Peter McCormack: So, we are going down the revolution?
Lyn Alden: I think we're starting to see that play out. Have you ever read the book, The Fourth Turning?
Peter McCormack: Do you know what, funny you should say that. No, I have it here. There's about three or four books I have here where people keep saying to read. I've got The Sovereign Individual, I've got The Fourth Turning, and there's another one I've got. Go on, tell me, you're the second person I think who's recommended that as well.
Lyn Alden: Yeah, so that was published in the 1990s by two demographers, and one of them is still active, Neil Howe. So basically it points out that roughly every four generations, you have some sort of revolution, and that society tends to go through these cycles where you have this big crisis, that is the "fourth turning", and then starting with the first turning, the next generation, you're going to have this period of unusual degree of unity, right, so everyone experienced the chaos and now they're all kind of unified. If you're in the in group you benefitted but if you're not, you're suffering, but overall most of the society is unified. Then that starts to fray a little bit over time, so of course that unity is inherently impermanent. So, over the second generation and the third generation, that starts to fray and then, by the fourth generation, you end up having another crisis where those 80-year-old institutions are sort of torn down and rebuilt.
I don't think they spelled it out in the book but if you look at the long-term debt cycle in the United States and Europe, the long-term debt cycles were all fourth turnings. It's the same kind of pattern. Whenever you have that really big debt double, you have that wealth concentration, that's usually when the system, as structured for the past several decades, is really no longer functioning and they kind of grind to a halt, and that's when you have both economic disruptions; but then tied to that are the social disruptions.
Peter McCormack: Okay, sorry, just remind me, what was the first turning again?
Lyn Alden: So, the first turning is this period of unity, right, so everyone's kind of on the same board. And then the second is usually when there's kind of a younger generation pushing back against that to some extent. So, in the US, that was the 1960s and 1970s.
Peter McCormack: No, because the reason I asked what the first one was is because, if we're in the fourth turning now, if we're going to have a revolution, we've got a period of unity coming afterwards?
Lyn Alden: Yeah, but in their timeline, that's like a decade away or more.
Peter McCormack: Okay, well I can still live through that!
Lyn Alden: Yeah, I don't subscribe to the -- it's just a framework to think about, especially because I focus on the economic aspect somewhat more than the social aspect, and I view the social aspect through the lens of an economic aspect and it's just observing that those cycles play out with the long-term debt cycle. So, as you build up, society goes through this thing, they get fat and happy, but then that starts to fray over time; you start to get more and more division; you build up more and more debt; you keep pushing the can down the road; and eventually, when you reach the zero bound of interest rates, when you reach a really high level of wealth inequality, it gets harder and harder to push it, it gets heavier and heavier, and then you get more and more populism and more and more protests and, not only an economic cycle starts anew, but it's kind of a new social framework usually that kind of accompanies that, because you have that all coming together.
Peter McCormack: In your article, you had it in the charts. You pointed to the two times over the last decade where interest rates had hit the zero bound. We've started to see negative interest rates which, to be honest, when they happen, I couldn't even get my head around understanding what that actually meant, but I eventually did. Did we get negative interest rates the previous time?
Lyn Alden: No we didn't.
Peter McCormack: So, this is new?
Lyn Alden: Yeah, this is a new part of it and I think there are a couple of reasons. One is that because financial instruments get more and more sophisticated over time, because the world gets more and more interconnected over time, volatility is dampened, to some extent, and that allows a larger and larger debt accumulation. So, we have kind of a higher level of debt now than we did in the previous long-term debt cycle peak. And then, in addition, demographics are a lot more slow-growing now than of course they were back eight years ago.
So, when you have that kind of overall more deflationary forces, so there's all this amount of debt in the system and then the weak population growth, weak consumption growth, those two variables plus technology expansion are very deflationary. So then you have this big, inflationary response to that but if it's not big enough then, yes, you push rates negative.
Peter McCormack: So, could we be in some kind of super-cycle now, like even mega-cycle?
Lyn Alden: Well, I think going back 80-years, I think an 80-year cycle is big enough cycle for me. I already think some people push back and say, "That's too far to look back. You can't look back that far". So, I don't know if I want to go back further than that but at the very least, we're kind of at an apex that you have to go back 80 years in the history books to see a similar kind of economic scenario.
Peter McCormack: Hold on, you went back 2,600 years at one point?
Lyn Alden: That's true! But, it's not one giant cycle; it's more like showing how long these cycles have gone back in time.
Peter McCormack: I guess what that bit was though was the social aspect, the similarities in the social aspect and the rise in wealth inequality would have on the social unease within a city or within a country; I guess you're the same?
Lyn Alden: Yeah, I love that quote, because you could literally -- it's so applicable to today's society. You could put today's politicians' names right on that quote and it would just play out the same way. You could add student loan forgiveness, all those sorts of things they're talking about in that quote, literally just translate pretty much one-for-one for things that are floating around today. It's the same sort of cycle playing out.
Peter McCormack: Can we talk about the Event Horizon and why 130%, because you put, "When debt to GDP hits 130%, that's eventually the Debt Event Horizon; you can't escape now". Is that just a historical thing, or is there a mathematical reason why you can't escape?
Lyn Alden: Well, it's kind of both. So, that particular study was based on history. It showed that over the past 200 years, whenever a sovereign reached over 130% of GDP, those debts were not paid back in real terms. So, in some cases they were defaulted on; in other cases, it was paid back but the currency it was paid back in was weaker, so basically you lost purchasing power. And it showed that basically, out of 52 cases that they looked at, 51 of them had that problem; and the one exception was Japan.
Japan has a lot of specific attributes that give it a lot of defence against this problem, so they've been able to elongate that issue more than pretty much any other economy has. So, they're the world's largest creditor nation, for example, they own more foreign assets than foreigners own of their assets; they have a very homogeneous culture; they are a very disciplined culture. So, they've been able to pull the levers in such a way that they've been able to reach that debt level and then not have any kind of devaluation consequences from that for a much longer period of time than any other.
But, the mathematical aspect to it essentially is that once you get debt that high, the only way to pay it down nominally would basically be to run surplus for a while. But, in most political systems, that becomes intolerable because if you're extracting surpluses from the system, then usually you get unrest at some point. So, you get economic slowdown; you're not juicing up the economy; and usually what happens is those people get voted out of office and you bring in the next round and you stimulate from there, for example.
Peter McCormack: Well, in the UK, the austerity programme over the last, what was it, decade under the Conservatives has been hugely unpopular. Now, they've survived their re-election recently but I guess if that had gone on for another decade, I don't think it would have lasted.
Lyn Alden: Yeah.
Peter McCormack: I don't know how traditionally it affects, but the austerity programmes really were quite cruel and difficult kind of changes to policies that affected the most needy within society, which was shocking really.
Lyn Alden: Yeah, they usually just don't last that long. And I think it's one of those things in theory, you can probably construct it in a way that'll work out. But, with the imperfect systems that we all have, generally 130% has been kind of a line in the sand where anything short of a perfect effort would pretty much fail at being able to nominally deleverage that.
Peter McCormack: And, where are we now; what's the level we're at now?
Lyn Alden: Well, it depends on countries worldwide, so United States, we went over 130% this year. We went into this, we were already over 100%, so we're already kind of flirting with the Event Horizon. We went over 130%. Japan's a special case, because they're at 200%. Europe varies; each country's a little bit different, but Italy's pretty high. Obviously they're one of the highest. Germany has kept it pretty low. The UK, they were a little bit behind the US, but they had a spike this year; most countries did.
So, Europe's a little bit behind us there but Europe, in general, has also a little bit more private debt. So, if you look at Japan, Europe and the United States, we're all in pretty much a long-term debt cycle scenario where we have very high sovereign debts, very high private debts, and so usually these things are very difficult to deleverage nominally and they usually end up experiencing currency devaluation which, in the mildest sense, is yields being below the inflation rate for quite a while; and then in more aggressive scenarios, can involve kind of a more inflationary outcome.
Peter McCormack: So, you're basically saying, in all likelihood we're heading towards a currency devaluation?
Lyn Alden: I think most likely. I think that's going to be a scenario that plays out in the 2020s most likely.
Peter McCormack: Right, because essentially, if we base it on history, when other countries have done it, there's about a 2% chance it won't happen.
Lyn Alden: Yeah. And I also think it depends on the country you live in, right. So Japan, for example, has been able to push it longer than anyone thought. They have current account surpluses, they have the biggest international investment position, they have a couple of strengths; they've been able to push that. So, a lot of people use that as an example and say, "Well, look at Japan. They got to this place and they didn't have problems for two decades". But, each country is a little bit different and Japan so far has been somewhat of an exceptional case. So, I'd be somewhat surprised if most countries are able to push this as far as Japan has.
Peter McCormack: But, the only thing I always hear with regards to Japan is they've gone through a two-decade period of stagnation. Is this because of this?
Lyn Alden: Well, I think that was a lot of factors. So, it's actually been about three decades. So, their stock market peaked in 1989 and still hasn't gone back to that high level. So, if you look at their stock valuations back then, there were higher stock valuations for them in 1989 than in the dot-com bubble. Then in addition, their real estate valuations were higher than in the 2007, 2008 bubble. So, it's kind of like they had a stock market bubble and a real estate bubble; they were both absolutely bigger, even in the 2007 periods and at the same time.
So, that was one of the biggest ever bubbles in history, so that's been deleveraging for 30 years. Now, part of it was leverage and part of it was just sheer overvaluation, so that just inherently takes a long time to play out. But in addition, they have a super-slow demographic. They have a very old society; at this point, the population's outright shrinking. So, that definitely also contributed to especially nominal GDP just not going up at the time because it's kind of in a more steady state.
Peter McCormack: Okay. So, this is where I got a bit sticky within your article. I'd followed most of it through, but when you got towards the end and started to explain how our currency devaluation looks like, can you just talk me through that so I can understand?
Lyn Alden: Sure. And I think we can use the US as an example because we've had three major devaluations in the past century. So the first one, in the 1930s, was the gold peg devaluation, and this is what most developed countries went through at that time. So, they all de-pegged their currency and re-pegged it at a lower rate. So, the United States, gold was about $20 for an ounce of gold, and then it was devalued to $35 for an ounce of gold. So, it was cut pretty dramatically. And what that allowed them to do essentially was to print a lot more money and still be able to back that by the amount of gold they had.
So, in the United States, that was not very inflationary, because it was going up against a very deflationary force of all that debt. So, that moment of the gold peg devaluation was when outright deflation shifted to inflation, but it wasn't very high inflation. So, that whole kind of 1930s decade was not very inflationary, but it was a devaluation relative to gold. So, that's one example. And there are different charts that show each currency de-pegged versus gold at a different rate. So Switzerland, for example, held up a little bit better; the dollar went down pretty far; and then several of the other European currencies went down further than the dollar, relative to the gold peg that they had.
And in the 1940s, that's when we had the more inflationary devaluation. So, that's what we talked about before where we had spikes of double-digit inflation, but they held treasury yields at 2.5% or less. So, anyone holding treasuries, you got all your money back, but the money supply went up dramatically in that decade; prices of everything went up dramatically in that decade; but the amount of debt you're getting back, the interest rate and everything, is fixed, right. So, you're buying fewer goods with the money you're getting back. So, that's an inflationary devaluation in the sense you have high inflation and interest rates are not keeping up with that. So, that's another example.
And then the third one was in the 1970s. That was a weird case because it wasn't a long-term debt cycle period, but basically it was a couple of different variables: high deficits, a change in the gold monetary system away from the Bretton Woods system, so a couple of factors came together. So, we had very high persistent inflation in the US and most of the developed world and even though you didn't have yield curve control, yields just rose more slowly than inflation. So, you had a couple of periods where you had big spikes in inflation and so yields caught up more slowly.
So again, if you're holding treasuries or other sovereign debt, you got all your money back; but by the time you got it back, you could buy fewer goods and services with it. So, those three periods were all faster than normal broad money supply increases, just a lot more currency units in the system, and those currency units buying fewer goods and services.
Peter McCormack: And do you think this is how it will play out this time again?
Lyn Alden: I think so. I think that at the very least, I think that real yields are going to be negative for quite a while, meaning that anyone holding sovereign debt or cash in the bank, any sort of yield you get, even if it's marginally positive like we had in the US, is unlikely to keep up with inflation. So, it's not even keeping up with reported inflation and then underlying real inflation for many people is probably higher than the reported inflation, so that super-low zero-level interest rates. If you're basically holding treasuries or holding cash, over a ten-year period, by the time you get that back, you buy fewer goods and services with it; whereas normally, we think of treasuries or putting money in the bank as something that grows our wealth, but that's very unlikely to play out in this decade.
Peter McCormack: Do you think we could see double-digit inflation, annual inflation, within say the US market? I know they're seeing it in Turkey right now, I think it's like 12%. Do you think we could see that in the US?
Lyn Alden: I think it's possible. I think it's hard to do because one difference is that countries that borrow in currencies that they don't print, emerging markets like Turkey, Argentina, they tend to have more inflationary outcomes because their obligations, their liabilities, are priced in a currency they can't print, so they can't devalue their debt. Whereas, developed countries, most of their debt is denominated in their own currencies so they have more leverage they can pull to make things happen more gradually.
But then, there are always disruptions to that plan. So, everyone has a plan until reality comes. So, I think from a policymaker standpoint, they want to have it be very gradual. They want, for example, inflation to run at 3%, 4% while they're holding yields at 1%, 2% and so you get that gradual currency devaluation over time; whereas it's very possible that if you get a supply shock, or you get some sort of major social unrest, or something that makes it so that the supply of goods and services in the system are not keeping up with that printed money, then you can definitely get a double-digit spike.
Peter McCormack: Like a pandemic?
Lyn Alden: Like a pandemic. For example, we've seen growth replace inflation. Most of it hasn't reached double digits. A couple of categories have but most of it, we've seen sort of 3%, 4%, 5% inflation in groceries because our supply chain is not super flexible. So, the supply chains that give foods to restaurants, for example, can't be quickly converted to put those same foods towards grocery supermarkets. So, when we've all consumed far less from restaurants and consumed far more from groceries, that's resulted in some supply shocks and some price increases.
Peter McCormack: Yeah, okay. So basically, what you're saying to me is, "Pete, holding cash over the next ten years in the bank is kind of risky"?
Lyn Alden: I think so. Yeah, I think treasuries and cash in the bank is risky. And, it doesn't mean I hold a zero amount, because I hold it for liquidity and then also, to some extent, hold it for countercyclical investing. So, if we get a big dip in any of the assets I like, I can take some of that and kind of deploy that. If we get kind of a brief surge or something goes up way faster than I thought, I can take a few chips off the table. But other than cases like that, there's not a super-compelling reason to just put a lot of money in the bank, or into sovereign debt, and then hope that over the next decade that that keeps its purchasing power.
Peter McCormack: Okay. So let me then just switch a gear with you a second. What's your Bitcoin thesis? How much are you interested in Bitcoin; how much do you know? Obviously, if you've been listening to my show, you care a bit, but what's your own personal thesis with it?
Lyn Alden: So, I'm bullish on it. I first covered it in writing back in 2017 because it was having that big surge and I was getting all these emails from people like, "Hey, can you cover Bitcoin?" So, I wrote this article on Bitcoin and my view at the time, because that came out in autumn of 2017 and I was like, it's really overbought. I analysed it from a couple of different perspectives. I analysed it both as a medium of exchange and as a store of value.
As a medium of exchange, I considered it overvalued; but as a store of value, I thought it held a lot of potential. But then at the current price, I just wasn't interested. So I kind of just said, "There's a lot of risk here. If you want to put 1%, that's fine, but I wouldn't go for it at these prices". And of course, the next few months, we got that big surge, just like 20,000. Then we got the collapse to 3,000 or 4,000 and we've been in this two-year, three-year consolidation.
Now, in April this year, it was back around the same price as when I analysed it in 2017, so it was kind of in the 6,000 to 7,000 range, and that's when I turned bullish on it. So, in my research service, I went bullish on it and then I published a public article in June on it, kind of outlining all the reasons why I'm pretty bullish on it now, especially in this point in the halving cycle. So, you have that kind of macro backdrop that I just described. We have persistently negative real yields, probably potentially a degree of quicker currency devaluation in some scenarios; meanwhile, there are assets like gold and Bitcoin that are these scarce assets, that even though they don't pay a yield in many cases, they're scarce so they can hold their value against more and more fiat currency being printed.
So, that's been kind of a main thesis that especially in this part of the halving cycle, there's a pretty asymmetric word for holding Bitcoin.
Peter McCormack: Right, okay, so you're in?
Lyn Alden: In in, yeah, since April.
Peter McCormack: You're in, wow. Okay, that's pretty cool. So essentially, my Bitcoin podcast is a little media company, but it holds cash reserves, it is a profitable business, and I moved to 60% Bitcoin position, because I have no need to spend these cash reserves over the next at least 12 months, maybe longer, and I was really nervous about holding cash reserves. I went 60%. I would say I did a very small version of what MicroStrategy did. I'm assuming you followed their news?
Lyn Alden: Yeah.
Peter McCormack: What did you make of that?
Lyn Alden: Well, it was interesting because when they did that, I actually bought a small amount to convince myself to keep following it and because some of my portfolios that I track for people, that's actually a way to get slight indirect Bitcoin exposure in these portfolios. But, I've been following that a little bit. Basically, that's a company that was extraordinarily cash rich. They had over $0.5 billion in cash. They used to have a period of fast growth but in the past few years, they weren't really growing. But, they had that really good asset of no debt and tons of debt.
So, imagine your biggest asset is how much cash you have and then you start to read about negative rates or yield curve control or inflation, or any of these things. And so, he clearly did a ton of research. I actually found it interesting because he had a couple of different interviews recently and he mentioned that he sent my Bitcoin article to his Board of Directors. So, he actually read that Bitcoin article; that was one of the pieces that he looked at. So, it's kind of full loop; he read my article, but then I invested in his company.
So, his is clearly a really big play. I would not have been surprised to see some companies put, say, 5%, 10% of their cash into Bitcoin, but the fact that he put literally all of his cash into Bitcoin was definitely pretty surprising. And I think one of the underlying things is that now, because they don't have a Bitcoin ETF, so the closest thing they have is the Grayscale Trust, which trades over the counter, but now you have a NASDAQ-listed security that one-third of the market cap is Bitcoin.
It's like an indirect Bitcoin ETF because any fund manager, let's say their mandate is they can only invest in stocks; well now, if that manager wants to have a Bitcoin exposure, he can say, "Well, I'm just buying the stock. I think it's a good software company, I want to buy it". But really what he's doing is he's getting Bitcoin exposure. So, it's like he's turned his company into this hybrid --
Peter McCormack: ETF?
Lyn Alden: Yeah, pretty much.
Peter McCormack: Madness! Yeah, because I look at other companies. I mean, everything always think of Apple. I don't know what their cash reserves are now; something like $120 billion, or something insane.
Lyn Alden: Something like that, yeah.
Peter McCormack: But as a company, they will be facing, over the next decade, potentially losing very significant, well we're talking purchasing power, but the value of that money. I wonder what a company like that is even considering doing?
Lyn Alden: Well, I think they're a little bit less vulnerable. So, with Apple's case, they actually have a lot of debt to go along with their cash, and so they lever themselves up for share purchases, so they issue really cheap debt. And of course, they have one of the highest credit ratings in the world, Apple, so they can borrow at extraordinary low rates. So, their balance sheet has a ton of cash and then a ton of debt, although the debt is not that high relative to their incomes and everything. But in terms of just because the company's so big, they have a pretty good amount of debt. So, it's kind of like someone who, say, has a lot of cash, but then also has a fixed-rate mortgage.
So, if you were to get that kind of cash devaluation scenario, Apple's more balance to that, because their debts get kind of devalued, but then also some of their assets get devalued. Whereas, MicroStrategy had no debt and tons of cash, so a currency devaluation scenario for them is all bad. And, there are companies like Google and Facebook that are in the same scenario as MicroStrategy, where they don't have the debt; they just have tons and tons and tons of cash. So, they're actually more vulnerable in the same way that MicroStrategy was. They don't have cash as the same percentage of their microcap that MicroStrategy had.
I mean, their cash relative to the size of the company was absolutely massive, but there are these other companies that have tens of billions of dollars in cash and T-bills sitting on their balance sheet and they don't have the liabilities to offset that. So yeah, they're vulnerable.
Peter McCormack: So is it then therefore a good time right now to take out debt?
Lyn Alden: I think it could be a time to take out debt responsibly. I mean, I would never encourage people to take on unnecessary leverage. I don't think it's a bad time to have a fixed-rate mortgage on an appropriate property, for example. If I was running a company, I would have a non-zero amount of debt. I would have a strong balance sheet, but I probably wouldn't have zero debt.
Peter McCormack: Interesting. I don't know what I could take debt out for on a three-man podcast business, but maybe that Lamborghini! Okay, so listen, just to finish out, a couple of things. If you are just a normal person like myself, just trying to figure out, day by day, how to get by; I want to pay my mortgage; I don't want to be broke; I've got a little bit of cash savings; I own a few assets; what should I be preparing for over the next decade?
Lyn Alden: I think there are a couple of things. One is diversifying income source as much as possible, so either people have their main income from their job usually, but any sort of side also they can do, or develop their own skills so they can have multiple sources of income. If it's a family, so there's two people in the family, and they both have an income, they could try to make it that their expenses are low enough that if they were to lose one of the incomes, the other income can still cover all their core expenses, right. So, the other income is kind of for saving and fun, so they kind of make themselves anti-fragile.
They can diversify the types of assets they hold, so they can have some global equities, they can have Bitcoin, they can have precious metals, they can have their own house; whatever the case may be that makes sense for them to have diversified assets with an emphasis on things that are scarce. And then, if they have debt, just to make sure they're not overleveraged, because you don't want to have a ton of debt and then lose your income and not be able to support that debt and have to sell those assets at an inopportune time. But for example, certain fixed-rate mortgages make a lot of sense for people, things like that.
Peter McCormack: Okay, brilliant. All right, well listen, this has been great. Something Luke said to me that stuck with me is that you should consider your portfolio in terms of cash, property, equities and scarce assets and try and rebalance over time, which is something I've never done and I've started to do that. I would say I'm highly leveraged with Bitcoin right now and I'm trying to get rid of my cash and thinking about a second property. It's difficult times to try and navigate if you're not economically trained, like myself.
Your blog is utterly fantastic and I'm subscribed. Tell people where to follow you though, Lynn?
Lyn Alden: So, I run lynalden.com, so I have a lot of free stuff there. And then, I'm also on Twitter @LynAldenContact.
Peter McCormack: Okay. What is the day gig? Are you a consultant?
Lyn Alden: Well, my website is mainly the research service, so I have that kind of premium thing on the side. My long-term background has actually been in engineering and engineering management.
Peter McCormack: I didn't see the premium thing; it didn't stand out to me. Tell me about the premium service?
Lyn Alden: So, most of my free stuff, for example, the free newsletter comes out every six weeks, whereas the premium service I have a report every two weeks and sometimes more often, and real-time portfolios, things like that.
Peter McCormack: You don't push the premium enough, I didn't even see that. It's just hidden.
Lyn Alden: Yeah, I don't do aggressive advertising.
Peter McCormack: It's only $200 a year; come on! I'd pay more than that. I'm going to sign up now; I'm going to do it. Listen, Lyn, thanks for coming on. This has been great, really useful for me, and I'm glad you're into the Bitcoin thing as well and good luck with everything you do.
Lyn Alden: Yeah, and thanks for having me, and I really enjoy your podcast; it definitely helps educate people. I came across a couple of your episodes and if there's ever an angle that I don't get, like in your archives you usually have a podcast where you brought on the exact right person to discuss it. So, it's really great.
Peter McCormack: So, do you actually use the archive, because there's an archive up on my website and it's got it by category and by guest. Are you the actual one user of that archive?
Lyn Alden: No, I just, for example, will search on YouTube or something like that and just be like, say it is a specific thing I'm looking for, and it's such-and-such Bitcoin, I just type it in, and often your podcast will come up because you have the guest talking about that.
Peter McCormack: Brilliant, that's fantastic. Well, listen, I'm going to sign up to your website now, I'm going to get the premium service, but thanks for coming on; I'm sure we'll do this again and good luck with everything.
Lyn Alden: Yeah, thanks for having me.
