WBD374 Audio Transcription
Debt Cycles & the Rise of Bitcoin with Greg Foss & Dylan LeClair
Interview date: Monday 19gth July
Note: the following is a transcription of my interview with Greg Foss & Dylan LeClair. 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 Bitcoin Strategist Greg Foss and Dylan LeClair from Bitcoin Magazine. We discuss crony capitalism and perpetual bailouts, why debt cycles spell inflation, and how the world will turn to Bitcoin.
“The reality is that Bitcoin will outcompete every other money going forward...at this point during the monetization process is going to increase 10, 100, 500-fold maybe.”
— Dylan LeClair
Interview Transcription
Peter McCormack: Greg Foss, welcome back, man. How are you?
Greg Foss: Well, I'm so excited to be back and I'm doing well thanks, Peter. Nice to have met you in person in Miami. It was really a great experience.
Peter McCormack: Dude, Miami was awesome. I had such a good time. It was great to meet you too. Dylan, first appearance on the show. How're you feeling, brother?
Dylan LeClair: Feeling awesome. Thanks for having me on. I'm a long-time listener, so happy to make it on here.
Peter McCormack: Listen, you wrote such a good article we had to get you on, we had to talk about this, but also it's good to have Greg to join us. You both know the show, you both know the way I do things. I like to keep things nice and simple, easy for people to understand. But this was great timing, your article, because I think it came after I'd watched Ray Dalio's video probably for about the fifth time. I'd seen it around the time you wrote this, because every time I'm just trying to see where we're going or trying to understand what's going on, I go and watch that video and then I'm, "Oh shit, we're absolutely fucked".
But that video is brilliant and your explanation's brilliant. I'm going to stick a link into the show notes, so people can go and check it out. It is called The Conclusion of the Long-Term Debt Cycle and the Rise of Bitcoin and it appears we're coming to the conclusion of the long-term debt cycle. But Dylan, just welcome yourself, explain to people who you are and then talk about why you approached this article because it's a bit of a beast.
Dylan LeClair: Yeah, so my name's Dylan LeClair. I work for Bitcoin Magazine. I started up with them about five months ago, didn't really start doing content but more media stuff. Yeah, started there, dropped out of school about a year ago. I had a business called 21st Paradigm where I consult people about Bitcoin and why it's important, why they need it. Yeah, it's been a crazy year; life's changed a lot.
Yeah, I think around April I put out this piece called The Conclusion of Long-Term Debt Cycle and the Rise of Bitcoin after reading a lot of Ray Dalio, his work. He has a pretty long book which has lasered this out; it's how he made his career honestly. I also have watched that 30-minute video multiple times. You'll probably learn more in that video than you will from a college economics degree, to be honest, so everyone should go and watch that at the very least.
Peter McCormack: Dude, I've sent that video to so many people. I've stuck it on Facebook. I've told my friends, "Listen, you need to watch this, you need to understand what's going on in the economy". I think I learned more about economics in that than the two years I studied economics for A level. I think you're absolutely fucking right; it's such an unbelievably condensed video of how the economy works. But I do want to ask you, you said you dropped out of school. All the smartest people drop out of school; they realise it's bullshit for some reason. What were you studying and why did you drop out?
Dylan LeClair: I was studying business. I'd been a numbers guy my entire life but was out of focus on finance and econ. I was learning Keynesian economics and at the same time, I'm listening to a bunch of podcasts and reading and doing all this stuff on the side for free. They sent us home because of COVID and it was the contrast between Zoom University, taught by a bunch of boomers, and free podcasts and Bitcoin Twitter; the contrast couldn't be more stark. So, I dropped out and picked up a job to stack as many sats as I could and about nine months later, I landed a job here. It worked out well.
Peter McCormack: Avoiding all that college debt.
Dylan LeClair: Yeah, for sure.
Peter McCormack: Good move, brother. Greg, you must love this video as well. You must know the Ray Dalio video.
Greg Foss: Yes, sir. I do and I followed Mr Dalio's career. I shouldn't say followed it; we tried to mimic it. At the hedge funds I worked at certainly his risk parody platform was brilliant; it actually doesn't work anymore. He knows it because interest rates don't go from 14% to zero and then from zero to minus 14%, okay. So, the US 10-year over my career and his career went from 14% down to just under 1%.
That works great when you use bonds as a hedge against the volatility and equity markets, but mathematics, bonds are only mathematics, and the math doesn't work when you go below zero. Mr Dalio knows that and so recently most famously he said, "I'd rather own Bitcoin than a bond". Mr Dalio shows that he understands math and he's trying to tell other people to study math but unfortunately, they're stuck; they're looking backwards;, they're driving in the rear-view mirror.
But can I add one thing? I met Dylan down in Miami first time and just before we went on stage, Dylan tells me. I go, "Why did you drop out of UVM?" and he goes, "Because I was sick of the Keynesian brainwashing". That line has stuck with me since I met you, Dylan, because it becomes a bit of a brainwashing; everyone accepts the curriculum as being gospel. The truth is no true academics have ever sat in a risk chair where they've traded risk as a career and don't quickly realise that what you learn in a textbook versus what you learn sitting in a risk chair like Mr Dalio's done are two very different lives.
There's theory, there's practice, sometimes the two intercept and sometimes they do not intercept. This is what makes life exciting and if you sit in an academic chair like Steve Hanke does, I would suggest you wrap his research in fish. Or the flip side: I wouldn't use his research to wrap fish, quite honestly.
Take Mr Dalio at face value, take young kids like Dylan who question the system and I just want to say that that's what gives me strength, is meeting young men like Dylan who decided to take his education under his own wing and go with it. Proud to be here, boys.
Dylan LeClair: Appreciate the kind words.
Peter McCormack: Yeah. Good work, Dylan. I'm in the same challenge with my own children now. I've really come to question a lot about the education they're getting. I try and teach them my own things and we're making progress, but luckily my son is an arts student so, there's not too much propaganda involved in that as long as he avoids some of the woke elite.
There's a couple of interesting points you made there I want to touch on actually. One of the things I find really interesting about Ray Dalio, he seemed to not get Bitcoin for quite some time. He put that tweet out that time. He said, "Do you know what? I could be wrong about this. I might need to reconsider my position". He put himself out there and admitted it and looked like he went and changed position. It feels like there's a lot of people out there who just don't want to do that; it's almost like there's some cost, "I've been so against Bitcoin; I've got to stay against Bitcoin".
Someone like that, that really sticks out, is Hanke. I've been a bit of a reply guy for his for the last two weeks because he keeps tweeting about various countries, I think it's Ethiopia and Lebanon and the currency crisis that's happening. I just keep saying, "I don't understand how you don't understand Bitcoin when you're posting this shit". It's almost like he feels like the solution is within the current system, but he refuses to accept that maybe Bitcoin can be an answer. He'll post about Ethiopia's inflation, or he'll post about Lebanon's inflation and currency collapse and then the next post will be something very anti-Bitcoin. I don't understand why he won't just even make an attempt to understand Bitcoin; it's a really strange position.
Dylan LeClair: The most ironic thing is that he has the Troubled Currencies Project in his bio. That's one of the things he does and, thinking about El Salvador, he said, "The most prudent thing they could do is elect a currency board". You just have to take opinion from guys like Hanke with a grain of salt at this point, just ignore him. But being a reply guy for him; I do it too!
Greg Foss: The truth is, guys, the best risk managers in the world, of which Ray Dalio is obviously one of them, they change their positions when the facts change. Anybody who sticks to a position that's costing them money will get carried out on a gurney off the trading floor or out of the hedge fund business; this is what Hanke doesn't understand. I don't want to bring up Peter Schiff's name, but you can see when conflict enters the situation or enters the discussion, meaning, "I'm a gold bug and I won't promote a better alternative". But then Mr Dalio is honest as the day is long. He says, "I could be wrong". Well, so could all of us be wrong, at least admit that, whereas other people who are dogmatically opposed to it because they've done their three hours of research on it; my goodness, this isn't even funny.
Matt Odell tweeted the other day, "Anybody who pretends they truly understand Bitcoin is either lying to themselves or lying to other people". That's the truth. How long have you guys been studying it and continued to learn new things about it and see the network and the Lightning layer too and all this stuff. You can't possibly claim to be an expert in it after only studying it for five years, which I've been doing. It's impossible; you continue to learn new stuff. So, people who categorically dismiss it as, "I looked at it for three hours and this is not going to work".
Peter McCormack: "It's too volatile."
Greg Foss: You can't listen to people like that.
Peter McCormack: "It's too volatile!"
Greg Foss: That volatility is the price of return; you want volatility. As a trader, you love volatility. I don't get it; people just don't, as if they put 3% in their portfolio and they forget about the other 97% of their portfolio. It's that 3% that's going to absolutely define their careers. That's exactly wrong and that's what Mr Dalio understands.
I wanted to point out one thing, Peter. I think at the beginning it would have been impossible for Bridgewater to embrace Bitcoin before it got over a $500 billion market cap sort of thing. It's just not a big enough market for the size of the fund Ray runs; they need liquidity, they need long shorts, they need to able to move in and amass a position. It's like anything; sometimes when a small cap company is just too small, it might be the best investment in the world and their analysts might agree that it is, but to get a position size that would matter in their portfolio; that just can't happen in many cases. So, Bitcoin is now in the big boys' league.
You'll be surprised: I just got off the phone, or it was a Zoom call two days ago with a very large family office in New Jersey, a kid I went to school with. 30 years he's been building his business and he's finally come around to realising they need to consider Bitcoin as a portfolio addition. If they're doing it, I promise you all other quantitatively-inclined accounts are looking at it as well. Volatility is good, you've got to understand volatility is the price of return.
Peter McCormack: I know, man. I know, I know. Look, it's probably for another show; there is an issue with volatility as somewhere like El Salvador accepts a medium exchange. People have to think about it.
Greg Foss: Correct, yeah.
Peter McCormack: But that's about risk management and teaching risk management. Your other point, reference to Matt Odell, in some ways I am the luckiest bitcoiner in all of Bitcoin because every week, I get to speak to the smartest fucking people and I get to ask them all the questions that I want answered, and I still don't know shit and I accept that. So, you make a really good point there.
Listen, we're going to make you the star of the show today, Dylan. Me and Greg are the boomers that get Bitcoin a little bit, but you're the youngster here. Your age probably starts with a two; you're still handsome; and you probably kill it on Tinder, so we're going to go ahead with you. Let's work through this. There will be people who won't have watched the Ray Dalio video. We'll tell them to watch it and they still won't watch it. We'll put it in the show notes and they still won't watch it. For those, we need to work through it anyway.
Let's talk about this long-term debt cycle, how we get there, etc. We're essentially talking about money we borrow from ourselves.
Dylan LeClair: Yeah, so when you think just borrowing, people think borrowing from someone else. But in the most basic sense, when you borrow money you're borrowing from your future self, you're pulling productivity forward. Whether at an individual level, you borrow $100 and you have to pay it back plus interest, you spend that money there, you invest it or whatever you do with the money, you have to pay that back with your future productivity.
Many people don't think of it like that, but that holds true at an individual level, everybody can grasp that, but it also holds true at a macroeconomic level, whether it's an industry or a sector or a nation or the whole world. So debt, because of that debt, is cyclical and so you see this play out over 8- to 10-year periods and you also see this play out over 80- to 100-year periods or around there; it's an estimate. Then these cycles play out because debt is cyclical.
Peter McCormack: Right. To help somebody understand that when you say you're borrowing from yourself, it's because in the future, if you're borrowing money now to buy a car and then you've got to pay for that car back plus the interest, a lot of people would do something based on the fact they think, "My career's going to grow, I'm going to earn more money, this is cool, this is fine. I'll be able to support it". But if your wages are stagnant through that period, that's where it actually becomes difficult for yourself on an individual level, because you suddenly become burdened with this debt and that means you're spending power of what you earn in the future is going to be decreased. So, you're putting a bit of pressure on yourself.
Let's try and extrapolate that out and think in terms of the entire economy, why we get to these boom-and-bust cycles. Listen, when I grew up and I studied Keynesian economics, we'd study boom and bust cycles, but these bust cycles, we had the 2008 Crisis and now we've got what appears to be a bigger crisis. It feels like this whole, let's call it short-term debt cycle moving into a long-term debt cycle, is going to get quite out of hand.
For me right now, I look at all the different points in your articles; you raise the issue of the rise of populism, the wage differential, the fact that you will see uprising and I only literally tweeted yesterday, "It feels like we've got a protest in every fucking country in the world right now".
Dylan LeClair: Yeah, that's not a coincidence. You have these debt cycles in the short term because you're pulling demand forward. On the upswing of a credit expansion, it's like a self-reinforcing upwards boom; you pull forward demand. If that debt is used for investment or it gets a positive return, that's a good thing; debt isn't always a bad thing. If you use debt to increase your income, like Pete, if you borrow some money and you hire a producer with money that you didn't have before, that's actually good and it increases your productivity.
But many people, especially during the bubble phase of a debt cycle, use that debt for unproductive things, "I'm going to use that debt and I'm going to buy a car because it's cool and it makes me feel good". Or, "I'm going to go use that debt to gamble" whatever, it could be anything. Bad debt is bad debt.
Peter McCormack: Buy some nice clothes.
Dylan LeClair: Yeah. People in these upswings feel richer; you borrow money, your asset value raises because you have more assets, you're more creditworthy, you have more collateral and this occurs at a national scale or a global scale. People intuitively understand, whether they're an economist or not, the business cycle, "Oh, times are good. Everyone's productive and once every ten years…" or, "Back in 2008, there was a recession". Then maybe people don't really understand why or that it's driven by credit, but they understand that maybe once every ten years, there's good times and then there's bad times and there's a recession and things get a little hard.
People don't really understand the driving forces behind that, but in 2008, in 2000 or 2020, we had these recessions. Over the course of the last 40 years, interest rates have gone in the US from 20% around there in 1981 to zero today. So, anybody that's holding an asset, and Greg talks about credit a lot, if you hold the long bond, you're just a bond investor from 1981 to 2020, you just sit on your hands essentially.
There's more to it than that, but the present value of all assets, when interest rates go from 20% to zero, skyrocket. But who's left out of that equation? The wage earners; anybody that doesn't have a bag of assets is getting pillaged. This is a systematic thing; there's not one person to blame, it's not this person's fault or that person's fault. This is occurring on a global scale and for the most part, because of international monetary order, it's driven by the US, but it is a global thing. The 1%, the rise of populism, all this stuff, Red Team versus Blue Team, Democrats versus Republicans, it's all just symptoms of the bigger problem here. That's what a lot of people don't really understand.
Peter McCormack: Greg, listen, I know we look a similar age but I think you've got a few years on me. 20% interest rates; that was a thing? You put money in the bank?
Greg Foss: That's correct. That's when I started in 1982.
Peter McCormack: When I was 4.
Greg Foss: I was 20, so there you go. To be exact, I was 19.
Peter McCormack: You're not 58!
Greg Foss: I am 58, sir.
Peter McCormack: Damn.
Greg Foss: The good thing is yes; it was 20% interest rates and Volcker needed to snuff out inflation and he succeeded. You can do that mathematically when you don't have a debt burden that we have today. Dylan, I love the way you talk about pulling things forward. All a bond is is a contractual obligation and everyone said, "Oh my god, I made so much money in bonds on a capital gains basis" but really, when interest rates go from 20% down to 1%?
Let's say you cash in that 30-year bond when interest rates have gone from 20%. So, you have a 20% coupon on your 30-year bond and in 10 years you decide, with 20 years remaining, "I'm going to cash out that 30-year bond" and it's gone up, it's trading $160 of parity, because that's only bond math. In year 20 though, you take that coupon and rates have gone from 20% down to, call it 12%. All you do is you pull forward those remaining 20 years of 20% coupons, and then you now have a 12% return going forward.
That's the bond math of it but you can bring it to the same context of borrowing money because ultimately, that's all a discount rate is; it's a measure, it sets the base level of risk. So, if your government is borrowing at 12%, everything else is discounted on top of that. Equities get discounted, let's say at 12% plus an equity premium, corporate bonds get discounted at 12% plus a corporate bond premium, etc. So, we've gone from a 20% coupon in the 10-year down to an under 1% coupon. Then recently the quintessential --
Peter McCormack: Greg?
Greg Foss: Yeah, hold on Peter. I want to say this. We had a 30-year bond 1 year ago. They got issued at a 1.25% coupon. It's now trading down 30 points, 30 bond points, because interest rates in the 30-year went from 1.25% back up to 2.5%.
Peter McCormack: What do 30 points mean to a layman?
Greg Foss: You buy a bond at 100 cents on the dollar, because that's generally when it gets issued, it gets issued at 100 cents on the dollar, and it's traded down to 70 cents. This is supposed to be capital preservation in bonds. You buy a bond 1 year ago at 100 cents on the dollar with a 1.25 coupon on it in the 30-year, and now it's trading down 20 points or 25 point,s because interest rates have gone from 1.25% to 2.5% and then back to 2% in the 30-year. It's all rounding errors from basis points, Peter, but that's the real-life impact on the price of your bond.
Peter McCormack: Did I just see Australia sell $100 million of bonds, 10-year bonds or something, at minus 1%?
Greg Foss: You did, sir. It's laughable, it's laughable.
Peter McCormack: I'm just trying to be rational here, but that sounds fucked up. Basically, I'm trying to think why rationally would you do that? If you have an expectation inflation's going to be high, that actually might be a good trade, right?
Greg Foss: It's good for the seller. The seller of bonds at a negative yield means that liability from the seller is now an asset, because they issued bonds at 100 cents on the dollar and they only have to pay 98 cents to eliminate the principal obligation. It's mathematics with negative yield.
Peter McCormack: But they found buyers?
Dylan LeClair: Greg, maybe you can speak more on this, but I imagine a lot of the buyers of those bonds are probably mandated to buy them, no?
Greg Foss: They are mandated, guys, but it's a liability, it's no longer an asset. They are mandated to lose money. That's a contractual obligation to lose money before inflation expectations are even priced in. Peter, it's crazy. I know you get it. It's, "I lent this guy 100 bucks and he's going to give me 98 bucks back and I'm going to be happy about this". What the heck; are you kidding me? This is ridiculous.
Peter McCormack: I wrote down one line specifically from Dylan's article and it just makes me think of this, "There is mathematically no way out of the current economic environment". The signal was there that we are in some kind of absolute fucked position. What I care about is okay, look, we're all screwed, how's this going to play out? Is Lebanon like a lens into the future for us in Europe and the US; or Europe and the US have high inflation but certainly not a situation like they've had there?
In my head, I'm trying to think how this plays out, because hyperinflationary events are things that happen in countries like Venezuela and Zimbabwe. They don't happen in the UK for me. I'm like, "No, that's not going to happen. Of course it's not".
Greg Foss: Until they do.
Peter McCormack: Until they do but I don't know. Dylan, you've got it in your article, this long-term debt cycle's coming to an end. How does it all end?
Dylan LeClair: How we got here is the short-term debt cycle's eight to ten years like we talked about. It's essentially debt to income ratios reach an unsustainable level, what happens? All of the malinvestment, all of the misallocation of capital in a capitalistic system would get wiped out.
Peter McCormack: Which is not a bad thing, by the way.
Greg Foss: It's creative destruction. It's called creative destructions, guys. It's supposed to happen.
Dylan LeClair: Yeah, it's a great thing. I covered an article; what we have now in the US is there's a semblance of capitalism, but 50% of every transaction is money and the price of money is centrally planned. We haven't had capitalism. The price of money, interest rates has been centrally planned. So, every time we have or have started to have some sort of deleveraging where anybody that was overleveraged or out of position would get wiped out. Well, what happens? Central banks come in; they lower the price of money. It's essentially a bailout and it's happening at a greater and greater scale as these debt cycles come along.
Greg Foss: Socialising losses, Dylan. That's exactly what you call it; you call it socialising losses. So, long-term capital management in 1998, a total example of Wall Street getting bailed out using crony capitalism, socialising the losses and eventually that financial burden gets transferred to the burden of the balance sheets of the Fed, which ultimately is the citizens, okay.
Peter McCormack: Greg, a couple of reasons why I think that might happen. Does that happen because it is crony capitalism or is it voter protection? Is it because we live in this short-term, four-year presidential or prime minister cycle and therefore, they're trying to protect their votes? They kick the can down the road, the next administration can deal with that, etc. Is that what's going on? Which one is it; is it both?
Greg Foss: Beautiful. It's both and here's what I'm going to add to it though. This is cool. Dylan was totally right because it's only math, Peter. Now, it's only math. Before, there was a time when we could have bailed out the Great Financial Crisis in 2008/09. The financial burden was transferred from the financial system to the balance sheet of the Fed.
If we had been prudent, we, and I say "we" because every single country was in the same situation, ECB, the Bank of Canada; if we had paid down that debt prudently, it would have cost an administration their votes because you go into power and you say, "Yeah, you know what guys? The prior administrations have pulled forward too much demand, so we're going to pay it down now and it's going to be hard. We're going to pay it down. Growth is going to suffer because we're not having the ever-expanding debt balloon to fund deficits, etc. We're going to pay it down but we're going to be prudent for our children". You think the guy's going to be in power for the next four years after that? Not even close, all right.
So, they don't do it and they continue to kick the can down the road like you said. Now, mathematically as Dylan said, it is impossible to reach a growth rate in the global economy that will service your debt and not allow that debt balloon just to expand organically because of the coupon on that debt. Dylan nailed it; it's math, guys, very simple.
Peter McCormack: I've got two more questions. I'll throw this one at you, Dylan, and feel free to pass it back to Greg if you want. 2008, should that have been the end of the long-term debt cycle because, as I think I remember it, the bailout was around $800 billion, which right now, actually that doesn't seem like that much money compared to what's happened, the trillions we're seeing printed right now. The $800 billion doesn't seem like that big a bailout. But if feels like perhaps what happened in 2008, that was the end of the long-term cycle.
Dylan LeClair: Exactly. It's funny when you watch Ray Dalio's video. He made that 30-minute video that we were talking about at the beginning in, I think, 2011 or 2012 or 2013. He actually referred to that as the end of the long-term debt cycle; interest rates at zero and he walked through the logical path going forward.
In Ray Dalio's book, and he talked about this in the video, there are three types of monetary policy: the first type of monetary policy is interest rate monetary policy. That's a central bank's bread and butter, that's what they use. It's essentially their level to control the economy and to control basically the cost of capital. So, over the last 40 years since 1981, it's essentially debt loads, debt-to-income levels get too high. What did they do? They lowered the cost of capital. There's another eight to ten years we coast by and it happens again and it happens again.
Well, 2008 interest rates at zero. It's like a hard floor and so what they do? In order to recapitalise the banking system, in order to stimulate the economy, they move to the second monetary policy which is QE. They essentially go into the bond market with freshly-printed cash and they'll tell you, they'll say, "Oh, it's not printing money, because we're just replacing a dollar of assets with a dollar of cash". But I think that's wrong.
Yeah, it's wrong but nice, because it's putting a bid in the credit market that wouldn't actually exist; it's adding liquidity to the system that wouldn't actually exist. So, what they did is they had the TARP bailout; they essentially took a bunch of junk assets off the balance sheets of the banks, they went in and they weren't doing it to the extent they are today, but they were essentially helping to monetise the deficit. They were essentially giving the government loans at an interest rate that they wouldn't actually get.
So, quantitative easing during a liquidity crunch, during a recession at the beginning of it, there is some benefit. We can argue the merits of it, but when there is this illiquidity in the bond market, there is actually a benefit to it. But with each marginal dollar that is printed, with each marginal dollar that's stuffed in its system, QE becomes less and less and less beneficial or it has less and less of an effect. So, Ray Dalio walks through --
Peter McCormack: Sorry to interrupt you, Dylan. Is that why now we're seeing levels of central money printing right now which are vastly higher than what happened in 2008; is that why it's trillions now?
Dylan LeClair: Yeah, because the $600 billion that they did at the TARP bailout and all that, that's a drop in the bucket. They're doing $120 billion a month, $40 billion in mortgage-backed securities and $80 billion in treasuries. That's just the Fed. The ECB, the BoJ, they're all doing it and that's the logical conclusion or the logical path forward for a central bank. That's how a debt cycle goes on and they really don't have a choice because we're in a purely fiat system.
Back in 1929, there was this big private debt bubble after the roaring 20s but we were on a gold peg. So, they really couldn't go in and, for lack of a better term, print money because there was a gold backing. All that huge debt bubble could collapse back onto a gold peg. Gold was that bearer instrument that all the malinvestment, all the bad debt could collapse back onto.
Now we're in a fiat system and Greg talks about it and nails it. He knows the math better than I do, but fiat is created through lending and it's destroyed through default or repayment. When I lend you or Greg $100 plus interest, I now have $100, $105 asset, Greg has the cash and the liability. Commercial bank lending creates money and so, when that money can't be repaid back, it all collapses down the asset I thought I had; it's not there anymore and Greg, whatever he did with the money, all of this collapses down. My asset, I don't have it, I'm not as creditworthy. I can't go lend or I can't go borrow any money because I don't have any assets and it just spirals all the way down literally to zero.
Maybe that's an over exaggeration but they can't let it unwind. Number one, It's not politically feasible, you're not going to get elected. You're not going to go up as a central banker and let everything collapse around you. But, two, literally credit has to expand or else everything goes to all hell.
Greg Foss: Again, it's mathematics. Dylan nails it, it's beautiful. I just want to add one thing: the fiat currency is now the error term that solves the growth in the numerator, which is your total global debt versus the denominator, which is total global GDP. We have reached a point of no return where the numerator is going to outstrip the growth of the denominator under any plausible scenario, which means you need to print money to solve that debt spiral. Again, Peter, it's only mathematics. Gosh, grade 11 math students would understand this if they actually were taught in school, but you don't teach this in school because it exposes the fiat Ponzi.
Dylan LeClair: There's four ways out of a big debt crisis and Dalio lays this out. For me, this was a lightbulb moment. I was reading his book last March and I was really like, "Whoa" and that's when I realised there's no alternative to Bitcoin. There's four ways out of a long-term debt cycle or a big debt crisis: austerity, so spending less money; debt defaults or restructurings; transfers of money and credit from the haves to the have-nots; or printing money, essentially quantitative easing, printing money, whatever you want to call it, bank recapitalisation.
Peter McCormack: The first three are hugely unpopular with immediate effect. The last one is the kicking the can down the road.
Dylan LeClair: Yeah, the last one makes asset holders feel good. Ray Dalio, when he lays out the three different types of monetary policy, the third one is stimulus checks, basically money to the people. Now it's called UBI and I guess MMT might fall in this bucket. You can "create more jobs" or do the theories of Stephanie Kelton and all this.
Peter McCormack: I was just about to say the school of Stephanie Kelton. I've had her on the show, man, and I tried to hold my own and I did all right.
Dylan LeClair: That episode was pretty brutal, I can't lie.
Peter McCormack: Yeah. I think I did okay; I just couldn't get her on the same page as me. I was willing to give her the time, but I was, "Look, you're living in a fucking dream world".
Dylan LeClair: Yeah. It is, it's living in a dream world that's not capitalism. These first three ways out of a debt crisis just aren't going to happen. What's going to happen, just because --
Peter McCormack: Elizabeth Warren's talked about the wealth tax.
Dylan LeClair: Have fun taxing my Bitcoin that I keep in my head!
Peter McCormack: Well played, brother, well played.
Greg Foss: Also listen, even if you could raise taxes, there would be a point of diminishing returns. If you raise your tax rate high enough, the diminishing margin will return in the tax base, because more of the economy goes underground, etc. One of the things that Stephanie Kelton obviously doesn't understand is mathematics. Again, we just have to look at the simplistic size of the debt balloon versus the ability of the economy to produce enough growth to keep up with the growth of the interest coupon, your debt service obligation. It doesn't work; therefore you have to keep printing money to solve the circularity of this side. I call it the error term, but think of it as circular value.
You remember in Lotus 1-2-3, you probably don't, but if you reformatted a cell and you built that cell on top of itself, they would give you an error in the bottom left-hand corner; circular logic. Well, that's what MMT is, it's circular logic; it does not frigging work.
Peter McCormack: Lotus 1-2-3.
Greg Foss: Do you remember Lotus 1-2-3?
Peter McCormack: Isn't that pre-Excel?
Greg Foss: It was, it was brilliant. It was pre-Excel, but then Microsoft took the code and combined it with WordPerfect. There was Lotus 1-2-3 and WordPerfect and now there's Word and Excel and they're both in the Microsoft suite and they talk to each other perfectly. All of a sudden, Lotus 1-2-3 was done. But there was a day when you programmed in Lotus 1-2-3 because that was the spreadsheet language. I was okay at it, but that's dating me because it's pre-2000.
But this is neat; Dylan's right. Think about this: it's all about collateral values. A bank can lend against collateral that's appreciating in value, because a bank is so levered itself; it needs to see appreciating collateral values in the economy in order to increase its lending base as well. So, Dylan you're nailing it on all fronts, I love it.
I wanted to say one term that we're using, we're throwing out: TARP. T-A-R-P stands for Troubled Asset Relief Program. You're right, Peter, with $600 billion in 2008, we did it to bail out the financial system, essentially transferring leverage or bad assets from the financial system onto the balance sheets of the Fed. If we had paid that down without any QE taper tantrums, because they were looking at the equity market, "Oh my god, now the equity market's going to puke again. We've got to stop this QE tapering; we have to continue it".
They wanted to stop the debt cycle, okay. They wanted to stop the credit cycle which is a periodic cleansing of the economy. They have decided there's going to be no periodic cleansing of the economy, we're going to eliminate the business cycle all together and if you want to do that, yeah, the value of your currency will accelerate to the downside.
Peter McCormack: Greg, let me throw another thing in there. We talked about it being unpopular politically, if you try and make people take the economic poison of the end of a cycle, you're going to risk not being voted for. Is there another thing in here as well? We're now in a globalised world, any of us can buy pretty much anything from anyone in any part of the world. I can buy services from you and pay you instantly online, I can travel to anywhere in the world.
So, countries now are in a position whereby if they choose to take poison, that may be a disadvantage to them in the global economy versus other countries; it's like everyone has to take the poison together. This is a global problem, because we're talking about global GDP and global debt these days. Unless the world takes the poison at the same time, it's going to put one country at a disadvantage to another. Surely, that's the position we're in; am I right?
Dylan LeClair: Yeah, 100% especially after we came off the Bretton Woods system in 1971. 1944, basically after World War 2, we agreed the US holds all the gold, they won the war, we'll back the dollar with gold, everyone else will back their currencies with the dollar. That unravelled, because there came the theory they were cheating the US and other countries as well. Starting in 1973, it was just the whole entire world was free-float fiat and we came off in 1971, but they tried to maintain a peg. After that, in 1973, it was just free, open-market fiat currencies.
Well, the incentive there, there's kind of a perverse incentive where, if you debase your currency or, in this case, lower interest rates, what do you do? You make your exports far more attractive; you suck in a ton of capital into your domestic economy. So, you'll see a lot of developing nations especially, you'll see them over the last 40 years, if you were a developing nation what you could do is you could basically debase your currency, you were incentivised to do it and you spur your economy. There's no incentive to just jack up interest rates to pay down your, because that would destroy your local economy. It's like a race down to zero, that's what the global fiat game is; it's just everybody racing to zero the fastest.
Greg Foss: It is actually called, there's a term for it and Rick Santelli said this famously on TV on CNBC, Rick Santelli being one of the few CNBC reporters that has a spine that can go out and call out the government for stuff like this, he calls it "beggar thy neighbour". You depreciate the value of your currency so that your exports, which is your global balancing, your foreign exchange trade is what balances C plus I plus G, your economic formula. If you increase your FX trade by debasing your currency or beggaring they neighbour, it's a short-term solution to your deficits. That's the terminology.
Dylan, you hit on something that I wanted -- you didn't call it out, but you did in an article after your excellent paper. You call it implicit versus explicit default. 1971 was an implicit default to the United States. You've got to call it like it is, guys; they defaulted.
Peter McCormack: Tell me what happened in 1971.
Greg Foss: Yeah, what the fuck happened in 1971?
Peter McCormack: I know what the fuck happened. You're talking about coming off the gold standard to pay for Vietnam. Nixon wanted to pay for the war.
Greg Foss: That's right, that was a default, that was a default. Let's call it what it was; it was a default.
Peter McCormack: Yeah, I see exactly what you're saying. I'd never thought about it like that, but it was a default because Nixon wanted to pay for the Vietnam War, it came off the gold standard and allowed him to print money, devalue -- okay, I get it, I get it.
Dylan LeClair: An implicit versus an explicit default. Greg has this long paper about credit default swaps and valuing Bitcoin off it and all this; but in a fiat environment, the US government or really a nation that has access to their own printing press is never going to explicitly default. If you're a corporate borrower or whatever, if you don't have enough cash flow, you go bankrupt; you're defaulting on your debt. Well, the US is never going to default on their debt; they're going to go the route of Kelton. They're going to print money, they're going to --
Greg Foss: If I can interrupt though, this is important, what happened in Venezuela? They shovelled that currency to the curve. Is that a default? Yeah, I think so.
Dylan LeClair: Yeah, it's an implicit default.
Greg Foss: It's E1 currency that gets thrown to the garbage heap.
Peter McCormack: Lyn Alden talks about this. She talks about the various ways you can get out of this situation. One of them she talks about is that the 130%, the debt-to-GDP ratio. She calls it the event horizon. Of 52 nations who have been in that position, 51 have defaulted; the only one that didn't is Japan. She says the way to get out of this situation is they print themselves away, so the bond holders are going to pay the nominal amount, but they're losing their purchasing power.
Greg Foss: Yes, except if she adds all debt in the world, with all due respect to Lyn, she's brilliant, it's actually 400% because you need to add all the debt in the world.
Peter McCormack: She's talking about individual nations.
Dylan LeClair: You guys are talking about public debt GDP.
Greg Foss: It doesn't matter. You add it all together in the globe and even in the US, she's only taking federal debt; you need to add state, government, local, corporate and unfunded liabilities on top of that, don't even get to me, don't even let me get into that. The point is, it's four times, it's 400%; it is not 130%, okay. It's gone, it's over, mathematically, full stop.
Peter McCormack: We're fucked.
Dylan LeClair: Hyperbitcoinisation essentially is the next decade; this is the largest wealth transfer ever and it's going to be from creditors. Anybody that's a bondholder, your wealth is going to be transferred to bitcoiners, essentially. There's a lot of nuance and a lot of things going down there, but if you're a bondholder you are transferring, not in nominal terms but in real terms, all of your value to Bitcoin holders over the next decade.
Peter McCormack: Let's quote you again, "A great debt jubilee is coming and it will later be known as hyperbitcoinisation". That's how you put it. Was that your final line on the whole paper?
Dylan LeClair: Yeah. That's just another way to say what I just said: the only way out from here is just to continue to make lower, lower and lower real yields. CPI just came in, that 5% or 6% or whatever it was. What's the 10-year treasury, what's the 30-year? The real yield on those securities is minus 4% and so the only way forward --
Peter McCormack: Let me ask you: is it just bitcoiners? Let's try and balance it out and be fair. What about gold holders, what about people who own property, what about people who own other -- is it all hard assets?
Greg Foss: Yes, it's not your house going up in value, Peter; it's the fact that the unit of account is going down in value. So, everyone's saying, "I'm making so much money on my house". No, no, no. If you measure your house price in gold, it hasn't moved. If you measure equity returns in gold, they've been flat over the last 20 years.
But everyone thinks they're going up because the unit of account, of which you're printing more and more of and it's being debased, that unit of account makes things look like your house is going up in price. It's weird but it's circular logic again, it's a circular error. If you measured in Bitcoin, it's not even close; everything looks horrible measured in Bitcoin except Bitcoin, which 1 Bitcoin equals 1 Bitcoin.
Dylan, you're hitting all the points again. Yes, it will be bonds because when you lend someone, Peter, a bond you lend $100 for ten years. The US will pay you that $100 back in ten years. The problem is in purchasing power, ten years later it's worth 65 cents. That's a great trade, isn't it? A fiat contract, it's good for the borrower, it's horrible for the lender. Anybody who owns bonds --
Peter McCormack: People are buying these bonds.
Greg Foss: Pension funds who are mandated; it's in their investment committee guidelines. They have to own X amount of their assets in bonds; it's there written in corporate law.
Peter McCormack: They should mandate them to own Bitcoin.
Greg Foss: They don't move that fast, Peter, and by the time they do, Bitcoin will be -- currently, as I always say, Bitcoin price right now is still a rounding error. When Bitcoin hits $250,000 and it's still wicked cheap at $250,000, a few of these investment committees may get their heads out of their you-know-whats and they'll say, "Okay, now it's time for us to own it". Meanwhile, El Salvador, the world will start to be learning Spanish, because we'd better learn Spanish because they are so far ahead of the game.
Peter McCormack: It makes me think of that thing, I think it's Preston Pysh who says it, "Bitcoin is a game of musical chairs and when the music stops, you want to hold as many chairs as you can".
Greg Foss: Okay.
Peter McCormack: I might have not got the quote exactly right. Someone's going to come back in the comments on YouTube and go, "You fucking idiot. Preston said it different", but it's something like that.
Let's work through this: it's not like there's a point of no return, we've already gone past that. There's not like there's going to be one cataclysmic event. So, how does this play out? I'll start with you, Dylan.
Greg Foss: There could be a cataclysmic event. Can I just say there could be a cataclysmic event; everyone assumes the contagion. What if Argentina defaults again, which they're going to, and that will make four times in my life that Argentina has defaulted. In my 30 years of trading risk, Argentina will have held the record of defaulting four times.
Peter McCormack: But we wouldn't be surprised by that.
Greg Foss: It's a G20 country though, it's G20. Canada's G7.
Peter McCormack: Greg, I've got this mate, I'm not going to name him, he always borrows money off me and pays me back sometimes and most of the time he never pays me back, he's a fucking idiot. That's Argentina. Let's call him Dave. Argentina's my mate Dave who never pays me back and I'm used to it. So, let's not worry about Argentina.
Greg Foss: Who's the idiot, Peter, with all due respect?
Peter McCormack: I'm the fucking idiot!
Greg Foss: An idiot like him who comes to you that keeps lending him money, or is it you that keeps lending him the money?
Peter McCormack: I like having a drink with him. I like Argentina and I like going there and having a steak and some Malbec. But I'm not going to be surprised if I read tomorrow Argentina's defaulted again, I'm not going to be surprised. If I read tomorrow that, I don't know…
Greg Foss: How about Canada?
Peter McCormack: Canada, yeah.
Greg Foss: What if Canada defaults? Would you be?
Peter McCormack: Yeah.
Greg Foss: Okay, we're in not good shape, Peter.
Peter McCormack: I know.
Greg Foss: And we're a G7 country and we happen to be one of the United States' largest trading partners, we used to be. If we're not first still, we're second. The funny thing is if we default, what would the people in the US say, "Oh, well that's weird because we always thought of Canada as being part of the United States almost and, by the way, they can't pay any of their bills. So all the stuff that we're exporting to Canada is full stop, that's got to stop". All of a sudden, people in the US go, "And why is Canada any different than the United States? Good Lord, why do I own bonds?"
Peter McCormack: You're saying, Greg, we could have a Black Monday event.
Greg Foss: Contagion, contagion. Contagion, you see it all the time. Contagion is the crisis of confidence in the ability of the system to continue. We needed to rescue the financial system in 2008 and 2009 and the Fed did the right thing. The thing they didn't do correctly was pay it down when they rescued the system; they continued to pretend they could skate their way and eliminated that cycle. They did the right thing because the world was ending.
I was sitting in that chair and there were times when I went to work on March 2009 saying to myself, "Wow, this really could be it". I promise you, unless you've sat in that chair, you have no idea what it feels like when all you want to do is sell anything you can because your clients are redeeming you.
Peter McCormack: You know The Big Short? Is this like the moment in that where everyone's trying to sell their shit? They've realised the game's up?
Greg Foss: I love you man, exactly. That's exactly what it is. Hence, credit default swap pricing on sovereign nations; before, it was CDS pricing on financial institutions. I'm just taking it up a level. CDS pricing on sovereign nations is exactly the same as CDS pricing on Lehman Brothers. Lehman, where the fire started, was in the credit default swap market and everyone was, "No, this is fine. The Fed's going to cut rates, the Fed's going to cut rates". Then kaboom!
Peter McCormack: All the smart people are basically doing the same with Bitcoin at the moment; they're getting rid of their dollars?
Greg Foss: No, they're not. No, they're not.
Dylan LeClair: Greg, we're the smart people!
Peter McCormack: I'm saying the smart people.
Greg Foss: How about this? But the smart people that understand credit default swap markets are still stuck in their little, "Okay, I'd better figure out how this works", but they haven't done the work on Bitcoin. That's what I'm saying; nobody has studied it.
Peter McCormack: Greg, not those fucking idiots. I'm saying all the people who understand Bitcoin, this is what we're doing.
Greg Foss: Correct.
Peter McCormack: This is the moment at the end of The Big Short where they're trying to sell. They'll say, "I'll take 30 cents on the dollar. I'll take 50" whatever. We're doing the same: I'll just take the Bitcoin I can get, I'll get rid of my dollars, I'll get rid of my pounds. Give me that Bitcoin because…
Greg Foss: 100%, yeah.
Peter McCormack: There might be one big Black Monday, there might be multiple Black Mondays. There might be a series of events, big events, small events. But either way, over the next however many years, we're going to see some form of debt jubilee; it's inevitable, the great reset.
Dylan LeClair: That movie's pretty awesome when Michael Burry's sitting there and on his white board and he just keeps marking down more and more losses. That's what being a Bitcoin holder feels like over the short term; it's like I'm right, I know I'm right but the market's telling me I'm wrong at the moment. Mortgage-backed securities, all that junk in The Big Short, that's like the entire fiat system and the credit default swap is like Bitcoin.
Greg Foss: Hallelujah, hallelujah. Here's the neat thing: that was a movie, guys. Sit in the chair, your sphincter is tight as a fucking nut, okay, you can't even breathe. You're sitting there, you're sweating, you're, "Fuck, my life is over. Everything I have invested in this system, in this business I'm trying to create and I have a good track record, but the world is blowing up" and you cannot even breathe. I promise you, that doesn't come out in a movie. You need to sit in the chair, you need to manage risk, you need to sweat your fucking ass off because you think the world is going to end.
Peter McCormack: This is the point I keep trying to make. Obviously, over the last year, especially the last six months, I've had people coming to me and they're saying, "Tell me about this Bitcoin thing. Why should I be buying it?" Then the last three months, it's a tougher conversation because people are saying, "Yeah, but it went up to $64,000 and now it's down to $32,000".
I'm saying, "Listen, you're buying Bitcoin for when you need it. You're buying it for that point when this stuff, when the shit hits the fan. If the price has dropped to $32,000, that's a bonus; you can still buy cheap, because you're not meant to be selling your Bitcoin now. You might be selling it five years or ten years or when you need it". So, every time you see a price drop, that's a bonus. Every Bitcoin you hold will drop in value.
Dylan LeClair: Bitcoin is like house insurance, the house is on fire and the agency just called you up and said, "Hey, your premium just got cut by 50%" and you're looking at him, "Why did you just cut it 50%?" The cost of insurance just…
Greg Foss: Beautiful, hallelujah. When do you buy fire insurance, Peter, real fire insurance on your house right now? Not when your house is on fire; you buy it before your house on fire because no one will sell it to you, rational people will not sell it to you when your house is already on fire, except people don't understand that the house is already on fire. Dylan is exactly right; you're getting cheap insurance.
Peter McCormack: Do you want to hear a funny story about that? My house was literally on fire about three months ago. I was down the gym with my son and my neighbour phones me and they said, "Hi Pete, your house is on fire". I was, "What?" He said, "There's a fire at your house". So, I come home and my next-door neighbour, he's basically emptied his chiminea 24 hours after lighting it, he's put all the ashes into the bin thinking he's fine after 24 hours. Something sparked, there's been a fire, the bin's caught on fire, the side of his house is on fire where there's a door, so the fire's gone into his house. My side, it's burned down all the fence and my bikes. Luckily for me, there's no doors and windows on that side of the house.
Anyway, he gets in touch and he's, "Oh, I need your insurance details because you have to claim on yours and my insurance company will pay you". Anyway, I go up to phone my insurance company and I get in contact and they're like, "Oh yeah, you cancelled your insurance eight months ago". Basically, my house was on fire and I didn't have insurance! How funny is that!
Dylan LeClair: Even worse.
Peter McCormack: Dude, I tell you I was lucky I didn't have a window or a door that side or my house would have burned down. Anyway, I have house insurance now. What a fucking idiot. Anyway, that was a…
Greg Foss: Going back to the Michael Burry, Big Short; Michael Burry was right because he's mathematically inclined. The truth is the financial system is always overleveraged and it's leverage unwind that causes the ultimate pain. You're sitting there thinking the world's going to end; if you're short, meaning you own insurance, you're short the markets, you're still nervous because you don't know if you'll be able to collect, because the guys that owe you all this money, they may go out of business.
What if you owned insurance on Lehman Brothers but you had bought it from Bear Stearns. Jeez, you're like, "I'd better go and buy some insurance on Bear Stearns, because they're going down as well", so that circularity contagion expands. Then you realise Bitcoin has no counterparty risk, nobody has to guarantee this insurance policy to me because it's called Bitcoin and it can survive a nuclear war, maybe. Who knows? Let's not go that far! It can survive anything; we've seen it survive over time and it's antifragile; it is a thing of beauty and it has no counterparty risk. That is what you want in an insurance product.
Dylan LeClair: I think of it a lot, especially after reading Ray Dalio's books and all that about past tech crises and whatnot. The solution to it in the past, the past centuries, was always gold. When you're at this point in a long-term debt cycle, you want to protect yourself from a couple of different things: you want to protect yourself from the central bank monetisation where basically if you're holding bonds, if you're holding cash, you're getting deluded, you're getting your wealth inflated away; but you also want to protect yourself from the counterparty risk that comes with deflation, with contagion, with what Greg's talking about. You don't want to hold anything inside the banking system because the banks or any financial institution might go bust, so you don't want to have any sort of counterparty risk.
I think about it a lot; if Bitcoin wasn't around, would I be a gold bug? I probably would, I probably would hold a fair amount of gold. It's depressing to think about, but Bitcoin is just that monetary asset, that bearer asset that has a production cost that has no counterparty risk for the digital age, for the 21st century. That's Bitcoin. Regardless if there's inflation, deflation, contagion, there's always going to be, because of that proof of work algorithm and because of the protocol, a production cost to producing Bitcoin; you cannot dilute my wealth. Unlike gold, the terminal inflation rate of Bitcoin is zero.
Peter McCormack: Let's dig into that point again. I'm going to quote you again, "The great debt jubilee is coming and it will later be known as hyperbitcoinisation". Let's dig straight into that. I think it's a good place to finish off because the people who listen to this is a range of people; we're going to have absolute Bitcoin heads who've put all their money in, like crazy, psycho bitcoiners, and they get it, they're it. We've got some people who've maybe been in for a couple of years and maybe they've got a good chunk of Bitcoin and they're like, "Ah, but it went up to $60,000 and it's come down to $30,000, I'm a bit worried". And then we've got the people who are just brand new, they're basically underwater with their Bitcoin right now and they think, "What the fuck have I done? I should have bought Dogecoin".
Let's set the record straight here. Explain, Dylan, what this great debt jubilee is, how it's going to play out, how you think it may play out and why Bitcoin is the answer.
Dylan LeClair: Yeah, so there's a couple of different ways it plays out or could play out. There could be, like Greg said, this large contagion event, deleveraging and there will be. But the thing that you have to think about is, how does it play out after that? In my opinion, it probably plays out with central banks, governments round the world monetising everything. The Fed balance sheet in 2030, who knows, it might be $100 trillion.
So, a great debt jubilee essentially is creditors getting their wealth wiped out in real terms. You're going to get paid back on your 30-year or your 10-year government treasury, but what is that value going to be worth? Well, I don't know, but in my opinion and mathematically speaking, it's most likely, most definitely a lot, lot less. As a Bitcoin holder, as someone that buys every day regardless of price, I know because of how network effects work, because of the protocol, because I can run my own node and I have complete assurance of 21 million, I know that honestly, the volatility of Bitcoin for me is zero, Bitcoin is my unit of account and volatility doesn't matter to me.
Obviously, that's a tough mental switch to have, but hyperbitcoinisation is essentially that process happening around the globe and it happens one by one. Day to day, it's almost painful sometimes, it's happening so slow or why can't people get it? But over time, there's the shilling point where people realise that Bitcoin is the best monetary asset the world's ever seen. One by one, people are realising that. You'll have your Hankes, you'll have your Peter Schiffs, you'll have people with ego problems that get upset by this, miss the boat and they'll think they've missed the boat for year after year after year. But there's just this empirical reality that Bitcoin is the best money the world has ever seen.
You had a great episode with Parker Lewis the other day. Parker's the man and he articulates it as good as anybody: is Bitcoin the best monetary asset the world has ever seen because of its assurances? Yes. Essentially, you can almost end the conversation there. There's a lot more to it, there's a lot of nuance and how does this lay out. You can understand that, I think you understand that or not. But the reality is that Bitcoin will out-compete every other money going forward. If you're just accumulating Bitcoin in cold storage or on your balance sheet, you're going to be okay and your real wealth over the long term is going to be protected. At this point during the monetisation process, it's going to increase 10, 100, 500-fold maybe.
Peter McCormack: I need more Bitcoin, brother. Every time I have a conversation like this, I'm…
Greg Foss: Here's a neat thing from a boomer. I'm the boomer and you need to understand firstly that the boomers have all the money still. When I say boomers, it's the guys that manage the big sovereign wealth funds and pension funds around the world. They have not even begun to invest in this asset class; they don't understand it, they haven't done the work and when they do the work, they look and they look to their left and they say, "Dang, I don't want to be the guy that goes out on a limb and says that I'm doing this, because nobody else is doing this". It's called the theory of agents; they try and stay within their own lane, because everyone's doing the same thing.
But it's going to come to where they own more than zero, Peter, but not 100% of their wealth or their fund; they cannot possibly do that. But what is the right number? According to Yale University, the right number for anybody who owns bonds and equities is to own 6% to 8% of your asset allocation in Bitcoin. That's a huge amount of money that needs to flow into Bitcoin to achieve the optimal portfolio allocation as a function of its volatility and its return potential. Okay, perfect. Most of these guys are at zero. If they were smart, it's been halved in price; it's come from $60,000 to $30,000 and it's still a rounding error based on where it's going to go. They've just to get that through their head.
Bitcoin is not digital gold. It is digital energy and every single thing in human history has been based on improvements of energy and energy productivity. Bitcoin is the purest form, as Michael Saylor says, of digital monetary store of value ever created by humans. Let's talk in 20 years; 20 years not 20 days, 20 weeks; 20 years, because that's when the horizons of most pension fund allocators are and that's what they need to focus on. It's empirically reality or empirical reality, quote unquote Dylan LeClair, sub-20-year-old. Are you 20 yet, Dylan? I think you were 19 when I last met you.
Dylan LeClair: Yeah, 20 years old.
Greg Foss: I'm three times your age.
Peter McCormack: Fuck, man.
Greg Foss: I'm three times your age and you're three times smarter than me.
Peter McCormack: Three times your age; it's bullshit!
Greg Foss: You are three times smarter than me and I love you because you are going to rescue the world. My generation is the most selfish generation ever put on Earth, because we're too afraid to take a loss and we need to be coddled. God forbid, we ever had to go fight a war right now. I don't even know whether we'd be able to get an army together.
Peter McCormack: Fucking boomers.
Greg Foss: Fucking boomers is right; a bunch of lazy, sappy, fucking spineless squids and I'm one of them.
Peter McCormack: Dylan, this is why you can't afford a house, because of this guy. You're twice my age and about 48 times smarter than me and it's impressive to hear.
Dylan LeClair: Appreciate it. Yeah, I don't think it's much about me, more about I'm here, I fell down a rabbit hole because of the incentives. Bitcoin pulls everybody in and you figure it out, like the curious and the people that are willing to drop their ego are going to figure it out, and that's just the incentives of adopting harder money.
Also, I wanted to comment a little bit on what you were talking about, Greg, with portfolio allocation. What a lot of people don't understand with Bitcoin is if an equity doubles, no earning increase or whatever and an equity doubles or triples or quadruples in price, it becomes more and more and more risky; the higher the PE ratio, the riskier it becomes. Well, with Bitcoin, when Bitcoin doubles in price, when Bitcoin 10Xs in price over a four-year period, it becomes less risky to allocate to. That's what people don't understand; as Bitcoin increases in liquidity and size and global dominance, it becomes a less risky add to your portfolio. You can think about that in risk-adjusted returns or volatility or all these things, but Bitcoin at $1 trillion is a lot less risky to allocate to than it is at $1 billion or $10 billion.
As Bitcoin goes from £32,000 to $64,000 to $128,000, it's naturally going to become a bigger and bigger part of the people's asset, the right side of their balance sheet; it's going to naturally become a larger percent of people's holdings around the world and the big money can allocate a little bit later, they can afford to. For me, I'm 20 years old, I'm putting 100% of my disposable income into Bitcoin and not thinking twice about it. I don't care if it gets cut in half, that's just my risk profile, if you want to call it that. Again, I don't perceive it as risky and I'm fine if they send it to $10,000; I'm still allocating. The thesis is unchanged and so, yeah, I think it's a process but Bitcoin, as it becomes bigger and bigger and bigger, a lot of people haven't adjusted to that.
Greg Foss: Can I add this too, and that's beautiful, Dylan. Peter, I was lucky enough to get involved in Bitcoin. You call it lucky; I tend to think I did some work. It was under $1,000. Bitcoin's a better investment now at its current price than it was when I got involved at under $1,000. In five years, the system has proven itself, the network has grown, the talent in the network has grown, the protocol is more robust, the layer 2 is real-life, layer 3 is coming.
Bitcoin could be -- not could be; the layer 3 on Bitcoin could absorb all the successful DeFi apps that are currently living on other blockchains. It's just unbelievable what this could cause in growth. It doesn't matter; the base layer right now is better value than when I got involved six years ago and the price was under $1,000 per coin. I am more excited about the return profile of Bitcoin today than when it was under $1,000 a coin.
Peter McCormack: I get that.
Greg Foss: Very simply because it is the network effect. The value of Bitcoin is the network and that network is growing with use cases growing every day. Then if you want an intuitive value, Bitcoin is default insurance on every single idiot fiat nation out there, which is pretty good insurance to own, because they've proven over time that they are a bunch of buffoons. If you want to keep your money managed by buffoons, go ahead and then who is the buffoon? Maybe it's Peter who keeps lending his money to his friend Dave who never pays him back!
Peter McCormack: Listen, if you went out for a beer with Dave, you'd lend him money; he's good value.
Greg Foss: Then I would, but then I wouldn't lend him money; I would just give it to him. I'd say, "Dave, here's some money". And maybe that's what the governments are doing to us now, "Hey Foss, here's some money" and I'm, "I don't want your money because every time you give it to me, you fuck it up".
Peter McCormack: I'm giving Dave stimulus cheques really, aren't I?
Greg Foss: You may well be.
Peter McCormack: Fucking Dave. All right, listen, look this has been great.
Greg Foss: I love Dave. I don't know Dave, but I love Dave.
Peter McCormack: He's not actually called Dave. I'm not going to give his real name. Well, actually he doesn't listen to this because he doesn't get Bitcoin. Listen, this has been awesome. I'll tell you how I want to close this out, I want to close this out quite differently. It's been a great show. Dylan, great to have you on man, you're smart as shit. I'd love to have you back on the show again in the future.
But Dylan, I'm massively fascinated by the fact that you quit college, you've built your education up, you've become very, very smart and educated around Bitcoin, how the economy works. Just for anyone listening who's in a position of thinking, "Shit, I like what this Dylan guy's saying" point them in the direction of some of the things you've read; you've mentioned the Ray Dalio book. What are the things you've read, what are the things you would say go and check out, go and listen to, go and read?
Dylan LeClair: I started stumbling upon podcasts, your podcast, Preston's podcast and a bunch of others, read The Bitcoin Standard, The Bullish Case for Bitcoin, the Nakamoto Institute, all that stuff.
My decision of dropping out of school, it's totally not for everybody; if you want to go be a doctor or anything that actually requires a degree, I'm not telling you to go drop out; but I would just say, especially once you come to understand Bitcoin, for me it was about measuring opportunity costs in Bitcoin. Bitcoin is $6,000 and I was sitting there in March through April crying my eyeballs out and saying, "What am I doing here? I need some sats, I need some Bitcoin". I would just say opportunity cost is real; going to college, none of these decisions occur in a vacuum.
For anyone that's 18, 19, 20 years old, I was really inspired by Jeff Booth's book as well. Education is free, information is free and abundant and so don't discredit that; a lot of things can happen and the internet is a wonderful place. I've made so many awesome connections over Twitter, YouTube, everyone else just by sharing my thoughts, asking questions, hitting people up on DMs. Don't think that you have to go to a university or get all these credentials and all that nonsense to be someone or something or make it, because it's not the world we live in. The sooner people figure that out the better.
Peter McCormack: Love it, man. Dylan, if people want to follow you where do they find you?
Dylan LeClair: Yeah, you can find me on Twitter @BTCization, bitcoinisation. My name's Dylan LeClair. Yeah, just reach out to me on DMs, happy to connect.
Peter McCormack: Brilliant. Well, listen, I've loved having you on. Come back on soon, brother. If you work on another thesis or idea you want to do, you've got an open invite to come back; I've loved this. Greg, any final closing notes from you, my man?
Greg Foss: Very simply, I love the young guns. A shout out to Jack Mallers, a shout out to Dylan, I want you guys. I know you wouldn't take this job, but I want you guys to run --
Peter McCormack: I'm still young. What the fuck!
Greg Foss: Okay dude, you're young, you're beautiful, but you're just not quite as young as you need to be, okay.
Peter McCormack: I know, I know.
Greg Foss: I want these young guns to run the world and you're going to some day, whether that's an aspiration or not. I want to make two final call outs to the young people changing the world: the kids in Guatemala, again I mentioned them in Miami, the Guatemala, the iBEX exchange, it's beautiful what they're doing and now they got called in to El Salvador. It's like the SWAT team, because they get the Lightning Network, this is exciting. Then the final call out, so that's iBEX, that's José and it's Mario and it's Carlos.
Here's a final shout out to you, Peter, and this is important. Some young man from London, England, Oxford to be exact, now I don't know if he goes to Oxford University, he called me the other day on Zoom and he goes, "I'm doing this Bitcoin exam and I want to help teach the world using an online Bitcoin exam". I'm, "What? This is brilliant, yes". He ran me through the beta test and everything and I gave him some impact, some viewpoints that I had.
But what I see is another young man who's 20 years old, his name is Stefan Allen. He might have, if I'm not mistaken, 25 Twitter followers, Peter, and he lives in your back yard. He's developed this Bitcoin exam that is brilliant to allow people to understand do they need to study more, because it's not a simple exam and there could be different layers; you could be beginner, intermediate or expert.
The point is this: it's about, like Dylan said, education around the world. So, a shout out to you young guns. I hope to be around for the next 20 years and I hope to talk to you in 20 years, so we can create notes or compare notes. What I will say is my three kids will be around in 20 years and I promise you they're going to be comparing notes, okay. Bitcoin is not for my generation; we fucked it up.
Bitcoin is my generation to make it work so we can pass something to future generations with value and store of wealth. Amen to people like Dylan and the young guns and amen to you, Peter, for having a platform that the world listens to. Thanks for having me on and I look forward to the successes and I look forward to the next talking again in 20 years.
Dylan LeClair: Pete, can I plug one more thing?
Peter McCormack: Yeah sure, Dylan.
Dylan LeClair: I do Bitcoin Magazine and I've been doing a newsletter called The Deep Dive. I just put out my thoughts every day on working with macroeconomics, on chain, derivatives, what's happening in the Bitcoin market. I believe Greg has a sub there, but that's what I've been working on lately. Yeah, I just wanted to give that a shill.
Greg Foss: It's brilliant, it's brilliant.
Peter McCormack: Greg, do you know where this Stefan Allen is on Twitter? I want to find him and follow him.
Greg Foss: If I lose you here, I'll DM you, because I'm in a fight with this new technology called a computer.
Peter McCormack: Fucking boomer. Listen to him!
Greg Foss: I am a fucking boomer, buddy, I love it.
Peter McCormack: I'm going to follow him. I want to follow him.
Greg Foss: You've got to follow him and I swear to god I want this to succeed. I actually want it to be done in Spanish too, so I reached out to the boys down in Guatemala and they sent me a beautiful response email today and they go, "You should see all the great things that are happening in Guatemala, in El Salvador" by the way. That's a real-life update from boots on the ground. Stefan Allen, hold on.
Peter McCormack: We're going to bore the listeners. You can ping that out to me. Loved talking to you, Dylan. Anything you need, you reach out to me, brother. Greg, same as ever; love you, brother. Hopefully, I will come hang out with you at some point when Canada opens up if it's any time in the next decade. Peace out. Thanks for coming on.
