WBD467 Audio Transcription

What Drives Wealth Inequality? with Lyn Alden

Interview date: Friday 25th February

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 macroeconomist and investment strategist Lyn Alden. We discuss the multi-faceted drivers of wealth inequality, the societal impacts of such disparities, whether we’re on the cusp of another great depression, state-led policies, and whether Bitcoin is a mitigation.

“And you can even consider Bitcoin as a type of populism, but I would just describe it as one of the better types of populism; basically, it’s people rallying behind a new network effect technology, and saying that this is the solution.”

— Lyn Alden

Interview Transcription

Peter McCormack: Lyn, hi, how are you?

Lyn Alden: Good, how are you?

Peter McCormack: Good, very good.  This year's rattling away from us already.  We're end of February, cannot believe it!

Lyn Alden: Yeah, moving too quickly.

Peter McCormack: Crazy start to the year already.  So, listen, Danny has been doing a lot of work in prepping for this episode.  Just to let everyone know, this is something Danny, the producer, is very keen for us to talk about, a concept or a topic he really wants us to get into, which is talking about wealth inequality, what's happening with the economy, and are we potentially heading towards a Great Depression II.  Obviously, you're the perfect person to talk to about anything like this.

So, yeah, one of the things Danny said to me, because we were going through the notes earlier and we were talking about it in quite a bit of detail, he didn't want us just to jump straight in and talk about how inflation is leading to asset price rising, the rich getting richer; I think this has been covered over and over again by lots of different people on lots of podcasts, and I'm sure we will talk about that.  But he wanted us to talk about the other things, like the variety of things that may be leading us towards a greater wealth divide.  And I also wanted to talk about potentially ideas on how you reduce the wealth divide, how does it actually happen historically, is it government intervention, is it revolutions?

So, there's a lot to get into here!  Do you have any opening comments before I start throwing questions at you?

Lyn Alden: I think the opening comment overall is that wealth concentration is a lot more complex than a lot of people make out to be.  They often propose there's just one thing, like if we didn't have QE, then we wouldn't have wealth inequality, for example.  I prefer the term "wealth concentration" usually, just because no one should expect wealth to be equal.  It's only concerning when wealth is, say, unhealthily concentrated due to bad policies. 

So, I tend to phrase it as a problem of wealth concentration, and I think the big starting point to make is, there's so many moving parts, and some of it is unintuitive to a lot of the common narratives or soundbites that you hear, both inside the Bitcoin community, and in the broader macro community.  There's so many takes out there that aren't necessarily backed up by data.  And all the actual underlying mechanisms are really complex.

Peter McCormack: So, do you have to divide your time; are you swimming between Bitcoin Twitter and macro Twitter?

Lyn Alden: Pretty much, yeah.  I mean, that's one of the big challenges of the past couple of years, is spinning up on a whole new asset, while also maintaining coverage of other assets.  It's less hard in some ways, because they tie so closely together.  I mean, when I analyse Bitcoin, it's less from, say, a software perspective and more from a macro perspective, so I try to come at it with the angle that I know more so than, I brush up on angles I don't know as well.  But when I actually feel like I have something intelligent to say, it's from that macro lens.

Peter McCormack: That's not entirely true, because you've done a lot of technical reviews of things like the Lightning Network, so I'm not going to allow you to say you only do it from a macro angle, because I've read your papers, your technical analysis, I've read your work on proof of stake, so you're a liar, Lyn Alden, you have done that!  Okay, well listen, you're always super-humble, but I'm still not going to let you get away with that.  So, let's talk about some of these complexities on wealth concentration.  Where do you want to start?  Do you want to start with technology?

Lyn Alden: We can start with technology, yeah.  I mean, a big theme is that as you digitise things and as you have more exponential type of technology, you can displace parts of labour, you can arbitrage labour in terms of geography, and so you can accrue the benefits to fewer people.  So, in some ways, we've not fully obviously decoupled wealth generation from labour, but we have diminished in some ways the role of labour.  In a similar way that, if you go back, say, over the long run, agricultural workers used to be a very large percentage of the work force, and as technology has improved that, we've been able to make it so that less than 1% of the population can feed the whole population.  So, we're starting to systemically apply that to other industries as well, which is always disruptive when it happens to the people that work in those fields.

Peter McCormack: Yeah, my friend, Jamie Bartlett, made a documentary called The Dark Side of Silicon Valley, and following that, I was kind of looking at some of the impacts that Silicon Valley's had on the world, this massive amount of investment during a time of cheap credit, that's come and allowed people to spin up these technology companies, but start to look at the negative impacts.

So, something like Amazon, not only has that led to this wealth concentration, but it's also, and this is less of a quantitative analysis, but kind of destroyed the experience of going to a bookstore, speaking to somebody in a store, asking about books, that whole experience.  I used to take the kids on a Saturday down to a place called Waterstones, and we'd just have a browse through the bookstore and we'd ask questions, and it was an experience that's now gone.

But also, on top of that, it's damaged the ability of someone to go and be able to create a competitive experience on the high street.  So, not only have we seen wealth concentration, I think we've actually damaged the experience.

Lyn Alden: I think so.  There's a combination of the technological network effects basically having, say, having the biggest ecommerce platform and the biggest servers to back that up, and even host other ecommerce sites and spread your profit over that.  But we also see it in non-tech fields, this consolidation.  And so, for example, hardware stores in the US used to have tons of mom-and-pop hardware stores, you'd go to your local smaller or mid-sized hardware store, and all these mom-and-pop stores, the thing is the owners have substantial equity and net worth in it; and then you can have employees that maybe work there for decades, because they know the family, they're trusted employees, they have a sense of ownership, even though they're not necessarily the owners.

Over time, as you've consolidated that into these large hardware chains, in some ways it enhances the experience, because you can go to the store and you can get anything you need, there's no such thing as you go Lowe's or Home Depot and they don't really have what you need, they're so big; but they've corporatised it, so we've put all the mom-and-pop stores out of business, employees are one of thousands of employees throughout this corporation, so you've taken the face off of it and corporatised it.

Another big challenge that those corporations can come in and negotiate with a local area and argue for tax advantages and things like that, and promising that, "We'll bring jobs there".  But often what they do is, if you go back and run an analysis five years later, the area didn't necessarily benefit, it was a net wash at best.  Really what benefitted was that company.  So, a combination of technology and just this increased corporatism has been one of the factors for wealth concentration.

Peter McCormack: Well, Amazon has been a great example of that, offering to open up warehouses, distribution centres, headquarters in places, and asking for advantageous tax relationships with the local city.  Every time I look into Amazon, all I see is a company that grosses me out.  I was discussing this with Ben Arc, I don't know if you listened to that interview, but I was going to attempt to do a whole month of not using Amazon and see if it was possible, and it's something I do want to try, because I don't know, I'm not a big fan of Amazon at the moment.

It puts me to another point, where with these tech companies, and this is not something I would know about, but monopoly laws.  One of the arguments against, say, libertarians is that you would get the rise of monopolies, and the state is meant to protect us from monopolies.  But it feels like within tech, we do have these monopolies and not too much has been done to curb them.

Lyn Alden: Well, part of it's that.  There's two different main views on monopolies.  One is that part of the way they form in the first place is working with government, basically that they get that tie-in with the government, or they get the government's blessing, they insert their cronyism.  So if you look, for example, the biggest network effects of the companies, they also spend the most on lobbying.  So, these Big Tech companies actually became the biggest lobbyers over time in the United States.  So, that would be a libertarian view of it, that would be their pushback, is they would say monopolies don't really form outside of a kind of government-controlled jurisdiction.

But the counterpoint to that would be, we don't really have an alternate test case, because the whole world always is under some sort of government jurisdiction and we do get these monopolies.  So, I think that's a pretty complex subject.  I mean, decades ago, my mum was actually an antitrust lawyer, she would go after those.

Peter McCormack: Oh, wow!

Lyn Alden: But it was kind of a losing battle.  She was dealing with it back when banks were in the process of consolidating, before they were too big to fail, and we all knew where that went.  They eventually all did become too big to fail.  But again, they're heavily tied into the Federal Reserve, there's that revolving door between financial regulators and the financial companies themselves.  Most of the officials worked at places like Goldman Sachs and these other kinds of firms, so it can be hard to separate a corporate monopoly from the government monopoly.

That's one of the overall issues, is that when I talk about these big changes over time, these big cycles, cronyism ends up being a theme that comes back, basically power begets more power.  It can happen on both sides of the equation.  For example, in the 1970s, you had labour cronyism.  You had these very powerful labour unions, and they would tie themselves heavily into politics.  Then the advantage there is workers would get paid pretty well.  But the disadvantage is you'd get bogged down with inefficiency and you just can't get anything done.  Whereas, when you swing to the other side, and corporations and those with capital have the power, they get tied into the cronyism.

Then you have this massive wealth concentration and this kind of labour arbitrage, labour suppression.  And if you look at history, you tend to get these pendulum swings back and forth between who has the power.  And the challenge there, the risk there, is that if you start to notice the problem and then change policies to push the pendulum back towards some sort of social contract that more people are fine with, that's the wise way to do it.  But in practice, if they don't handle it well, then the pendulum just slams so far that it breaks the side of the case, and then you get a revolution or collapse, or something like that, and then nobody benefits.

So, that's always these challenging points in history to navigate that happen every generation or two, and represent these big decision points that affect how the next several decades go, in terms of which countries are in charge, what groups benefit the most.

Peter McCormack: How much has globalisation led to wealth concentration?  I was watching a documentary recently, I can't remember who it was, but Tony Blair was talking about an economic policy and relationships with other governments and removing tariffs and allowing certain parts of manufacturing to move abroad.  But what that really benefitted was, the owners of the companies were able to move their manufacturing abroad, but it was a real negative for the local communities.

We know this is an issue, for example, with car manufacturing, and it just became, for a lot of companies, too expensive in the US for them to manufacture cars.  How much has that led to a different kind of wealth concentration?

Lyn Alden: I would say that's been a major factor, but often people think of it as inevitable.  It went from, say, the developed world to the developing world, whereas actually that's not really the case when you look at country by country.  So for example, Germany and Japan were not really hollowed out by offshoring and globalisation.  If anything, they benefitted from it to a reasonable degree.  A lot of the cost was actually borne by the American middle class, also some places in the UK.  Basically, there are certain areas in the world that were net losers from that, and other areas that were net winners, like China and parts of these other developed countries; Switzerland and Singapore, I mean they weren't harmed by it.

So, it really comes down to the more specific policies.  So for example, I often tie this back into the petrodollar system that we've talked about before, which is that the United States chose to make these deals with Saudi Arabia and OPEC to basically make it so that the whole world needs dollars if they want to import oil.  That puts an extra monetary premium on the dollar, it makes the whole world demand dollars, and the only way that we realistically get dollars out to the world is by running these structural trade deficits.  It increases our import power, as Americans, and it decreases our export competitiveness.

So, everybody in America benefits from that to a certain degree.  So, if you're rich or poor, you get cheaper goods, for example.  But the costs are disproportionately borne by the people that lose their jobs or that have their wages suppressed, because of that new global competition.  Whereas, the ones that really get all the benefits and few of the downsides are those that work in tech, healthcare, government, these kinds of higher margin, or that they own the companies themselves that are benefitting from that labour arbitrage. 

That's where you have the formation of the Rust Belt in the United States.  So, our steelmaking capacity, our car-making capacity all went down, and you don't really see that in, say, Germany or Japan, that haven't really made this kind of petrodollar deal with the Devil, type of situation.  So, I would say that it's more a US phenomenon than a developed world to developing world phenomenon, but there is some aspect of it everywhere.

I mean, the lowest margin industries, like textiles, pretty much throughout the world have gone to developing countries.  And of course, the thing there is that's how emerging markets historically go up the value chain.  They use the fact that they're impoverished, that they have cheap labour, and that's how they're able to start accumulating that capital.  So, when you think of it on the global scale, there are people benefitting, there are people harmed, but we shouldn't be surprised when we start to see populism in those regions that are harmed by that.

So, we can talk about certain aspects may be inevitable as the world opened up and became connected, there's going to be winners and losers from that; but there are also specific policies that accelerated, and we shouldn't be blind to those.

Peter McCormack: Yeah, so even though it may lead to a local form of wealth concentration, has it essentially, on a global scale, reduced wealth concentration, in that it's given smaller countries, you were essentially saying, a chance to kind of raise themselves up?

Lyn Alden: To some extent.  I mean, one way you can describe a whole field of economics is that specialisation is helpful, for the most part.  So for example, as we learn to specialise, that's how we boost our productivity.  There is such a thing as overspecialisation, where you can only do this one task, and if that task becomes obsolete, you're not a well-rounded economy or well-rounded community or well-rounded individual.

But basically, bringing all these countries together and arbitraging the frictions and reducing them as much as possible, in theory is good for global wealth.  I think it only becomes a problem when you don't either counterbalance that by effective policies, so you have policies that encourage all the capital flow up to the top and arbitrage everything, and then don't address the fact that there are going to be losers from this, and then be blindsided when you have populism.  So, I think basically there are ways to soften it with effective fiscal policy that they don't really do.  So, I think some aspects are inevitable, but other aspects are poorly handled.

Peter McCormack: Okay, and then into your wheelhouse, monetary policy, how does that contribute to wealth concentration?  Obviously, we've seen a massive increase in wealth concentration during the last 12 to 24 months with COVID policies, but can you just explain that?

Lyn Alden: So, this is where I disagree with some of the common narratives among other people I agree with.  So basically, there's the argument that QE grows wealth concentration and that low interest rates grow wealth concentration.  Actually, a lot of that is true.  So, the straightforward case there is that those things primarily boost asset prices, and who owns most assets?  The rich.  So, that boosts the net worth of the rich without really helping the poor.

Now, if we were to then run the data and we say, "Okay, let's test if that's actually happening, if that theory's true?" we should look across countries in the world and see that the countries with the most QE relative to their GDP and the lowest interest rates for longest should have the most wealth concentration, or at least that should be the general trend. 

Instead, we find there's either no correlation, there's actually an inverse correlation, where the countries that did the most QE and had the lowest interest rates, like Japan, have among the lowest wealth concentration.  Then you have countries like Europe that were in the middle, and they're usually in the middle in terms of wealth concentration.  Then, in the developed world, the United States did less QE, as a percentage of GDP, and had higher average interest rates than Japan and Europe, and we have the most wealth concentration.  So, obviously there's more moving parts here than just that.

So, a lot of people like to say, "It's only the Fed's fault, it's only this", and that's why I bring it back and say, "Actually, there's so many moving parts here that are a lot more complex".  And a general theme I would say is that it's more about fiscal policy differences than QE differences.  So, QE has its own, I think, when you boost asset prices, that benefits the rich; but a lot of what QE is doing is funding fiscal deficits, so you're monetising fiscal deficits, especially if the central bank holds that debt for the long term.

So then the question becomes, "What are those fiscal debts it's being spent on?"  So, in Japan, they don't spend almost any money on their military, as a percentage of their GDP.  They basically have among the cheapest healthcare per cap in the world, despite being one of the oldest populations in the world, and there's a bunch of things that go into that.  And so, because it's domestic funding, it's spent on the people, it's a reasonable tax environment, that wealth doesn't circulate to the top.  Whereas, if you, say, take all those deficits spent on the military industrial complex, give basically Amazon all the tax cuts you want to give them, you keep labour payroll taxes pretty high, you're going to channel that wealth towards the top.  So, that's why I describe it more as being a fiscal phenomenon, fiscal differences, than QE alone.

Peter McCormack: Is the US unique in this situation as well with these concentrations of wealth, because it has been so successful on the technology front?  We talked about technology companies being able to drive concentrations of wealth.  You look at Tesla, Amazon, I mean the majority of some of the biggest companies, tech companies, are in the US.  But these are also global companies, Facebook's another.  Whereas, outside of those, how many are there?  I mean, Spotify, Alibaba, there's not many huge, global technology brands outside of the US.  Is that one of the reasons the US is different?

Lyn Alden: I think that's a factor for why you have the really long end of the curve, the people that are worth over $100 billion or over $50 billion; that's the only big factor, that the United States is home to these gigantic network effects, more so than other countries.

But when we think broadly about what is technology, different eras have different things that are technology.  So, there's a certain period where railroads were technology, and they became the billionaires of their day.  The same thing with getting oil out of the ground and transporting it effectively was technology.  And so, for example, if you go back a few decades, Japan was the heart of technology.  They were exporting all these high-quality goods to the world.  That industrial tech was the leading-edge technology, and they didn't have extreme wealth concentration.

So, it's that combination of being in the forefront of technology can boost wealth concentration, but then the question is, is fiscal policy magnifying it, or is it balancing it, or is fiscal policy not really involved?  So, I think that's kind of the way to look at it.

Peter McCormack: Okay.  So, these concentrations of wealth, in terms of theory about the impact on this, we've seen this big rise of tax the rich, AOC, and these kinds of campaigns against the billionaires, the billionaires should pay more tax, or we shouldn't have billionaires; some people are staunchly defending them saying, "No, these people create the most jobs, they create opportunity.  It's not a zero-sum game", etc.  But is there any theory behind that these concentrations of wealth damage people, or damage society?  Would it be better if some of this wealth was freed up and distributed?  Are there any thoughts behind that?

Lyn Alden: Well historically, in multiple societies, and this literally goes back thousands of years, even studying Ancient Greece, for example; but if you look around the world, when you get extreme levels of wealth concentration, that's when you generally get more prone to populism, and in extreme cases, revolution.  So, it is something that we should be aware of and concerned by, but of course that's where I think people are going to differ and determine, "Why do we get here, and what are the policies to maybe reduce this severity and avoid some of the worst outcomes?"

So, I think the problem is, with a lot of those tribalistic views of it, they look at the symptoms, rather than debating the root causes, or getting to the root causes.  So, if someone's rich, it's less they say, "Okay, we're going to go ahead and take 80% of wealth and disperse it", it's more like, "What are the systems we have in place that make for such extreme wealth concentration, not just for successful individuals that do really good companies, but why do we have such, say, wage suppression among workers; why do we have this sense of social contract breaking down on fairness?  What are the root issues?  What way is fiscal policy magnifying this already?"

I think that that billionaire investor, Jeff Gundlach, phrased it well.  So, he was pointing out, he's based in California.  If you add up all of his tax rates, he pays over 50% of his income in tax.  And he was talking about, for example, AOC had that 70% tax proposal on the federal level, which if you're then in California, would boost you to over 80%.  He was like, "I would just stop working at that point".  So, he phrased it as, "Instead of getting someone who's paying over 50% of their tax rate up to 80%", he's like, "When there's other wealthy people like Mitt Romney that are reported to pay 12% income tax, which is less than the typical worker, maybe go after those sorts of inefficiencies, more so than basically doing these super-high penalising tax rates".

That's how I view it too, in a sense that there's not a really good track record of super-high tax rates being the answer to those things.  But I think having a fair tax structure makes sense.  So for example, if a wealthy person pays a lower tax rate than their secretary, that's probably not an ideal fiscal policy choice.  And if the wealthy are getting most of the benefits from fiscal spending, so if a lot of that fiscal spending, say in the military, goes into the industrial complex, gets those people super-rich, then the Federal Reserve does a lot of its policy through BlackRock and then BlackRock executives get rich, a lot of that spending is benefitting the rich.  So then the question is, if you have that spending benefitting the rich, and then you also have these kinds of tax arbitrages from decades of lobbying, that's how you concentrate wealth into the top.

An example was, the PPP programme, so in the United States, we did that programme back in the pandemic, where we gave loans to small companies, where they have to meet certain things, they can't fire their employees and if they do all this, and then eventually those loans are forgiven.  And they went back and did analysis on it.  The vast majority of those companies would not have reduced their employees anyway, so basically what happened was that money just went straight to the top line of the company, the people that owned those businesses.  So basically, most of that went to people that were already fairly wealthy.

For example, if you instead did the same amount of fiscal spending and just even increased the stimulus cheques, or let's say you cut payroll taxes, you make it more enticing to stay in the labour force and have a job, those types of things trickle to the actual workers more so than how we structured the PPP loans, for example.  So, it comes down to both the spending side and the taxing side, and we have these decades of accumulation of mainly, "Oops, this policy favoured the rich.  Oops, this one did too.  Oops, this tax cut was 80% to the rich".  It just keeps piling on, and part of that is not an accident, because we have that lobbying, cronyist kind of cycle that's built up over decades.

Peter McCormack: Yeah, and could we just reduce the size of the state and reduce the tax rates for everybody?

Lyn Alden: Certainly, that's one of the political views, right.  So, obviously there's people of different political stripes have different approaches.  So, someone with a larger government focus would say, "We need to, say, tax differently and then spend more on the poor", whereas other people would say, "Okay, we need to have less government, less of that recycling to the top".  We see from countries round the world, ranging from Norway to Singapore, there are very different ways to have a fairly functional society with very different tax rates, very different spending policies.  But the key trend is it has to be intelligent, it can't be corrupt, because that corruption and cronyism is the main thing.

There are multiple right and wrong answers for how to run an economy, or run the government overlay onto the economy, there's multiple right and wrong answers, but there are objectively worse ways to do it that just feed populism, feed wealth concentration and make things worse.

Peter McCormack: Have you thought of becoming the Fed Chair?

Lyn Alden: No!

Peter McCormack: We might need you, Lyn!

Lyn Alden: I've been asked -- rule one is they pick people that are qualified from their work, like investment banking, and things like that to work in that role.

Peter McCormack: Well, you know why.

Lyn Alden: Yeah, because it's the revolving door.  But even then, people jokingly ask, "What would you do if you were the Fed Chair?" and I would say, "Resign!" because that's when I go back to the long-term debt cycle thing, where I would say that the Fed made huge mistakes over decades, especially under Greenspan, where they held rates super-low when they didn't need to, encouraged these debt bubbles to build; and now the debt's so big that if you then raise rates, it collapses everything, and if you don't do that, then you just let inflation run hot and burn away, devalue currency.

So, I'm often confused why Jerome Powell, for example, even wants the job.  He's super-rich.  I don't know, I would not want that job at all.

Peter McCormack: Maybe he just loves the risk!  I don't know, I wouldn't want that job, I mean I'd be terrible at it.

Lyn Alden: Yeah, he's got millions of people making memes about him.  I don't want that job.

Peter McCormack: I'd be phoning you every day saying, "Lyn, what the fuck do I do here?!"  So, you talk about this populism side of things, and what we're really talking about here is political opportunism, in that people like to be able to gain votes by saying, "Those people over there are the reason you haven't got what you've got".  Do you think any of this growing wealth divide is part of the problem that we have today, with so much, I don't know, political upheaval, the left versus the right; do you think that plays into any of that?

Lyn Alden: Well, I think it all feeds on itself, and this goes back to the whole pendulum thing.  You could describe it as kind of economic entropy, or government entropy, where a generation builds up these institutions, these frameworks, these agreements, and over time, those work at first, and then you have this big period of social cohesion.  You've covered that with Brandon about the Fourth Turning on your podcast before. 

You go through these generational cycles, and eventually those start decaying over time.  They become outdated, they become corrupt, people stop trusting them, you get inefficiencies building up in the system.  Either, let's say, labour gets more and more entrenched, or the opposite, where capital gets more and more entrenched and gets more power, and then eventually you run into that shift in the other direction.

When you have a situation where capital gets most of the power, the natural result is you get more rising populism.  I mean, in the simplest sense, populism is politics that focus on the everyday person, and I think that obviously there are more benign forms of populism, and then there are more dangerous forms of populism, and it's almost like the longer those initial populist outcries are ignored, the more they grow and become the more dangerous type. 

You can have populism on the right and you can have populism on the left.  So, in the United States, the Tea Party was a type of right-leaning populism, Occupy Wall Street was left leaning, and then over the decade, you've transformed that.  So, the right-leaning populism went towards Trumpism, and the left-leaning populism went towards wokism.  So, we've diverged into these subsets of populism.  At least there are subsets of both sides that are dangerous that they feed in their own echo chambers, they get very tribalist mentalities, and we see this in multiple countries in the world too.

You see it less in countries like Japan, where they have less wealth concentration to start with.  But when you have, for whatever reason, a country has a lot of upheaval, that's where you get that more rising populism.  And you can even consider Bitcoin as a type of populism, but I would describe it as one of the better types of populism.  Basically, it's people rallying behind a new network-effect technology and saying that this is the solution.  So, that's obviously the populism I would prefer, more so than some of these other types of populism.

I don't view populism in itself as a bad thing.  I just view it as something that, when it starts to develop, politicians have to pay attention to it; and if they don't, then you start to get these more dangerous varieties.

Peter McCormack: There is another side to this as well, and it's something I have to consider, of being a parent with two children.  I've got a son going off to university about to incur a potential amount of debt over the next three years if he doesn't hit a certain grade, because I'm only paying his fees if he works, the job market he'll enter in in three years, the fact that he'll want to buy a house.  These concentrations of wealth have made certain things just become a lot more expensive, it's a lot harder for people to get on the housing ladder these days.  I think that's universally accepted.  So, that means I don't know how long my children will live with me.

But also, in my father's day, my father never earned a lot of money, but they always knew they could buy a house and they could own a house, they could have a car, they knew they could get the basics within life and have a pension.  It feels like these things are getting further and further away from people, which I was talking about with Junseth recently, where he was talking about this nihilistic behaviour, where people are just gambling; whether it's crypto, stocks, Robinhood, etc.  Is this another symptom for you of these growing concentrations of wealth?

Lyn Alden: Absolutely, and part of it goes back to Bitcoin and money, that because we've had decades of bad money, weak money, so zero or near zero interest rates, and especially negative real interest rates, people have had to monetise other things.  So, they monetise stocks, they monetise real estate, they monetise all these other types of assets.  And especially for real estate, which is among the most functional of assets, it puts them out of the reach of people.

So if you look at, say, home values to income ratios, and this is not just America, this is around the world, it puts them more out of the reach of people.  My father, he was pretty old when I was born, he was old enough that he could have been my grandfather.  And when he was in his 20s, he was a police officer and just bought a house; it wasn't a huge deal to buy a house, and he didn't even have to get a student debt to do that, he just went into work and was able to buy a house.  Now we've made it so that you need a degree often to have a similar income that someone had decades ago without a degree, and yet you also have student loans, and things are more expensive.

That's part of why people have sensed that things are becoming more and more stacked against them.  There's that chart I've used in a couple of articles.  If you look at median male income in the US over time, it goes up, but then you see things like housing costs, transportation costs, healthcare costs and college costs kept expanding until they eclipsed that median income.  So, it made it so that you need two incomes, or you need to be in above average income, in order to support what was once supportable with a median male salary.

Peter McCormack: Is this where people talk about the squeezing of the middle class?  Because, as somebody growing up, when I used to hear this term, "squeezing the middle class", I used to think, "Why should we worry about the middle class being squeezed?  We should really worry about the working class", but actually that has a strong signal and a detrimental effect on society.

Lyn Alden: Well, yeah, and also working class and middle class are two very large segments, and they're both really important.  When you look at the median, you're capturing good chunks of -- that's the middle number, so there's a bell curve around it, and you're kind of capturing working- and middle-class people overall when you're looking at the median.  It gives you signal for a broader stretch; even though that's officially middle class, that kind of reflects what's happening with the working class even more and it's happening to the middle class.

What we're watching is a social contract over time break down.  People had certain expectations of the government, of each other, of corporations; we had this understanding of what it means to live in this country, and then over decades that changes.  Then, people are either maybe less attached to their country, less attached to their government, less attached to these institutions, because they feel that over time, those were corrupted, or over time that they unilaterally changed the contract.  They said, "Okay, we're going to close our auto plants in here and open auto plants in Mexico". 

People said, "Well, if they're not holding up their end of this social contract, then they're going to trend towards nihilism or meme trading", or things like that.  That's where you get, if one side arbitrages, the other side's going to try to arbitrage.  They might have less power to do so, obviously, so it's one of those things where some of it is inevitable, some of it is technology, and we just have to adapt with it.  But other details are when politicians become corrupt, and then they exacerbate that change, rather than either push back on it or just let it play out.

Peter McCormack: I just downloaded today Jean-Jacques Russeau's The Social Contract, so I'm going to be diving down that rabbit hole.  It's probably something I'll talk to you about actually coming up.  Okay, so the last thing I want to go into with you, because this is the most concerning, is that Danny was starting to look at the similarities between what's happening now and what happened in the 1920s.  He noticed that back in the 1920s, there was also this profound shift in wealth, with the rich getting richer, etc, and there were a number of causes for that.  I'm guessing you've seen a similar pattern.

Lyn Alden: Yeah, absolutely.  So, I've used the 1940s as my template for where we are in the 2020s, but if you look at the 2000s and the 2010s, those were the 1920s and the 1930s; you kind of have this big parallel.  And you can frame that in multiple ways.  I like to frame it through the long-term debt cycle, so that's the last time that monetary and fiscal policy looked like it does now.  But also, it looks very similar in terms of wealth concentration.  That's the last time you had wealth this concentrated in the US and in some other countries.  And, yeah, you get prone to extremes, so you have a spectrum of outcomes.

On the one hand, you can have what happened to Russia, where you overthrow the wealthy and then make it worse; you have that revolution.  You also, in another dark way, you have the Nazis.  That was one of the most dangerous forms of populism at the time.  Or, in the United States, because of our experience in World War I, we then did World War II a little differently in the sense that, when veterans came back from World War I, we kind of just gave them a bus ticket and said, "Thanks for your service", and then that led into some of the things of the wealth concentration that happened throughout the 1920s, and then eventually the breaking of the social contract.

Whereas, when we had veterans come back after World War II, and we were like, "Okay, this is not where we're going to stop spending money now, so we're going to at least make sure that these veterans have resources to get integrated back into society, that we thank them for their service".  And so, obviously there's different political opinions about the political leaders of the time; but we did recognise that there was growing sympathy with communism in the country.  We were in the war of ideas with the Soviet Union with those more dangerous aspects, and we said, "Okay, obviously we don't want to go down that route, but we can't ignore some of these rising populist tendencies, and these people noticing that the social contracts are breaking down".  So it's like, "How can we tweak policy to address that?"

Right or wrong, they threaded the needle enough that the United States, partly because of the war outcome, but also just because we kept our institutions relatively intact, we went on to have another several decades of prosperity.  So, it is kind of identifying the problems and then not ignoring them.  But there's obviously different views on the best ways to solve those.

Peter McCormack: So, is coming out of COVID similar to coming back from World War II, in that there's this recognition that people need to be looked after; would you say that's a similar scenario, is COVID like a World War?

Lyn Alden: In many ways.  Biden even referred to it as wartime finance, and I agree with that.  I think I wrote that even before he said that, which was that when I compare the 2020s to the 1940s, it's not that we're necessarily having a kinetic war, hopefully, at least between major powers; but instead, it's that because there's so much debt in the system, that when they get a shock to the system like the pandemic, you're going to see these huge fiscal expenditures, and you're going to see this big monetisation of debt, devaluation of currency, and that's something that the stage for that was set over decades, and it comes out all at once because of a catalyst. 

But there were a bunch of analysts that were expecting that type of thing anyway, and it's just that it got so condensed in a short period of time.  So, I do think that looking at that through the war lens is one way, from a macro analyst's standpoint, of looking for inflation, looking for money supply growth, looking for why things are happening the way they are, I do view that war-financing lens as one of the main tools to view it through.

Peter McCormack: And we have a similar kind of permeable attitude, in that I don't know how long the stock market bull market's been going on, I know we had the COVID dip, but essentially speaking, for quite some period time, the S&P, what is it, a decade long?  Is it ever since 2008, it's just been in pretty much permanent growth?  There was similar back in the 1920s, there was that permeable attitude, ten-year of growth before the Great Depression hit.  But also, saying that, have you read the thread Preston Pysh put out, I think it might have been yesterday?

Lyn Alden: I don't believe I have yet, no.

Peter McCormack: He's starting to talk about the unwinding of this, which is why we brought up this idea, "Is there a potential Great Depression II coming, and can we avoid it?"  Where are you at with that?

Lyn Alden: I view it somewhat differently.  I don't know Preston's specific thread, but for people that are kind of calling for a Great Depression II, I view it somewhat differently, in that by many ways of looking at it, we've been in a mild depression for over a decade now, in the sense that if you look at, say, the 2010s, they actually line up a lot to the 1930s.  It's basically going through a similar experience, but with way better technology.

In the 1930s, you had the Dust Bowl, you had war-torn areas, so it's going through a similar monetary and fiscal environment without that.  And so, when you look at the rise in, say, opioid deaths, the rise in these homeless camps, you have areas look like Hooverville, so we actually do have this decade-long period of a mild depression, meaning below trend economic growth and severe dysfunction.  So, I view us as being in less of that deflationary phase, which I think we already went through, and now I view us as being more in that inflationary wartime financing type of phase. 

When I think about depression going forward, the risk, I think, is more on the inflationary side, or that more stagflationary type of depression, where I think the key risk is not having enough energy essentially.  So, I look at it through the lens of energy more so than these other things, because say you bring up MMT, for example, you steel man MMT for a second.  They say, "We can print any amount of money we want, as long as we have real resources", and I disagree with a lot of the MMT people, but that's the part that they're not really wrong on, is that it ultimately comes down to, what are our real resources?

So, we saw that over the past couple of years, we have real limitations in our supply chain.  That's a large infrastructure investment; there are ports and ships and manufacturing facilities and all these different things that specialise, and they have a large capital base, and they take years to change and build on.  But then we also have finite amounts of commodities and energy at any time, and those projects take billions of dollars and many years to develop if you want more of them. 

I think, when you combine that with, say, mismanagement of energy policy, I would say the biggest risk to a depression type scenario going forward would be if humanity is unable to continue growing its energy usage in a way that's in line with allowing per capita GDP growth around the world to continue.  I think that's probably the big risk.  So, I view it as less of a deflationary type of depression, like you see in the 1930s; I think we went through a version of that already.  And now, we're more in that stagflationary type of risk, where we just run out of the resources we need to continue to boost human flourishing around the world.

Peter McCormack: And especially right now, considering Russia's incursion into Ukraine, the Nord Stream pipeline certificate has been removed by Germany, I'm fully expecting some form of energy wars between Russia and the rest of Europe.  It's really interesting how energy could now become -- we talk about military wars, or we talk about cyber warfare, but we could have energy wars really.

Lyn Alden: We had that back in the 1970s.

Peter McCormack: Did we?

Lyn Alden: Well, the politics in the Middle East.

Peter McCormack: Oh, okay.

Lyn Alden: So, one of the ways that OPEC punished the United States for supporting Israel was to basically cut off its oil supply.  That's part of why you had the inflation of the 1970s, is because of certain geopolitical realities.  So, this wouldn't be the first time that regions with energy production used that energy production in order to assert their political will, either successfully, or unsuccessfully.

Ultimately, if I were in any sort of policy position in a country, one of my biggest concerns would be, how do we make sure that our country gets a reliable supply of energy, ideally diverse energy, so we're not just relying on one thing.  You can look at the renewables to some extent and say, okay, are we harnessing our sun and wind well; are we doing what we can domestically there?  Do we have nuclear power?  And then, how are we getting gas and oil and things like that?  So, you can look across the full spectrum of resources you have available to you, and I think that countries that are not doing that are in a very dangerous situation.

Peter McCormack: Right, okay, interesting.  Did you listen to my show with Troy Cross?

Lyn Alden: I don't think so, no.

Peter McCormack: I'd recommend that.  He's got this unique theory of how we can use Bitcoin mining to massively increase investment in green energy and Bitcoin mining, by making Bitcoin mining an ESG tool, whereby those who have ESG budgets can invest it into green mining.  It's worth having a listen to, because that might help solve one of our energy problems.

I've got up this Preston Pysh thread, but I wanted to refer to one part of it specifically and get your views on it, because he talks about UBI, but he said, "By years end, I expect UBI to be politically popular by all parties in the world.  Make no mistake, use of QE and UBI are tools for failing currencies.  I'm not promoting their use, but instead providing a projection for what I think is likely.  Once UBI becomes the preferred tool for fiscal/monetary policy (yes, they are merging into one), you'll also quickly realise that it must be accompanied by more QE.  The reason why?  Because UBI will cause extreme price dislocation and abnormalities".

So, one of the things that I was thinking about in reference to us talking about wealth concentration is that, some of the solutions that have been given to advancements in technologies is UBI.  But I listened to the interview, I think it was with Andrew Yang and Joe Rogan, maybe a year or two ago, and Andrew Yang talked about this $12,000 universal basic income.  But at the same time, that might be somebody who was a trucker, who was on $70,000 a year, and it felt to me like UBI is one of these tools which will be used because of this hollowing out of jobs in manufacturing and service industries that will be replaced by automation; but also, that the UBI does not solve the wealth concentration, if anything it makes it worse.

Lyn Alden: Well, it's one of those things where I think it depends on where in history you are.  If we imagine a sufficiently technical future, where say 80% of the population just can't find a job, that's a very different discussion than what we have right now.  So, I think when you look far enough in the future, those types of things, I don't think someone's crazy for bringing those up and saying, "How are we going to manage this if we get to that future?"

I know Andrew Yang likes to use the example of Alaska, because he likes to point out that it's not purely a left-leaning thing.  So, Alaska's generally a Republican state, and they have an oil dividend to their people.  Basically, the people of Alaska in some way benefitted from the fact that Alaska has oil, rather than just a couple of companies coming out and them benefitting from it.  Norway did a similar thing, where they had these gigantic oil reserves.  And instead of just having a company come in and just get all the benefits, they said, "No, this is the people of Norway's resources". 

That's how they started the whole trillion-dollar sovereign wealth fund; they started with oil profits and they took those profits, they invested it.  So now, the people of Norway have the equivalent of a gigantic pension.  So, they haven't gone the full UBI route, but basically they have a pension that represents the fact that they were lucky enough to be born in Norway essentially, and they had a very high per capita allocation of natural resources.  And instead of just all that going to the oil barons, it went to essentially the people, at least on the behalf through the government as a proxy.

Again, that's one of the things people can debate how that should go.  So, you can argue that when you have the natural resources, or technological resources, that it's the government's job to share those resources to maintain a social contract.  But the risk is, if you do those in such a way that it destroys incentives, or damages incentives to work and to feel like you're part of a community, it can make it worse.  So, if you bring out those types of solutions too quickly, you make people too dependent on the government, you break down incentive structures, that's where you have a lot of danger.

That's also why I view it as less likely being more of an inflationary, stagflationary type of situation, where we already see that when you get high energy prices, some of these countries, they give people money to buy energy.  So normally, if you have a normal economy without too much debt, and you can actually go through a recession without widespread insolvency, what happens when oil prices get too high is it generally causes a recession, people consume less of it, and that helps equalise the market. 

But if you have such a levered credit system, you can't have a recession really, because you start to implode the debt situation.  So, this whole multi-decade credit growth, this whole fiat currency system is like a shark that swims through water.  A shark can't stop swimming, otherwise it drowns, ironically.  It just has to keep swimming, it has to keep getting water through the gills in order to keep that going, and the fiat currency system's kind of like that, where this constant credit growth can't stop, it has to keep growing.  And so, when you get this indebted, this part of the long-term debt cycle, if you run into a recession, it starts to get more existential, it starts to get more depression-like, or just massive insolvency-like.

So, when you have energy prices spike, instead of saying, "Okay, we have to consume less now", they say, "Well, here's your energy stimulus".  And that's part of, because they damaged the social contract so much before, now they're on the hook for that.  So for example, if you go through the subprime mortgage crisis and you bail out the bankers but not the homeowners, and then you have another crisis later, people are like, "No, we're not doing this again.  Where's our bailout?"  It's understandable that they want that, because we already had socialism for the rich, why not have socialism for the poor too?

Peter McCormack: Well, this is happening in Scotland.  I was just bringing up an article, because I was reading about this the other day.  So, "Scotland will benefit from an additional £290 million of funding to help ease the burden of rising energy bills, the Chancellor has said.  The money is a result of Barnett consequentials from a council tax cut announced by Rishi Sunak.  It will be on top of a £200 reduction on energy bills for customers in England, Scotland and Wales".

Lyn Alden: That's my pushback for when people say, "High energy prices are going to cause a recession".  I'm like, "Well, maybe yes, in some markets around the margins".  But you have to take into account the fiscal situation, the debt situation, because many governments will do these types of payments to keep energy demand high, despite prices.  So then, it relieves itself in terms of currency devaluation and shortages, more so than a disinflationary type of recession.

That's why, in this type of extreme macro environment, any sort of analysis about business cycles has to include, what is the government response going to be; what is the political response going to be?  Because, that's kind of the environment we're in now.

Peter McCormack: So, what does ever close the wealth gap?  Is it just revolutions, is it currency devaluations?  Historically, I'm trying to imagine the scenarios.  I've only lived in a time where the rich have got richer, so I don't know.  But is there anything in history we can look to?

Lyn Alden: Historically, there are a couple of ways to do it, some are uglier than others.  So, from that book, Lessons of History, sometimes you have either distributing some of the wealth from the rich to the poor, or you have revolutions where you distribute poverty to everyone essentially.  So, you can decrease wealth concentration by just destroying wealth, that's one way to do it.  No one really benefits from that.  Or, you can have more effective policies over time.

If you look at the United States from, say, the 1930s into the 1970s, where you had a big decrease in wealth concentration, essentially what they did was they had really high tax rates for the upper income percentages, they had a big currency devaluation and most of those bonds were held by the wealthy, they spent a lot on GI bills and things like that, and they had strong economic growth.  Now, that's kind of hard to repeat now, we're in a much different situation, so I don't think it's going to play out that smoothly.

When it comes to currency devaluation, I've talked about this before in some of my writings, it's a more complex thing.  So, a lot of people say that if you have a currency devaluation, the most people that are hurt are the poor, because they're the ones that primarily hold cash.  Whereas, what happens is, if we break it down by income deciles and we say, "Okay, let's look at the bottom 50%, let's look at the 50% to 90%, let's look at the 90% to 99%, and the top 1%; let's break it into those four groups". 

If you look at asset-to-debt ratios, the top 1% have a ton of assets and little debt relative to those assets.  As you go down the income spectrum, they have more debt relative to assets, and debt is partially what gets liquidated when you have a currency devaluation, especially the middle class that own, say, a home, they have a fixed mortgage on it.  So, when you had, say, the inflationary 1970s, generally the middle class did pretty well by the end of it.  It was the working class that was hurt, it was the wealthy that was hurt, because they were holding the stocks that did poorly, they were holding the bonds that did poorly.  It was actually the middle class, homeowner class that did pretty well in that environment.

So, when you have a currency devaluation, it's not so much that it impacts specifically the rich or the poor, it depends who.  So for example, among the rich are wealthy, older bondholders, pension-holders, fixed income receivers.  Those people get hurt by that environment, so that's a very problematic environment.  If you have a homeowner, they do generally pretty well, so especially the middle class that has most of the net worth tied up in their home, with a lot of debt attached to it.  But then, yes, you also have areas of the lower classes that get really hurt by it. 

If you have an outright hyperinflation, like you had in Weimar or you had in Zimbabwe or you have in Venezuela, then it hurts almost everybody, especially the poor.  So, it's degrees, it's like one of those things with, say, wine.  A little bit of wine is fine, a lot of wine is bad.  So, when you have a controlled currency devaluation, that's what policymakers try.  People wonder, "Why to policymakers try these things if they don't work?"  The answer is because, in small amounts they do work, but they're really easy to mess up and then they implode.

So, when you have this much debt in the system, I prefer a harder money system, so that's my view.  But if you have this fiat currency system and you do these policies that build up all this debt, mathematically the only way out is currency devaluation.  So, if they do a mild one, if they somehow stick the landing, which is actually really rare; they did it in America from that 1930s to that 1970s period.  But outside of that, it's pretty rare to do it well. 

So, that's I think why they try to do this approach, because they assume that they're going to be the ones to stick the landing, even though the vast majority of time, they mess it up and everybody gets hurt.  The poor get hurt, a lot of the rich get hurt, some of the rich escape it, a lot of the middle class gets hurt.  And so, historically, you generally go through these really rough times when you decrease wealth concentration.  And then in the aftermath, depending on how you structure policy, you can build your way out of it, and I think that's the key to focus on, is what long-term policies are going to maintain a healthy social contract and not have this cycle that just pushes all this fiat printing all the way to the top of the income stack.

Peter McCormack: Okay, I've got a big final question for you then, Lyn.  Can Bitcoin, or will Bitcoin reduce the wealth divide?

Lyn Alden: I think it's one of the tools that has a chance to, and that's where we go back to true hyperinflations or truly impoverished areas.  Having access to liquid hard assets is really useful.  Anyone paying attention to what happens in Venezuela, Turkey, Lebanon, any of these countries, Eastern Ukraine where people are trying to flee out of that area, having self-custodied hard money is really useful.  I think that's one of the things that people in the West missed, or don't care about, is they think, "Why do we need crypto?  Why do we need Bitcoin?" 

Well, you've spent decades in a rather safe bubble that the majority of the world doesn't have access to.  A lot of them don't even have access to good stock markets, a lot of people can't afford a home, so they need something hard to save in that's liquid.  And even though it's volatile, one of the long-term potentials is that Bitcoin can be that thing.  It can allow for uncensorable payments, and it can allow for difficult-to-confiscate savings.  So, I do think that's one of the technologies that can demonetise.

We've monetised all these assets like homes.  Ideally, you want to demonetise these productive things, and have actual money be monetised.  Instead of bad money and then monetise everything else, you demonetise these things and have your actual money stored in money.  So, I do think that's one of the most powerful tools that people have.

I also view it -- so, I'm more mixed about how it's going to affect wealth concentration, but I think it's more about pushing back on these surveillance types of states.  That's the clearest thing where I think Bitcoin is the answer, where you have this rise of authoritarianism, you have a rise of techno-authoritarianism, which in many ways is the most frightening kind.  Imagine if all those infamous 20th century authoritarians had access to CBDCs and big data and things like that?  We already have it in China, we're seeing it pop up in other countries, and self-custody money, primarily Bitcoin, is I think one of the few tools that allows the future to not go in that direction.

Peter McCormack: Fingers crossed then, okay.  Well, as ever, I've learnt an amazing amount in a very short time from you, Lyn; you do know everything!  I also got an email this week from somebody saying, "I signed up to Lyn Alden's criminally cheap newsletter", which I keep telling you, so everyone listening, go and sign up to Lyn's newsletter.

Lyn, always great to talk to you, fantastic subject, and the detail you gave here is amazing.  I'm going to see you in Miami very soon, in about six weeks, so I'm looking forward to that, and yeah, let's see you next month and appreciate, as ever, you coming on and helping us all learn a little bit more.

Lyn Alden: Happy to be here, thanks.