WBD4967 Audio Transcription

Why Bitcoin is the Best Money with Lyn Alden

Release date: Monday 2nd May

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.

Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss currency crises, the history of money, the properties of good money, and whether Bitcoin can usher in a new era of programmable, commodity money.

“All of these monetary transitions involve people that could think of the unthinkable. And that could look past how the system currently is and envision: if you just start with a blank sheet of paper, how could it be? What are the alternative kind of timelines we could be under?”

— Lyn Alden

Interview Transcription

Peter McCormack: Lyn, hi.  

Lyn Alden: Hey.  Thanks for having me back.

Peter McCormack: We will always have you back on our show.  It's great to see you in person, great to see at the conference.

Lyn Alden: You as well.

Peter McCormack: Great to see things going so well for you.  So, we're going to talk to you today about money, the nature of money.  You've written another epic article.  I don't know how you produce them; they are unbelievable.  Actually, I'm waiting for the Lyn Alden book.

Lyn Alden: I've got a couple of questions about that.  Yeah, the problem is I put out so much of this content that I have no time for a book.  I probably would take some of the content and organise it into a book, but it's just every year's been too busy and another thing kind of piles on and I've never got a chance to actually sit down and write one.

Peter McCormack: So you're thinking about one?

Lyn Alden: I've thought about one a number of times, and years ago I wrote a short stock book that people still buy on my website, right.  So, I have experience putting together something of that length, but you know, just not recently.

Peter McCormack: Well, it feels like this article, the What is Money? article you've written, that feels like the framework for a book.

Lyn Alden: Yeah, I mean, it's over 20,000 words; so it's a short book essentially on its own. 

Peter McCormack: Wow.

Lyn Alden: And then it could be expanded.

Peter McCormack: Just before we get into it, how do you do it?  You seem to produce something like this nearly every month; I don't know how you do 20,000 words like that.

Lyn Alden: So, that one was a longer preparation than normal because of its length.  What I do is I have multiple ones I'm working on at the same time, over the course of a couple of months, and whichever one is drawing my passion, I start working on that. 

If I get stuck somewhere, I'll go to another one until something clicks and then I figure out how to make the one I was stuck on better.  So, that's one of the examples where I started working on it and then got stuck somewhere and just let it marinade, worked on something else, and then I was like, "Okay, I know how to fix this now", and I would come back and rearrange it.  I wanted to try to tie some of the other pieces I've been working on all together into a big update.

Peter McCormack: Are you having to hide from email and turn your phone off so you can concentrate and focus?

Lyn Alden: Yes.

Peter McCormack: I've tried to write; I can't do it. 

Lyn Alden: Emails are my biggest -- the biggest challenge is dealing with the inbox.

Peter McCormack: Yeah, I can emphasise with that, and Telegram, and Signal, and WhatsApp.  Especially this week, this week's been insane.  Well, just so people know, we're on the Saturday after the Bitcoin Conference; I'm a bit croaky, apologise. 

So, okay, let's get into this.  What is Money?  Why this subject?  It's been touched on, a lot of people have written about it before.  Can I tell you what I think?  It felt like you are looking at where we're headed and to look at where we're headed, you needed to see where we'd come from.

Lyn Alden: Exactly, yeah, that's a good way to describe it.  I think it's also one of those things where every several decades, or every better part of a century, there's a big transition in the last couple of centuries about how we treat money and how money works.

Basically, in part, money's a technology and as technology changes, what we consider money changes, and then you add geopolitical realities on top of that.  So, I wanted to prepare people for what I think we're going through this decade; people are often are used to picking investments, getting out of a investments, getting into other investments, but they don't often think about the money itself.

Funnily enough, people in emerging markets think more about what is money; they often to deal with a weak money and so they want dollars instead or they want other types of assets; whereas, people in developed countries hardly ever have to think about money. 

Also, there are so many things it touches on because it goes into the whole Bitcoin versus crypto thing; what is money versus what is some VC tech platform, right?  It's like all these kinds of questions go to what assets do you want to hold over the course of the next 10, 15 years as we go through some of these really big macro transitions?  It's kind of starting from first principles of what is money. 

Then, of course, the article draws from so much great expertise that is out there.  Some people that are long dead from the 1800s; some of the references are older than that.  Then other people, of course, that are active in various communities, including people in gold, people in Bitcoin, people in fiat even, kind of just all these thought leaders and saying, "What is their view of money and how do I interpret that; how do I tie these together; how do I contrast these views of what is money?"

Peter McCormack: So, what I'm hoping from this is we get a show that I can send out to all my friends, who I'm still struggling to get them to even consider the nature of money.  Over the last I would say 18 months to 2 years, I'd used Facebook as a testing ground; so Twitter, that's out there in the noise with all the other crazies, but Facebook is friends and family.  I've tried to share ideas with those about why Bitcoin's important, why thinking about money's important, and nothing's landed.

To echo your point, even though we're at high inflation in the UK at the moment, I think we're about 6% in the UK; we know it's higher, we've seen a massive increase in commodity prices.  My energy prices are up, personally, nearly 300% in a year.  I filled up my car the other day when I went back and it was something like £120 to fill up the car, probably double what it could cost here.  But I still think people aren't fully understanding what's happening to their money.

Whereas, when I've been on trips with the show, when I went to Venezuela, it was really important experience because people are using five different types of money, ranging from the bolivar, which they had to use; wanting dollars; some people using Bitcoin; some people using the Colombian peso; and then that stupid crypto they created, but we won't talk about that.  They really did understand money, and I think sometimes you're forced to understand it when it collapses.  I think this insidious inflation we go through hasn't forced people to consider it enough; some have, some haven't. 

So, I think today's going to be super important.  I'm hoping this is a show I can put in front of people and people will really think about that because there is a lot of risk to money right now.

Lyn Alden: Exactly, all around the world.  So, for the longest time, you only had to care if you were in developing countries where they have currency crises; now, developed markets are going through a debt crisis and an inflation crisis they haven't really gone through since the last time money had a big change, since money changed really from gold back to fiat.  That's the last big money change that happened.

This environment looks like that whole environment, and that whole thing was a process, right.  So, you slowly started severing money from gold.  It started in the World War I era and then the aftermath specifically, and then it carried on to the Great Depression; then, of course, it carried on to World War II and, the end of that, we had a loose peg to gold but not a direct connection.  It was really in 1971, of course, it was completely severed and, that whole period, we're going through almost like a mirror image today.

There are a bunch of charts that I show on all my articles of what debt looks like, what the deficits look like, what interest rates look like, and it's kind of a mirror image of that whole period.  So, I think people have to be prepared for the changing nature of money; the digitalisation of money, so money becoming more digital in various ways; and how it's easy to fall in traps and think, "This is money versus this is not money", and it's actually you have to go back to first principles to find out what is good money; what do I want to hold longer term?

Peter McCormack: Well, that's my starting pointing when anyone does ask me what Bitcoin is; I always say it's money.  That's it; it's just a form of money.  I used to try and come up with these more complicated answers but really I've simplified down to just explaining that it's a form of money and then explaining the properties.  I'm going to jump around a bit here, Lyn, so excuse me. 

An interesting question for me to put to you is, we've had these periods where money's changed and money is a technology; if we had no Bitcoin, or we had not digitisation, if there wasn't a technological change right now but we were still going through a currency crisis, do you think we would see another change in the nature of money?  Do you think the central powers would come together to do another Bretton Woods?  It feels like we have this weird coincidence that, at the time we're having these currency crises around the world, we have had, fortunately, over a decade of something like Bitcoin to establish itself to be an alternative.

Lyn Alden: I think if you didn't have the creation of Bitcoin, one is that gold would be rising a little bit more in prominence than it is.  You can also separate it from the sovereign level and the personal level, right.  The case I've been making for a while is that sovereign reserves are going to probably begin diversifying more than they have.  So, if we back up a long time, gold used to be the primary reserve.  Then, with the whole eurodollar, petrodollar system, they started putting the US Treasury at the heart of the whole global reserve system.

Ever since really 2013, 2014, you'd been seeing a little bit of a shift back towards sovereigns being interesting in holding gold as part of their assets, because they could compare that currency; they could treat it like money, look at it versus other fiat currencies, and it has certain advantages.  It has a lower monetary inflation rate and you can self-custody it in a way that you can't do with liabilities of other entities, like other countries.  So, those can be frozen but if you hold gold in your vaults, it's yours.

So, there's been uptake in interest in gold.  It's also the only alternative money, or outside money you can call it, that's big enough to absorb these large sovereign flows.  But now, with the invention of Bitcoin, it's interesting because it's more accessible to people around the world, anyone with a smartphone really can, for the most part, access it; and it's also too small for many large sovereigns at the point, but it's something that over time could become more interesting there.

So, I think that, in the absence of it, we would see maybe a return to gold, but the problem is that gold was somewhat flawed as money; it's shortcomings: just the portability, auditability, things like that.  So, there's a reason why we disconnected from gold.  So, I think that, for a lack of better alternatives, there'd be some kind of shift back.  Either people would want to preserve their purchasing power or even sovereigns would want to preserve their purchasing power and sovereign entity, but now there's another option. 

So, now there are multiple things to look at and then they have to compare not only fiat, you have to compare gold, you have to compare Bitcoin, you have to go around and be like, "What properties am I looking for in a money?"

Peter McCormack: Right.  So, what I want to do is, like I say, I want it to be a bit of a 101 for people.  So, I want to send this show around to people who I think maybe haven't thought about money enough.  So, I want to work through some of the basics with you.  I want to help people understand the nature of what makes good money, what makes bad money.

Then I want to dig into the uses of money because I hadn't really considered it in terms of consume, save, invest and share, which is in your article which we will share in the show notes.  I know I do it, I know I use money for that, but I hadn't considered them individually and what makes good money for those different use cases.  But I think it's a good starting point to talk about the key aspects of money.  Vijay Boyapati's article on The Bullish Case for Bitcoin has that grid, which I think's fantastic.

Lyn Alden: I agree.

Peter McCormack: I'll share that in the show notes as well.  But when we talk about types of money, Bitcoin, fiat -- and if anyone listening doesn't know what fiat is, it's dollars, pounds, euros, etc -- gold, fiat and Bitcoin, we talk about these properties and how each form of money is suitable for those.  So, do you want to run through them and explain what makes good money and what makes bad money?

Lyn Alden: Sure.  As you point out, this has been highlighted by Vijay; Robert Breedlove's done a lot of work on this; Saifedean's done a lot of work on this.  It's going through the properties of what makes good money and how they kind of compare to each other, and so you want a list of criteria. 

So, the whole purpose of money compared to an investment, or something like that, is that you want it to be liquid, safe, fungible.  So, if I buy a house or a specific company as an investment, that is something that is risky and that is something that is non-liquid and fungible; it's a specific thing, it's a hassle for me to transfer to someone else.  That's either a long‑term bet or long-term savings or a specific plan to grow my investment with a risk of loss.

With money, it's the opposite.  I want a low-risk battery of storing income now so that I can spend it in future, or share, or give it away, or whatever I want to do.  So, it's got to be liquid, it's got to be something that I can just easily transfer to someone.  It's got to something that is easily divisible, fungible so that all the units are either identical or nearly identical.  It's got to be something that holds its value that I want to hold it longer term.  Then, you want to add other things, like you want it to be verifiable, you want it to be portable, and there are multiple ways to break that down.  You can look at different monies and, like Vijay did for example, you can score them on the different aspects.

So, for example, gold holds its value pretty well long term because gold's got a very, very low inflation rate, meaning the amount of gold that exists above ground grows at a very, very slow rate historically, and there's a good reason for that, whereas other types of commodities can grow quicker.  So, gold ends up being a very good store of value but it has shortcomings in terms of portability, divisibility, verifying the way you actually own this gold, the ease of being able to do that.  Whereas, if you look at something like the dollar, they've made advances for how easily you can send it around, right; you can have a digital representation of it and it's very easy to move around. 

Of course, the downside is that there's no constraint on how much they can print, other than self-imposed restraint that is meant to keep guardrails on the system and stop it from hyperinflating.  So, there are kind of guardrails on it but they're self-imposed, and so over time, in practical terms, the rate of new dollar creation is much faster than the rate of new gold creation. 

So, when you compare those, you think, "Okay, those are interesting.  We obviously have to pay them for tax purposes; we have to have some working capital to use them; they're liquid".  The government specifically does their best to try to control the volatility at the exchange of devaluation, but they try to control the volatility of it.  So, there are advantages, but they're not a great long-term place to store capital.  So, when you go down a list, each type of money has shortcomings. 

When you look at something like Bitcoin, it's interesting because the innovation there is that it took the best properties of gold and fiat and mixed them together.  So, you have the slow monetary inflation rate of gold; in the long run it's even less, because eventually the inflation trends towards zero with Bitcoin and you have that scarcity, but then you also have the better divisibility, better portability and better verification. 

So in many ways, it's across the board, better than most other monies with a couple of weaknesses.  It's still relatively untested; it's got 13 years of testing, 13 years or monetisation.  It's smaller than dollars or gold, so it's less liquid, far more volatile, less widely held, less widely accepted.  So, what we can describe it as an emerging money, and all anyone has to do is look at the properties of it and determine if that's something that they want to hold relative to other monies, if that's something that's valuable to them. 

So, a lot of people still put it in the speculation camp or the investment camp, and I think it's a reasonable way to interpret it, because you're betting that the way it's behaved for 13 years and the properties it's had for years are going to continue.  So, you've analysed the probability of this occurring, you're making some sort of future judgement about this relatively new system, so that makes sense. 

But, on the other hand, you can literally use that insurance, because it's one of the few types of monies that you can easily self-custody, it's more portable than other types of monies, and we've seen this through emerging markets.  It's hard to move across borders with gold or physical cash, it's hard to transfer bank money around the world, but Bitcoin's something that you can really self-custody and pretty much move wherever you want.  So, I don't think the world fully realises its properties yet and what that means.

Peter McCormack: Yeah.  The interesting thing about Vijay's chart is the way he grades each form of money; that can change over time.

Lyn Alden: Yes.

Peter McCormack: One thing I wonder is missing, and perhaps it's missing to the benefit of Bitcoin, is volatility.  I think price volatility is something which is helpful to understand in consideration for this, because if you look at the chart, you look at Vijay's chart, to me it implies, "Oh, well, that's the best form of money; it can do every single thing I want, therefore I should hold all my money in Bitcoin", but there's a risk to that because of volatility. 

I always felt like, if you wanted to make a decision about which forms, maybe multiple forms of money, there's an argument to hold a basket of Bitcoin, gold and maybe dollars.  I know that's heresy with some bitcoiners, but I think that you can make a solid argument if you wanted to plan long term; you could have a mix.  But to consider that mix, I think volatility should be considered; do you think that's fair or not?

Lyn Alden: I think it's a huge variable, especially for medium of exchange and unit of account, right.  So, basically, I would describe Bitcoin as an emerging money; it's a 13-year-old money, so it doesn't have the track record or the size of those other monies, and because it's a smaller market, it has more volatility.  It's got basically a bigger range of outcomes for how it could look in ten years compared to, say, gold.  So, because there's a bigger gap of expectations about what this could become, the volatility is very large.

In addition, because it's a smaller market, less liquidity even though it's got quite a bit of liquidity, it's got less liquidity than, say, the dollar market or the gold market, and that's because it's smaller.  So, if a Michael Saylor comes in, they can potentially move the market; whereas, if you have a handful of hedge funds, fast money, decided to sell it because of whatever macro factor they're looking at, that can also move the market.

Also, because it's known for good returns, even though the leverage in the space is actually small relative to market cap or other ways of looking at it, there are individual parts to the market that are extremely leveraged; those easily get liquidated when you have big moves to the upside or downside, which exacerbates volatility.  People are betting on it in a way that don't bet on, say, gold and things like that, or at least not at this scale, and so that adds to volatility.

One way to think about fiat currencies is they tried to optimise for low volatility, but then the sacrifice they make is devaluation.  So, they kind of have this manual adjustment mechanism, where if you get deflation, they want to print a lot more.  If they start getting inflation, they try their best to throttle that back.  They've had mixed success with that but basically, you never really have a case where a developed market currency is 50% less useful the next year, right, whereas that can happen with Bitcoin, even more so.

Now, in extreme historical events, even those fiat currencies, they break down.  So, they go decades and decades and decades without having a major volatility event, and then you get like a 1933 event where it's practically cut in half; emerging markets go to this far more often.  Egyptian pound had a month where it just cut in half about five years ago.  So, that kind of thing is common throughout the world, unfortunately.

But in developed markets, from year to year, the volatility is low and that, combined with the fact that it's recognised as legal tender, makes it a useful form of near-term money.  You can save it, you know it's going to be worth roughly the same in six weeks, and you go about your day; that matters for people where their incomes and their expenses are very close. 

So, if you live in a country and your making $400 a month and your expenses are $400 a month, you can't risk holding a lot of your assets, or whatever assets you might have, in something that can go up 50% or go down 50% during that time.  You'd probably have to have a stable amount because you have no margin for error.  Whereas of course, if you have a large pool of capital, you have a better ability to withstand volatility.  So, it's kind of a privilege to able to accept the volatility for harder, better money in the long term.

Peter McCormack: Well, Alex Gladstein talks a lot about this in certain markets that Tether is much more important than Bitcoin.  Turkey, what, the inflation rate; did I see it's over 100% now? 

Lyn Alden: It was very, very high.  I think it was high double digits; it was insane.

Peter McCormack: He talks about people in Palestine who struggle financially.  He said, for a lot of the people in these places, they cannot risk having a high volatile asset such as Bitcoin because they have day-to-day costs; maybe they can have a small amount in there hopefully that'll appreciate in value, but some people are living hand-to-mouth.  So, something like Tether has become super-important in these markets.  When he explains to me the importance of that, I've had to check myself on criticisms of altcoins.  I think there are fair criticisms of them, but at the same time, if these are currently solving a problem for people, I find it hard to take a firm position against them.

Lyn Alden: Yeah.  I've not been bearish on stablecoins overall.  I think it's obviously an innovation.  If anyone who tries sends money internationally, stablecoins are an improvement; it's just better technology.  Obviously, I'd  like to see them on Bitcoin, right.  So, we've actually seen some announcements at the Conference about being able to bring stablecoins back to Bitcoin Lightning; so all else being equal, I'd like to see them there.

But yeah, one of the few cases in altcoin land that actually has use case, I think, has been the stablecoin market, and Tether's an example, whether it runs on Ethereum or others.  If a chain gets too expensive it starts spilling on to another chain, and that is useful for people.  An example is Lebanon where they're through a major currency event.  Even ones that were holding dollars in the bank, that is prone to confiscation, transferring back to the local currency. 

So ironically, Tether ends up being safer for them than holding their dollars in a local bank.  Whatever questions people might have about Tether's collateral or things like that, their ability to blacklist addresses, they look at that compared to what's happening in their local banking system and they're like, "Well, I'll take the Tethers". 

So, it is important for people, especially when there's not a big margin between your expenses and your income, to have a low volatility asset; that can mean different things to different people.  I mean, currency is generally very low volatility over, say, a two-month period, except for extreme events, then you have gold that's more volatile than that, and then Bitcoin's obviously far more volatile than that; that's actually one of the downsides longer term, is that then an inverse correlation between volatility and their ability to hold value long term.  And so the cost of that volatility management is ongoing devaluation.

Peter McCormack: Okay.  So, there's going to be a range of listeners on the show.  I'm not worried about the people who are understanding how to balance their fiat versus Bitcoin; I think they get it and they're going to get a lot out of this show just because you bring so much to the table, Lyn.  But there are going to be some people, I hope, I really hope, there are some people here who only hold dollars or only hold pounds and are starting to think about this.

It's interesting, when you start to consider the different uses of money, taken straight from your article, the use to consume, save, invest and share, personally running through this, the majority of my consumption is with my traditional pound bank account.  I use my card and I pay for things or I withdraw cash and I pay for things.  But when we come to saving, whilst I have a small amount in pound, I don't tend to save too much in pounds; it's the money I tend to put away for the next year.  Anything long term is going into Bitcoin because I know, long term, that's where I feel that's a better place to save money.

Investing is kind of interesting because certain things I'm investing in, the football club for example, that's an investment of pounds; I've taken from savings and put that into that.  But I can see scenarios where I'd invest Bitcoin into Bitcoin companies.  Then, when we talk about sharing, actually, the majority of my sharing is actually Bitcoin, because that's appreciated so well and there's so many projects that accept Bitcoin and they accept it internationally; I've actually been doing that.

I think it's interesting to start to consider, I actually need different monies for different purposes.  Can you run through this and why you did this breakdown?  It's actually the first time I've seen somebody do this, and it's made me think about money in a different way.

Lyn Alden: Yeah, I think during monetary transitions, that becomes very common to use multiple types of money.  You were saying, in Venezuela for example, there was like five common types of money and that's because they're going through a very difficult time.  It's like the more stability there is, the less need there is for multiple types of money.  When you have all these imperfections with different types of money, or at least imperfections as part of their journey -- so, for example, Bitcoin's imperfection, we can call it, is the volatility; early on, that volatility's inevitable.  So, whatever the type of money might be, there's going to be a downside to it, and so they use that for the things that it solves and use another type of money for the things that that solves.

So, when you go back to what we can do with our assets, right, so if we have a surplus of what we generate versus what we do, we can either (1) just consume it, we can just use it up in various ways, discretionary, (2) we can save it.  The whole point of savings is something that you expect to not be super-volatile but that, of course, is different timeframes.  So, you might want to save for something six months from now, and you need to have pretty low volatility for that if you're saving up for a down payment on a house, for example, compared to something if you're saving multiyear, you're willing to accept more volatility but you still want it to be pretty much a sure thing; you want it to not lose value significantly over the longer term.

Peter McCormack: So, hold on just one second; my Bitcoin is both a saving and investment.

Lyn Alden: That's currently where it is in this transition, right, because it's a more volatile money and because it's earlier on in its monetisation process, it kind of blends the category between savings and investment.  I think it's also partially the more knowledgeable someone gets on it, they might start putting more in the savings camp; whereas, people that are approaching for the first time really think about it in the investment camp.  But really it has aspects of both, right, because it's this 13-year-old asset that's monetising.

When you hold Bitcoin, you're making an assessment of its properties relative to others, kind of how you would in an investment.  If I buy one stock over another stock, I'm making an assessment of its properties and saying, "I want to own stock A and not stock B".  The same thing with Bitcoin; I'm looking at the properties and saying, "Okay, it's not something I want to hold if I'm going to buy for something in six weeks", right?  I'm not going to store it in Bitcoin, but it's something I want to hold if I want to make an expectation about what's going to happen five years from now.

Peter McCormack: Yeah, okay.  Let's talk about the sharing bit, because I definitely didn't think about that as a separate area.  If you just said, "What do I do with money?" I'd be saying, "Well, yeah, I buy stuff with it and, yes I save with it and I certain invest with money" but I never would have thought about sharing as an important separate category.

Lyn Alden: Yeah, it's its own thing.  I like to characterise that as essentially investing in your community, right.  So, you can kind of put it in the investment category, but it's a very different type because you're not trying to invest specifically for yourself.  I think a lot of us, we're wired to want to help the community around us; that's how we survived as a species.  Our social interactions are a key part of what makes us human and so sharing is a key part of investing in our community and just helping other people.

So, when you have some sort of surplus, you can consume, you can save, you can invest, you can share.  There can be different types of monies or different types of assets even, if you're talking about investment and non-monies, like things like stocks or companies or real estate, that serve those purposes differently.  Ideally, in the long run, you'd have one money that can do it all, and maybe Bitcoin, after 25 years, can check off more boxes than it can check off now.  Right now, it can check off a bunch, and the longer it goes on, it might be able to increase the number of boxes that it can check off in terms someone's finances.

Peter McCormack: Yeah, it's funny you considered it there as an investment as your community.  I was talking to Danny about it beforehand.  I actually thought of sharing as more like consumption in that I am choosing; I have a choice to spend it on myself or to give it somebody else.  When you give it to somebody else, you have that feeling, that good feeling like you're helping other people.  So, I actually also considered it as consumption as well.

Lyn Alden: I agree.  That's a good way to look at it.

Peter McCormack: Yeah.  Okay, so that's a really good way to understand the different uses of money and, therefore, like you say, during a transitionary period, while you need to consider the monies you have and what you use them for.  We are though in this transitionary period, very obvious to us what's happening; even more obvious to you who's somebody who can read the market like tealeaves and spot everything that's happening. 

I think this is one of the really important things for people who haven't fully understood what's happening for the nature of money right now, haven't fully considered let's say all digital money, not just Bitcoin, the advent of the CBDCs.  I don't think we should spend too long on the history, because I'd encourage people to go and read it, and read the other articles that I've done, but can you give a brief summary of how we're got to where we are, the different transitions; then we'll cover specifically what's happening with money right now?

Lyn Alden: Sure.  So, through that lens, money is technology and as technology changes, our money changes.  So, we can put it in three buckets: commodity money, fiat money and digital money.  That's one way to just simplify it.

So, commodity money was the reality for thousands of years where you're trying to figure out, if someone has apples and they farm apples, they want to turn that into products and services.  Rather than try to line up all these people that need apples, if you can find a third asset, something that everybody wants, and sell her apples for that and then be able to use that as her savings and her expenditure in the future; so you need something that is going back to properties we discussed, that is liquid; fungible; everybody wants it; it stores its value pretty well; it's easy to move around; you can transfer a decent amount of value with a small amount of space and weight, and so various commodities serve that role.

The risk there is that, if technology improves, you can make a lot more of those commodities.  So, you can threaten the value long term of those commodities.  So, if you look at history, you go up the scale to all these different -- you can use salt as money; you can use coconuts as money; you can use livestock as money; you can use copper as money.  And as technology improved and as cultures with different levels of technology interfaced with each other, the harder monies would win out over these ones that technology can devalue.  Eventually, you wound up with gold and silver, and then really it was really gold that came out on top in the end.  So, that's kind of the history of commodity monies. 

It's because gold has an inherent difficulty adjustment built it, so as time progressed, we got a lot of easy gold deposits, and as our technology improved, we could access harder gold deposits but it's increasingly hard to get that gold.  So, actually, almost no matter how much human technology improves, we've had trouble making more than 2% more gold per year, right, and that's kind of the upper limit, except for a very brief moment where we find a new continent or some sort of massive step change. 

Other than rare moments like that, we don't really know how to make more gold quickly, and so that's why it's stood the time compared to virtually every other commodity in terms of being good, long-term savings.  But because the downside is portability and auditability, it eventually got very centralised, so it would get collected in banks and claims would be made on the gold.  Then it got increasingly collected into central banks where not even banks the held the gold anymore. 

So, you had a complete detachment from what people used as a medium of exchange, partially for convenience and partially due to legal decree.  Governments had an interest in collecting the gold while people would be expected to use the papers.  But the risk there is that you can just, with a stroke of a pen on midnight one day, just sever the connection between those papers and the gold.  That's what happened in countries around the world multiple times until it happened permanently in 1971.

So, we've been in this era of fiat currency where it's almost like an artificial commodity.  So for example, the stock-to-flow ratio, so how much money exists versus how much is created in a year, is higher than most commodities; so that's important as a money.  It's lower than gold and silver, but it's higher than, say, oil or copper, things like that.  So, you have kind of a workable money. Its volatility is managed by the government and central bank, there are various checks and balances for who can create money, and the number of people that have to sign off on new money creation, at least in these developed markets.

But the downside is, longer term, your monetary inflation rate is 7%, 8%, 10%, 15%, and of course in many countries, far higher and the interest rates rarely keep up with that long term.  So, you basically get diluted.  As you hold stake in that network, we can call it a network, your percentage of that network keeps getting diluted over time by holding it.  In addition, it still has shortcomings in terms of auditability, right. 

So for example, there was a lot of dollars held offshore and then those get levered, but those still represent claims, essentially, for US assets.  It's actually a very OPIC market because it does not have great auditability and obviously paper money can be counterfeited. So, it has various imperfections, and so that's been something that's been plaguing humanity for a while I would say, is that money's this kind of political thing; it devalues.  Then, especially for people living in emerging markets, you have a hyperinflation event once a generation at least, right, and so that happens in developing countries in the world. 

So, it's bad enough in developed markets.  It's ten times worse as you go down the spectrum, if you go towards what they call the periphery of the financial system, countries that are not near the core of the whole money creation process; they're not the Fed, they're not the ECB, they're not the Bank of Japan; they're in these periphery markets and they have all the volatility of the system.  So, the developed world kind of pushes the volatility out to them and they get all the downside of the system and none of the upsides.

Now, first you had the creation of Bitcoin and then you had various entities study that and say, "Okay, can we do this to fiat; can we fiat on the blockchain; can you get stablecoins?"  Then you get governments look at that say, "Hey, can we just make stablecoins issued by the government; can we make digital money; can we improve our banking rails?" 

People often say that the dollar's already digital, that fiat money's already digital, your money's just a ledger in a bank mainframe.  That's partially true, but the digital change adds a lot of new variables for how much they can track it, how much they can control it, how much they can freeze it, how much automated it can be, right.  So, if you're sending money from entity to entity, it can be much more automated if it's digitally native compared to those old bank rails.

So, I think one way or another we're going to this future where, due to the application of technology, money's increasingly digital which makes it more verifiable, easier to transfer, things like that.  But of course, the huge risk there is that increases surveillance and control capabilities which, going back to living in different countries, that can mean very different things depending on what country you're in.  A CBDC in Norway could be very different from a CBDC in China, for example, what the actual practical implications mean, but either way, it puts people at the whim of the entities that control that money. 

Bitcoin is basically, I would say, the creation of commodity money in digital form.  So, they made something that requires work to produce which is unlike the fiat currency system and unlike most of these other digital assets.  It actually goes back to the days of commodity money, except it improves on that because it makes it more divisible, more verifiable and more portable. 

So, we're kind of in this world now where you have digital bearer assets, like Bitcoin, being the most immutable, the most money-like out of them, commodity money, hard money; then you have various imitators; then you have stablecoins, which are basically fiat currency in digital form; then you have nationalised stablecoins which are centralised CBDCs, where the central bank issues the money and has complete control over how it's used.

Peter McCormack: Digitised commodity money, that's very cool.  I never had it explained like it in years.

Lyn Alden: Even Satoshi explained it like that once.

Peter McCormack: Really?

Lyn Alden: Yeah.  He talked about how he's like, "Imagine a metal that is boring and grey in colour, can't be used for a lot of things, but it's as rare as gold, but that has one unique property that you can send it over a communications channel".  That was one way he helped people think about what Bitcoin is.

He's like, "If, for any reason, this weird commodity became valuable, if it had any sort of value, it could be a useful type of money because you could send it to people and they could either spend it or they could convert it to something else and then spend it there".  So, that's one of the ways he conceptualised it.  So, even he thought of it as a digital commodity money.

Peter McCormack: Out of control of government.  I put the Hayek quote in here.  I've actually seen him; I've seen the YouTube clip.  I'm going to read it for people.  "I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is we can't take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can't stop".  I mean, that's an incredible quote to read now.

Lyn Alden: Yeah, because it's Bitcoin before Bitcoin existed; he was the first bitcoiner.  You kind of translate that, so for example, commodity money is dictated by nature, right.  So nature and our technology against nature determines how much of it we can create and what its properties are.

Fiat currency is something that is in the hands of the government; they can determine essentially how much there is and what are the rules about how to use it.  The invention of Bitcoin represents a way to take all the properties are commodity money, or at least most of the properties, and then put them in digital form and so you have something that's proof of work.  So, you have to expend real world resources to create it.

Then, among all the different blockchains out there, Bitcoin's the one that actually is decentralised and relatively immutable.  It's the one that's the closest to representing an actual commodity rather than an equity security, a network that requires ongoing governance and a centralized hub; it's the closest thing we have in digital form to a commodity money.

Peter McCormack: For you, Lyn, do you still have moments with Bitcoin where you have a step change, deeper understanding of it and become even more convinced by it?  Just like there, then, I hadn't heard Satoshi explain it like that, but to hear you explain what commodity money is and then explain Bitcoin as digital commodity money, that is another step change for me, another kind of lightbulb moment, "Oh yeah!"

Lyn Alden: Yeah.  I think we all kind of approach from lenses we understand.  So, that was one of my early ways of approaching it, is seeing it as digital commodity money; that's kind of how I got it first.  All my hesitations were like, "What are ways that this could be damaged or how could its immutability be compromised?  How could its shortcoming be exploited?" things like that.

So, it's more like, from the very beginning I acknowledge it as commodity money, and it was like, "Is it good enough commodity money?"  just because how, in the past, different commodity monies would compete and some of them would be found wanting and would get pushed aside as money.  So, the whole question was how hard is Bitcoin; how's it going to hold up in the long term as commodity money?  So, the longer it goes, the more of its properties you understand, it's doing quite well.

So I think, for me, the biggest implications are just seeing how it can change finance, the larger it gets and the more development happens on it.  So for now, I'm looking at things like other layers, what's happening in Lightning, what's happening on Liquid, things like that, and how that can transform some of the ways that all of finance operates.

The whole point is you have an immutable base layer and then programmable other aspects of it.  So, you can do programming on top.  It's basically programmable commodity money.  I think the implications of that are crazy, especially when you look out 10, 20 years because software is one of the few things that just keeps expanding exponentially.  It's like, what is it going to look like in 20 years when you have programmable money and people have been programming on it for decades?

Peter McCormack: Maybe that's your book.

Lyn Alden: I think I'd have to hire programmers to help me.  I've written some code, but I'm in no means a programmer.

Peter McCormack: When you talk about how it can change finance, what are the things you're looking out for on these layers?  Like, at a rudimentary level, I'm really interested in these new Bitcoin-backed mortgages; I think they're fascinating.  For me, I've just bought a house and the timing isn't right; but if it was now and I could get one of these Bitcoin mortgages, they actually to me make a lot of sense.  What are the kinds of things that you're looking at?  Are there big changes in finance you think Bitcoin can bring in?

Lyn Alden: Well, I think longer term, yes.  I think basically, over the past couple of decades, we've monetised non-money assets because our money's been so bad.  Because our money constantly devalues, we're like, "This is a hot potato; we want to get rid of it".  So, we put a monetary premium on other things, and that actually makes those things less accessible for people that just want to use those for the utility value.

So, for example, if don't know what to do with my money so I buy a second home and I treat that as an investment, if enough people have that practice, it bids up the price of homes and therefore makes buying a first home less accessible to someone who really just wants the utility value of a home.  The same thing for stocks.  We bid up the valuation of stocks because we're saying, "Okay, I'd rather store my money in a diverse collection of stocks than in dollars or treasuries". 

One of the things that, if you have the reintroduction of credible hard money, it can demonetise some of those assets, take away that extra monetary premium.  So, they're still valuable; real estate's still valuable; equity is still valuable, but you might have less of a valuation premium on them and that could make them more accessible to people and make their returns better, and you put that monetary premium in the hard money.  So I think that's one.

Then, you have all sorts of just improvements.  You apply automation to finance, so you have less friction and gummed up issues in the whole banking system.  So it's a very manual process, and you can take out a large portion of that manual process and automate it.  So if money moves faster, the question is how can that influence economic growth rates?  So, as the world population has aged and slowed down, GDP growth has been on the down trend, and the question is if you unlock faster money what does that mean; and freer money; and more people will be able to access that money?

So, for example, if people around the world that are in these, say, periphery markets that have trouble accessing good money, what if we expand dramatically the number of people in the world that are able to access good money; what can they do with it?  So that's exciting to me because you open up the market for so many more people and talented people throughout the world that can now access this open monetary network.

Peter McCormack: So, if we've gone through these transitionary periods now where you had commodity money, we had the Gold Standard, Bretton Woods, the Petrodollar System, we're heading into this digitisation of money which we've talked about, and you talk about in the article, for you is this now an inevitable change? 

Lyn Alden: Well, I think the digitisation of money's inevitable, and then the question is which type becomes dominate?  Is Bitcoin strong enough to push back on government control over it, or does it run into a number of shortcomings and governments are able to make their CBDCs rather dominant?  I err towards Bitcoin being successful long term.  I think it has the properties: it's hard enough; it checks off a number of boxes; even the boxes it doesn't check off are within sight of being able to be checked off as technology improves and as it gets just more widely held and it becomes better.

So, I think longer term, Bitcoin is you can call it the fastest horse in the race; it's, I think, the best thing to bet on, even though for most people, I wouldn't recommend 100% allocation of Bitcoin, but I think it's something that's silly not to have any of at this point.  I think in 2022, if you have zero Bitcoin, I think the person has to probably send more time looking into what that is.

Peter McCormack: Are you listening Peter Schiff?  Okay, so if we head into a world of Bitcoin winning, what do we lose by not having fiat money, government money, whether that's as we have it now or CBDC?  We know governments have levers to help with the economy.  Some bitcoiners will be like, "We don't care; I don't care", but you, as somebody who's a macroeconomics analyst, is there anything you think we lose that we might miss?

Lyn Alden: It's hard.  So, these types of changes, I think it's easy to overestimate what they can do in a couple of years, but then underestimate what they can do in the longer term.  So, that's the part that's really hard to fully grasp.  It could, for example, change the optimal size of a nation state.  So, if money's more portable inherently, that kind of opens up the competition between different countries.  So before, if it's harder to transfer your assets, there's more frictions, that means the jurisdiction has a little bit more control.  If someone can take, you know, the vast majority of their assets with them easily, then it kind of opens up jurisdictions, you can shop for jurisdictions. 

One implication of that is that's something that's really accessible to the rich more so than the middle class or the poor, and so that's something that really does advantage you if you're privileged in some ways.  So, I think that's going to be interesting implications longer term.  That might be something that, if you can get brain drain out of certain areas that are struggling, or the people that have the resources, that have the skills, can get out, and it makes it hard for that area to recover, right. 

But it's harder to predict long term what means, and I think it's one of those things that it changes; I think this is like a phased transition, so it's not something that just happens overnight.  So, I think it could change governance and things in some ways, but I think they're hard to foresee.

Peter McCormack: We could go through a period of time where we have a government digital money alongside Bitcoin, and maybe some countries will launch a CBDC.  I'm still not sure it'll happen here in the US; I'm not 100% sure in the UK.  I know it exists in China; I know other countries are trying; who knows?  But, while we wait for Bitcoin to win, or while the race is happening, these other currencies will exist.  So, somebody listening to this, Lyn, they're still going to have to consider the relationship between what they hold in terms of, say, fiat and what they hold in terms of Bitcoin.

Now, you've talked about developed markets, seeing currency collapses.  We've raised Venezuela today, we've talked about Lebanon, we've talked about Turkey, there's Argentina, there are plenty of other countries that are seeing high inflation and seeing currency collapses.  But for the first time in my life, I feel like my domestic currency, the pound, is at risk of very high inflation.  There are lots of weird things happening.  The same here in the US.

So, just for somebody listening who might not understand, what is kind of the worst and best case scenario that you're planning for with regard to what's happening with the dollar? 

Lyn Alden: I use the 1940s a lot as a description of what's happening now, and that was pre-war, right.  So, now it actually got closer unfortunately to that comparison, because now we're adding additional kinetic war to the mix.  But essentially, the last time that the developed world was as in debt as it is now on the sovereign level was the 1940s, and that was a result of all the imbalances during that period and then the large wars.

The way that was largely handled was massive currency devaluation, right.  So, interest rates would be held low because, if you have 100% or 150% debt-to-GDP, you can't pay 10% interest rates on that; that's how you spiral into bankruptcy.  So, they just hold rates low even if inflation's double digits.  That doesn't mean that interest rates can't go up, but if you go up from 0% to 3% while inflation's 8% or 12% or whatever the number is, you're still getting devalued; your share of that network is being diluted over time.

My concern is that, as we enter an environment of scarcer commodities, as we enter an environment or even just partial deglobalisation, so just the lack of continuing of globalisation, maybe hold on to the globalisation we had, maybe claw it back to some degree, all those add friction and inflationary forces to the system.

So, I think we have a lot more inherently inflationary forces in the real stuff that we need to consume at the same time as the money system, the monetary inflation, so the number of units being created, the percent increase per year is above average, interest rates are super low, and because of the debt, they have trouble raising them, that's a recipe for ongoing currency devaluation.  Then, throughout the world, that can result in massive political revolutions, protests.

Peter McCormack: Well, we're seeing this right now.

Lyn Alden: Yeah, exactly.

Peter McCormack: Was it Peru I just saw last week, protests?  We've seen protests in Turkey.  It feels like this is a growing issue.

Lyn Alden: Yeah, and I think that generally, whenever you have food prices spike and you have fuel prices spike, and especially when it happens faster than wages can adjust, because those things can happen over a course of a month whereas it's not like everyone's wages just automatically tick up to make that during that month, that's when you get these massive protests because people can't put food on their table, they can't power their car, their motorcycle, whatever the case may be; they just can't do the things they have to do in order to function in life, and that's when they hit their last straw and they go out and protest and they can get pretty volent.  

So, that's the challenge of these decades, these decades of commodity scarcity and these decades of big monetary transitions.  There's no silver bullet, there's not something that can do to entirely eliminate risk.  There's going to be people that are really negatively impacted by this, but the way that people can protect themselves is by doing a careful assessment of where they're storing their assets.  So, are they storing their assets in things that can be devalued? 

Obviously, you need some working capital, or at least most people, unless you're super tech-savvy, if you can optimise it to be on your own kind of like Bitcoin standard or something.  But, for the vast majority of people, you need working capital, you need some kind of low-volatility money for incoming spending and things like that, but your actual reserve, to the extent that you can have them, you want to be very selective with what you own.

You want to look at things like scarcity; can it grow long term?  What the value of this thing going to be like five, ten years from now most likely relative to other things?  Then also, depending on where they are in the world, is it something they can self-custody or not?  That's one of the rare aspects of money is that I can't self-custody in equity, I'm on someone else's ledger if I own an equity, same thing with a bond, real estate obviously is not portable.  So, there are actually very few things that you can hold it and it's a bearer asset that just you hold it outside of the system; there's no counterparty risk.

Gold has traditionally filled that role, where someone can have a small amount of gold and it's just theirs; it's an asset that is not someone else's liability.  So, equities are, technically, liabilities of the company.  Bonds are obviously liabilities.  Currencies are liabilities of the central bank.  All of these assets are some other entity's liability, except for these fundamental bearer assets, things like gold.

Now, over the past 13 years, we have Bitcoin, and it's more portable, you can transfer it with you wherever you go, you can use it for censorship-resistant payments if you need to, but it has a variety of use cases.  So, I think in addition to being an investment and in addition to being savings, it's also insurance; it gives you that optionality in a way that other assets don't.

Peter McCormack: Amazing.  Okay, I just want to tell you the one last thing that I really liked from your article because I've never seen this before either; I'm wondering, is this one of yours?  Proof of force.

Lyn Alden: Yeah.  So, I've seen people describe it as proof of violence.

Peter McCormack: Proof of violence?

Lyn Alden: Yeah.  For example, I quoted Mosler in there; he created MMT or revitalised an older form of analysis called chartalism, the idea that money's issued by the government.  If you look at his quotes about how the money system works, it's essentially proof of violence, proof of the ability to exert force over someone.  That sounds extreme, but of course different jurisdictions, that means different things.  So, even in a relatively benign country, you have to pay your taxes usually in that country's currency, and if you don't, you either get a knock on the door by people with guns or you have to leave.  So if you want to be involved in that system, you have certain obligations to that system.

One of the ways I wanted to describe it was, so we had this whole multi-thousand-year history of commodity money, and the harder and harder monies kept winning out over softer and softer monies until you end up with gold.  Then the question was how did gold lose to paper; how did it lose to paper?  It was the only kind of downgrade in human history where you went to softer money globally, and it's like, "How did that happen?"  It's like, well, it's because it was enforced. 

It's something that it either gets really blatant, like in the United States where they literally said, "Americans cannot own gold under a threat of ten years of imprisonment", which is kind of insane if you think about it today, or just more subtle things like, "Okay, you want to hold gold?  We're going to tax every time you use it.  So, it's no longer money, it's no longer legal tender.  We're going to tax it every time you want to transfer it.  We're going to treat it like a stock or something like that", even in some cases worse than a stock, high capital gains, long-term capital gain taxes in a stock.

So, it makes it just inherently more friction to use, and through those various measures, you can enforce the use of a fiat currency.  You could say, "This is the only thing you can pay your taxes with and moving around every other type of asset is a taxable event".  So, that's how those systems survived for decades.

Peter McCormack: Well, I love proof of force.  I think we need to meme that into existence as a common term attributed to CBDCs, which versus proof of work, I think, is an easier way for people to understand why it's a better form of money.  Lyn, again, it's brilliant.  Everything you do is brilliant.  I love this.  I do want you to write a book because I think you'll be amazing.

Lyn Alden: Eventually I'd to.  I appreciate that.

Peter McCormack: You'll get there.  Anything else you want to talk about before we leave?  Do you want to tell anyone about anything?

Lyn Alden: I think that covers it.  I think the important thing is to have an open mind, because all monetary transitions in history rewarded people with an open mind.  That doesn't mean you mind's so open that you brain falls out!  You know that old term like, "Don't be so open-minded that you're not critical".  You want to be critical, but you also want to be open.  So that involves taking small steps, think through from first principles, what does this mean? 

So there are times when we don't have to go back to first principles and reassess everything.  We can just assume that things that worked out are going to keep working out.  But there are big transition periods where that's not going to be the case and you have to go back to the root of what assets you want to own; what is money; what is a good investment; where do you want to live in the world?  Things like that.  Just reassess from first principles what it is that you're doing here and what are you optimising for and what the risks are to you personally as well as broadly.

So, the other thing about the Bitcoin space is that there are people that make a call about Bitcoin, like someone's like, "I don't like Bitcoin because X, Y, Z", and then they get to told to have fun staying poor, and so they harden.  Then there's no amount of information that will ever change them; they've made their decision.  I think the trick for surviving this decade is to not be like that.  Don't be someone who makes a viewpoint and then that's your viewpoint now; you can never change your viewpoint because your ego is now tied to your viewpoint. 

I think this is going to be a decade that rewards someone whose ego's under control, you're always curious, you're always assessing what's going on.  "What are the risks facing me?  What are the risks to my assets?  What did I maybe miss a year ago; what did I miss two years ago?" and I think that's the way to move forward, is to just be open-minded because all of these monetary transitions involve people that could think of the unthinkable and that could look past how the system currently is.  If you were to start with a blank sheet of paper, how could it be?  What are the alternative timelines we could be under?  I think that's important to think of going forward.

Peter McCormack: I agree.  I also think it's a decade that's going to reward people who are signed up to the Lyn Alden newsletter, which I pimp every time we make a show because I think it's amazing.  Lyn, this is incredible.  Love talking to you.  Thank you so much.  Great to see you again in person, and I just can't wait to see you again.

Lyn Alden: Thank you, you too.