WBD519 Audio Transcription

Inflation’s Hidden Cost with Avik Roy

Release date: Monday 27th June

Note: the following is a transcription of my interview with Avik Roy. 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.

Avik Roy is president of the Foundation for Research on Equal Opportunity think tank and a policy Editor at Forbes. In this interview, we discuss the Lummis Gillibrand Responsible Financial Innovation Act, inflation’s compounding impact on the poor and why Bitcoin provides optimism.

“A lot of people, particularly intellectuals, like to complain about our consumerist culture in America. Well, what creates a consumerist culture? A monetary policy that destroys the long-term value and reward for saving your own money.”

— Avik Roy

Interview Transcription

Peter McCormack: Avik, good to see you, man.

Avik Roy: Hey, man.  It's good to be back with you. 

Peter McCormack: Yeah, it's good to hear you.

Avik Roy: I wore black in your honour.

Peter McCormack: You did, thank you.  I have a habit of wearing black.  Nearly every single interview, I pretty much wear black.

Avik Roy: You know, Peter, the thing I wanted to do for this interview in preparation for it was to watch the El Salvador video, and I didn't get to because the Lummis Gillibrand bill dropped, so I had a deep dig into that.   So, I wanted to be able to be like, "This is the most amazing thing ever".  I did watch the trailer though.  I can't wait to watch it.

Peter McCormack: Well, it's not too long, it's 35 minutes.  A lot of good work went into it.  I should give a shout out to Neil Berkeley, the director who worked on it.  He reached out to me about a year ago and he said, "I like your work, I want to do some film work and I think we can work together".  So, he came out with me with Director of Photography, Curt Taylor, and we shot for a week and a half and made the film, and I've got the buzz.  Me and Danny picked out a number of locations.  I think we're going to try and do ten more.

Avik Roy: Great.

Peter McCormack: Yeah, I think that's the next step.

Avik Roy: Are you going enter it in any competitions or anything like that?

Peter McCormack: Not now because they're not kind of film festival-type films, they're not full-length documentaries.  I intend each one to be 30, 35 minutes.  But not every one will be a Bitcoin show.  So the title we went with, Follow the Money, is that idea that we can expand a little bit outside of Bitcoin, talk about asymmetric subjects that people care about.

We just had a show that went out with Lyn Alden covering inflation, something we're going to talk about today, and it was a huge show.  It's already done over 110,000 listens or views on YouTube in 2 days.  So, there is this desire to learn about wider economic issues by Bitcoin people, but I also think it's a way to bring people into Bitcoin.

Avik Roy: I totally agree.

Peter McCormack: I think the next one we're going to do is probably in the UK covering the cost of living crisis, which is highly relevant again to what we're going to talk about today.

Avik Roy: Absolutely.

Peter McCormack: I think that maybe we'll orange pill some people.

Avik Roy: Well, thanks for doing all that work.  It's important work.

Peter McCormack: Well, look, thanks for everything you're doing.  I was talking about, before we started, I will recommend people sign up to the FREOPP newsletter.  It's dense, full of content; it's very interesting content.  It doesn't feel politically motivated in any kind of partisan way.  It feels like you guys are just trying to help with good policy.

Avik Roy: Thank you, we are.

Peter McCormack: You should probably tell them about it.  Sign up, by the way; everyone sign up.  It's fucking good.

Avik Roy: Thank you.  Well, the thinktank that I founded and run is called the Foundation for Research on Equal Opportunity, which we abbreviate as FREOPP, or freopp.org.  We have a new newsletter on Substack which we launched a few months ago which you can get to at https://substack.freopp.org/.  That'll get you to the main site and you can subscribe there.  We're also on Twitter @freopp, and I'm personally on Twitter @Avik.

Peter McCormack: Get that all in there.  But tell people about the work you guys actually do.  How does a thinktank work?  That's what we going to be talking about today, after we talk about the bill from Lummis and Gillibrand, talk about the work that you guys are doing.  What's the motivation in it?

Avik Roy: Yeah.  So, there are lots of different kinds of thinktanks, but the main category of thinktanks are what we would technically call public policy research organisations.  It means we're looking into issues of importance to the country or the world, particularly economic issues, but just issues of law, issues of policy, issues of regulation; things where, if you change a law or you change a regulation, you can make a difference, ideally for as many people as possible.

In our particular context, our mission is to expand economic opportunity to those who least have it using the tools of economic freedom, technological innovation, individual liberty and pluralism.  So, we're trying to say, "Hey, things like Bitcoin, things like entrepreneurial innovation, if done the right way, can do a lot to improve the lives of lower- and middle-income Americans, people of lower net worth", and not just Americans, obviously, in the case of Bitcoin.

Our focus is primarily on the United States, and the idea is that we can bridge this divide.  There's conventional wisdom out there that the left and the right hate each other and that for your team to win, the other team has to lose.  I think a lot of our work is oriented towards, actually that's not true.  There are ways to achieve progressive policy outcomes in which people have more social mobility and more financial security, but do so in a way that creates more choice, more competition, more freedom.

Peter McCormack: How do you work with policymakers?  Do you have direct connections with the teams that work for the senators and the people in Congress; how does it work?  I know US lobbying is a big thing in the US; is it considered lobbying?

Avik Roy: It's technically not considered lobbying what we do.  So, the tax code actually specifies it.  So, there are different forms of organisations that can be non-profit, tax-exempt organisations, and ours is called a 501(c)(3).  To be a 501(c)(3), you have to not engage in lobbying, or very limited amount of lobbying. 

Lobbying is directly defined as you're lobbying for a specific piece of legislation, so a specific bill that's actually been introduced.  You're saying, "Pass that bill, Members of Congress, and you out there in the public, you should call your congressmen to support this bill"; that's called lobbying, for example.  Or lobbying could be to advocate for the election or rejection of a candidate based on their politics.

So, we don't do things like that.  What we do is we're non-partisan, we brief policymakers, so we have direct relationships with the senators and with the congressmen and with the people and the President's staff and executive officers, and their staff.  So, sometimes it'll be like Congress is having a hearing on Bitcoin or on healthcare policy or energy policy, and our scholars will be asked to testify before Congress at those hearings that, if you're an American, you'll watch on C-SPAN, for example.  Or it could be that we're directly actually, in a private setting, briefing a Member of Congress or his or her staff on --

A typical thing will be a Member will say to us, "Hey, Avik, I'm really interested in this.  I read your newsletter, I saw this thing about the rising cost of housing, I want to do something about the rising cost of housing.  If I wanted to introduce a bill to do something about housing, what should I think about?  What are the factors I should consider?  What are some of the policy ideas you have for reducing the cost of housing?"  So, we'll walk them through some of our ideas, and then they'll decide what to do with that.

Peter McCormack: Stop BlackRock buying all the houses!

Avik Roy: That would help!  So a lot of it is, you could think of it as almost like a pro bono consultancy, where we're not being paid by the politicians or the people to help them.  We do it as a charitable function.  They ask us for help, we give them technical advice, help them design policies that will advance, hopefully, their goals and ours, our mission, and then we're supported entirely by donations.

Peter McCormack: Oh wow!  Okay.  Well, listen, I love the work that you guys are doing, and it's been great to get you back on the show, and I'm sure you're going to be on a bunch of times.

Avik Roy: Thank you.

Peter McCormack: I think I'd like to try and get some other people within FREOPP on.  I think you've got some really great thinkers in there.  I don't know their specific roles, but like I say, every time I get the newsletter, I end up going down a couple of little rabbit holes of different information.

Avik Roy: Well, we recently added David Zell, the President, or founder, of the Bitcoin Policy Institute.  He's over here somewhere.

Peter McCormack: David Zell, here in the room with us.

Avik Roy: He's now a fellow FREOPP as well. 

Peter McCormack: Didn't David Zell start a 501(c)(3) or whatever it is?

Avik Roy: He did.

Peter McCormack: Yeah, he did.  Have we got David on tomorrow?

Danny Knowles: Tomorrow, yeah.

Avik Roy: Yeah, and he's roped me into his thing too, so I'm a senior advisor at the Bitcoin Policy Institute.

Peter McCormack: Wow!  Well, the amount of stuff he's done before his 14th birthday is incredible.

Avik Roy: Yeah, it's kind of embarrassing.  He needs to slow down.

Peter McCormack: Yeah, come on, man!  Okay, so we met up in Austin, went for some food and you told me you guys are writing a paper about inflation and how it disproportionately affects the poorest in society, and we are going to get onto that.  But this paper has dropped, this bill by Senator Lummis from Wyoming, and Senator Gillibrand; where is she from?  Is she New York?

Avik Roy: New York.

Peter McCormack: New York, yeah.  Bipartisan bill which some people I've seen reject it today and be very critical of it.  I've seen others say, "Actually, this is great because we've got clarity now".  For me, it feels like Senator Lummis, who is pro-Bitcoin, is trying to get ahead of the curve here and say, "Here's some positive legislation to help the industry progress and flourish", rather than allow someone else to come in and be too negative. 

I haven't read the bill; I'm aware of some of the details, specifically the $200 exemption for people to be able to make payments, which is very sensible, and I'm aware that there's an inflation clause in it, which is incredible.  But you messaged us an hour ago, so we should get into this.  So, tell me what you've seen within there; what's the good, the bad; what should we be aware of? 

Avik Roy: Yeah.  So, I've been following this, as many of us have for some time, because obviously Senator Lummis in particular, who communicates with many of us in the Bitcoin community, has been sharing that she's working on this and waiting for the final one to drop; I think a block, was it, that dropped a draft of it a couple of days ago that was from March.  So, to see the final version is interesting. 

Just as a way of background, one of the things that happens with these bills is what they do is they'll share it privately with lobbyists, with stakeholders, with trade associations, so like the Blockchain Association, or Coin Center, or maybe even the Bitcoin Policy Institute.  They'll go to these various groups and they'll say, "Hey, we'd like your input on this"; they'll do that with FREOPP as well.  People will give feedback and they'll take some of the that feedback, and maybe not all of it, and that helps shape the final version of the bill versus what they started with.

So, what we see here, I think, is really interesting.  I'm still yet to go through the entire 69 pages of the bill.  I've gone through the entire legislative summary, I've gone through some details of the full legislative text; it takes a while because legislative text is very technical.  But I would say overall, the way I'd summarise it is it's better than I expected. 

So, based on conversations I'd had on Capitol Hill with various people prior to the bill, the final draft dropping, there were some things I was concerned about.  I feel like overall, what I see from the bill is a very clear definition of Bitcoin as a commodity, whose spot price in terms of exchange and things, is going to be regulated by the CFTC.  Not only will Bitcoin be regulated by the CFTC, but a good proportion of the broader cryptocurrency landscape will be regulated by the CFTC, anything that is not a security, as defined in the legislation.

So, one thing that has been a sore point in the broader crypto world, less so with Bitcoin, is this point about, is something a security or not?  I think what the bill does is create this regulatory framework now where Bitcoin has kind of got a free pass, where Bitcoin is not a security; the law basically makes that very clear.  One thing that's really important, particularly for the international audience that doesn't necessarily know this, there's a legislative hierarchy in the US.  So, there's the US Constitution, which is the highest level of law.  The next highest level of law are Acts of Congress, meaning Congress actually votes on and passes a piece of legislation and then the President signs it into law. 

The next level below that, for federal law, is what we might call regulations.  So, Congress passes a law but leaves the details to the Securities and Exchange Commissioner, or the Treasury Department, or, if it's not healthcare law, maybe it's Health and Human Services, or whatever it is.  They'll fill in with 1,000-page documents that are lodged before the Federal Register, "Okay, here's exactly, in nitty gritty, to say how this will work".  The reason I mention all that is that something that is a regulation or, say, a Supreme Court precedent, that's one level of law; but if Congress passes a statute, then that is very hard to change.  Congress would have to pass another law to change it, or the Supreme Court would have to rule it as unconstitutional. 

So, if this bill were to become law, then the legal status of Bitcoin as a commodity that's not regulated as a security, that has these various features, that has this $200 de minimis transaction sandbox or window, that would be pretty hard to change; that would create a stability, a legal stability and a recognition of Bitcoin that it has not had to date.  That would be pretty powerful, I feel like, for the Bitcoin ecosystem.

Peter McCormack: Yeah, and for a couple of reasons; firstly, for the clarity here, but also I think the US will lead the way here.  I cannot see a scenario whereby, certainly Europe would see a solid argument for making the buying and selling of Bitcoin difficult against the US giving this regulatory clarity, because it would just put Europe in a disadvantageous position.

I think the UK is, thankfully, separate to that, and we are seeing some politicians come out and start to say a few things pro-crypto let's say, not just Bitcoin; I can think of at least three politicians.  But I think it puts Europe in a very tricky position if the US gets this clarity regarding it.  I have got a bunch of questions.

Avik Roy: Go ahead.

Peter McCormack: So, if it falls onto the CTFC, what does that actually mean? 

Avik Roy: Yeah, that's a great question.  So again, this is one of those things where it's helpful to define some of the landscapes.  So, the legacy financial system, in the US, has a bunch of different government agencies that regulate it; most places, that's not the case.  In most countries, there's a single regulatory body that basically has regulatory oversight over stocks, securities, bonds, commodities, like oil futures or wheat futures, and digital assets like Bitcoin.  It's all part of one agency, and so it's pretty easy for that one agency to do what is needs to do, positively or negatively.

In the US, the biggest problem and a big part of why Bitcoin regulation, and crypto regulation more broadly, has been a big problem in the US is that there are actually several different agencies whose jurisdiction somewhat overlaps. 

Peter McCormack: The CFTC, SEC, I understand.

Avik Roy: Yeah.  So, CFTC stands for the Commodity Futures Trading Commission, and then there's the Securities and Exchange Commission, and then there's the Treasury Department which is sort of separate from all that.  All of them have jurisdiction, to a degree, over Bitcoin.

So, for example, the tax treatment of Bitcoin is regulated by the Treasury Department.  Bitcoin being a commodity means that, in theory, the way it should work is exchanges that trade Bitcoin, they're commodity exchanges, at least in the context of trading Bitcoin, and in theory should be regulated by the CFTC.  But the SEC has also waded into this, because the SEC doesn't want to be left out of this conversation. 

It's kind of a turf war or landgrab where the SEC Commissioner's been, "No, no, this is our turf.  We're the ones who are going to regulate, say, an ETF", which is technically a security and exchange-traded fund based on Bitcoin.  But a big part of why the SEC has held up the approval of a spot Bitcoin ETF is because the spot market for Bitcoin today, it's not clearly regulated by any one of these different alphabet soup agencies that we've talked about.

So if, all of a sudden, you have a situation where the Commodity Futures Trading Commission is explicitly charged with regulating the spot Bitcoin market, even though it's obviously a global market where there are exchanges all over the place, all over the world, then the SEC doesn't have that excuse anymore.  There is a regulated market for Bitcoin.  In fact, what the CFTC could do is say, "We certify these 20, or 10, or 5, or 100 exchanges as regulated by the CFTC, compliant with our regulations about KYC and AML, all that kind of stuff, and you can use the blended volume-weighted average price of Bitcoin on those markets to build your ETF".

Peter McCormack: I see.  Okay, that makes sense.  So, Kraken, Coinbase, Gemini, maybe even River, whoever is trading, will they have to become regulated or could you be an unregulated exchange and your price is included; or will you have to legally be regulated?

Avik Roy: If this bill were to become law, then you could obviously have exchanges that are not regulated by the CFTC that are offshore. 

Peter McCormack: Yeah, but within the US?

Avik Roy: But within the US, if you wanted to be a US-domiciled company, you'd have to basically register with the CFTC, which has historically been friendlier to crypto than the SEC, at least in the last five to ten years.  And the CFTC, in general, because they're very accustomed to dealing with these kinds of products in the physical world, like again the wheat futures and the coffee beans, etc -- for anyone who hasn't watched Trading Places, a classic 1980s movie, it's a movie about commodities trading.

Peter McCormack: Have you seen that, Danny?

Danny Knowles: No, I haven't.

Peter McCormack: Do you even know what it's about?

Danny Knowles: Trading Places sounds like spot trading, but I've got no idea.

Peter McCormack: So, this is an old Eddie Murphy film and he's homeless.  He's a bit of a hustler on the street, and these two old, really old commodities traders have a bet, and they have a bet whether they can turn him into a successful commodities trader.  Turns out the bet was, was it a dollar?

Avik Roy: It was a dollar, yeah.

Peter McCormack: It's a dollar.  So, they get Eddie Murphy --

Avik Roy: It's kind of spoiler alert!

Peter McCormack: Yeah.  They throw him in the back of his taxi and then he starts explaining how poor people think and what that impact has on prices.  So, they end up turning him into a trader, and he goes from homeless and he's like, "I'm blind!  I'm blind!"  He's on that little thing, cart, pulling himself around.  He gets all suited and booted, becomes a successful trader, but in doing so he forgets --

Avik Roy: They also make one of the waspy successful traders to basically fire him and make him homeless.

Peter McCormack: Yeah.  That was…?

Avik Roy: Dan Ackroyd.

Peter McCormack: Dan Ackroyd.  Yeah, Dan Ackroyd.  So, Dan Ackroyd goes to being homeless and like stealing, and Eddie Murphy becomes super successful, but he then forgets his roots and then they end up coming together, don't they?

Avik Roy: Yeah, they kind of, yeah.

Danny Knowles: It sounds like the most 1980s movie of all time.

Peter McCormack: It is, it's brilliant.

Avik Roy: It's a great 1980s movie and it's very entertaining, and it does actually a decent job of explaining how commodity trading works. 

Peter McCormack: It was the orange futures.

Avik Roy: I think it was, yeah, foreign frozen concentrated orange juice that plays a central role in the plot.  So anyway, all this to say that, if you want to understand commodities trading in an entertaining two-hour film, go watch Trading Places, and it would give you some sense of what the CFTC regulates.

Peter McCormack: I've been to the CFTC, I interviewed Brian Quintenz in there.

Avik Roy: There you go!

Peter McCormack: Yeah, and I've been SEC, I interviewed Hester Peirce there; very intimidating places.  But that's great.  So, what you're saying is there is a path now here for exchanges to be regulated, and therefore for a spot ETF to be launched, which the SEC itself can also then regulate it, because they have the prices from the regulated exchanges.  I guess the regulation will have some kind of restrictions upon the exchanges and requirements for reporting.

Avik Roy: Right, and there will be KYC AML and all this stuff, and again, hardcore anarcho-libertarians will say, "Oh, it's terrible that we have that", but I would say that there's no way, in the context of a society like ours, for legitimate Bitcoin businesses -- legitimate, the word literally means legal, right, legitimate -- for legal businesses to operate and interact with the fiat world unless you have some of these rails in place.  So, that's really important. 

So, those are some of the really encouraging things about the bill, from what I can see.  There are some elements are that sort of neutral and some elements that I'm more concerned about.  So, the neutral elements are -- one thing I was really worried about over the last several months, is how the bill was going to treat CBDCs, central bank digital currencies, which we've talked about before, and I'm very concerned about as a venue for totalitarianism and the surveillance state in the US. 

Original versions of the bill, under my understanding, were going to at least imply that they were going to give some sort of licence or permission to the Fed to build a CBDC that would be "limited in scope" to just Fed interactions with big banks.  I was very concerned and made this opinion known to the relevant people that that's very risky, because if you let this Federal Reserve build a CBDC that can interact with only like JPMorgan Chase and Wells Fargo or whatever, it's very easy to go from that to something that then replaces the US dollar and every American is required to use. 

Once you've actually done the hard work of building the 90% version of the CBDC, going from 90% to 100% is very easy.  So, though I still need to dig through the text to make sure this is the case, I'm encouraged and hopeful that the bill does not explicitly encourage a CBDC. 

I was also hoping that the bill would explicitly prohibit the Federal Reserve from building a CBDC, so make that very clear that that's not in the Federal Reserve's mandate.  The bill does not do that in its current form.  What it does do is it requires the Fed and relevant people to basically do a study of the Chinese CBDC to see what are its features, what are its risks, etc, in privacy and in other ways.

Peter McCormack: Well, I would hope we wouldn't be taking tips from the Chinese model for surveillance capital.

Avik Roy: Yeah, let's hope so.  There are differing views in the Fed about this.  There are people in the Fed who are very excited about CBDCs.  So, all that to say that the language on CBDCs in the bill, from what I've seen, is better than I expected in that's it's not pro-CBDC but it's not anti-CBDC either; it's sort of neutral, "Let's study the issue and see what goes on".  But that's better than it was before, so I see that as an improvement but still sort of neutral.

There's also a directive for government agencies to study the energy consumption and proof of work, etc.  So that's going to be something for all of us who believe that proof of work is an important feature for Bitcoin, to keep an eye on.

Peter McCormack: Well, I also think, with regard to proof of work, miners are moving towards more renewable forms of energy.

Avik Roy: Sure.

Peter McCormack: I know people would be like, "Don't acquiesce to this".  But, at the same time, there are, I believe and others believe and Andrew Dessler, who we had on the show yesterday, a climate scientist, believe that we are warming the planet is an issue.  So, I think a study is fair.  I just think we shouldn't be -- for example, how Nic Carter highlighted the regulations in New York, they're essentially picking what datacentres can do, is essentially the thing. 

So, as long as it's a study and then there's some intelligence behind it and they don't start, I don't know, penalising miners or banning miners from using certain sources of fuel, because I think that's hard to enforce anyway, especially if the miners are buying from the grid which has a mixed source of input.

Okay, fine.  Well, listen, progress and clarity, it's a place I never thought we would be in.  I always felt, like four or five years ago, I was trading Bitcoin, I always felt like there's going to come a time when they're going to clamp down on this, but actually, you know…

Avik Roy: Well, that's why this bill is really important.  There's this term, "regulatory clarity".  You hear it in thinktank circles a lot, and it does matter, because if you're trying to start a business, you've got your 1031 hat on, 1031 invested Bitcoin businesses, right, if you're trying to start a business in the Bitcoin space, you really want to know if what you're doing is legal or not.  That's pretty important. 

If you're going to ask other people to give you hundreds of millions of dollars, hopefully, to start this business and get it going, they don't want to throw their money down the drain if that business is going to turn out to be illegal because some commissioner at the SEC woke up on the wrong side of the bed that day.  So, having clarity is incredibly important to businesses, and if we want there to be a robust ecosystem of Bitcoin businesses that serve our community, then it's really important to have regulatory clarity.

Peter McCormack: It will be interesting to see what comes out as a commodity.  I think we all agree, with regard to Bitcoin, that it passes the Howey Test or fails?  I've never been sure.  You know what I'm asking?

Avik Roy: Yes.  Bitcoin passes the Howey Test in the sense that it's not a security, if that's the way we're going to define it.  But the Howey Test, just for people who don't know, and many of your followers will know, but the Howey Test, it was a Supreme Court case from 1934, if I recall correctly, about orange groves. 

Basically, that ruling from the Supreme Court, which was I think a 5-4 ruling, it may have been 6-3, but it wasn't a unanimous ruling, basically that kind of a law of unintended consequences became the defining legal framework for what is a security and what isn't.  It defines the SEC's authority, because the Securities and Exchange Commission was created by the Securities and Exchange Act of 1933.

So, basically, all the law around what is a security and what isn't, the SEC would claim, is defined by that Supreme Court case.  But the Supreme Court case is kind of vague and not really well-written in that sense.  So, it's been really tough for the Bitcoin/digital asset world to navigate that, and I think this bill will really nail it down and say, "Okay, Bitcoin is not a security.  Bitcoin's spot market will be regulated by the CFTC".  That then allows for so many more products.  There could be a real explosion of opportunities for people who want to start new businesses.

Peter McCormack: I think Ethereum, they would make a good argument that is also passes the Howey Test, that it isn't a security.  It was discussed before, a couple of years ago, where it's the belief that it may have been a security but it isn't now. 

I'm not sure where it will really go with a lot of these other shitcoins.  I'm not a fan of them, I'm not a fan of the rug pulls, I'm not a fan of the unknown information, and it's going to put a lot of these projects, in the future, in a position where they're going to have to provide a lot of clarity.  Some people are obviously very against growth of the state and anti-regulation.  I do think there will be some regulatory protection to investors around some of these shitcoins, basically.

Avik Roy: Yeah.  I think this is an important and, I think, underappreciated element of the regulatory trajectory, which is that Bitcoin is pretty clearly not a security, not merely because the government has said so on many occasions, and this bill does as well, but just again by the Howey Test and some of these legal traditions in the US.  There is no management, it just doesn't meet the test; very clearly, it doesn't meet the test of a security.  Ether is a bit of a middle case, as you alluded to, but Bitcoin clearly is not a security. 

So, all these different crypto projects which get buzz because people look at that and say, "Well, I can make 1,000X my money on random crypto shitcoin, but I don't know if I'll make a 1,000X my money on Bitcoin", and so they all gravitate there.  It's more speculatively interesting.  But the problem is, there's a lot of downside, not just in the price of those assets, but also in the regulatory landscape for those assets because they are going to get regulated, in most cases, as securities.  That is going to really limit their upside relative to someone like Bitcoin, which obviously is, and is trying to be the hardest money ever built.

Peter McCormack: Does that put some of the exchanges in a difficult position?  We'll give a pass to Bitcoin and Ethereum just for now; if these are securities, does that mean people involved in the projects have to register them as securities, or if they want to launch one, they have to launch as a security, and therefore every exchange will essentially only be able to list those that are a registered security?

Avik Roy: Well, it'll be a mix.  So the law, the Lummis Gillibrand bill, which I think is called the Responsible Financial Innovation Act, that bill actually says there are going to be basically three classes.  Class 1 is a security, defined as such by basically the Howey Test.  They basically codify into congressionally legislated action, statute, what a security is.

Then there's this sort of middle group which they call ancillary assets, and a lot of crypto would fall, under the bill, under ancillary assets, meaning they're not exactly securities like the way a stock, like Apple stock is a security or a bond is a security, because you have this thing, it is actively managed by some group of people at a cooperation, but because you have no ownership share in the crypto project, it's not actually a security the way it is if you -- if you buy Apple stock, you have an ownership share, however small, in Apple, the company.  That isn't necessarily true with a lot of these crypto projects.  You don't actually have an ownership share.

So, there's a list of definitions of things that, if you don't pass this test, you're not a security, you're called an ancillary asset, which would also be under the bill regulated by the CFTC, not the SEC, but would be required to have a lot of disclosures around your risk factors and who's behind it and what assets you hold.  You'd have to have rules around what happens if you go bankrupt and how you dispose of your assets.  So, there would be a lot of regulation around those ancillary assets, which would encompass a good chunk of crypto, that could protect consumers a lot in the sense of saying there would be this legal document, like there is with an IPO. 

If there's an IPO today of a normal stock, then there's this long document called an S1 that the company has to file with the Securities and Exchange Commission that lists all the risk factors that the legal department can conceivably come up with as to why you might lose money in this investment.  I think that's a good rule.  It creates confidence in the market because you know you've got that to look that.  If they misrepresent something in that legal disclosure, you can be sued.  That's why it has the power that it has, that they actually have to do it the right way.

So, all that to say that a lot of these projects are going to get heavily regulated.  Whether they're securities or ancillary assets, they're going to be regulated and they're going to be required to disclose their risk factors, they've going to have to have a kind of a bankruptcy plan.  That's going to mean that there's a lot more maturity in that market for good.  I think it means that the best projects, the projects that actually have merit, that aren't shitcoins, or at least have some sort of financial utility to them, will continue to succeed, and the ones that are just get-rich-quick schemes or rug pulls will have a harder time.

Peter McCormack: So, either way, it's really a boom for Bitcoin because the regulatory clarity for Bitcoin makes it easy for people to invest in it, and the rules regarding whether something's a security is probably going to limit the amount of projects that are available to invest in.  

We'll talk about the process for passing, but if the legislation passes, what kind of period of time would exchanges have to respond to this?  If it's codified into law and Bitcoin is regulated by the CFDC, do they have a period of grace?  Is there a period of time with figuring out what regulation for an exchange is?   How does that all work?

Avik Roy: So, during the legislative process, they are free, like anyone is, to speak out about their position.  So, Coinbase or Kraken can say, "Here's what we think about the bill".  They can go directly, they can call up or meet with Senator Lummis and actually tell her directly, or Senator Gillibrand, or any other senator who's thinking about voting for the bill, whether they support it or not.  The bill actually has to be introduced.  It's been introduced into Congress formally; that's what they did today as we're recording this podcast. 

But then, in order for it to actually pass Congress, the Senate Majority Leader would have to actually say, "Okay, we're going to have a vote on this bill", and then it would have to overcome a filibuster, meaning at least 60 people would have to vote in the Senate out of 100 to close debate, and then have a final vote.  Then a majority, 50 plus the Vice President minimum, would have to support the bill.  Then it would also have to pass the House, and then it would have to also be signed by the President.  So, a lot of steps to go through just to get it passed.  Through all that process, these various stakeholders or interests can voice their position.

In fact, Senator Lummis's office released a six-page document that had a bunch of quotes from a lot of the trade associations, like the Chamber of Digital Commerce, etc, and Kraken, and Coinbase, and FTX and some others expressing their general support for the bill, or at least the process behind it.  So, all that is out there.

Peter McCormack: How long would that all take usually?

Avik Roy: It could take years; it could take months.  It all depends really on whether the Senate Majority Leader wants to put it forward.  I would say we just don't know right now.  I think, if there's a lot of support, if there are 70 or 80 senators who say, "This bill is awesome, I'm all for it, Let's do this", then it could pass in the next several months. 

The more likely scenario is that people are going to study it, they're going to think about it.  They're not going to see any urgency to do anything about it, and it's going really fall to the next Congress meeting after the mid-term elections in 2022.  The following Congress comes in 3 January 2023.  It may be in the following year where they try to push it, or it could be that this thing just kind of dangles and just kind of sits there and lingers for a long time without it getting the majority support.

So, it all depends on how many senators support it, and obviously if the Bitcoin community decides it's something they want to support, then they would need to make that point known to their members of Congress.  But all that to say that there's no guaranteed timeline.  It's not like if two senators introduce a bill, then it gets voted on a month after that, or 60 days after that, or whatever.  It could never pass Congress, it could pass Congress five years from now, it could pass Congress in a month; it all depends on that group of senators all deciding what they want to do.  Then, after the bill passes, then the regulators come in.  So, then the CFTC, now that it has this new authority, would then have to issue regulation to say, "Okay, here's how we would implement this law".  The SEC would have to do the same on their end, and the Treasury Department, etc.

So, then those regulations come out, what are typically called interim regulations, and then people comment.  They have a certain amount of time to comment on those regulations formally through a website that the government puts out.  And then the relevant agency reviews those comments, decides whether to take it into account or not, and then based on that, they revise the regulations or keep them the same, and they're required by law to do that.  If they don't honour that process, you can sue the government and say, "Hey, you passed this regulation without having this process of notice and comment.  If you don't do that, then the courts could throw out the regulation"; that does happen from time to time.

Peter McCormack: Does it help that it's a bipartisan bill, or is that quite a regular thing?  I don't feel like I've seen anything that feels bipartisan for a long time.

Avik Roy: There are a lot of bipartisan bills that pass Congress and you just never hear about, because the media's never going to cover the stuff that's not controversial.  They're only going to cover the stuff where one side or the other hates it.  So, that's part of it.  I think this is an unusual case where it's a bipartisan bill that there's a community like ours that really is very interested in it, so it's going to get more coverage.  But having said that, I am very encouraged by the fact that, at least in the interviews I've seen of Senator Gillibrand, she has as much ownership and endorsement and support of the bill's contents as Lummis does. 

That's important because, we've talked about this before, there's a real risk that Bitcoin becomes more of a partisan issue because that's just the nature of the US political system, things become tribal and become more polarised.  It's important that it not be that way, because Bitcoin is something that can improve the lives of everyone, and we don't want it to be seen, at least I don't want it to be seen, as an issue that where only one side thinks that it's good for them.

Peter McCormack: Okay, great.  Well, listen, thank you for that update, that's very useful.  Let's see what happens.  I think it's promising.  It's quite surreal as a bitcoiner to see it, but yeah, congratulations to Senator Lummis for her good work and also Senator Gillibrand. 

Okay, so we originally were meant to talk about inflation.  We've had a nice big intro ahead of that.  Big issue at the moment.  You and I have talked about it for a few months, you put the paper out; excellent article.

Avik Roy: Thank you.

Peter McCormack: The thing that really stood out to me, we put the quote in there, was actually it's not just inflation, it's inflation inequality. 

Avik Roy: Yeah.

Peter McCormack: We put the quote in here, "For all the talk about income inequality, we need to have a matching discussion about inflation inequality".  It's something I kind of talked about with Eric Weinstein.  He said, "Inflation's really relative.  Inflation affects people in different ways, and this CPI print really is useful as a benchmark, but it's not useful to the individuals".  I think it's pretty common talk amongst most people these days that, whatever print we're seeing, we're seeing much higher inflation ourselves.  UK fuel prices hit record highs today, went up to 178.5 pence a litre, which works out at $10.15 a gallon.

Avik Roy: It's crazy.

Peter McCormack: The only reason it's not higher is that the pound has been falling against the dollar; I think it's lost about 10%.  But it looks like we're heading to £2 a litre, which again is just incredible.  My car, it used to cost £80 to fill up, it's over £100 now and it's going higher.  That affects a lot of people, but it affects people in different ways, and also the second- and third-order effects.

So yeah, it's a really interesting topic to get into.  Like Danny said, everyone's talking about inflation now.  This wasn't something I've ever talked about prior to running a Bitcoin show.  Now I run a Bitcoin show, but everyone else is talking to me about it, my friends, I even talked to my kids about inflation.  So, it's really become part of the conversation.  You guys wanted to attack this and you wanted to attack inflation inequality.  What was the background to this?

Avik Roy: Yeah, a great question, and thanks for all the kind words about the paper.  So, the one thing that we discovered right away, when we started FREOPP in 2016, is that if you have the lens that we have declared that we want to have, which is we exclusively work on policy problems or reform ideas that would meaningfully improve the lives of Americans whose incomes or wealth are below the US medium; that's test number one.  Test number two is, our reform ideas should be ideas that embrace the principles of free enterprise, individual liberty, technological innovation and pluralism. 

So, if you look at those two tests and say, "Where's the intersection there?" because the whole idea is how do we get Democrats and Republicans, Progressors and Conservatives, to work together to solve important problems, that's why we have that lens.  So, if you look at the landscape with that lens, or with those two tests, we find that a lot of the work that really comes out of meeting those two tests is around the cost of living; not merely inflation and the way we normally think about it or read about it in the newspaper, where the CPI print is this and the Federal Reserve does that, or other central banks around the world, but also there's the microeconomic conversation about inflation.

So, if we're to talk about inflation, we could break the inflation conversation into two categories; there's the microeconomic category with a subcategory of inflation which is stuff like zoning laws that restrict the growth and supply of housing, leading to increase in price of housing, because if you don't allow new housing to be built and the population grows and people get wealthier, then that price of houses is going to get bid up.  That's an example of microeconomic inflation.  Then there's macroeconomic inflation, which is a thing we in the Bitcoin world talk about a lot, which is the supply of money as controlled by central banks and things like that.

So, both categories of inflation are important, and a lot of our work outside of the macro space deals with that.  So, we talk a lot about healthcare inflation; we talked about that a lot in our last conversation for your podcast.  There's housing inflation, there's higher education inflation, college and vocational school and all that.  All these things, the prices are skyrocketing because of dumb regulations or subsidy schemes that have created artificial scarcity or artificial demand, that have made these products more expensive for everyday people.

When you're poor or when you're low income, if you're making $20,000, $30,000 a year, or $10,000 a year, those prices affect you even more.  So if the price of gas, like you were pointing out, goes up by double and you have to drive to any sort of job you might take as you live in that part of the country, then that extra $100 a week, or $200 a week you're spending, you don't have that $100 or $200 so where's that coming out of in your household budget? 

So that's something that we've noticed for years as a major concern, and I'd say about 70% of our work revolves around the cost of living.  About 30% is things like criminal justice reform or education reform, that aren't directly about cost of living; they're about economic growth or economic opportunity.  But 70% is cost of living, so it's something we've been following for a long time. 

Then you throw onto that, or layer onto those just baselines problems we've had as a country with what happened during COVID, where we spent $6 trillion in relief dollars through Congress, COVID relief dollars, and then the Fed came in and printed another $6 trillion to $8 trillion in new dollars, US dollar quantity.  So, you put those things together and there was this macroeconomic inflation effect on top of all the other things that we were just talking about.

Over this time period, we've grown, we've added new scholars, and so we added two really outstanding macroeconomic scholars.  One is Jon Hartley, who's a PhD student at Stanford in the Economics Department there, the other is Jackson Mejia, who was a PhD student at MIT in the Economics Department there.  So they and I, we decided we wanted to track this particular problem, because no one else has been doing the work.  You see CPI, this print comes out, you read about it in the newspaper, and no one's talking about the fact that the whole point of CPI is, it's the average consumer; CPI's affecting the average person in this average way.  We could have a whole episode on whether CPI accurately measures the average consumer.

But even if you take it at face value and say, "Okay, well let's stipulate for a moment that CPI is accurately measuring the average consumer", and again, I don't believe that it is, I don't think you do either, but let's just stipulate that for the moment for the sake of argument, what about the below average consumer?  What about the above average consumer?  If you take the government's official data, how does inflation affect different populations?  That was the thing that we wanted to study in this paper.

One of the reasons why this has not been studied before, I think, is because the people who are the most dovish about monetary policy in the US and around the world are typically people on the left, the people who are hawkish or typically people on the right.  That's not exactly true, it doesn't always map that way, but that's often the case.

So, what's interesting is people on the left are the ones who are normally talking about inequality, and yet here you have a situation where the policy that left-leaning macroeconomists, Keynesian macroeconomists tend to want to favour, which is more monetary stimulus, it's their policy that's leading to more inequality.  So, we wanted to measure this because no one else had really done it.

So, Jackson and Jon went through and basically crunched the data using official Bureau of Labor Statistics figures on inflation, CPI, and said, "Okay, let's break this down a number of different ways".  So, the first way to break it down is actually, the BLS doesn't just measure the average CPI.  They actually measure, indirectly, non-average CPIs.  So, what do I mean by that?

To measure the consumer price index, what the government is doing is saying, "Okay, we theorise that the average consumer buys X amount of groceries, Y amount of rent for housing or owning a home, Z amount of transportation costs", etc.  So, you go through the bucket of things that people normally have in their household budget.

Peter McCormack: As a percentage of their budget, or as a total number?

Avik Roy: Both, as a total number and as a percentage of their budget.  So, they measure that based on a survey they do.  They actually literally poll people and ask them, "Okay, how much do you spend on X?"  Sometimes they use different techniques, but they basically compile all these surveys of pricing data and of what consumers actually spend money on, and it's a very technical process that they use to come up with those, but then they come up with this average.

Peter McCormack: Just a quick question in there, looking at the poorest in society, and I'm not sure how you answer this, but what kind of percentage of their income is disposable?  So, what I'm trying to understand is how much leeway is in their budget?

Avik Roy: Yeah, that's a great question and a very important question.  So, the short answer is zero.  

Peter McCormack: Okay.  That's what I assumed.

Avik Roy: If you're in the bottom quintile -- so, the BLS typically breaks this data out into fifths.  Are you in the bottom quintile of income, the second lowest, the middle, the second highest or the highest?  They measure in more detail than that, but usually in the terms of the most digestible things they send out, they divide it into these five groups of even numbers of people based on their incomes.

What you find is that you find a couple of things, and we have the chart actually.  Danny, if you want to pull it up, it's the chart, I believe, that's called Consumer Basket, yeah.  Consumer Expenditures by Income Quintile.  You can pull that up on the screen, so for people who are watching the video, they could see this.  So, what this chart is showing you, I know it's hard to read the little numbers and things like that, but the yellow at the bottom is what people in each of the quintiles is spending on housing.  So, the bottom quintile spends 43% of their income on housing.  The highest quintile, even though they have bigger houses and more expensive houses, spends only 32% of their income on housing.

Peter McCormack: The highest quintile, what's the lowest income bracket that is?

Avik Roy: I'm trying to remember what the dollar cut-off is.  I want to say it's about $100,000 a year, something like that; don't quote me on that, but it's in that range I believe; it might be higher than that.

Peter McCormack: Oh right.  So, the highest quintile is everyone from $100,000 to billionaires?

Avik Roy: Yeah.  So, they're obviously spending more on housing, but as a share of their overall income, it's less.  The category that you see, the light blue category where it's much bigger for the highest quintile and the smallest quintile, that's personal insurance products, life insurance and things like that, where obviously if you're wealthy, you want to have life insurance because you've got a lot of wealth to preserve and you have disposable income to spend on things like life insurance, which average or lower income people do not. 

So, those are some examples in the chart of where the consumption basket is different.  So, why does that matter?  It matters because, if the price of housing goes up a lot compared to the price of life insurance, then lower income people, as a percentage of their consumption, not as a dollar amount, as a percentage of their consumption, it's going to go up.  So, what I mean by that is the $200, to put it that way, if your gas prices go up by double and bottom quintile people are spending more of their income on gas, then the percentage that inflation is, the CPI for that population, is higher. 

So, we have a chart, I don't think it's in one of the charts I spent you, Danny, but there's a chart called the FREOPP Misery Index by Income Decile.  If you click on that you'll see this.  What this is showing you is the blue is the bottom decile.

Peter McCormack: The Misery Index?!

Avik Roy: Yeah.  So, the Misery Index is an old term from the 1970s during the President Carter years where they added the inflation rate, CPI, and the unemployment rate, and said, "Okay, what's the combination?"  In the Carter years, it exceeded 25%.  It's now relatively low because unemployment is relatively low.  But if you look at this chart, what this chart is showing you is the light blue is the bottom decile and the dark blue which is below is the next bottom decile, and the bottom category is the orange and the light orange, those are the wealthiest deciles, or highest-earning deciles.  What you see is inflation, both inflation plus employment, is much lower for those higher income groups versus the lower. 

If you're poor, if you're in the bottom quintile, you face higher inflation, higher unemployment.  So, what does that mean?  So, this is just something, year-on-year basis.  If you look at, say 2020, the combination of unemployment plus inflation for someone in the bottom decile, it's 21%.  For the highest decile, it's 4% or 5%; that's the difference.  Now, that's in a given year.  Now, imagine if you accumulate that year over year, and this is really the powerful thing.  So now, if you go to Cumulative Income Growth Adjusted for Income-Based Inflation.

Danny Knowles: Okay, got that.

Avik Roy: So, I apologise if you're on the podcast and you're listening to this, you can find all these charts at the FREOPP website, www.freopp.org.  The title of the paper is Inflation's Compounding Effect on the Poor.

Peter McCormack: We'll put them in the show notes, anyone listening, and also we'll actually put them on the video as well.  So, if you do want to see this, you can go onto YouTube.

Avik Roy: Great.  So, what this chart is showing you is the blue line, or the blue curve, is how cumulatively inflation affects the bottom decile versus the top decile.  So that means, let's say you spent $100 of expenditures in 1978 as someone in the bottom decile, and you stayed in the bottom income decile throughout the next 40 years, how much have you basically made?  How much has your income grown relative to inflation, so if you adjust for inflation?  So, how much have your wages grown minus what inflation's been, again, according to official government statistics?

According to official government statistics from 1978 to 2021, your wages, on an inflation-adjusted basis, grew 4%, total.  Not 4% per year, 4% total over a 43-year period, which is effectively nothing.  Over that same period, in the top decile, your income grew 81% total over those 43 years.  So, what this chart is showing you is that --

Peter McCormack: Growing wealth divide.

Avik Roy: Yeah, and that's a wealth divide -- inflation's a hot topic today because inflation's at 8%, but inflation, over the course of our lives, has mostly been low according to what we think of as low inflation, 2%, 3%, etc.  That has been seen as a policy success by the Federal Reserve, that's been seen as a policy success by most mainstream economists. 

But what we show in this paper, and this is the real kind of, "Aha!" moment for this paper, is that even periods of low inflation, compounded year over year over year over year, lead to massive wealth inequality, because if you're wealthy, you've benefited in a lot of different ways from inflation.  You have a stock portfolio which grows in inflationary environments, your home that you own grows in inflationary environments; so your assets grow.  But if you're poor, you don't have assets, so you're only surviving on the wages that you get, and those wages have not been growing.

So, all this to say that the message we were trying to send with this paper is, over time, compounded over time, over a long period of time, even very small differences in CPI from the lowest brackets to the highest brackets, grow and grow and grow and create massive income and wealth inequality; that's problem number one.  Problem number two is, that's true even in periods of low inflation.

Peter McCormack: So, that says two things to me right now.  Firstly, there is a real cost of living crisis that that causes. 

Avik Roy: Yeah.

Peter McCormack: If you have no disposable income, or little disposable income, you're essentially having to juggle your income.  What we know happens in the UK right now, because I've been looking into this for the next film, is that we have people going into fuel poverty, so they can't pay their fuel bills; we have people who are skipping meals so they can feed their kids; we've got real-world difficult decisions that people are having to face, which ultimately will lead to civil unrest.  

Actually, it leads to two things.  Firstly, it's leading to a government reaction where we're having our form of stimulus coming in in terms of fuel subsidiaries which really are a sticking plaster over a gaping wound and they not going to work.  But based on what you said, they're going to compound the problem because that's going to lead to further inflation anyway.

Avik Roy: Totally.

Peter McCormack: So there's real-world issues right now, but what also is happening is that the reality for some of these people to actually start owning assets, it's being pushed away from them.  We know that's real because I know, when my parents were of a similar age to what I was, my dad was an aircraft engineer and my mum was an Avon lady, but it was possible for them to own a house.

Avik Roy: Yeah, totally.

Peter McCormack: It was totally possible for them to own a house. 

Avik Roy: It was a middle-class aspiration, legitimate middle-class aspiration.

Peter McCormack: Yeah, but my parents weren't even middle class; they were working class.  They could own a house.

Avik Roy: The working-class aspirations, yeah.

Peter McCormack: They had a pension, they had everything they need.  I know now, my kids, whenever they leave university, they're not going to be able to afford a house, even with good jobs, because everything's been pushed further away from them.

Avik Roy: Absolutely, and you're highlighting two things that are really important; the first is that inflation is an incredibly politically potent issue because of the fact that it is so regressive in its impact, because it disproportionally affects middle and lower income people.  They're the ones who get the most upset, and there are more of them than there are wealthy people.

So, when you do something that's highly regressive in its effects, which inflation is, there is often civil unrest.  There certainly is a desire to punish the people in charge.  So, that's very important for Washington to understand, which is a big part of why we wrote this paper to say, "Hey, Federal Reserve, you have this bubble in which you think everything is good, or at least up to recently, think everything had been good because inflation was 2% or 3%, and that's hunky-dory for you; but it's not.  Actually, even 2% to 3% inflation is too high over a long enough timeframe for people who are lower income".

So, our goal is to help to start the conversation with the Fed, but the Fed is, at this point in time, very insulated from outside points of view.  They do get a lot of input in the sense that there are a lot of people sending the Fed stuff.  They have a staff full of PhD economists, left-leaning PhD economists, so ideologically conformist, but they have a lot of smart people there who work there and look at all the official economic statistics, but they miss a lot of this stuff. 

So, part of what we have to do, and part of what we hope to do with this paper, is to try to convince the Fed to be a little bit more humble about its predictions.  They were very confident predicting that there was not going to inflation, it was going to be transitory; we all remember those days.

Peter McCormack: Do you honestly believe they believed that, because there are a lot of people who knew that wasn't true?  Do you think that is just a way of dampening the impact of this?

Avik Roy: I think it's a combination.  I think the majority is they didn't know, because they were in their own bubble.  Then I think there was a minority that did worry about it, but didn't feel they could say something about it.  So, there's good reason to believe that J Powell downplayed the risks of non-transitory inflation, because he wanted to be reappointed Fed Chair.

Peter McCormack: God knows why he wanted to keep that job!

Avik Roy: That's a great question, but you'll have to ask him that someday if you ever get the chance to interview J Powell.  It's probably harder than interviewing Nayib Bukele. 

Peter McCormack: Yeah, and Janet Yellen.

Avik Roy: Yeah, absolutely.  So, Randal Quarles, who was until recently on the Fed Board of Governors, said in an interview or in a speech, he said it very cryptically, but he effectively strongly implied that the Fed didn't take action against inflation because Biden took too long to reappoint Powell as Fed Chair.  Well, what does that tell you?  Why would it matter?  The Fed's supposed to be independent; it's not supposed to matter what Biden wants to do.  They're supposed to be able to be these brilliant PhDs with their technocratic approach. 

So, what clearly was going on is J was looking over his shoulder at a possibly more dovish candidate maybe being nominated ahead of him, Lael Brainard, and he said, "Well, I'm going to keep pouring fuel on the fire here until I get reappointed, then I'll raise interest rates", which is exactly what he's done.

Peter McCormack: Well, what role do wages play in this and wage rises?  Obviously, you've covered that in the document.  I know from speaking to friends who are talking about inflation at the moment, talking about whether their employers are giving pay rises, and it's a tough time at the moment because it looks like we're heading into recession, we may even be in recession, so small raises I know are happening, but they're real-world deductions.

I know, even in the UK, there was an agreed amount for the nurses.  I don't know the amount; Danny can look it up, but there was an amount agreed for the nurses, and whether it's 1%, 2% or 3%, they're arguing about, that is still a real-world pay cut because of the inflation levels.  But private businesses have a lot more scope to raise wages; they run their own balance sheet, they know what their company's doing.

My understanding is that the problem with maybe the poorest, who are either surviving on welfare or have got minimum-wage jobs, you're not going to see a rise in a regulated or mandated minimum wage that's going to be inflation, you're not going to a 10% rise, or 15% rise.  So, does that create another issue?

Avik Roy: Well, there's a lot to say about this topic.  First is that wages usually lag the price increases.  So, inflation happens first most of the time, not always, but most of the time inflation will happen first and then people will raise wages to try to catch up with that.  Sometimes it goes the other way, but usually the inflation happens first and wage increases happen later, and so you're still feeling the bite of inflation.  Maybe over time it sort of keeps up, but you're still feeling the bite of it.  So generally speaking, inflation still does affect you.

Then there's the point that we were alluding to earlier about the fact that, if you're wealthy, you benefit from inflation.  If you own your home, your home prices are going up.  If you own a 401(k) or a stock portfolio, those things go up in inflationary environments.  So, those of us who own Bitcoin, Bitcoin has benefited from all the easy money, etc.  So, all this to say that the wealth inequality does definitely occur, and I think we document it pretty persuasively in this paper.

Another piece of it that you reminded me of with the comment about people who are on welfare versus not, is that most welfare benefits including social security, public pension benefits are indexed to CPI or some other CPI-related formula.  So, Medicaid spending or food stamp spending or social security spending will go up.  But if you are privately employed, if you are a member of the working age population and you're in the workforce and you're depending on our employer to keep pace with inflation, that'll lag.

So, you create this kind of two-tiered track where on one track, there are the people who are either the government employees or who get their benefits from the government primarily, whose pay may go up over time because of government formulas that make sure that those payments track inflation.  On the other side, if you have a minimum wage job or a job that's not tracking inflation in the private sector, if you're in the working poor, you're going to fall further behind.  So, the wealthy are going to do well, people whose pay is from the government may keep pace with CPI, but if you're not in one of those two categories, you're going to struggle more.  So, that's going to create more resentment, more potential, certainly political unrest if not worse, and it's a huge problem.

So, this field, we went through all the academic literature.  We actually said, "Okay, who's working on this?" and it's really remarkable how inequality is the dominant topic in every area of political and economic policy, except inflation; it's the one area where it just almost nobody is working on it.  So, we just felt it was really important for us to throw our hat in the ring there, and hopefully we did something useful on it.

Peter McCormack: I want to go back to you point there.  Even if welfare tracks to CPI, we've already said that CPI's an average, so actually they are still seeing a real-world decrease, even if it tracks CPI.

Avik Roy: Totally.  That's true, yeah.

Peter McCormack: Have you done any work looking at those who are working but maybe on a minimum wage, that this creates an incentive not to work?

Avik Roy: That is something that we're very interested in as a follow-on area.  A lot of people are talking in the US, I don't know what's going on in the UK or in Europe, but in the US there's an increasing amount of commentary on this, the Great Resignation it's being called, that lot of people who were thrown out of their jobs during COVID, or maybe quit because they'd felt unsafe going back to work, have realised that, or felt that for whatever reason, that they don't want to go back to work, or they can find a job; we don't really know.  There's not really good survey data on this yet, but there are a lot of people who dropped out of the workforce during COVID who have not re-entered the workforce as COVID has subsided, and it's pretty alarming. 

Peter McCormack: There are, I guess, various reasons for that.  They maybe have got a partner who's working and it's not worth going back; but maybe their stimulus or their welfare payments are enough; maybe they have a cash side hustle.

Avik Roy: Yeah, could be all those things.  The thing I worry about, and I hope is not the case, but what I worry about and what we need to do research on is what if there are a lot of people out there who worked because they felt that was what they were supposed to do, they were supposed to work, that was the way they survived, the way they get by, the way they were part of society.  They lost their job during COVID, they got some of the relief money and started participating in some of these government programmes and then felt at the end of that, "Well, wow, these programmes pay me as much as it was making before and there's no income taxes on this money, so that's actually a pretty good set up".  So, they don't go back to work because of that.

There's an enormous amount of research that shows that people who fall into that track end up much less happy, much less fulfilled in certain ways, lose a lot of their connection to society and to communities if they are not in a position where they're working in the more conventional, traditional way.  So, that's something that welfare reformers have long talked about. 

The whole welfare reform effort in the 1990s under Bill Clinton was all about this.  The best welfare programme is a job because that's what not only gives you that sense of fulfilment, that sense of being part of a team, part of a group of people, but you can work harder, you can make more money, you do even better over time.  You can't do that on a welfare programme.  There's a limit to how much you can earn on welfare, and then that's it. So, people get kind of in rut in that situation.  So, again, we don't know yet if that's what's happening, but that's what I worry about.

Peter McCormack: Yeah, okay.  Well, if you do do work on that, I'd love to see it.  Okay, so with regard to inflation, historical target of governments is 2%; sometimes overshoots, sometimes undershoots.  You said even at that level, that compounds over years.  Is inflation actually necessary?  We've always been told it's necessary, because if we have deflation, people won't spend and that might lead to recession; is that bullshit, just something the government says because inflation allows them to expand the monetary base over time, or is there a genuine risk of deflation?

Avik Roy: Well, before we even get to that, we should mention, and you may have talked about this with some of your other guests, I don't remember, but the Fed did something very significant last year, which is they moved from a de facto ceiling on inflation, where they tried to keep inflation under 2% at all times, to what they now call flexible average inflation targeting, where the average inflation rate is supposed to be 2%, but it can go above it sometimes and go below.  The idea is that they're so good at managing inflation that they'll be able to keep it an average of 2%, which of course as soon they did that, inflation basically blew through their average and is now out of control. 

So, that was a major policy change by the Fed.  It changed a policy that had been around either explicitly or implicitly for decades.  So, that was a huge choice by the Fed that turned out very disastrously for them, so that's something that we should just note in a preface to what your question is.

But I'm with you, I would argue, as a bitcoiner, that the supply of money should be as close to constant as possible, or at the very least only minimally growing, but ideally constant.  That's obviously very far afield from where we are today, so you couldn't wave a magic wand and convert the dollar to that mode without massive, massive financial and economic disruptions.  I'm not advocating that as what the Fed should do tomorrow, but yes in an ideal world, at the very least we should shoot for 0% CPI, not 2% CPI.

On top of that, we need to measure inflation more accurately, and this gets to some of the stuff that obviously bitcoiners talk about a lot in terms of the Cantillon Effect, where inflation is not this thing that symmetrically raises all prices equally.  And one of the problems in our inflation debate actually is that there's actually a big difference among what we might call monetary hawks or monetary conservatives, in that there's what we might call the Milton Friedman school and what we might call the von Mises or Austrian school. 

The difference is that the Austrians would say the supply of money should be effectively constant because that's the gold standard of hard money, literally.  Friedman's view was a little different.  Friedman's view was that the monetary supply should track economic growth, roughly speaking.  I'm oversimplifying to some degree, but that's what he would say.  He would say, "If you want CPI or prices to be a constant, then yes, you can grow the money supply, but just grow it roughly around the way that the economy is growing, and if you do that then prices will be stable".  That's what a lot of right-leaning or hawkish-leaning people at the Fed claim to support, is the Friedman model.

I personally am of the view that the Friedman model is wrong because of the Cantillon effect, that prices don't symmetrically increase; this is the insight of the Austrians and of Cantillon himself.  So, that's one division that makes it harder for the Fed, which is to say that there are the doves, there are Friedmanite hawks and then there are the Austrians are sort of seen as these completely --

Peter McCormack: Crazy.

Avik Roy: -- outré, illegitimate participants in a way.  If you're an Austrian, if you're a bitcoiner or if you're a goldbug, if you're in any of those categories, if you're even Peter Schiff -- there he is in the corner -- or Steve Hanke, one of these guys -- actually Hanke's more a Friedman guy.  I'm not sure where Schiff falls on that front, but Hanke's very much a Friedman guy.  But all this to say that they're on the far end of the mainstream conversation and Austrians/bitcoiners are not; they are totally off of the mainstream.

So, we have a long way to go to have a monetary policy that is as sound as what Bitcoin's monetary policy is.  But, at the very least, if we could get to the Friedman approach, which we might call a centre-right or centre-hawkish on the monetary context, not on the broader political partisan context, but in the context of monetary policy, the sort of mainstream hawk view might be, "Let's have 0% inflation".  That would be the far end of the hawkish spectrum, and I think that should be the goal.

I will say there are people who support that, there are people in Washington.  Pat Toomey has alluded to this.  He's the retiring Republican Ranking Member on the Senate Banking Committee who has jurisdiction over some of this stuff, and he said, "Yeah, some people believe, and I respect their views, that inflation should be 0%, and we would be a fairer country and a less regressive country when it comes to the evolution of prices, if we strove for 0% inflation instead of 2%".  But what do you the Keynesian and what do the mainstream economists say to that?  They say, "Well, if you had 0% inflation, then people would have an incentive to save instead of spend".

Peter McCormack: By the way, why is that such a bad idea?

Avik Roy: Well, it's terrible.  Can you imagine if people saved all their money instead of spending it?  Then GDP would shrink or something; that's the argument.  The argument that unless you steer people into spending their money, then the economy would sort of die, and that's not true.  If my money's appreciating in the bank, I'm still going to spend it on food, on a house --

Peter McCormack: TVs.

Avik Roy: -- on trips to Nashville to see you.  I'm going to spend money on things.  Yeah, I'm going to buy a TV.  We're all going to spend money, that's what we do with money.  So, this idea that somehow people are going to stop spending money if somehow they're rewarded for saving, is just one of these theories that every mainstream economist believes, that isn't true, and it's a major error in monetary policy.

Peter McCormack: My expectation with that as well is that people will become more considerate though about what they spend their money on.

Avik Roy: Yeah, sure.

Peter McCormack: Which would encourage people who are producers of products and services to have to produce better products and services. 

Avik Roy: Right.

Peter McCormack: I think we've been a little bit too exposed to people getting away with producing absolute shit.  I think the fast fashion industry is an example of that, and I think we should move away from that.  I don't see the issue with having people save.  I think this is really the result of poor economic policy that the narrative changes.

Avik Roy: Yeah.  The way I put it is that a lot of people, particularly intellectuals, like to complain about our consumerist culture in America.  Well, what creates the consumerist culture?  A monetary policy that destroys the long-term value and reward for saving your own money.

Peter McCormack: I had Steven McClurg in here this morning; we were talking about what is happening.  He was talking about rate hikes that'll come in and hopefully that's going to bring inflation under control, but also saying, "Look, there's a potential towards the end of the year there's going to be a massive stimulus injected into the market".  He said, a couple of people of have now said, "This could be $5 trillion to $10 trillion", which will then again lead to inflation, and we're going to get this almost yo-yo effect.

He believes there is a risk we get to very high inflation, the kind of inflation numbers we're used to seeing in places like South America and in Argentina, which I can't even imagine happening; it just seems absolutely crazy.  But what it does lead is a potential monetary collapse at some point and, from the ashes of that, maybe, maybe you would have a government that has to have a more responsible monetary policy, maybe 0% inflation.  Maybe the Austrians win in this scenario or maybe we just all move to Bitcoin.

Avik Roy: Well, first of all, I think that's unlikely as a near-term scenario, particularly when you think about the fact that, in the November 2022 Elections, the Republicans are likely to take the House at the very least, if not the Senate.  That means that, in terms of Congress spending money, there's going to be a bit of gridlock situation where they're not going to agree on what to do.  So that I think is, at least on the fiscal side of monetary stimulus, not going to be there.

The Fed, of course, could reverse course because they're spooked by a recession or by the stock market collapsing and things like that; that's possible.  I don't think it'll be like COVID-level stimulus, but could they put a halt to their increases in interest rates and their phase-out of QE?  They could do things like that?  That remains to be seen. 

I am less worried about the near-term situation and I'm much more worried about the long-term situation, which was the theme of that piece we talked about when I was last on your show, Bitcoin and the US Fiscal Reckoning, that long-term deficit in debt problem that the US has that's continuing to get worse, largely because of healthcare spending.  That is the thing that, in a 20- to 30-year timeframe, is going to be very disastrous.

If we do have that kind of, let's not call it hyperinflation, let's just call it significant inflation, let's say inflation gets to 20% or 30% -- hyperinflation we think of is like 1,000% inflation -- let's say it's 20% to 30%, it's not even all the way to where Turkey is this year, let's say it's half of Turkey, then that is catastrophic for the country.  I would honestly fear for the Republic in the sense of, you could imagine massive changes to the constitution, to the government and the stability of the government if that happened.  So, all this to say, I think --

Peter McCormack: Even balkanisation?

Avik Roy: Yeah, all that could happen, and the human cost.  Most people don't own Bitcoin, so I think part of our job, and you do this obviously better than almost anybody, is to spread the word and convince people to park some of their money in the hardest money that's ever existed so they can protect themselves from this problem.  But if the majority of the country doesn't do that, then they're going to be very upset when that 20% to 30% inflation hits them.  We should not root for that outcome because revolutions, in general, are very damaging, very costly, can lead to worse outcomes in the end than the society we have today.

Peter McCormack: In terms of Bitcoin, you gave a great intro explaining the work that FREOPP does and who you're trying to help in society, but I would still consider Bitcoin as an asset and kind of a luxury purchase.  So, what role does that play in the policy work that you're doing?  Do you consider it as something that you should be encouraging those within the poorest aspects of society at least try put a little in there for some long-term investment; or is this more that you're encouraging a move to a more Bitcoin-based society because that creates a more responsible economy?

Avik Roy: It's both.

Peter McCormack: Okay.

Avik Roy: I'd say, yeah, it's both.  If you have a more Bitcoin-based society, then lower income people are going to more naturally have more Bitcoin, because they're going to use it more widely.   So for example, if this $200 threshold for payments kicks in and you can buy your hotdog or your meals or your grocery shopping with Bitcoin and know that you're not going to be have to pay capital gains tax on that, that then lubricates the ability of Bitcoin to be more of a payment mechanism without having to use the kind of second-layer stuff that Strike and others are building.  So, that could be very interesting as a way of encouraging more people to…

Payments, to me, are a gateway drug to saving with Bitcoin; so the value, to me, in a relatively censorship-free environment, obviously if you're in a place like China or Ukraine or wherever where you need to send money in a censorship-free way, that's where the payment piece of Bitcoin is super important; but the value of, say, a more Bitcoin-centric trading- or payments-based economy in a place like the US is that then, if you're buying and selling in Bitcoin, just by kind of thermal dynamics, by your just general inertia, you're going to have money that you're saving in Bitcoin over time. 

This is, in theory, the upside of the El Salvador situation, is that people are buying and selling in Bitcoin, and they're going to save some of it in Bitcoin; they're not going to trade it all back to dollars and, if they do and they see that value appreciating over time, then that's when it starts to help them.  So, that's the value of the second part of what you're saying, but the first part is important too, the work of people like the Black Bitcoin Billionaires and others who say, "Look, you don't have to buy a whole Bitcoin.  You can buy a couple of sats a day if that's all you can afford.  Just do what you can".  What we talked about with the Keynesian approach to spending versus saving, encouraging that culture of saving again is so important.

If you think about the people who grew up during the Depression, and the Depression people were way poorer in every way than Americans are today, both in terms of just the actual dollars that they had in the bank and the technology, what those dollars could buy.  They were way poorer than us, there were breadlines, people were starving, and they had that culture of saving because they couldn't trust banks, right.  They put their money under the mattresses, things like that.  If you've known people who lived through the Depression, your grandparents, say, they will tell you how much they hated debt.  They really didn't want to be in debt because they never want to be in a situation like that ever again, and we've lost that because we're losing that generation. 

But what if we could recreate that using Bitcoin?  What if people could realise, through Bitcoin, that, "I don't want to be stuck with these dollars that are declining in value over time.  I want to have an asset where I can save, I can rise up.  Maybe I'm only saving 1% of my income every year by being a little more frugal, but over time that can mean something".

Peter McCormack: Yeah.  I do want to ask you one more thing on inflation before we finish up.  I want to understand a little bit more about how it impacts the middle class and the more wealthy in society.  But, before we get to that, is there any part of this with regard to the poorest in society we've not covered?

Avik Roy: Let's see.  We've covered the fact that the basket of consumption is different, and that's important.  We've covered the fact that, as a share of their disposable income, because they don't have any disposable income, inflation impacts them more; that's really important.  We've talked about the fact that, because they don't have a house or a stock portfolio, they don't benefit from inflation they way wealthy people do, and that's why they're kind of on a treadmill, just running in place.  Those are probably the most important elements. 

We talked about the wealth inequality piece, which is, as time goes on and, say, homes get more expensive, the ability to enter the ownership society, as some used to call it in the past, becomes harder and harder, because it becomes harder to own a house.  You can own Bitcoin though, and that's the counter revolution, you could say.

Peter McCormack: Your digital property.

Avik Roy: Yeah.  So, I think those are probably the main things I'd highlight.

Peter McCormack: Well, again, I'm just going to raise BlackRock again.  It just doesn't help with the likes of BlackRock buying tens of thousands of homes as a store of value for themselves as well, and that's taking --

Avik Roy: By the way, that's fuelled by easy monetary policy, because they benefit from low interest rates that allow them to borrow gobs of money.  This is another element that's really important, by the way.  This is maybe the thing we haven't discussed which is that, again, the conventional wisdom among Fed economists, among mainstream economists, is that easy monetary policy is good for the poor.  They need to borrow money because they're poor, and if they borrow at lower interest rates, they'll be able to borrow more; that's the theory. 

The reality is that the people who borrow the most when interest rates are low are financial institutions and hedge funds and private equity funds and venture funds.  These are the people who are the beneficiaries of the Fed when the Fed prints money, when the Fed lowers interest rates, not poor people.  Poor people have poor credit ratings and can't borrow anything.  Try getting a mortgage if you're making $20,000 a year; you can't.  Try getting a credit card if you're making $20,000 a year; maybe you can but the interest rate on that credit card's going to be 50%. 

So this idea, this dogma at the Fed and among many mainstream economists that if you are poor you benefit from low interest rate and easy money policies is completely wrong and requires a total re-examination.  This is one of the real problems that we have right now.  The reason why monetary policy in America and around the developed world is so bad is because of this intellectual mistake that mainstream economists are making.

Peter McCormack: Mistake or perhaps dishonesty.  Look, the information's out there if people want it.

Avik Roy: That is true, but I will say I talk to a lot of these people and they genuinely believe it.  They're wrong, but they genuinely believe it.

Peter McCormack: With regard to the middle class, not everyone in the middle class owns a home.  You've still got renters, especially in the large cities.  I know there's a squeeze on the middle class right now.

Avik Roy: Totally.

Peter McCormack: When there's a squeeze on the middle class that means they're also having to make decisions about what they want to buy.  Of course, they have more disposable income, and some people just saying, "Well, you shouldn't be complaining", but there is reality for the middle class as well.

Avik Roy: Absolutely, yeah.  So, all the same things are true; they're less accentuated for the middle class than the poorest or lowest-earning people, but particularly the pieces around wealth inequality affect the middle class the most.  So, again, when we were young, when our parents were young, there was a sense of, if you work hard and you have a steady job and you do your part in that way, you will be able to own a home someday.  The quintessential description of the American dream is --

Peter McCormack: The white picket fence.

Avik Roy: Yeah, you own a home, and that becomes your nest egg and it becomes the thing you can pass on to your kids.  We have taken that away from tens of millions of Americans, and many more around the world, through these kinds of policies, and it is a huge problem.  Again, what I'm really worried about on this particular front is that the dogmas that I've described about monetary policy are so entrenched in the mainstream economic community and at the Fed that we're probably at least another ten years from people waking up to the fact that they're tragically wrong on this stuff.  That means another ten years of this problem getting worse.

Peter McCormack: Well, Lyn Alden said the next decade is going to be all about inflation, it's going to be very painful for a lot of people.  We don't have to spend too much time on the wealthiest in society.  My conclusion I'm coming to is they mainly benefit.

Avik Roy: They do, and we've seen it if you look at price-to-earnings ratios in the S&P 500, for example.  So for those that don't know, most of you probably do, but if you don't know, the Standard and Poor's 500 Index is a basket of 500 very large companies in the US Stock Market, and the price-to-earnings ratio, which is the stock price relative to the actual profits that are generated by these companies per share, was at record highs prior to the recent tightening by the Fed, record highs or modern record highs. 

That shows you that there's a lot of money sloshing around the system relative to the actual fundamental profits or growth or economic generation of these companies.  That's one measure of many.  I could point you to say, look, we were in a bubble of financial assets that, again, benefits the people who have the ability to own financial assets, which are people with disposable income, people who don't spend, don't have to spend as much as they earn. 

If you're able to earn a lot more than you spend because you're making six figures or something higher and you're not living in New York City or San Francisco, then you can put money away.  Maybe you have a really nice 401(k) benefit with your job.  Whatever it is, whether it's a pension benefit or it's your own frugality or your own high-earning capacity, that is a huge, huge problem.  So, that's created a massive two-tiered society in America.  It's really the two tiers of society are people who own homes and have stock portfolios and people who don't, and the gap between those two populations is widening.

Peter McCormack: It's a rigged system, Avik.  Okay, just to finish off, is there anything you're optimist about?  Do you have optimism on anything?

Avik Roy: Yes.

Peter McCormack: Okay, good.

Avik Roy: When you work on public policy, you're trying to solve problems.  Of course, you focus on the things that need to be improved or that need to be fixed, but I'm very optimist about the ability of Bitcoin to be the hardest money the world's ever seen, to be that vehicle of savings.  And I think, as I said, the most important thing to minimise a civilisational disruption is for people like us to do everything possible to get as many people into Bitcoin as possible, particularly in the lower end of the scale. 

There have been emerging surveys that show that wealthier people are the ones disproportionately who own Bitcoin, or high earners, so we've got to do more on that front.  But at least the technology exists.  15 years ago, the technology wasn't there.  So the fact that it's even possible to do what we're talking about is an incredibly important fact, that allows for the preservation of wealth for even very low income or low net worth individuals.  So, that's really important, the fact that an alternative exists, and it's possible that we may have a gradual and peaceful transition into that system.  I think that's really important.

I'm optimistic about the fact that there is technological innovation going on all the time that, if allowed to by incumbents, by regulators, by people who make laws, if it's allowed to compete with the legacy system, it can make a lot of things less expensive.  So, we've been talking a lot today about housing, there's a start-up called ICON that makes 3D-printed houses.  The first one is in downtown Austin actually, and some of the founders are based there.  That's something that could revolutionise the cost of construction of homes.  At a time when one of the limitations in the building of homes is the lack of construction workers and contractors to build the homes, if you could print the homes with 3D printing of concrete, then you could, in theory, build much larger and cheaper and faster housing units in a way that could make housing more affordable for more people, for example.

So, there's a lot of innovation going on in the world that can solve these problems, and I think one mistake that people often make when they're looking out at the world is to just say, "We're going to take these trends from the past and we're just going to straight line them into the future".  They don't take into account things like the ability of innovation to change some of those curves.  So, I'm very optimistic about the ability of innovation to change some of these things and make them better in ways that we can't even anticipate.

Peter McCormack: Amazing.  Well listen, Avik, it's always a pleasure to talk to you and hang out with you and have a beer or go and eat, and I appreciate you coming into Nashville for this.  Hopefully, I'll see you in London at some point in the future.

Avik Roy: Yeah, that'll be great.

Peter McCormack: I expect, every few months hopefully, we'll get to do this again because you're a really great speaker and the work that FREOPP is doing is incredible.  Everyone listening, make sure you go and check it out.  We'll put all the links in the show notes.  Just keep doing good work, man.  I really appreciate you. 

Avik Roy: Peter, same to you.  I'm such an admirer or everything you do.  You've just contributed so much to this space, so much of this community and I want to you to keep doing it as long as you don't get tired of it.  Don't get tired of us!

Peter McCormack: And Danny, let's thank Danny as well, and Jeremy.

Avik Roy: Danny too.  Yes, exactly, Jeremy.

Peter McCormack: And David Zell.

Avik Roy: And Ben.

Peter McCormack: All right, man.  Take care, thank you.