WBD521 Audio Transcription
Will Bitcoin Replace Central Banks with Lyn Alden
Release date: Friday 1st July
Note: the following is a transcription of my interview with Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss the rise and role of Central Banks: their intermittent role in the US’s history, the piecemeal erosion of a gold standard, the new era of easy money, and whether Bitcoin could replace Central Banking.
“I think this decade is going to be transformative, but we’re still too early to say exactly where this ends up or how quickly this goes.”
— Lyn Alden
Interview Transcription
Peter McCormack: Hi, Lyn.
Lyn Alden: Hey.
Peter McCormack: It's been a while.
Lyn Alden: Yeah.
Peter McCormack: People won't know we've recorded two shows today, so we should let them know, because it'll be the second one, so it makes sense. Okay, got a super-interesting topic I want to get into with you today, which is central banking. And one of the reasons I want to talk about this with you is firstly, you know about everything, so that's great; and secondly, a lot of bitcoiners talk about how Bitcoin can replace central banks.
Central banks are often seen as the root of all evil with money, and I half agree at times. But I also want to understand where they came from and I assume there's some good sides to having central banking and I want to understand what we'd lose if we lose central banks. So I kind of wanted to cover as much of this I can with you to really understand what the trade-offs are for replacing central banks with Bitcoin, if that is something that ever happens. You're okay with this?
Lyn Alden: Yeah, happy to discuss it.
Peter McCormack: Cool. So I know you've done the research on this in the past, but what was the background before we had central banks? I know Nic Carter has written about this a lot, the era of free banking, but I don't know a lot about this. Can you kind of explain to me and educate me?
Lyn Alden: So that depends on what region of the world you focus on.
Peter McCormack: Okay.
Lyn Alden: Basically, if you go back long enough, you go back to, barter systems, monetary goods are rising, people keeping track of ledgers, kind of the invention of money. And then you had state money where you say, "Okay, we want to simplify commerce by having standard amounts", and so, you know, the emperor would put his face on a gold coin and that makes it harder to forge and also it's standardised. So that kind of greases the wheels of trade.
Then throughout Europe and other places, you start to have national banking arise, where you don't want to have all your gold with you or all your silver with you. You deposit it and you get a receipt for it, and then that receipt becomes a proxy for that gold. It's more convenient, there's ways maybe if you lose it you can get it replaced, you can maybe prove your identity and get it replaced. So it's more secure, especially if you're transporting over ships, for example, you don't want to lose all the gold at the bottom of the ocean. So you started to have these notes arise and so you essentially had banks arise.
And because gold is not very portable, it tends to centralise. There was economies of scale of securing it, especially because governments have an interest in eventually centralising it, and so you had banks arise, and then inevitably you got towards central banks where they would arise in Europe. And so one of the earliest examples is the Bank of England that was created in the late-1600s. And so, the whole premise there is that you have a central bank that works as the bank for the government and then in different forms, because there's not just one type of central bank, there's different central banks and some of them will also be lenders of last resort to other banks.
And so maybe we want to shift to American history now at that point, of talking about where they arose to the modern state?
Peter McCormack: Well, I probably want to ask you a little bit about the Bank of England, the first central bank. Being from England, I'd want to know a bit more. But am I right in thinking that came about because of war?
Lyn Alden: Oh, when you go back far enough, yes.
Peter McCormack: Yeah.
Lyn Alden: These things tend to arrive in war and basically they come about due to just changes in institutions. But when you go back to that point, I mean you said I know everything. I don't know detailed European history, so there are people that can go way more into the history of central banking in Europe in particular; there are historians that can go way more into that.
Peter McCormack: Yeah, I mean I know that would be asking a lot, but I bet you do know; you do! Alright, so let's do American history. The era of free banking, as you said, that was a period where banks arose because people had money, they wanted a place to deposit it, so I guess somebody one day came up with the idea of, "Hey, I'll look after and guard your money and keep it in our safe and protect it and you don't have to keep it in your home", which I guess protected people. And then the issuance, the credit note or the paper, that I guess was the start of paper money.
Lyn Alden: Well, in the United States we had a couple of different eras. Ironically we never -- unlike the Bank of England, we didn't have this continuous institution. We had eras where we had a central bank and then didn't have a central bank and then had one again and then didn't have one.
Peter McCormack: Okay.
Lyn Alden: And so basically in the United States, gold and silver from nearly the beginning were for money with the Coinage Act, where gold and silver were recognised as legal tender. But then, what institutions wanted to do with that was kind of left to them. And so in the very beginning, the central bank was very limited, and there were actually discussions among the Founding Fathers of whether or not they wanted to have a central bank. And so Alexander Hamilton was the proponent of it, whereas Jefferson was against the idea, and Hamilton's faction won out, and so they had a central bank with a 20-year charter.
It was very limited and it was not a lender of last resort, it was not the Federal Reserve of today. It was a fairly small institution and its purpose was basically to do banking activities for the federal government.
Peter McCormack: Right, okay.
Lyn Alden: And they couldn't even -- for example they couldn't buy government debt. They were very limited with what they could do. And it had a 20-year charter, and eventually by the time that charter came up, Hamilton was no longer around, he had died in that duel, and the political winds had changed and that had expired. But then, after the War of 1812, there's a period where there was not any bank and then there is turmoil, and they start another central bank. So you had bank number two and it had another 20-year charter.
Peter McCormack: Okay.
Lyn Alden: So you had another central bank, and again it was very limited. And then there were political forces against it, and eventually that also was led to expire. And then after that is when you enter the long period of free banking.
The way that essentially worked -- and those banks had existed during the central banking period as well; and the way that essentially worked is that a bank would have gold and silver deposits and it would, as we described, issue notes against them. And you essentially had a separation between state and money, where gold and silver were nature's money and then there were claims on those, but those were these private issuances. And the ability for that note to be recognised was based on the reputation of that bank.
So for example, a large New York bank, that might be a rather liquid and widely accepted note. It's well trusted, even pretty far away, because people know that's the note from the bank in New York and you'll be able to redeem that. Whereas if there's a note issued from some obscure bank out west maybe, that might be far less liquid. People might only be willing to buy it at a discount, because they know there's going to be frictions to ever redeem that, and so you had competing issuances of money.
There was ultimately representing claims on gold and silver, but of course you had to trust the solvency of that institution and you had to trust the liquidity and the scale of that institution compared to where you were in the country.
Peter McCormack: Was the denomination of those notes in dollars at that time, or was it just an amount of gold?
Lyn Alden: Dollar was defined as an amount of gold and silver.
Peter McCormack: Right.
Lyn Alden: That was back in the Coinage Act of the late 1700s. So, yes.
Peter McCormack: Okay.
Lyn Alden: They were uniform in that aspect, but they were all differing in terms of their creditworthiness.
Peter McCormack: Right, okay. And did they have different denominations of notes, or could you have a weird note which represented just what your holding was; like, could I have a $1,300 note?
Lyn Alden: Yeah, different banks could offer essentially what they wanted, there was no standard amounts. And again, there's probably a historian that can go through all the detailed nuances of what kind of things they had, but essentially what you had was private money.
Peter McCormack: Right, okay. And as people travel around the country, they had different notes, different representations, and depending on who that bank were, where, there was different levels of trust.
Lyn Alden: Yes.
Peter McCormack: I wonder how those reputations were built though, because there would be no internet!
Lyn Alden: I mean, yeah, basically it was much slower.
Peter McCormack: No Yelp!
Lyn Alden: Yeah. I mean it really is about the centralising forces. So banks in New York, these large capital centres, you know, those are the ones that would have reputation, and as you got into the periphery, it'd be very, very hard to build a reputation.
Peter McCormack: Right, okay. So how did we get to the stage where we had, essentially, the Fed?
Lyn Alden: So that came about in the early 1900s. And the preceding of that was, there was a crisis in the very early 1900s and you had a banking failure. So the challenge with this system, there was a couple of issues. American free banking was a lot messier than, say, Scottish free banking. That's actually one of the things that central bankers today will look on that period and say, "Look how messy that was". There were tonnes of bank failures. Essentially what they were doing was doing free banking in what was an emerging market.
I mean, America in the 1800s, we're expanding across this continent and also you had -- generally they were limited to operate within states, so they didn't have a lot of geographical diversification on their lending exposures and things like that. Plus it's, just due to technology, you couldn't -- because it was all built on trust, you couldn't audit them really well.
Peter McCormack: Right.
Lyn Alden: You couldn't just say, "Give me your proof of reserves"; that's hard to do. And so, there were all these shortcomings, and you would have a number of bank failures on a regular basis, and you had a particularly bad one in the early 1900s. And for part of it, it looked like the whole system might just come crashing down. And eventually you had a couple of bankers, led by JP Morgan, the person not the institution, the actual JP Morgan; essentially JP Morgan worked as a central bank. He was the lender of last resort. He's like, "This thing's not going to go down, I will backstop this thing". And essentially what you had was a centralisation problem. If the bank system of the US came down to what JP Morgan was going to do, that was perceived as a problem.
So, the opportunity was taken, okay, after that resolution, after that crisis was resolved, they said, "How can we institute some sort of lender of last resort?" and that's when they shifted towards the idea of a Fed, and that came about a few years later in 1913. And the original bank in the United States was like Hamilton, he centred that around Bank of England. So that's always been the model for America and they recreated it again, but they did it in a somewhat more decentralised way. So rather than having some central institution, they created this public-private partnership where it's almost like this complicated proof-of-stake model, and that's the creation of the modern Federal Reserve.
So ever since 1913, we've had this continuous central bank. So it's the longest lasting central bank in the United States, and although their charter has somewhat changed over time, it's a relatively continuous organisation.
Peter McCormack: And these banks back when they first originated, did they offer very similar services that they do now? We've mentioned they would hold your gold for you and protect it, but they would offer, what, credit and loans and --
Lyn Alden: Yeah, a combination of custody and offering different types of credit and services like that.
Peter McCormack: Okay, and how would interest rates be set; just by the bank locally?
Lyn Alden: Yeah, basically. It's national supply and demand. So if you want more deposits, you have to offer higher rates, and then lending of course is based on the market at the time. So you'd have, instead of a central entity determining rates for the whole region, you'd have different rates based on different regions. So a rate for one region might be very different than a rate for another region.
Peter McCormack: But I guess because the banking sector wasn't digitised at that point, you couldn't offer fractional-reserve banking, because you could only offer loans based on what you were holding within the bank.
Lyn Alden: Well, fractional-reserve banking is often misunderstood to mean that they have more liabilities than assets. It just means, for example, unless they're insolvent or fraudulent, they have more assets than liabilities. They have positive bank capital, but say they don't have all the gold on hand to redeem all deposited at the same time if there were to be a bank run.
Peter McCormack: Because some of it's loaned out.
Lyn Alden: Some of it's loaned out. So the bank has -- they have gold, but then they also have basically loans on real estate or things like that that for them is an asset. And so they're doing basically duration mismatch. So they're arbitraging the difference between short-term lending, which is what depositors are doing when they deposit their gold and silver, versus what the bank is doing, where they're making these longer and higher-yielding loans.
Peter McCormack: But would they have to hold minimum reserves?
Lyn Alden: That's where you had a hot pod of different regulations, so different states would have different requirements.
Peter McCormack: Right.
Lyn Alden: And, so, yes, there'd be differing areas of regulation for how much gold you had to hold and how often they'd be checked, and things like that.
Peter McCormack: So why did banks fail at that time; what were the general reasons?
Lyn Alden: That's where you're going to get different views from different people. Central bankers would say the whole thing's unstable and proponents of free banking would say, and I tend to align with that view, because we have other examples of jurisdictions, like I mentioned Scotland where it worked better, they would say the specific set of regulations were unfavourable; banks were, very geographically constrained, in terms of their area of operations; and it was essentially an emerging market environment.
So there was a whole host of reasons why banks would fail, but the American version was this pseudo free banking, rather than a fully free banking environment and it was just a new environment overall.
Peter McCormack: Okay, so 1913 it was established. What was their mandate?
Lyn Alden: Essentially to be the lender of last resort. So if there were to be a large run on banks and if there was a credit contraction, they could be the -- instead of going to JP Morgan and saying, "Hey, do you want to bail us out this time?" they'd be an institution whose job was to have reserves to backstop liquidity if you were to get a nationwide contraction in credit.
Peter McCormack: Right. How would they be capitalised though; was that just from taxation?
Lyn Alden: They'd be -- yeah. They're essentially this pseudo government private organisation. So they were capitalised by the banks in the system. So it's literally a proof-of-stake system, not on a blockchain obviously, but basically the different banks around the country owned shares in this and then also the federal government, they would appoint some of the leaders as well. So basically we had representation from the people and then you had representation from the banks, and so you had this merger of public and private. And so they were capitalised from the banks and capitalised from the government to backstop that.
But then over time, the federal government came in and pulled some of the power towards themselves, and so for example after the crisis of 1929, you had another set of things set up. So you had FDIC insurance, number one; and then number two, they took the gold from the Fed and transferred it over to the Treasury, so the Federal Reserve had -- the ironic thing is the Federal Reserve is not really federal and it has no reserves. So at that point, basically what they do is they create reserves. They don't have reserves; they create reserves out of thin air. That's the fiat system. Even though back then they were still on a gold standard, they didn't actually have gold owing to them.
Peter McCormack: Okay, that sounds like the first crack.
Lyn Alden: Yes.
Peter McCormack: Okay. So essentially, the role of the central bank was to give stability to the banking system nationwide?
Lyn Alden: In theory, yes.
Peter McCormack: In theory. Did it work?
Lyn Alden: I think that depends again who you ask. So there are a number of people that will point out that contractions became some more spread out and less severe after that point in American history. But I think also you -- it came at the cost of long-term stability. So you basically shorten these contractions, but then you lead to constant debt accumulation over time, because you're essentially controlling interest rates. And I think if you go to people normally and you say, "Are price controls a good thing?" most people would say no, but this whole system relies on controlling the price of money. So you're doing one price control that affects every other market.
And there are relatively few markets where that would be true. So controlling the price of energy or controlling the price of money, for example, are some of the few things that ripple out to everything else.
Peter McCormack: Right, okay. And the FDIC, again, what was their mandate at the time? I know it's expanded, and I was tracking the FDIC back a couple of years ago when we did a four-part series about Mnuchin and we were a looking at what happened with OneWest, and how essentially the FDIC enabled banks to be quite reckless in their lending. I'm assuming that is like an expansion of their mandate over the, what, 100 years since this existed?
Lyn Alden: To some extent. I mean the general idea with FDIC insurance is to provide depositor insurance, so if the bank fails they still get their money protected by some sort of common entity. And so the point is to deter a run on the banks. So if you game theory and there was no bank insurance, if banks are highly levered and they start to fail, the correct thing to do is go and get your money out right away. But if everybody does that, then it fails quicker.
Peter McCormack: Yeah.
Lyn Alden: So they want to disincentivise people rushing in to get their money out. But then the problem is they have to be able to backstop that, so that -- and it also makes it so that you can get away with more risk, because there's a backstop there. But a lot of us take it for today that you put money in a bank and you're relatively stable, and it's because of FDIC insurance, but that can only really work when the underlying money itself can be created.
Peter McCormack: There's a limit on FDIC insurance, is that right; is it up to $250,000?
Lyn Alden: Yeah, that's what's expanded over time. So over time, they would change that limit, but yes, there's limits on how much; so basically rewards smaller- and medium-sized depositors, rather than the largest depositors.
Peter McCormack: Interesting. So it's one of the few scenarios where the smaller guy is better protected.
Lyn Alden: Yes, but then there's -- so that's why, for example, larger pools of capital would rather be in something like a treasury.
Peter McCormack: Right, I see.
Lyn Alden: That's why there's a market for treasuries, because you're directly backstopped by the federal government.
Peter McCormack: Risk free, unless you're Russian!
Lyn Alden: Yes.
Peter McCormack: Yeah. I think we have something similar in the UK. I think we're protected up to about I think it's £85,000 is it?
Danny Knowles: I think it's something like that.
Peter McCormack: Yeah, about £85,000, and I'm pretty sure that came in, again, after the 2008 Financial Crisis, because it looked like Lloyds and I think Royal Bank of Scotland were going to fail, so they have a similar protection there. But it still has its limits, which is another reason to encourage people to not hold large amounts of money in the bank.
Lyn Alden: Yes.
Peter McCormack: Strange. Where does Bretton Woods play into this?
Lyn Alden: So Bretton Woods came a little later. So in American History you had, for the 1800s and then in the early 1900s, you had a gold standard. So if you had a bank note, you could convert that to gold and back, and in many other countries as well. That was the whole point of the gold standard.
Peter McCormack: Yeah.
Lyn Alden: In 1933 and 1934, they passed a law where they said it's illegal for Americans to own gold and notes are no longer going to be redeemable for gold, and then after that conversion happened they told everyone, "Okay, come in, turn your gold in and we'll give you the dollar amount for the gold", to be compliant. Once they all did that, then they reset the value of gold overnight basically so that the big winner there was the American Government, that has all this gold in a vault. And so that actually allowed them to create a lot more dollars, because their backing could still be maintained because they just devalued what a dollar is compared to gold. It's essentially a type of default.
Peter McCormack: Right.
Lyn Alden: Anyone who's owed debt when that happened basically was defaulted on, because they changed the definition of what they were owed in. So if we made a contract where you owe me a certain number of dollars and then you pay me back in a dollar in another -- another type of dollar, like Singapore dollars, but that wasn't part of the contract, we're like, "Well, you didn't say what kind of dollar".
Peter McCormack: So it went from a redeemable dollar to a non-redeemable dollar?
Lyn Alden: Well, it went from redeemable to non-redeemable, and it also was pegged to a lower amount, and it was not even redeemable for that lower amount. Now, what it was redeemable for is for foreign creditors, because they had to maintain why someone in Europe might want to ever accept American dollars for anything. So for an official like, say, central banks, they could still redeem dollars for gold at that lower rate.
Peter McCormack: At the lower rate.
Lyn Alden: Then the Bretton Wood system was, as World War II is winding down, all the countries involved basically had messed up their currencies. They all had printed way more currency than they had the gold to back up. Part of that was because you had that separation between the money-creation process and gold. In a free-banking era, you can't create far more bank notes than you have gold, because you know at the end of the day that you have a certain amount of depositors that could come and get your gold.
But when you have all -- banks don't even hold their own gold, it's all in the central vaults, they make their loans based on other factors, you can have a complete detachment between loans, the currency in circulation and gold, the amount of gold that's in the system. So the gold ends up not being a constraint on money creation when the redeemability is severed.
By the time Bretton Woods came around, World War II came around, you had way more currency in the system than gold, and also because of what was happening in Europe, a lot of the gold was shipped to the United States to keep it safe in the event of German occupation. So the United States was in a position where they had emerged more favourably than Europe, because they were mostly unattacked during the war, other than Pearl Harbour, and they had a lot of gold.
So countries convened together, I believe it was 44 countries, and they convened in New Hampshire, Bretton Woods, that's where the name come from, and they made a pseudo gold standard, where they said, "Okay, dollars are still not redeemable for gold, but international creditors can still redeem dollars for gold". The way it would work is that other countries would peg their currencies to the dollar.
Peter McCormack: Okay. It just sounds like we've gone from 1913 to 1944 and we're starting to expose a lot of cracks, or ways the system can be manipulated for the benefit of the federal government. Was it Alexander Hamilton and George Washington you said disagreed on this?
Lyn Alden: No, it was Hamilton and Jefferson.
Peter McCormack: Hamilton and Jefferson.
Lyn Alden: And they of course had factions with them.
Peter McCormack: Right. Do we know why Jefferson was against it; do you know that? Otherwise, I'm definitely going to research that.
Lyn Alden: Well, it was actually similar to what you have between the modern Democrats and the Republicans, a states' rights issue versus federal government. So Alexander Hamilton was in favour of a strong federal government and Jefferson was in favour of more agrarian federation of sovereign states type of model; so you had disagreements about what the United States should look like.
Peter McCormack: I definitely need to do a lot -- I'd love to get a historian on to cover that period, it's fascinating. Okay, so at what point did everyone start to withdraw, the country start to withdraw their gold from the USA and return it back; was it after the war? I seem to remember France for some reason…
Lyn Alden: That was when you got to the 1960s and 1970s.
Peter McCormack: Right.
Lyn Alden: So after the Bretton Woods system was established, you basically had, between World War I and World War II, you had these floundering currencies everywhere.
Peter McCormack: Yeah.
Lyn Alden: Everybody was printing way more currency than they had the gold to back up and you increasingly disassociated the money-creation process from gold. The 1944 Agreement gave back some degree of international stability to these markets, and so that worked for a period of time. The problem was that again the gold was so separate from the bank money-creation process that you still had a proliferation of dollar creation. Anytime a bank makes a loan, they're basically creating new dollars. So you had the number of dollars in existence grow more than the amount of gold in America's vaults.
So anyone who's smart, foreign central bankers, would say, "You know, we're going to go ahead and take some of our dollars and get some of that gold, if you don't mind". So over time, if you look at a chart, American gold holdings kept decreasing throughout the 1940s, 1950s, 1960s, and it became more and more apparent that this was going to be unsustainable. Gold was going down, while the amount of dollars in existence was going up, and the United States would try to slow down that creation. If you were aggressively turning your dollars into gold, you became on unfriendly terms with the United States. That you were basically calling their bluff on the system.
The classic example was the French when they sent over a battleship and they said, "No, we want the gold, we want the actual physical gold. Put it on our ship, we'll bring it over". And as these bluffs were increasingly called on the United States, they eventually had to say, "You know what? We have to temporarily stop this gold redemption process". Nixon never said, "We're going to stop doing this forever". He said, "Due to speculators and things like that, we have to temporarily stop doing this". But of course temporary became permanent and so the dollar is no longer redeemable, even to foreign creditors, for gold.
So you had this multistep process where the world wasn't on a gold standard and then off a gold standard; it was step by step. So first, it was a gold standard, and then it was only on a gold standard for certain types of large institutional and foreign creditors, and then it was, nobody at all can redeem dollars for gold.
Peter McCormack: Right. What was breaking in the system? A lot of people are ardent supporters of the gold standard, thinks -- well, one of our team, Ben, who put the website together, WTF happened in 1971?, talks about everything's happened since coming off the gold standard in 1971. But was breaking in the system at this point; what was stopping the central bank from performing?
Lyn Alden: I think what was breaking was that the money-creation process and the amount of gold, there are so many abstractions between those two things, that the amount of gold could not prevent money creation. And so basically, the way I phrase it is that the bad decisions were not made in 1971. That was just marking to market the problem that had already happened.
Peter McCormack: Okay.
Lyn Alden: By the time you got into the 1960s, the system was already broken. There's a combination of fiscal expenditure and just normal bank lending. All of that was resulting in way more currency than the gold that could actually back that up. When you basically go from a free-banking system to a central-banking system, you just completely -- the gold in the treasury vaults, when banks make loans, they never go check how much gold is sitting in their treasury vaults. They're looking at their own capital ratios and consumers are taking out loans, and you just have the complete separation.
Even foreign banks could actually cut dollars in the whole offshore market, the whole eurodollar market, and they could make loans. So there's even non-American banks making dollar loans, and therefore making more claims on dollars in existence, compared to the amount of gold sitting in the treasury's vaults.
Peter McCormack: And this is why Bitcoin is a better technology for such a standard, because you can verify how much exists, as long as people want to show you --
Lyn Alden: You can verify how much exists --
Peter McCormack: -- whether it's real.
Lyn Alden: An institution can do proof of reserves, unlike a free bank of a prior era. Then in addition, because it doesn't have those portability challenges that gold has, it's easier to self-custody or do collaborative custody with and then send it speed of light around the world, either through Lightning or a little bit slower through base-layer transactions.
Peter McCormack: Okay, but the consistent problem here is money creation. The ease of creating money, as Jeff Booth would say, creates distortion of money.
Lyn Alden: Yes. Well especially if you have something that -- if money's defined as a claim for something else, like bank notes are a claim for gold. If you have the processes too very far apart, then gold ends up not being a constraint for that money creation. That's why throughout history, you'd have these routine deep peg breaks where you say, "Okay, now we're going to devalue the currency compared to the gold, because we realise we've created too much".
The question used to be, "Why did you keep creating too much?" and it's because there is so many steps between the two. That's really the outcome I think between when you go from that central-banking era all the way up to the 1970s, you increasingly abstracted the money-creation process from gold. So even in a free-banking era, there would be more dollars, there would be more claims for gold than gold. But it was a relatively low ratio, because any individual entity knew how much gold they had and was issuing notes against that gold, whereas when you have layers and layers and layers, that’s when the number of claims can be far, far higher than the amount of gold.
Peter McCormack: Okay, so free banking is more decentralised risk, whereas central banking, the era of central banking, would essentially socialise risks.
Lyn Alden: Yes.
Peter McCormack: But it could be exploited by politicians, political reasons, to create money; whereas in the free-banking era, it'd be more about risk and reputation of the banks themselves. So there's just these trade-offs?
Lyn Alden: Yes.
Peter McCormack: One of the things I've always wondered is, there's a lot of criticism towards central banks and money creation, but I wonder if there have been some benefits from it. Has the ability to create money and make credit cheap, has that seen an acceleration in innovation? I've always wondered if there's some benefits we've not openly discussed. And I know that benefit also has a trade-off, because for whatever winners that exist there, there are losers elsewhere, but are there benefits to the money creation that we don't ever talk about?
Lyn Alden: The way I would answer that is I think is looking at money as a technology and therefore looking at these steps as some degree of inevitabilities. So when you had gold and then you had the creation of telecommunications channels and good accounting and ledgers and things like that, the world could move faster than the gold, as a bearer asset, could move. So it became inevitable due to technology you'd have an abstraction between the two, and that abstraction is easy to arbitrage and centralise.
The fact that it happened in multiple instances throughout the world shows that it's almost an inevitability. It would take profound discipline in order to not have that centralised. You'd have to have a very strong culture around, keeping that from coalescing. So it's like an unfortunate fact of history that the way the technology worked out, the order in which we got technologies led to the abstraction between money and currency and then the state and central banks controlling that currency.
So while it came with advantages, mainly I think a lot of the advantages came from telecommunications channels and social contracts and things like that, it also came with a ton of costs. Basically, money could be diluted without people even knowing that their money is being diluted, because they're holding something that think is worth a certain amount of gold and then there's a war, and then they can just print a lot of money, and then be like, "Oh, now your note is worth either less gold or no gold or in theory it could be redeemable but not by you". So it's a more rapid button that governments can press compared to what they used to be able to do. So for example if we were citizens in Rome and Rome was trying to fight wars and they didn't have enough money --
Peter McCormack: Clip, clip.
Lyn Alden: -- they can start being sneaky. They could clip coins, they could make diluted coins; but if I'm holding my gold, it's hard for them to divide my gold. Over generations, they could do it. But if I'm holding just a claim on gold, then Rome, or whatever other country, could just, with a snap of a finger, devalue my holding, because I'm only holding a claim; I'm not actually holding the bearer asset.
Peter McCormack: Right.
Lyn Alden: And so that's the environment that we found ourselves in over this past century, century and a half, is people just holding claims, and claims can be devalued overnight.
Peter McCormack: Yeah, I mean this is why it's quite interesting that still to this day, many governments and central banks still hold gold and a lot of individuals don't. It's a bit like -- do you know what it reminds me of? It reminds me of these shitcoin companies that hold Bitcoin, but try and push their shitcoins to other people. The gold was still the valuable asset that retained its value.
On a personal level, I'd love to know your opinion, do you think there is a role for central banks? Do you think they are net positive or a net negative; do you see a world without them and think it might be better? Just because I trust you so much, I'd be interested to hear your opinion on that.
Lyn Alden: I think it's largely dictated by technology. And so I think it was inevitable that they would arise in this period where telecommunications and information could travel faster than money. Basically, the fact that arbitrage existed almost inevitably would lead to central banks existing, and any sort of advantages and disadvantages that came from that.
I think if we get to a point, either through Bitcoin and just, it's the long run, here we go, I think that you can reduce or eliminate the need for central banks. They no longer make sense potentially in that type of environment. So for example, if someone were to ask me if I'm in favour of price controls, my answer would be no. I think that markets should set prices. And that includes things like energy and the price of money; the lending rate that different institutions decided to lend to each other. So no, I don't. I think in the long run, we should not have central committees, the group of a bunch of grey --
Peter McCormack: Old men.
Lyn Alden: Yeah, a bunch of grey-haired people deciding what the price of money's going to be in a 330 million-person country that then also has ramifications for the whole world. I think that's a very analogue and silly model in this day and age. But I think that in some ways a lot of it, people focus on the idea that it was immoral, and in many ways it was. I mean the whole point is everybody wants to get their bigger share, so if you're in a position of power, you like the Cantillon effect, right?
Peter McCormack: Of course.
Lyn Alden: But in some ways, I view it as a technological inevitability. When you had information and commerce travel faster than money, that's what's going to arise. And if you can make that money travel as fast as commerce can, then I think it narrows any sort of reason why in the long run you would have central banks.
Peter McCormack: And where we are right now with central banks and where we are right now with the economy, is this just a natural place we've got to because of the inherent flaws within central banking and the mis-incentives and the ability to create money; or has something gone extra-specially wrong over the last, say, 20 or 30 years?
Lyn Alden: I think that a couple of things converge. So one is the long-term debt cycle, and I think a lot of that is fuelled by central banking. A lot of that is fuelled by central banking. Then, two, you just have cultural shifts. You build up institutions and after a number of generations, the institutions seem like they don't make sense anymore to new technology and new culture, and you start to get less and less trust and more and more corruption in those institutions, both public and private.
And then coinciding with that, we talked about in our prior episode, the commodity cycle, and also the globalisation cycle, where we've arbitraged geographic labour and arbitraged energy and commodities. So I think what we're seeing right now is this combination of long-term debt cycles. So I think we're getting the payback period for multidecade price controls of money essentially. We are also experiencing that specifically because we're at the phase of the commodity cycle and the supply-chain cycle where it's hard not to have inflation.
Because central banks and other factors have led to so much debt accumulation in the economy, they can't really raise rates and they can't really backstop and make sure that a currency continues to be worth a certain amount of energy. So I think that's where we're in now, where we have to go back to the 1940s to find a similar type of extreme environment, at least in terms of fiscal and monetary policy.
Peter McCormack: And I guess therefore with Bitcoin, you can't have price controls for money.
Lyn Alden: Well I think in the long run, that makes it harder to do so. I think, if you have peer-to-peer money that can be self-custodied, support by encryption, it's much harder to overlay essentially control ideas on how that money's going to transfer around. Basically if you control the banking system, the way I would phrase it basically is that, before Bitcoin, if I wanted to send money to a friend in Tokyo, right, we had to go through banks. We had to go through these large permission entities.
So governments could control the gateways of where value is sent and they don't have to impose on the people; they don't have to impose price controls on the people, they don't have to impose transfer controls on the people, they only have to target these well-known banks. But as soon as we had the invention of peer-to-peer money, that depowers in some ways that institution, but it only works if enough people understand how to use this technology and centralise around a handful of one of them, rather than this hodge-podge of so many different things and a very small percentage of people actually using them. So I think in the long run, yes.
Peter McCormack: I'm not going to ask you for an actual number, but do you see a scenario where Bitcoin does become the standard for the world and it does displace central banks?
Lyn Alden: I think it's a reasonable hypothesis. I think the idea is that a new type of money's been discovered, it's unusually hard, so in terms of, say, the stock-to-flow ratio; and it's decentralised and peer-to-peer. And in the long run the question was, why would you want to hold other types of money other than that money?
Right now, you can make a case for why you wouldn't want to put all your money in that. You don't know, it's only 13 years old, it's volatile, maybe it's small enough that governments could add a lot of frictions to it, they can make it harder, they could try to hurt the value of it for a long period of time. But the more it grows, the more you think, "Why would I want to hold yen; why would I want to hold euros; why would I want to hold the second house as a monetary asset; why would I want to hold a painting, when I can just hold the best money?"
So I think if it continues to work as expected, and if it gets past a number of challenges, I think it takes a pretty big chunk of global monetary share. So I would say it's a monetisation process that clearly has a direction. And the question is, do any of the tail risks make it deviate from that destiny?
Peter McCormack: Do you see a scenario where potentially, similar to the free-banking era where credit notes were issued against gold, that we could have forms of money which credits or notes issued against Bitcoin?
Lyn Alden: I think so, yeah, I think you could have a free-banking system based on Bitcoin, in theory. It would have advantages over gold in the sense that banks could have proof of reserves. That's the theme that Nic Carter brings up lot; I think it's a good one. And the fact that it's just inherently faster, that it reduces the desire and the need to hold currencies that are backed by nothing, that cost nothing to produce. The only way to enforce those ends up being basically force, essentially. If you want to force people to hold a softer money, it takes some degree of courage.
Right now it's not super needed, because the trust level of these cryptocurrencies as a whole especially -- then even Bitcoin, a lot of people can't differentiate between different cryptos, they don't know how Bitcoin's different than Dogecoin or different than LUNA; a lot of people just put them all in the one bucket. And I think that over time and knowledge, if you do get that large enough understanding and adoption of Bitcoin, it becomes harder and harder to maintain other types of money.
Peter McCormack: I guess essentially, when you wrap Bitcoin and you take another token as an asset against that Bitcoin, that is essentially a very similar scenario where you're being issued something that can be redeemed for Bitcoin in and out; and I know probably very similar to what happened with UST and LUNA, except obviously that completely failed. But that's an interesting scenario because I wonder if that's something that enables Bitcoin to scale better?
Lyn Alden: Yeah. The short answer, you need to incentivise that in some ways. So for example, we have Liquid Network, where you give a Bitcoin, you peg it in and you get a Liquid Bitcoin and the advantage there -- so the disadvantage first of all is that you're not directly holding Bitcoin anymore. Now you have an extra layer of trust put on top of your Bitcoin, the Federation is not going to work against you. But what you get in return is that you get faster Bitcoin, you get more expressive Bitcoin and a little bit more private Bitcoin. So you're agreeing to a set of trade-offs.
Then there's other versions, like for example Federated Chaumian Mints, where they can make essentially an even more anonymous version of what Liquid's doing.
Peter McCormack: I've seen people talking about this recently. I know Anita Posch has talked about this; I think I saw Matt Odell talking about this. Do you want to explain what these Federated Mints are?
Lyn Alden: So someone with a degree in computer science could go more into detail, but essentially it goes back to the 1980s, Chaum. They created blind signatures where you could essentially run what is basically a community bank, where you can peg in something, let's call it -- well, that was pre-Bitcoin, it was the initial eCash. But if we were to apply it to Bitcoin, you can peg in a Bitcoin to a Chaumian Mint and get a token that represents a Bitcoin, or a denomination for Bitcoin; you could have different bills basically, digital bills, representing a certain amount of Bitcoin.
The cool part about it is, it's anonymous to both the creator of the mint and its other users. The downside is you have to trust that the person running the mint is either not going to be coerced or exit scam; it's a centralising force. That's I think a big piece of why the initial creation of it back in the 1980s and 1990s didn't take off. But there are ways to reduce that.
So for example, if you had that built on a multisig and it was a federation, that becomes a somewhat more reasonable trust model. We have to assume that say the board of directors of this institution, the majority of them are not going to be corrupt or coerced to act against it. So what you essentially have is these anonymous community banks that hold Bitcoin, and that issue blind IOUs, that are essentially more anonymous versions of Bitcoin, but they go through that federated trust model. So it's like Liquid; it's less auditable but more private.
Peter McCormack: Again, I guess with something like that, you could build, I don't know, small, regional little economic centres, a bit like what happened with Bitcoin Beach?
Lyn Alden: Yeah.
Peter McCormack: And you could use that -- I mean, somebody could fund a local project and have a distribution of sub-tokens from that mint and help drive that economy.
Lyn Alden: Yes.
Peter McCormack: Yeah, that's fascinating.
Lyn Alden: Yeah, there's a whole -- you can do fully centralised ones, you can do federated ones, you can do anonymous ones, you can do non-anonymous ones. There's all sorts of models you can build using Bitcoin as a base layer, similar to gold. And it just becomes a question of, does Bitcoin become a large and stable enough asset base for those sorts of things to become sustainable?
Peter McCormack: I wonder what the impact is in terms of how the central banks will break down, how they would collapse, and what the impact would be; have you thought through that?
Lyn Alden: Well, we've seen in emerging markets a model of how that works, where they get to a point where they have recession and high inflation at the same time, they have stagflation. And that's something that's been very rare for developed markets in the past during this whole span of the system. So we saw it during World War II, we saw during the 1970s. That was breakdown of the Bretton Woods. Then we really haven't seen it since then.
So now we're seeing it for the first time, cracks emerge in the developed market central banks. So I think the way that eventually breaks down is when you have high inflation, but they can't raise rates to maintain it, and faith in that system deteriorates and the quantity keeps increasing.
Peter McCormack: Like what's happening right now!
Lyn Alden: Like what's happening now. But people are quick to jump to the Weimer comparison.
Peter McCormack: Okay, yeah.
Lyn Alden: They tend to go to the fastest thing. A couple of points about that. One is even in Weimer, you would think, looking back at the chart, you would think, well the easiest thing to do is to hold gold and even lever your gold. The funny thing is, when you zoom in on the micro, German authorities weren't dumb, they weren't just letting this happen. There were periods where they tried to fight back. They tried to strengthen their currency and they tried to rein this in.
So you'd have, for example, gold drawdown 80% in German marks during hyperinflation and then shoot up 1,000,000%. Basically it was like this crazy sine wave that was breaking out; it looked like a Bitcoin chart. Gold basically looked like Bitcoin in German marks during hyperinflation. So, one is that even hyperinflations, when there are attempted pushbacks, they're not smooth; and, two, you can have much slower versions of that where something like Weimer was a very specific case. You had a deindustrialised economy from the war, you had external liabilities denominated in things you can't print.
Peter McCormack: Is that the reparations?
Lyn Alden: Yeah, the reparations.
Peter McCormack: Yeah.
Lyn Alden: And so now you're in an environment where major developed central banks and governments and institutions in them, they owe debt denominated in their own currency, but their currency is slowly failing, because it's no longer worth a certain amount of energy anymore, and the interest rates are no longer able to compensate for that high inflation. So I think this decade is going to be transformative, but we're still too early to say exactly where this ends up or how quickly this goes.
Peter McCormack: Okay, so, interesting. So if it looks like a Bitcoin chart, but is it really like a Bitcoin chart in reverse, in that you've got the Weimer Republic as the collapse of the currency and it's becoming increasingly more volatile, but actually the Bitcoin chart is super-volatile, but the volatility is dropping essentially as we're recapitalising the world on a new currency; are we seeing that, do you see what I mean?
Lyn Alden: Kind of, yes, because in Weimer you had the collapse of the mark to the gold; whereas now, you have mostly the rise of Bitcoin with a smaller collapse of the fiat currencies.
Peter McCormack: So in a world of no central banks, is inflation then purely down to growth in productivity and changes in economic environments? Is inflation just a naturally occurring phenomenon?
Lyn Alden: So I think in the long arc of time, deflation is the outcome. So even in our current environment, right now, let's say you have 3% inflation over a long period of time. If you look at the actual money supply, that might be 6% average money-supply growth.
Peter McCormack: Okay.
Lyn Alden: And the question is, where's that other 3%? So you have 3% inflation and money creation is actually 6%, it's really because there's a lot of innovation going to making prices cheaper on a regular basis. We can think of it in terms of TVs, computers, smartphones.
Peter McCormack: So again what Jeff Booth talks to us about.
Lyn Alden: Yes.
Peter McCormack: Yeah.
Lyn Alden: So the underlying long-term arc is towards technological deflation, so things get cheaper over time, most things, especially when compared to whatever the hardest money is. So things priced in gold tend to get cheaper over time because we find better and better ways to produce more of them. But they tend to go up as priced in fiat currencies because we're making fiat currencies at a faster rate than that technological disinflation, deflation. So if you had a hard-money environment, whether it's gold, which has a 2% inflation rate, or Bitcoin, which tends towards a 0% inflation rate, you would incline towards low negative inflation, if you ever had that environment.
Peter McCormack: And I guess also we have Bitcoin which is lost, or we have the dust number, which can't be used. Even though it trends towards zero, the actual total supply, even if it's not been issued, is also -- or total available supply is always shrinking as well. I do wonder though, like I wonder if Bitcoin can support a billion people. I haven't seen the evidence that it can. Now, I know some people have talked about sats being like microsats, but I haven't spent enough time looking at that. I'd be interested, have you considered that?
Lyn Alden: I think, well, yes. I think the only way it works realistically is in layers, which is how any financial system, any complex financial system, has developed. So you have basically Bitcoin as the base layer, you have Lightning and then you have different levels of custody on top of that. You could have things like Cash App. Cash App is scaled to tons of people, but of course you're trusting Cash App, you're giving up some degree of permissionless. Then you have those things like Federated Chaumian Mints that can be on the spectrum between self-custody and third-party custody; you can have these distributed custodies.
So I think when you combine multiple layers and technologies together, people can choose their own adventure on how far down the Bitcoin stack they want to go or what their economic reality allows them to go. So someone with a lot of Bitcoin might want to go deeper on the Bitcoin stack, whereas a lot of other people might want to rely on those federated custody services or fully custody services, or just have their own Lightning setup.
Peter McCormack: Yeah, and if you have other scaling solutions like, I don't know, Liquid, it can be a variety of these this is essentially the very similar to the free-baking era, but it's the free Bitcoin banking era, kind of, and different Bitcoin will have, I guess, different value. But I mean, I don't know, is there a premium on a discount on Liquid? I don't think there is, I think they trade one-for-one.
Lyn Alden: I think so, yes. So, in the free-banking era, there was a discount based on, one is how much you trusted the originator of that issuance; and then two, how far you were from it, how liquid it was. So for example, the Bank of Arkansas, let's call it, if you lived right near the Bank of Arkansas, they'd probably trade one-to-one because you know it's super liquid; whereas if you're in New York, you're like, "I don't want the Bank of Arkansas note at all. I'll buy that for 80 cents --"
Peter McCormack: Yeah, "Fuck Arkansas!"
Lyn Alden: "-- because I've got to do all this friction to get it ever redeemed, I have to get to Arkansas, and I don't really trust it". So you'd have these different levels of pegs. We actually see that today with USDC and Tether.
Peter McCormack: Yeah.
Lyn Alden: So during the whole LUNA fiasco, USDC, their attestation was 100% T-Bills and cash, whereas Tether has a portfolio model where they hold some of those, but they also hold some assets that do have risk, and they also have this longer track record people questioning their asset quality. And so you had more people want to redeem Tether, Tether is trading at a discount, whereas USDC was trading at either full, or sometimes a premium.
So you have different levels of how the market assesses their risk and arbitrages that. Some people say, "Okay, you want to sell me Tethers for 95 cents? I'll go ahead and redeem them for dollars". So you have someone willing to step in and arbitrage that. So yeah, basically in an era that is like that, including the one right now, if there are questions about liquidity or solvency, you get a discount, compared to the underlying Bitcoin that it represents.
Peter McCormack: It's fascinating. We're living in an era where we could genuinely see a transition to a completely new monetary system.
Lyn Alden: Potentially.
Peter McCormack: Yeah.
Lyn Alden: But if you look back in history, that happens on not a frequent basis, but it happens regularly. Money is a type of technology essentially. And I think 13 years into this, we're still premature in terms of imagining the world 50 to 100 years from now. We can have these visions of what things happen, but I do think that cryptography has changed the -- and a global network. The combination of a global network, with cryptography, with proof of work, with difficulty adjustments, has changed the game here in terms of what is possible with money.
Bitcoin is obviously the best version we know of on how to do that. So you can never really fast-forward 20 or 30 years and say this is what the world looks like, but I think we've opened this Pandora's box of recreating the possibility of hard money, commodity money, but one that, unlike gold, moves at the speed of light.
Peter McCormack: But these transitions to new monies that have happened historically usually come because a better money is replacing failing money.
Lyn Alden: Yes.
Peter McCormack: And we have a better money replacing what is failing money right now. I guess the control around this is state reaction to it, because undoubtedly Bitcoin reduces or changes the shape of the state. But again, one of the interesting parts of that is, it's very clear that there isn't a separation between money and state now. For example, in the US it's very clear there's a relationship between the government and the Fed. It's very clear the policy decisions seem to be timed relative to in time to mid-terms or elections. That all goes away under a Bitcoin standard and therefore any centralised state force, whether it's funded by Bitcoin or whatever, it loses that ability to distort the money based on election cycles, which is obviously very good.
Lyn Alden: Yes. But I think people still have to be somewhat realistic in terms of how far that goes. I think for example, Rome, the Roman Empire, in some sense you had separation of state and money. They couldn't just snap their fingers and create gold. Now, over time they could dilute gold and things like that, and they could of course put their Caesars' heads on the gold, but essentially you still had a separation between what money was and the state's ability to create it. And yet you still had Rome. And so the question becomes, that of course affects the size of states and affects the way that states can operate, but I think it's challenging to envision exactly what that world looks like in a cryptographic version of gold.
Peter McCormack: Well, the state could be whoever has the most money, the most Bitcoin.
Lyn Alden: Arguably.
Peter McCormack: Because they could control the most resource. We might live in the state of Michael Saylor! Is there anything I've not covered on central banks that I should have, or anything I should have asked you about?
Lyn Alden: I think we touched on most things. I think one thing we could talk about is the inflation requirement. So we have central banks that have a positive --
Peter McCormack: Yeah. I think I've said this to you before, I grew up aware of inflation numbers on the news. I don't know why, I just always remember it used to stand out to me. "Inflation's at this number" or, "Inflation's targeting this number". And so I always felt like inflation was a natural part of the economy, part of a healthy economy. I almost associated it with growth, like if there's this inflation, there's growth. I wasn't aware of the insidious nature of inflation until I started making this show. Now I question, is it really just Keynesian propaganda?
Lyn Alden: That's certainly what the argument would be, basically the idea that we need constant inflation in order to keep the wheels on the cart. And I think the problem is that the edifice we've constructed is so debt-based that they end up being a self-fulfilling prophecy.
Peter McCormack: Right.
Lyn Alden: In the current system, I guess we need inflation, otherwise you get collapse; like a shark has to keep swimming otherwise it drowns; like how if you build this extremely meticulous garden, you need to constantly maintain it against the force of nature that would just turn it into a forest. So in this system we've constructed, it doesn't really work unless you have continuous inflation. You have to have money supply growing quickly enough to support all the debt.
But I think the mistake people do is they take that and they assume that that's just a rule of the universe, whereas if you had a much lower debt system with a much sounder base, then you wouldn't need that and basically you couldn't even get that.
Peter McCormack: Well, look, it's fascinating. We're right in the centre of watching this happen and I'm speculating that it will win. I'm really interested in the effects of this. Do you know Harry Suddock?
Lyn Alden: Yes.
Peter McCormack: We had a long chat with Harry last night. We all went out to dinner and we talked about Bitcoin being like this blackhole and swallowing or changing industries and it swallowed energy and it's swallowing money, and now it's actually not just swallowed energy but swallowing energy companies. It's like this singularity that everything's heading towards. I think the most interesting thing is going to be the things we aren't aware of. I wasn't aware of the idea that Bitcoin mining would lead to the buildout of new energy facilities. I never foresaw that four or five years ago and I can't foresee other things, but I know there's going to be changes. So, very cool. Sounds like central banks are done. What will be, will be.
Lyn Alden: I think again it comes down to technology.
Peter McCormack: Yeah.
Lyn Alden: So right now, we're in the process of testing this 13-year-old technology. So in the beginning, the funny thing is when you look at the forums when Wikileaks turned to using Bitcoin, Satoshi got nervous.
Peter McCormack: Yeah, of course.
Lyn Alden: Because he wasn't sure if it was ready for that.
Peter McCormack: Yeah.
Lyn Alden: And of course we've come a long way since then, but it always requires a degree of humility to see, "Is this network ready for this? Can it withstand a certain state attack? Can it withstand this happening?" So everything that Bitcoin goes through, we're testing to see how hard and how durable the network is. So the Mt. Gox attack; certain countries banning it, unbanning it; China banning Bitcoin miners. What happens in this environment? What happens if a million altcoins try to scam people into going into other systems and then they blow up and they have to sell their Bitcoin in a weak market?
So, we're testing every step along the way. Is this the right system? What are the attack vectors? Is there some sort of way to exploit it? Can we hack it? Things like that, we're testing all this through. And so looking super-far ahead can be premature because we're still testing the system, but we have a clear direction here. The Pandora's box has been opened in terms of cryptographic money, peer-to-peer money, self-custodial using encryption, and we see a clear direction.
Then the question just becomes, does any risk that we haven't accounted for throw us off that? And if no, then basically it becomes continually a stronger form of money than anything we've had before. And then it becomes a question of what does that mean; what does that mean for central banking? Does it arbitrage between the economy moving faster than the money go away? And does it mean that we have, say, created some sort of asymmetrical technology that empowers people over larger entities?
Again, in a prior conversation, we were talking about the Oslo Freedom Forum and Human Rights Foundation. This is a strong environment for authoritarian regimes, because if you control the banking system and if you have advanced surveillance technology and big data, you have a lot of top-down power; whereas cryptographic money is bottom-up power. And the question becomes, which one of those two forces is stronger?
Peter McCormack: Okay, well I know which I want. Lyn, remind me, when did you first start seriously getting into Bitcoin?
Lyn Alden: So I first heard about it in 2010 and I thought it was neat but --
Peter McCormack: And you bought a shitload?
Lyn Alden: Nope.
Peter McCormack: Doh!
Lyn Alden: Nope, and I kept hearing about it. My basic question was -- because a lot of people would hear it and dismiss it.
Peter McCormack: Yeah.
Lyn Alden: For me, I never dismissed it but I was like, "Why can't you just copy it?" or, "Maybe they'll make a better one". I got the basics of it. I was like, "Oh, seems neat". In 2017, I took it seriously.
Peter McCormack: Okay.
Lyn Alden: But it was very euphoric at the time and again I was like, "I'm not sure which one of these is going to win". It was really when I saw the resolution of the Blocksize War and I saw the immutability of Bitcoin tested, and I saw the differentiating network effect of Bitcoin versus the others, and then I delved deeper into the technology of why doesn't Bitcoin have smart contracts; why do they keep the blocksize small; why didn't Bcash win over Bitcoin, basically going into the rabbit hole of why these variables are the way they are; why can't you just change it; how immutable actually is it? That's when I got interested in it. So I bought my first Bitcoin in April 2020.
Peter McCormack: April 2020. And over the last two years -- because when I was first introduced to you, I was like Lyn's just an expert in macroeconomics and has been getting into Bitcoin, but following you on Twitter the Bitcoin stuff is growing and growing. Are you finding yourself sucked into the gravity of Bitcoin and it potentially being like a fundamental wrapper to everything within the macro environment; or are you just being sucked in because it's so bloody interesting?
Lyn Alden: I think both.
Peter McCormack: Both.
Lyn Alden: I think, one is it blends technology with economics, which is profoundly interesting. And it's also a set of building blocks. I made the analogy before that when the iPhone came out, no one thought, "This is going to disrupt the taxi industry in ten years". And, then we had Uber and it did.
Peter McCormack: Yeah.
Lyn Alden: And so when we have programmable peer-to-peer money, what does that mean? It's like a building block, but it's hard to envision ten years from now what that means. And so I'm just super-excited about what that means for a lot of things. Then, two, a lot of my macro work is around studying money, currency and energy, which just naturally --
Peter McCormack: There you go.
Lyn Alden: You can't not have a view on Bitcoin and you can't not study Bitcoin and figure out to what extent do I want to hold Bitcoin; but also, to what extent does Bitcoin change my other things? To what extent does it change energy companies? To what extent does it affect reserve practices? To what extent does it affect periphery markets that are already struggling under the current system, and they might want to go to another system?
So because a large part of my focus is studying the failures of the current monetary system, I can't help being interested in the future possibilities of what can happen if these other technologies continue to be adopted.
Peter McCormack: But there are plenty of other people who study these markets like yourself and they completely dismiss Bitcoin. Fools!
Lyn Alden: I think, well there's a couple of things. One is I think they … it's a very large time commitment to understand.
Peter McCormack: Yeah.
Lyn Alden: So my multiple first interactions with it, I was openminded, but it was hard to jump in and just put the time in and see why does this work the way it does? What makes it unstoppable, or hard to stop, you should say? Then, two, I think a lot of people are either turned off; they either are mad they didn't buy it earlier, or they're turned off by some segment of the community, and they don't realise that the actual ecosystem has got far more layers and depth than they realise. They think there's like just only the Have Fun Staying Poor crowd; they think that's Bitcoin. Whereas there's so many different segments. There's VCs, there's cypherpunks, there's investors.
Peter McCormack: There are environmentalists now.
Lyn Alden: There's environmentalists. There are so many different communities within -- there's no Bitcoin community. There are some shared values in some ways and there's OGs, but it's gotten big enough that there's no one thing anymore. And I think that some macro analysts don't fully realise that. I think it's unique in terms of, you need some technical depth to get it. You don't need to be a computer scientist, but you --
Peter McCormack: I would challenge that thesis. You don't need it.
Lyn Alden: You don't?
Peter McCormack: You don't. I've got away with it for five years.
Lyn Alden: But you've put a lot of time into it.
Peter McCormack: Yeah, I still don't have any technical depth.
Lyn Alden: I have don't have programming depth, but I think it's when you understand things like bandwidth and storage, for example, you start to see -- basically, someone has to be able explain technically why Bitcoin is more decentralised than Dogecoin or Ethereum.
Peter McCormack: I think I can do that, I can manage that one.
Lyn Alden: Yeah. Someone needs a certain degree of technical depth to get there and then they need economic depth. And I think that there's intersections that just make it complicated, and also goes against our current understanding as to how money works, and people get threatened by it.
Peter McCormack: Well, listen. We're super-lucky to have you. Me, Danny and Jeremy are super-lucky to sit down with you every month or so and have these conversations. I learn so much from you. Please do go and check out Lyn's amazing newsletter, it's so ridiculously cheap. She's getting all embarrassed in front of me right now. It's like $199 for a whole year, and each month it's like a whole depth of knowledge. Go and check it out. Lyn, thank you so much. Can't wait to do this again.
Lyn Alden: Thanks for having me.
Peter McCormack: Thank you.
