WBD582 Audio Transcription

QE Infinity with James Lavish & Greg Foss

Release date: Friday 18th November

Note: the following is a transcription of my interview with James Lavish & Greg Foss. 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.

James Lavish is a Bitcoin advocate and writer, & Greg Foss is a Bitcoin strategist, and they’re both co-founders of Looking Glass education. In this interview, we discuss FTXs lack of checks and balances, how fiat is struggling to find yield, zombie countries and the the debt spiral, and how Bitcoin is the best asymmetric bet of our lifetime.

“There are five institutions that control $30 trillion of assets in this world. You’ve got Fidelity Vanguard, BlackRock, State Street, and UBS, that control $30 trillion. So when they get in, and they actually put it in their portfolios, it becomes a no-brainer for other asset managers to do it as well.”

— James Lavish

Interview Transcription

Peter McCormack: Well listen, James, welcome to the podcast.  Mr Foss has been -- this feels like an advertising campaign for Real Bedford!

Greg Foss: That's what we wanted it to be!

Peter McCormack: Yeah, nice one.  I had Preston on the show last year and he was wearing one of the T-shirts, and the following week we sold about 20 of the T-shirts, but I hadn't connected it.

Greg Foss: Beautiful!

Peter McCormack: I was like, "We keep selling a lot of the T-shirts", and then I suddenly realised when we released the show.  So, hopefully it will work, but thank you for supporting that and going on stage and wearing them.

Greg Foss: That was good in Edinburgh, it was a real, real pleasure to be in Edinburgh. 

Peter McCormack: We've had a couple of good conferences recently.

Greg Foss: Great conferences.  I actually quoted Mark Moss last night.  We were lucky enough to go out for dinner with Michael Saylor and Mark was there and he goes, "I've never had so much positive vibes in the presence of a bloodbath on the price of Bitcoin"!  That's what I love about it, because even in Miami, we never talked about price; Edinburgh, we never talked about price; this, we never talked about price, because it's still a rounding error, we know that it's a rounding error in the big scheme.

Peter McCormack: It's all about the mission.

Greg Foss: Correct.

Peter McCormack: We don't care about that.  James, welcome to the show, it's great to get you on.

James Lavish: Thank you for having me.

Peter McCormack: It's been a pleasure following you online.  Not everyone will know you listening, they all know Foss because he's been on a few times, but you should just tell people a little bit about yourself, a bit of background if they don't know you.

James Lavish: Sure.  So first of all, thank you for having me.  I've been watching for a long time and it's awesome to be here.

Peter McCormack: Great, thank you.

James Lavish: So, I've been an institutional investor for over 25 years in hedge funds, private equity and I've just been an investor.  So, I recently got into the space.  I kind of got in late and, as you do, and I've told this story before, so apologies if some of the listeners have heard it before; but --

Peter McCormack: Greg, tell him he's still early.

James Lavish: I'm so early!  So, it's 2018 and I'm trying to figure out, I want to invest some extra money I had and I want to go on the risk tail, do something just a little bit different, not real estate, not stocks, not bonds; I wanted to find something different.  I kept hearing about this Bitcoin thing and I was like, "I've got to check this out", and being an institutional investor, you do what you would normally do; this is a new technology, so you go and you talk to the technology analysts.  But every single one of them, bar none, said, "Avoid it at all costs, it's a Ponzi, there's no underlying value, it's worth nothing, you'll lose all your money, don't do it".

Peter McCormack: And they were right!

James Lavish: And so it turns out they were right!  The sad part is the price of Bitcoin had a 3 handle on, so it was like $3,500.  So, that was the worst non-investment I ever made.  And so, I kick myself a little bit to the day, but everybody gets the Bitcoin price that they deserve.  So later on, I flash forward a couple of years, and I'm leaving the position I had in the private equity hedge fund that I was working on and I wasn't sure what I was going to do.  My son knew this, and he's at Cornell, he's a senior at Cornell this year and really into technology and cyber security and all that.  He said, "Dad, I really think you ought to give this crypto thing another shot, go and check it out", because he knew I was trying to figure out what to do.  So I did and he convinced me to get some Ethereum, Cardano and Solana.

So, I leg in, as Greg and I might say on Wall Street, you "leg in" to a trade, you get a little bit and it forces you to do research.  So I did that and then I started watching podcasts and videos and get on Twitter and start talking to people, saw you, I saw Michael Saylor and Jeff Booth and I was orange pilled within weeks and I was like, "I've got to get all this money out of crypto and into Bitcoin".

Peter McCormack: Nice.

James Lavish: That's the journey that I've had and that's how I've been in this space and now, being an institutional investor, I love being here and teaching people about our world because it's so opaque and people don't understand, and it's not their fault.  It's not taught in schools, it's not covered.  Whether you're in grade school, high school, college, these things are not taught.  So, I have people who have MBAs regularly coming up to both of us and the other guys, Larry Lepard and Mark Moss and some of the guys that we're working with, that they can't believe all these things are not taught in schools, and they're learning stuff about it and how important it is in the world of money, and just the concepts around it and how it works.  So, that's why I'm here.  That was a long answer, but that's why I'm here.

Peter McCormack: No, it's a good answer.  We want long answers, we're a long-form podcast.  Why aren't these things taught?

James Lavish: Some people think it's purposeful and that they're cynical about it.  I don't think it's really that as much as there's not really an upside for Jamie Dimon to explain to you exactly what he's doing; it's not an upside for the bankers to explain exactly how they move the money around and make money off of it.  I don't think they're trying to keep people out, but it's just if they have more information than you, they're trading in that.  They've been in this world of fiat and it's a closed world, it's a club, and they've benefited so greatly from it; it's not like they're actively keeping people out.

Greg Foss: I'm a little more cynical.  I believe if they taught the truth, that people would question the stability of the banking system as a whole, they wouldn't deposit their money in the banking system, and that would cause the collapse.

James Lavish: Well, maybe it's subconscious.  I don't disagree.

Greg Foss: Very few people understand how risky banking actually is.  I tell you that a bank is 25 times levered to its capital or risk-absorbing equity base.  That's an extreme amount of risk where if you're a depositor, unless you have money printing to back it up, that's a high, high risk investment.  But the system doesn't work if they don't have deposits in the commercial banking system, so you can't teach it.

Peter McCormack: But as an institutional investor, you would be aware how the system works but since you came into Bitcoin, has it opened your eyes to other things?

James Lavish: Completely.

Peter McCormack: What's it changed?

James Lavish: Well, I call myself a reformed hedge fund manager, and the reason is because, look, I was in that system, I benefited from that system and I understand it.  And now, I can see just how damaging it is to everybody who's not really a part of that system, who's not really close to the spigot.  So, it's literally changed the way that I look at money and the access to it and the separation of wealth in all of these countries, and how rapidly it happens and how unfair it is. 

Inflation, it's just incredible; I never really thought about inflation before I dug into and studied Bitcoin.  Just think about that.  I was in investing for 25 years.  The only thing I thought about is, that is our bogey to beat and when we're investing, that's how we get to our mutual rate, our real rate of return.  It's just blown my mind that I've been doing this for so long and I was ignorant in understanding it, and it's embarrassing.

Peter McCormack: Well, I think we all have that.  I'm similar.  Inflation was one of those things you see on the news, when they report inflation, "It's at 2%, inflation's at 3%" and I just assumed that was part of a naturally-growing economy.

James Lavish: It's natural; natural 2% inflation.  It's bullshit, it's evil.

Peter McCormack: Yeah, and we know that now.  I mean, we sat down with Avik Roy, do you know Avik?

James Lavish: No.

Peter McCormack: He's been on the podcast a couple of times.  He operates --

James Lavish: I don't know him, but I know who --

Peter McCormack: Oh, you know him.  So, he wrote this article recently for FREOPP, which was covering inflation.  He said, "Even at 2% inflation, it has a highly insidious effect --" actually, "Any amount of inflation has a highly insidious effect on the poorest in society".  We're constantly making life harder for the poorest in society.  I just believed that for an economy to grow, you had inflation.  I don't think I really grokked it until the time I actually sat down with Jeff Booth, read his book.

James Lavish: Boom!  Exactly.

Peter McCormack: I was like, "Oh, okay".

James Lavish: Inflation versus deflation, how those forces are meeting and they're going to clash.

Peter McCormack: Yeah.

James Lavish: His interview, I watched an interview with him, and it clicked, it finally just clicked and I was like, "Okay, I've got this.  I understand why this is so important now".  And so now, that's all I want to do.  I want to be in this world for the remainder of my career to figure out how to help.  Like Greg says, it's for the kids.

Peter McCormack: So you said you've got a son who's a senior; I've got a son who's, what would you say, is a sophomore first year?

Danny Knowles: I think freshman.

Peter McCormack: A freshman, he's 18; I've got a 12-year-old daughter.  It's fundamentally shifted how I talk to them about money and life.

James Lavish: Absolutely, and I've got a daughter, she's a junior in college, and that's exactly right.  They are both studying money in a different way and they're seeing it in a way that I didn't see it when I was their age, not even close.  Now he's migrated all the way to Bitcoin; he understands that it's the future, Bitcoin.

Peter McCormack: It's good how it does that to you.  Well, it's great to have you here.  Danny's a big fan.

Danny Knowles: Definitely.

Peter McCormack: So, Danny was the one who was like, "Got to get James on!"

Danny Knowles: We've been trying to do it for a while.

Peter McCormack: Yeah, because we have our rule, and then we have the pleasure of Danny saying today, "Oh, we're doing it with Greg Foss as well".

Greg Foss: But James was kind enough to say, "Yeah, let's do it together" because I would love to bring up the way James and I met.  We were on a Spaces, invited to a dual Spaces by, it was Rash, right?

James Lavish: Yeah, it was Rash.

Greg Foss: And I said, "Man, I've got to talk more to this guy".  And it didn't hurt that he's a hockey player.  He's very humble, but he was drafted into the NHL, okay.

Peter McCormack: Really?

Greg Foss: Yeah, coming out of US college hockey due to injury, otherwise he would have played for the US Olympic hockey team and he would have played for the Boston Bruins.

Peter McCormack: Boston!

Greg Foss: And he grew up close enough to the Canadian border that he could be an honorary Canadian if he wanted to, because we had that bond.  He's an Ivy League-educated kid that played hockey; I went to school at Cornell, where his son goes, so we had that bond and we immediately reached out.  And I could tell, man, I like talking to this guy.  So, happy to be here.  This is James' show though, so I'll chime in whenever you need me to.

Peter McCormack: Did you keep all your teeth?

James Lavish: I do.  There are some that are pretty loose!  But yeah, I have all my teeth, but I've had my entire body x-rayed.

Peter McCormack: So, it's that brutal?

James Lavish: It's pretty brutal, yeah, shoulders, the whole thing.

Peter McCormack: Okay, so I don't know a lot about hockey, but I do know it's the nearest we have to our football, in terms of the atmosphere, how difficult it is to score.  It's slightly higher scoring than our football, but it's not like basketball where it's every two seconds.

James Lavish: No, and that's why I love watching football, soccer, I love it.  It's a lot of similar strategy actually, trying to create two-on-ones.  It's a little bit slower and more methodical, but some of it really lines up similarly and we actually played soccer in our off-season training to work on plays and stuff.

Peter McCormack: And so, you were drafted by the Bruins?

James Lavish: I was, 1989.

Peter McCormack: 1989, okay.

James Lavish: I was on the US national team my senior year, and it's a bigger team.  So, it's like one-and-a-half to two full teams that they're choosing the Olympic team from.

Peter McCormack: Oh, so pretty easy to get in then!

James Lavish: Yeah, so easy!  So, played in a tournament up near you actually, outside of Quebec, wearing the jersey and everything is going great.  My senior year; at the time, I ended up being one of the top ten goal-scorers in Yale history.  So now, everything is working, I'm going to the NHL, I'm getting an agent.  The GM for the Boston Bruins said, "There are two players we're going to sign: Bryan Smolinski and James Lavish", it's in the Boston Globe and I'm like, "This is happening".

As it happens, senior year, we're playing St Lawrence, just another team in our division, no big deal, and I'm taking a break-out pass from behind me.  I take one step, my skate catches in a groove in the ice, and I get hit the same moment and blow out my knee and it was over, it was all over.

Peter McCormack: Shit!

James Lavish: Yeah, it happened in an instant.

Peter McCormack: And is that an injury that if you had now, would be recoverable?

James Lavish: It's terrible timing and the reason I was doing so well was because of my speed.  I was one of the fastest players in the league; that was my thing.  I mean, I had an extra gear.  And to get to the NHL, that gear had to be 20% more.  And so at this point, to be on the US national team, I was like, "There's no way I'm going to recover".  Everything was just a couple of months before I had to go do all of that.  So it literally was the worst time.

Peter McCormack: How did you cope with that?

James Lavish: I went to Wall Street.

Peter McCormack: So, "I'm going to make a fuck load of money"!

James Lavish: No, you know honestly, I lost my identity for a little while, I had no idea what I was going to do.  I was so certain that this was my path that it was difficult.  I had loans, I had student loans, because they don't have athletic scholarships at Ivy League schools.  So, I was under a little bit of debt.  I was in New York, I actually got traded to The New York Rangers and they picked me up and I tried out with them, but I just wasn't there.  So, they went on to win the Stanley Cup without me.

Peter McCormack: Did you ever get to play again?

James Lavish: I did, only in exhibition.  But then, I was in New York and I was just sleeping on friends' sofas and trying to figure out what to do, and one of them said, "You're really good at maths, right?" and I said, "Yeah, I'm good at maths, I can do maths" and they're like, "Let me introduce you to some people".  So, they introduced me to some people on Wall Street and next thing you know, I was working on the floor of the New York Stock Exchange trading something called ADR Arbitrage.  So, yeah.

Peter McCormack: Was it on the floor with the people in the jackets and the tickets?

James Lavish: Yeah, it was no hand signals on that floor, but everybody yelling; it was crazy, it was not like it is today.  I mean, it was nuts, there was paper everywhere, it was this deep.

Peter McCormack: Did it strangely give you a similar kind of adrenalin as to the sport?

James Lavish: That's it.  So, my answer is, I went to Wall Street, but what happened was, "Look, you're good at maths, you can operate quickly, under pressure, with a lot of eyes on you, and you understand how to adjust, readjust".  There was a coach that was at Union when I was in college and he had coached me in the summers a couple of times, and he said, "Read, react, adjust; read, react, adjust", that's what you're trying to do and it's the same thing.  Read the situation; react to the situation; adjust.

But if you can do that really quickly, I mean Greg will tell you, sometimes it's not the first trade you make, it's how you react to it, especially when you're young and you don't know exactly what you're doing.

Greg Foss: Famous hockey coach, Scotty Bowman.  I grew up in Montreal and he would coach the Montreal Canadians, but he had a line that, "10% of life is what happens to you and 90% is how you react to it".  You're in a bad situation; if you react, generally you'll make the typical thing, and I hate to bring up Sam Bankman-Fried, but he reacted to a situation by making it worse, digging himself a different hole.  I didn't want to hijack the situation, keeping it back to hockey.

So, James and I took a walk today and we went down to the beach.  So, I'm going to pull up the fact that James was sleeping on people's couches on Wall Street.  I reacted that I had driven my bike, my mountain on a certain trip and I go, "At one point in my life, that was my most valuable possession", because my mountain bike was worth more than my car.  My car was worth $800, I'd bought an $800 car, and I had a $1,200 mountain bike.  I figured I was worth about $2,000 coming out of college. 

James looks at me and goes, "That's a great story, Foss, because people think that we're just given stuff, we're entitled".  No.  James and I worked our talent, but it's not easy.  We've achieved a level of understanding of the system, but no one handed it to you.  You've got to do the digging, you've got to do the homework to understand where you have an edge, so read, react, adjust; that's pretty cool.

Peter McCormack: Well, six months after I launched this podcast which is, what's the date today?

Danny Knowles: It is November -

Greg Foss: Yeah, 13 November.

Peter McCormack: So, on the 17th, it will be five years since the first episode.  Six months into launching it, I was nearly declared bankrupt and nearly lost my house.  You've got to fucking work.

Greg Foss: Oh, yeah.

James Lavish: You scrap.

Peter McCormack: You scrap, hustle.

James Lavish: Do you want to hear a funny story?  When I was working for SG Warburg, the firm that I got hired by, I literally had no money.  So, I charged a suit from Macy's on my credit card and three white shirts and one red tie and shoes and a belt, that's it.  I had literally maxed it out to get that, because I had maybe $1,000 of availability on that card.  And I'm going to work and you know what it's like to be on these Wall Street firms?  I mean, it's brutal.  The hazing back in the early 1990s; brutal!

So, I walk onto the trading floor, maybe the fourth day, and my boss pulls me aside and he goes, "Lavish, you have got to buy another tie.  You cannot come in here wearing the same thing every day"!

Peter McCormack: I had it.  I remember when I was at university and I had no money, and I'd just learnt to code websites.  I'd only made one and I went out with my friend to play golf, and afterwards we were just in the bar having a drink and started chatting to this other guy and he was like, "What do you do?" and I said, "I'm a website designer".  He was like, "Oh, great, well my company needs a website".  It was back when it was very new.  He was like, "Could you do that?"  I was like, "I can come and have a meeting with you next week.

So, then I went down to Hertz and I rented a convertible, because I wanted to be like convincing, like I knew what I was doing.  Otherwise, I'm coming on the bus!  So, I rented this convertible Saab and just drove it up there and I got the contract.  I got a £5,000 contract to build a website, which basically was the money I lived on for the rest of the year.

James Lavish: And you had to learn how to do it!

Peter McCormack: No, I did.  Actually, I had to get somebody in to help me off this freelancer's board.  But the hustle's there and I think that bitcoiners --

Greg Foss: Proof of work, man, proof of work.

Peter McCormack: Proof of work.  But I think bitcoiners are hustlers.  I mean, Matt Odell tweeted out today, he said, "Whatever people complain, I'm working five jobs so I can stack more sats than you".  I think you find a lot of hustlers here in this Bitcoin thing.  Let's talk about FTX, because it's kind of the big thing at the moment.  Firstly, it's depressing and it makes me angry, but I'm also interested in moving beyond that and seeing what comes next.  But I'll start with you, Foss.  How did you take this whole weekend?

Greg Foss: I'm disappointed for two reasons.  I'm disappointed and I've got to call this out as a Canadian; I'm disappointed that somehow, one of our big pension plans got caught up in it.  So, the Ontario Teachers' Pension Plan, one of the top pension plans in Canada, was a series B investor.  So, along with Susquehanna and Tom Brady, our Ontario Teachers had a substantial loss in absolute dollars.  As a percentage of their portfolio, you're going to say they're going to walk it back and say it's a couple of basis points.  That's not the point.  The due diligence was absolutely horrendous.  Sometimes these deals are club deals, "Oh, Susquehanna in, I got to be in and we'll let them do the due diligence", so I'm disappointed there.

Shoutout to American HODL.  I was on a Spaces chat today and he was just laying right into them, as typically he does.  So, I think he's coming back on Twitter.  @americanhodl8 I guess is his handle now.  I think it will get to 14 before long!

Peter McCormack: Before Christmas!

Greg Foss: I love to kid, but he was carving them a new arsehole and it was beautiful.  But the reality, he had a great statement.  He goes, "The reach for yield is a fiat disease".  When you have to always pretend that there is a return that is somehow priced in, whether it's a bond or it's a yield by using option strategies or whatever, that actually is a fiat disease.

So, what I think is the best way I can describe FTX, I worked on trading floors my whole life and it is a self-cleansing process because they make you go on vacation for two weeks, where someone else prices your book, which means the trader that's sitting -- and it's a jungle on a trading floor.  And sometimes the guy sitting next to you doesn't want you to make money, because the bonus pool gets shared with the people that make the money.  And the people that don't make the money, they get no bonus.  So, if you're having a really good year, but the guy next to you is having an even better year, there's a level of competition. 

The point is, you go on vacation for two weeks, someone else marks your book, which means, "Prove that the marks are real.  If you're short something, prove to me you can buy it back at that price without you adding to your position.  And if you're long something, prove to me you can sell it, apart from you being the bid".  And, that's an efficient trading market, jungle type of checks and balances.  The reality was Sam Bankman-Fried had no checks and balances.  He was marking his book and no one was there to overlook it.

Now, he's a criminal, okay; criminal.  His CEO, she was a maths major and everything, but she self-professed, "Well, I never had to use it"; she's 23-something-years-old.  I can't believe the world placed that much trust in these two monkeys.  At the end of the day, it's disgraceful.  However, here's the soft-hearted Foss come out.  He's someone's kid, in fact two Stanford law professors.  Oh, sorry, are they law professors?  Anyway, they're both Stanford-educated.  I'm sorry, if he was my kid, I would just be like, "Dude, why did you keep building and digging the hole for yourself?"

It started off by him thinking probably, "Oh, I'll skate myself onside", but you never skate yourself onside, you dig a big deeper hole by using this mark on FTT, by defending that mark.  And as long as you can defend that mark, well the Ponzi doesn't collapse.  So, there were so many signals in hindsight, but I've got to call out the private equity funds at the outset that they didn't do their due diligence.  And whether or not this is true, the rumour is that he was playing that game, League of Legends, I think it's called, or whatever --

Peter McCormack: During the call with Sequoia.

Greg Foss: With Sequoia.  But even during the due dili that some people -- at the outset of the series B round.  So, hindsight's always 20/20.  I'm ashamed as a Canadian, I'm looking back on it, like the checks and balances, certainly so easy to see.  And then, as a dad, "Kid, guys, when you get onside, read, react, adjust".  His adjustment was continuing to dig himself a deeper hole and then the Ponzi collapsed.

James Lavish: But isn't it crazy, like today I tweeted out something that's kind of like, "FTX is kind of like the long-term capital management situation plus the Tech Bubble", you know, the pain for the retail investors in the Tech Bubble.  So, long-term capital management back in 1998, we talk about this a lot, both of us.  But it was just a leveraged play.  Then I thought about it more today and I think I saw, maybe it was Caitlin who had tweeted this and it really resonated with me is, "Doesn't it remind you of Enron?" where you had all these off-balance-sheet entities that were just marked by them and nobody knew exactly what the marks where.

If you don't know what an off-balance-sheet entity is, you should not be investing in crypto.  And if you know what an off-balance-sheet entity is, then you're a crook, and go ahead, you can invest in crypto because these things were created by Enron to hide the fact that their price, their market value was marked up on nothing.  But they fooled thousands and thousands of institutional investors on Wall Street.

Greg Foss: Enron did, to be clear, yeah.

James Lavish: Enron did.  But doesn't it remind you?

Peter McCormack: Hold on, what was that, was it the Smartest People in the Room, or something?

Greg Foss: That's a book that was written on Enron, yeah.

Peter McCormack: I read that years ago.

Greg Foss: Yeah, there's a great book for people to read on long-term capital management.  It's called When Genius Failed.  Both books should be read.

James Lavish: By Lowenstein.

Greg Foss: I much prefer the When Genius Failed over The Smartest People in the Room.  But that being said, they're both must-reads, absolutely.

Peter McCormack: Look, I sympathise with what you say as a parent, and he's someone's son.  I remember when Bernie Madoff was arrested and convicted and they sentenced him to 150 years in prison, I was like, "That's a lot of time", I mean for a financial crime.  And then I watched the film and I didn't realise four people committed suicide, including his son, and the emotional damage on so many other people and the amount of lives that he destroyed.  I was like, this is a broad crime that affects a lot of people.

Greg Foss: He is absolutely the criminal.  And that being said, when I say, "As a father", he's going to have to do time.  The problem is, as a father, you just wish that he had reached out when he needed more guidance, rather than digging himself a deeper hole.

Peter McCormack: Well, I'm wondering where it went wrong though.  What I mean is, was FTX created because Alameda already had a hole; or was FTX created because FTX was so successful and then there were issues later on?  Where did it go wrong; where did he make that first bad decision that led to the next one to the next one; I can't figure it out?

James Lavish: We may not know for years.

Peter McCormack: But we all know, if you're in that situation, you're making the decision where if you don't get away with this, you're facing years, if not decades, in jail.

Greg Foss: I promise he didn't think that far down the path, and that's the danger of being young and unaware.  You're just too young, you don't understand.  Last night, and not to dox too much, we had a great dinner with Michael Saylor.  Let me tell you, that man continues to amaze me with his brilliance, and it came up; where do his ethics as a publicly traded company originate?  He's very clear, and sorry, Michael, you can cut this out if you need to, but the truth is he goes to the SEC.  People are scared of the SEC.

Sam Bankman-Fried didn't have any reason to fear a regulatory body, because they don't oversee his fund.  It's like having absolutely control over your own empire, and you don't have to --

James Lavish: There are no repercussions.

Greg Foss: Yeah, no repercussions, you don't have to answer to anybody.  So, you can mark your book however you want, as long as people don't realise that it's the fraud that it was.

Peter McCormack: Yeah, I mean gosh, people won't like hearing me say this, but sometimes I'm like, "Maybe we do need regulations, maybe we do".

James Lavish: Absolutely.

Greg Foss: Over to you, James, because we absolutely --

Peter McCormack: I'm not an anarchist --

Greg Foss: I know you aren't.

Peter McCormack: -- but I do like the idea of a smaller state.  I don't like accredited investor rules, there's a lot of things I don't like.

James Lavish: Well, they're outdated, they cause more separation of wealth, yeah.

Peter McCormack: But this Wild West of anyone can do anything and get away with anything, I don't know, certain things I think need regulation.

Greg Foss: One of the most influential courses -- sorry, I said, "Over to James" -- that I took at Cornell, whatever, 1998, 1997, how many years is that?  Close to 40 years, right?

James Lavish: 120!

Greg Foss: But anyway, 35 years, a great class I took was called The Efficient Amount of Regulation.  In any system, there is required amount of regulation, it's that simple.  And within, well let's say crypto and make sure we understand the difference between Bitcoin and crypto, if you truly want institutional adoption, which is the thing that will make Number Go Up, you need a level of regulation that will allow those investors comfort that they are not entering into some sort of potential Ponzi that was mimicked by FTX.

Peter McCormack: Well, this was Tyler and Cameron Winklevoss' point.  I mean, people didn't like the campaign, Crypto Needs Rules, and I would prefer it to be a bit more Bitcoin, but that's the exact point they're making.  No one's going to touch this if it's a Wild West, no one's going to touch this.  I mean, how much capital has been eviscerated this last week that is actual venture capital, how much of that has just been destroyed?  Anyone looking in on this must be like, "What the fuck is this all about?"

Greg Foss: Correct, and don't forget the contagion that's involved.  Over to you, James.

James Lavish: We were talking about it this morning on our walk and that's why you said, over to me, and I just don't think the institutional money, like real institutional money, is going to come into this space until we have proper regulation; they're too scared of it.  I mean, if you're a portfolio manager or a Chief Investment Officer, what's the upside to getting into this space with so much risk with so many of these schemes that have been unearthed this last year.  There's too much career risk in it, so there's not enough upside to outmatch that.

Peter McCormack: Some bitcoiners would say, "Yeah, good, let's not have regulation.  Let's have a grassroots movement and leave it for the little guy".

Greg Foss: You can't suck and blow, okay.  If they want the price to go to where they want it to go to, it will not happen without the big money.

Peter McCormack: Well, I think some of them say, "Let that come later.  Let's build this --"

Greg Foss: I would agree with that.

Peter McCormack: I'm in the middle, I just hate people getting fucking screwed.

Greg Foss: I'm aware of people that lost their lives due to LUNA, there will be people that lose their lives, take their own lives, due to FTX and the losses they absorbed there.  In the grand scheme of things, in the global financial place, the losses will be de minimis.  Within our ecosystem, there will be repercussions for a long time.  But from a global financial perspective, wipe it off the table.

Peter McCormack: How could there have been so much systemic failure in the due diligence with this, because I don't understand how Sequoia can write a $200 million cheque without some kind of deep due diligence; I just don't understand it?  Or is this again a fiat problem?

Greg Foss: Well, it is a fiat problem.  I know more what I want to answer, but you go first.

James Lavish: Well, you're marking things to market and FTT is marked where it is, and you see how much it's trading or what the number of holders are and who holds it.  Then you have a certain level of comfort and it's just how much comfort does that one mark give you?  That's a starting point for some of these guys, "Okay, let's start with what are the assets?"  But as far as all the entities, I don't understand how they didn't pull this apart.

Greg Foss: How about, okay, I'll take it a step further.  One of the tough game in private equity is, you want the next round always to be higher than the previous round.  And when you have a down round, which means a down-pricing round, where your series B is lower than your series A, or whatever, that's not good for the valuation on your books.  Well, a lot of these guys will fund things at a higher valuation, just because.  It's good because they can take the stuff that they already have on their books and mark it to the new valuation.  If they were in series A and then the series B round clears at a much higher enterprise value, that's good for the performance of the equity fund.

Peter McCormack: That's a little bit Ponzi itself though?

Greg Foss: There's no doubt that there are issues coming up about private equity marks on the private companies that they have funded.

James Lavish: That's a great point.  So, the way it works in private equity, you come up with a valuation technique, and you should keep it consistent throughout the life of an investment, whether you're doing discounted cashflows, or you're doing comparable valuations, whatever it is, comparable multiples, you know, to public companies; those are pretty good metrics to use.  You decide how to do it, you come up with your paperwork, your back work, any information that could back it up in your models.

Then you go to your auditor at the end of the year and they look at how you valued them, and they decide whether or not to sign off on it and say, "Yeah, this is a believable valuation".  So, that's it, and unless you're audited, that's it, that's as far as it goes.  So, if somebody decides that they can -- it's not that the auditors are stupid, it's not that they're criminals or anything like that, it's just they're trusting their client.  Remember, the client pays the auditor to audit their books.  So, they're paying them to do this work, so it's a very close relationship.  Not to be cynical there --

Greg Foss: Let's be cynical!

James Lavish: -- but there are times where the auditors will just take your word for it and go, "You know, I've got a lot of work".  When 31 March comes up, these guys are so busy, they're so busy that they're like, "You know, I'm going to have to take your word for it", and it's a problem.

Greg Foss: I'm going to be cynical a bit.

Peter McCormack: Just a question on that very quickly.

James Lavish: You're cynical the whole show!

Peter McCormack: Within Sequoia, whoever signed that off, will they face consequences, or will they just write it off, "No, this shit happens"?

Greg Foss: I believe more closely to your second.  VCs make money.  In ten investments, seven will go to zero, two will break even or slightly better and the one that knocks it out of the park makes your return on the ten investments.

James Lavish: Yeah, it really depends on how the bigger investments within the portfolio that the portfolio manager was --

Greg Foss: Let me pull a little bit more of the conspiracy theory.  What if you do know that it is something that you have discovered there's fraud, but you want other people to come along and still mark it higher so that you're allowed to mark your prior investment up to the new funding round price and you're like, "Damn, I hope they don't realise the things I've realised up until this point, and I'll let them skate the project to the next level".

Peter McCormack: Pass the hot potato.

Greg Foss: It's not passing it as much as, "Let's all hold our breath and pretend it actually isn't as bad as someone has discovered it to be.

James Lavish: Yeah, so going back to what you were saying about reaching for yield, people are thinking, "Everything's breaking, crypto's creaking, the bond market's breaking", whatever happened in the UK.  Well, go back to reaching for yield.  So, in the UK with the pension system and what happened when the gilts collapsed, it's because you have these pension funds that need to create a certain amount of return over the life of their investment fund, which is in perpetuity, in order to pay out these liabilities that they have; they have to pay out their pensioners who are the members of that fund, or schemes as they call them in the UK, even though that's kind of a negative connotation here in the United States, they're called pension schemes out there.

The problem is that when you have interest rates manipulated so low for so long, I mean you had a very difficult time in Europe trying to find yield.  There were $15 trillion of negative-yielding bonds, this is nominal, negative-yield bonds, last September.  So, trying to figure out a way to make enough money to pay out those future liabilities is an issue.  So, what happens is the pension funds have to figure out a different way to do it.  Enter the LDIs, which are Liability-Driven Investments, and what they are is just swaps.  So, there's nothing inherently wrong with a swap; you can use a swap to create returns and to minimise risk.  We'll get to a third way to use them, but creating returns with a swap, because you can swap out what you have on your books in order to make an investment in whatever way you need to make it. 

But to minimise risk, you can swap out floating-rate instruments or securities into something that's fixed, so that you can have a predictable cashflow; you can swap out currencies.  So if you have some sort of investment that is not in your base currency that you can swap that into it, so you don't have that currency risk over the life of that investment, but then you can also use them to leverage, and this is exactly what they did in the UK.  They would use these instruments, or these investments, LDIs, in order to lever up the returns they were getting, because if they were getting just a few percent, they could lever that up two, three, four times that in order to make a better return.  So, if you're making 3%, you can lever that up to 9% or something, three times, or whatever it is.

When I was doing swaps back in my arbitrage days, I only had to put down 5% to 8% collateral on our swaps, so think about that.  That's like 20-1.  That's a lot of leverage for that investment.  Well, these guys are doing this in their books, and then the Finance Minister --

Peter McCormack: Kwasi Kwarteng?

James Lavish: Yeah, he came out and said that he was going to have this massive tax cut, didn't tell anybody where the money was going to come from, and just said, "We're going to have this massive tax cut --"

Peter McCormack: And increase spending.

James Lavish: -- and increase spending, and the market literally imploded.  So, anybody who owned gilts, the UK bonds, they were like, "Where's the money going to come from?"  This is going to be a problem, this is going to be negative real rates for as far as we can see now, and so they started selling these bonds off.  Well, they started selling them down and the UK investors, these pension funds who had these LDIs, remember that if you have something that is unleveraged, you have a margin requirement, and these started dropping down and getting close to the margin requirements.  And they were going so fast that some of the pensions were now underwater in their investments.

So, they approached the Bank of England and they were like, "If you don't stop this, we're done, we're all insolvent this afternoon".  And again, it goes back to what you were saying, reaching for yield, and that's the problem and this is the fiat disease that you're talking about, exactly.

Peter McCormack: Well, this is the interesting thing.  I don't have a pension and the reason I don't have a pension is when I got divorced, I had to split my pension and I went to a pension adviser.  They said to me, "How much money do you want to live on a year?"

James Lavish: What would you have had a pension from?

Peter McCormack: Just from my company, I had an advertising agency.  So I used to put a certain amount each month and you could match that tax-free, the government would incentivise it tax-free.  It wasn't a great pension, but anyway, I only did it because my business partner said to do it.  But I went to my pension adviser, or financial adviser, and they said, "How much do you want when you retire to live on?  You'll have a lump sum, but how much do you want to live on?"  I was like, "I don't know.  £40,000, £50,000 a year would be great, a decent amount of money".  They said, "Okay, you need a pension pot of £2.2 million".  I was like, "You what?!"  They said, "Yeah, so you need to save £2.2 million for the rest of your thing. 

We were talking, I was like 35 at the time, so I was going to work 30 years.  So, even if I earned £100,000 a year, basically I couldn't do it.  So I was like, "I'm just not going to have a pension.  So, what I'm going to do is I'm just going to earn as much money as I can and I'll work until I have to work, that's just going to be my life.  And if I work until I'm 70, that will be it.

Obviously, the thing I've discovered now with Bitcoin is you look at this and you go, "This fiat disease is that if you want a pension, you've got to constantly be chasing the inflation number and beating it and outperforming it".

James Lavish: That's right.

Peter McCormack: The great thing about Bitcoin is, kind of with a deflationary currency, you just have to have savings.  And if you're saving in something that is deflationary over 40 years, by the time you retire, you've got your nest egg, you're good, and you haven't had to do anything.  You haven't had to steal from anyone, you haven't had to lie to anyone, you haven't had to fuck anyone over.  These little pins keep dropping.

James Lavish: Exactly right, that's it.

Peter McCormack: Well, anyway, so back to -- I don't know how we got there from Mr Bankrupt-Fraud.

James Lavish: Reaching for yield.

Peter McCormack: Well interestingly, a coincidental number, your price target is now $2.2 million.  Interesting, that's my pension number!  I would have just needed 1 Bitcoin!

Greg Foss: Now, are you referring to a tweet that I sent out?  That was half in jest, because the value of Bitcoin has actually gone up, the price of Bitcoin's gone in the other direction, for various reasons, but the price has gone up.  I increased it by 10%, because I view that as being the positive contribution by getting rid of some of the shitcoinery that's going on in this asset class.  But I've run through that number with you before, Peter, how I get to $2 million.  It's pretty simple, grade 11 maths. 

We can run through it if you want but the reality is I sent that out trying to make a point that the value of Bitcoin, with all these things that have gone on, macro events within the TradFi world, micro events within the crypto ecosystem, all have led me to believe my valuation for Bitcoin is higher.  Why is that?  Well, because the likelihood of you needing the insurance against the system has increased, meaning with all the mistakes the LDI, the pension plans are making, you need to have insurance that there's some other asset there that's going to protect you.

Peter McCormack: But we're not really at that point where Bitcoin is reacting.

Greg Foss: Not yet because it's education, but also there's still a lot of levered money on Wall Street that is trading Bitcoin as a risk asset, when in fact it's going to take a lot of education to teach the hot money, let's call it what it is, the hot money, to understand that Bitcoin is a non-correlated asset that actually is insurance, which means it shouldn't be traded as a risk asset; it's actually the flipside.  As risk increases, which it is in the world, Bitcoin becomes more valuable, not less valuable.  That hasn't permeated the thinking process on Wall Street yet.  Why?  Well, because they don't teach it to you in school. 

When you come out of an Ivy League school and you're working on Wall Street, perhaps some of the things you were doing to begin with is writing an algorithm to discover a correlation between Bitcoin and Nasdaq stocks, and historically it has reacted like this, so the algorithm will programme it to continue to act that way until further notice.  It takes a lot to break down these bad models.

Peter McCormack: What's your timescale?

Greg Foss: Well, here's the key; $2.2 million in today's dollars.  So, I have an expression, "Give a target, but not a time".  Well, we're measuring it in today's dollars, so if it takes 20 years to get there, what is the value of today's dollars --

Peter McCormack: Oh, you think it's worth it now?

Greg Foss: I can give you the maths that indicates to me that it should be trading there. 

Peter McCormack: I wish it was!

Greg Foss: Well, I'm going to flip it on its ear.  I'm a probabilities guy and I'm never 100% certain of my investment outlooks, but what I do try and measure is what the market says my odds are, Peter.  And it made the maths easy when it was $20,000 versus a $2 million price target.  $20,000, and it's in today's dollars, versus $2 million, you take today's trading price, you divide it by your target and you get a percentage of what the market says your odds are.  That's a 1% chance.  The market is telling me I have a 1% chance of being right.  And I'm not saying I'm 100% certain I'm right, but I'm way higher than 1%, ladies and gentlemen, and that's how I've always managed risk my entire career.

James Lavish: Right, and for anybody who is watching this and saying, "Yeah, but you've got to put an interest rate on that to discount it", we're at negative real rates, so it doesn't really matter.

Greg Foss: Okay, that's fair, but I also stress it is today's dollars.  Let's not mess if it --

James Lavish: But what I'm saying is it doesn't matter because we're at negative real rates, so actually it's even better than that.

Peter McCormack: Because the interest rates are lower than inflation?

Greg Foss: Correct.

James Lavish: Yeah, so it's even better than that.

Greg Foss: But again, bring it down to first-principles-thinking, Jeff-Booth-thinking, it's like going to the race track this year for the Kentucky Derby and you had watched the Kentucky Derby winner train all the time.  And you know what the odds were going into the Kentucky Derby of that horse winning Kentucky?  80-1, and that's where the odds closed.  And if the guy who had spent his life studying horses had watched this horse train, he's like, "Okay, 80-1 is a longshot and I still don't think he's a walk to win it, but man, the odds aren't 80-1, maybe they're 25-1", so that's why you have to take opportunity of wrong odds that are laid by a racetrack, or by a market; all the same thing.  It comes down to risk management.

James Lavish: Yeah, and we did the same thing in arbitrage.  You'd look at whether a deal was going to close and you would handicap it.  And if the market said it was a 30% or a 40% or a 50% and you thought, "Either I'm missing something or they're out of whack on their price", that's where, if it's a compelling opportunity and that risk reward is so great, then --

Greg Foss: Again, it's James' show, but I can't keep my mouth closed!

Peter McCormack: It's our show.

James Lavish: Yeah, it's our show.

Greg Foss: Hey, asymmetric investments define careers; that's as simple as it is.  I've had three in my life, asymmetric investment opportunities.  This is hands down the best I've ever seen.  It's not even close.  The other two, which were the best up until my current introduction to Bitcoin, they were good, but the asymmetry of Bitcoin is just so beautiful, hands down this is the best opportunity I've ever seen.

James Lavish: Agreed.

Peter McCormack: Yeah.  I missed the internet one and I should have taken it.

Greg Foss: Coulda, woulda, shoulda; that was uncertainty.  But if you had zero exposure, you were also on the wrong side of that trade.  But this is how you line it up, and mine, the second one, came out of the Great Financial Crisis and the asymmetry was just crazy and there was so much of this available, I was able to buy $7 billion of something for our fund.  That's why I hung up my cap at the end of the Great Financial Crisis four years later, because I said, "I'll never be able to recreate that opportunity".  And guess what, in 2016 I found Bitcoin, but I wasn't managing money professionally anymore, except for my own account.  That's why I've gone in with both feet. 

So, lucky to meet a guy that speaks the same language as I do, because that's all it is; managing risk is managing probabilities, it's managing an unexpected value outcome, and that's why I take such exception with these knuckleheads on Wall Street who say, "It's got no value".  "Okay, are you 100% certain of that?" and they'll say, "No", and I'll say, "Then shut the F up, because you have to play probability distributions".  That's where you're dealing with the fiat mindset versus the reality of managing risk.

James Lavish: And really, the challenge is to get some of these institutional investors to leg into the trade.  Get some so it forces you to do the work and it forces you to do the real research on it, and then they'll be orange pilled, if they really, truly do.

Peter McCormack: What about your old buddies on Wall Street; have you talked to them much about this?

James Lavish: A few, and I've got one or two that understand it, literally a handful.

Peter McCormack: They already did, or you've spent some time with them?

James Lavish: No, they already did.  But beyond that, they group it in with Ethereum and Web3 protocols and they just don't understand how it's different.  They think it's all crypto and, "I'm just getting a little bit of each", and they don't understand it and they haven't done the work on it.  They're mentally lazy.

Greg Foss: Intellectually lazy.

James Lavish: Intellectually lazy, and it's incredible.  And there's going to be a lot of them that missed the boat, just absolutely missed the boat.

Greg Foss: Can I add, so the cool thing is, the one guy that was one of my biggest counterparty traders coming out of the Great Financial Crisis, he was a JP Morgan trader, he just messaged me yesterday on LinkedIn because he's been following it.  He does not want Bitcoin to succeed, but his spider senses are like, "Hey, Foss, let's talk more about this".  And I'm like, "Fine".  I'll go into anybody's barn and have a discussion, whether they're crypto, whether they're fiat-based, because it's an education process.  There are a lot of people that are paid not to want it to succeed, but there are enough smart Wall Streeters who know they have to cover their arses well from a risk management perspective.

Peter McCormack: Well, I'll tell you what's been interesting on this cycle is, the previous cycle it was very much like the Bitcoin educators, it was the writers, it was the techies.  This entire latest cycle has been dominated by macro people.  I mean, we have you, James, we have you, Greg, we have Lyn, we have Preston, we have Luke Gromen, Jeff Snider now.

Greg Foss: Larry Lepard.

Peter McCormack: Larry Lepard, and even though Jeff Snider isn't a bitcoiner, he kind of is and doesn't realise.

Greg Foss: No, he doesn't realise it.

Peter McCormack: He doesn't realise, but he is.  We've got so many now and our show isn't a Bitcoin show anymore, it's a macro show.  The reason I can tell you that is I can make a show with Lyn Alden, we can not even talk about Bitcoin, not even have it in the title, it will be the biggest show of that month.

Greg Foss: Isn't that interesting?

Peter McCormack: Yeah.  This one will be a big show.  People want macro, they want to understand money, they want to understand the wider context.  Of course they want some Bitcoin stuff as well, but the macro people have driven the engagement and the interest this cycle and there's more of them coming and they're smart, and they're coming out with great arguments.

Greg Foss: And the 60/40 portfolio, which is the traditional 60% equities, 40% bonds, has been decimated this last year.  It's the first time in 100 years that both strategies have been down double digits.  That means that there are asset allocators out there that need to find new ways of meeting their bogey, which if you're a pension plan and you're assuming you have a 7% hurdle rate and you've just lost double-digits negative combined, you need to find something that's going to bring that return up, or diversify your investment portfolio.  So, it's happening, Fidelity is the leader on the institutional side this way, and look, BlackRock is doing it kicking and screaming.  Larry Fink didn't want to do it until he realises he's losing clients to Fidelity unless he does it.

James Lavish: That's right, or opens it up to -- the individual investors are the ones that are clamouring for it.  They want this, and so now they have to listen to it.  But we talked about this the other day, there are five institutions that control $30 trillion of assets in this world.  You've got Fidelity, Vanguard, BlackRock, State Street and UBS that control $30 trillion.  So, when they get in and they actually put it in their portfolios, it becomes a no-brainer for other asset managers to do it as well; that leads them to do it.

But again, going back to our original point, which was we need some regulation in here to get them comfort, to understand how Bitcoin is different, because the regulators are going to tell them, "Bitcoin is different", and they'll be, "Oh, okay", and it will click finally and they'll say, "The career risk has been taken down and so I can now leg in", and they get a 1%, 2%, 3% position, what's the maths on that? 

Greg Foss: It adds up quickly.

James Lavish: It adds up quickly.

Peter McCormack: What kind of regulation do you think is required?

James Lavish: To show exactly how Bitcoin is different, how it's regulated as a commodity versus all the other crypto --

Peter McCormack: So, CFTC oversight?

James Lavish: Yeah, so all that stuff.

Greg Foss: Non-market manipulation.  One of the reasons that the SEC's comfortable with a futures, cash-settled futures product, BITO, is because they feel they can regulate the trading in the Chicago pits versus cash-settled Bitcoin, which trades globally and they believe could be manipulated by Asians, let's say, overnight London time.

James Lavish: Or Russians.

Greg Foss: Yeah, but here's the cool thing, and Peter, here's the cool thing.  You had Shaun Cumby here, you talked to Shaun Cumby the other day.  Shaun and I were involved in the first Bitcoin ETF in Canada.  They allowed Canada to have a spot ETF; that's advantageous for Canada, leading the charge.  And Shaun Cumby was responsible for taking the OSC to court and proving that it is not manipulated overseas.  Shaun was brilliant on that fact and Canada's better off for it. 

So, it's coming.  It's called The Theory of Agency.  Career risk is easy when no one else is doing it, "I don't want to get out of my lane".  If everyone is losing money, that's great.  I don't want to be the guy who's losing money because I went on a different strategy and everyone else is making money.  That's the career risk; Theory of Agency is the problem.

Peter McCormack: Damn.  Well, going back to the macro stuff, when you've talked about double-digit down on bonds and equities, do you see a recovery, or is this just a death spiral?

Greg Foss: A recovery in bond prices?

Peter McCormack: Well, either?

Greg Foss: Okay, so absolutely.  I mean, bonds have now gone from a 1.5% US ten-year to close to 4%.  It topped out at higher than 4%.

Peter McCormack: By the way, is that actually a good thing?  Should bond rates really be at that rate?

Greg Foss: Yes, and they're still not high enough because you still have nominal yields after you subtract out your CPI, negative real rates.  That being said, there's an element, and I said this on stage here in the conference, that people are going to change from being worried about inflation to being worried about credit risk of the USA.  And that's what an interest rate is; it incorporates an inflation expectation and a concern about credit risk.

Up until now, nobody in the world has worried about the potential default of the USA.  But guess what, and I saw the chart you had there, the graph of the Congressional Budget Office that showed the deficit in the USA, that graph right there.

Peter McCormack: Can you put it up, Danny?

Greg Foss: It is a beautiful -- if this was a company, you wouldn't touch this thing!  This is so ugly, you look at this --

Peter McCormack: Foss, explain this to people listening.

Greg Foss: The primary deficit, okay, the components of the total deficit -- the total deficit is the combination of the purple and the blue.  But the primary deficit is your fixed costs.  It's your military spending and it's your entitlements, and correct me if you see something else here, James.

James Lavish: Well, and others.  So, the ones you just listed are mandatories, they're under legislation.

Peter McCormack: This is the government budget?

Greg Foss: And it's done by the Congressional Budget Office.

James Lavish: Which means that it's quite optimistic!

Greg Foss: It doesn't matter, it's still so pathetic.  You are going to have a total deficit in 2051, okay.

Peter McCormack: What's that; $15 trillion?

Greg Foss: No, it's how much on an annual basis you are losing.  You are correct, it's $15 trillion negative.

Peter McCormack: So, it's not a percentage, it's an actual number?

Greg Foss: Correct.

Peter McCormack: And is this accumulating every year?

Greg Foss: Well, don't forget, when you don't pay off last year's you have to pay interest on it and it gets bigger.

Peter McCormack: But that's not the number, that's the increase.

James Lavish: No, that's the number, that's the total deficit.  It's increasing, yeah, exactly.

Peter McCormack: Yeah, it's increasing.

Greg Foss: So, deficit as a percentage of GDP for the USA.  You're getting a deficit that's 15% of the GDP of the USA annually, and the component, the biggest component is your net interest, which is because the interest coupon has to rollover and fund the deficit from the prior year.  So, it's organically growing because of the debt spiral.

James Lavish: Let's talk about that for a second.  So, this is a great chart because it shows that the CBO, the Congressional Budget Office, admits the problem.  But let's talk through the real problem.  So, going back to what Greg was saying, you've got your GDP --

Peter McCormack: Hold on, one second, James.  I just want to explain to the people listening just what we're looking at and we're put it in the show notes, but essentially what we're seeing is the deficit year by year.  We have an anomaly in 2020 and 2021 because of COVID, I imagine?

Greg Foss: Correct, that's exactly right.

Peter McCormack: So there's a massive amount of borrowing.  And then what we see, it's going to drop back in 2022 to about 5%.

Greg Foss: Correct, of GDP.

Peter McCormack: And then from 2027, it's going to be about the same, but it's going to go up to about 15% by 2051.  But the majority of the increase is interest.

Greg Foss: Correct.

James Lavish: So, let's just walk through how it's ridiculous.  Now, first of all, our baseline deficit right now is $1 trillion.  So, let's walk through the numbers really quickly for your listeners to understand what Greg is talking about, and we talked about this and that's why I wrote that newsletter about the debt spiral in the United States.  So, you have your major revenue source, that's your taxes.  They have other things, their penalties, etc, but your tax revenue is your major source of income for the United States, and that's driven off of your GDP, your Gross Domestic Product.  And that right now is running at about $4.5 trillion.

Greg Foss: That's right, $4.5 trillion is your tax revenue.

James Lavish: That's right.  So, you've got your major expenditures are your entitlements, okay, these are signed into legislation, these are your mandatory expenses.

Peter McCormack: Social security?

James Lavish: Yeah, social security, Medicare, Medicaid, right, and that's $3.7 trillion.

Peter McCormack: Hold on, what's the GDP?

Greg Foss: GDP of the USA, about $24 trillion.

Peter McCormack: And tax revenues are about…?

Greg Foss: $4 trillion.

Peter McCormack: So hold on, $3.7 trillion of that is mandatory?

James Lavish: Correct.

Peter McCormack: Does that include the military?

James Lavish: No.  So let me go through it.  So, it's $3.7 trillion is mandatory.  Then, out of your variable expenses that change year to year, you've got military, which is $800 billion, but those are contracts, so you kind of count it as a mandatory, because they're invoices that they're getting from these contractors that they've agreed to make these defence products for them, or defence systems.  So, that's $800 billion.  Then your current interest on your debt is at $400 billion.  So now walk that back.

The number is actually $4.8 trillion of revenue.  You've got $3.7 trillion in entitlements; $800 billion in defence, now you're $4.5 trillion; then you've got $300 billion left over for interest expense.  However today, your interest expense is at $400 billion, so you're already running an additional deficit of $100 billion.  Now, Larry Lepard and I sat down before this conference and talked through a proforma of next year.  So, a proforma's just a projection on your baseline.  So remember, your total, if you include everything, so forget about the mandatory only; if you include everything, we're running right now at about $1 trillion of deficit. 

But now next year, if you peel out from our revenues the $600 billion that we got, which was kind of a one-time deal in 2020, after all the money printing and the stock market and all the assets went up, they had a great capital gains revenue line item of about $600 billion of additional, so pull that out.  Then also, we have right now about $400 billion of additional spending that the Treasury has said that they're going to issue bonds at going into the fourth quarter, going into the first quarter.

So now you've got the $600 billion plus that $400 billion plus another $150 billion of the COLA, the Cost Of Living Adjustment, on those entitlements; so that goes up by another $150 billion.  So you're about at another $1.2 trillion.  Add that to the $1 trillion deficit that you're already at; that's $2.2 trillion.  Now hold that.  So clearly, okay, we'll go back to that in a second, but then when you add in that we're going into a recession and the last two great recessions we were in, which was the Tech Bubble of 2000 and 2008 was the Great Financial Crisis, your tax revenues dropped between 8% and 10%, and your entitlement spending went up between 8% and 10%.  That's about another $800 billion to $1 trillion on top of that $2.2 trillion dollars, if we go into this downward economic spiral, or at least into a hard recession.  So now you're at over $3 trillion.

Now look at the chart and see how rosy that picture is from the CBO, even though -- so, if you look at 2026, it's showing, what; 5% as a percentage of GDP?  Remember, GDP is $24 trillion.

Greg Foss: So, 5% is $1 trillion.

James Lavish: And that's going down.

Peter McCormack: Okay, so this is bullshit.

Greg Foss: But it's still so ugly.  If this was a company, you would never touch this with a bargepole.

James Lavish: Exactly.

Peter McCormack: But the thing is, if this was my household budget, what I would be doing is going, "I've got to cut something out", or get a second job.

James Lavish: No, what you would do -- this is what the US Government's doing.  They're assuming, yes, exactly what you just said.  But instead of cutting spending and getting a second job, they can't get a second job, where are they going to drive revenue from?  Instead, what they're doing is they're operating on credit, so they've got a credit card that they're overspent on and they've got an interest rate on it. 

So now, their mandatory expenses of your mortgage and your car payment and food, you've got all those things you've got to pay for, for you and your kids.  Well, you're not meeting that margin with your job, with your revenue.  So, you can't cut out food, your mortgage or your house, so what are you going to do?  You're going to take out another credit card and then you're going to pay the interest on that credit card.  Then eventually, you're paying so much in interest that you have to take another credit card, and that's the blue line.

Greg Foss: There's your blue line, that's your net interest, so it's the equivalent of being in credit card hell, okay.

James Lavish: It's a debt spiral.

Greg Foss: You are taking out more credit cards to pay the interest on your old credit cards.

Peter McCormack: And this is why there will be a default at some point?  They print a load more --

Greg Foss: Thank you very much.  The fiat currency is the error term which balances this debt spiral.

Peter McCormack: So they print out, pays back on nominal returns --

James Lavish: Print to oblivion.

Greg Foss: As long as it continues going.

Peter McCormack: Does that affect credit rating though?!

Greg Foss: Absolutely it does.

James Lavish: That's great!

Greg Foss: But that's why the credit rating companies are conflicted.  If this was a corporation, there is no question it would be rated CCC.  It's a very simple calculation on EBITDA interest coverage, and the USA does not even cover its interest expense by one term, James ran through the maths, which meant that as a company, those are defined as Zombie Companies.  Well, guess what?  The USA is a Zombie Country and it's the best country in the world from a financial perspective.

Peter McCormack: Yeah, there were times when we would run a surplus and times when we would run a deficit and it just feels like we never have a surplus anymore.

Greg Foss: Okay, why?  Because your organic growth in your debt is at a point where the growth in your interest is outstripping the possible growth of your economy.

Peter McCormack: But why is it happening now?  I've got a couple of theories.  I think one is globalisation, who is going to blink first?

Greg Foss: No, Paul Volcker was able to do what he did, because total debt-to-GDP in the USA at the end of 1988 was 30%.  And now total debt-to-GDP in the USA is 130%.

Peter McCormack: But why have we got this now?

James Lavish: Okay, so just think about it.  If your interest rates are going up and you're running a deficit, now your interest rates are getting bigger, so each year your deficit is growing and so that's the problem; it's just maths.  So think about it.  Now you've got $31 trillion of debt in the United States right now.  So, if your interest rate -- which is why the Treasury is on guard here.  So you've got $31 trillion up there on the left, so if you've got right now, if they're paying -- what did we come up with?

Greg Foss: It was 1.5%. 

James Lavish: About 1.35% to 1.5%?

Greg Foss: They're funding themselves at 1.5%, make the maths easy.  On $31 trillion, they have $450 billion annually of debt.  Peter, look, at the top; $30 trillion times 1.5%, that's $450 billion annually, which James pointed out.  38% of that debt rolls over in the next two years and will be funded at a 4% coupon, because that's the open market rate on debt now.  So, there is the growth in your interest expense.

Peter McCormack: Oh, okay.

Greg Foss: You go from $450 billion to meaningfully higher, because your debt rolls at a much higher coupon.

Peter McCormack: Hold on, question?

Greg Foss: Yes.

Peter McCormack: I think I've just realised something that I hadn't fully realised before.  When you just said, "The debt rolls over", because they have to pay off old bonds, they have to issue new ones to roll over.  Right, okay.

James Lavish: Exactly.

Greg Foss: Now, Peter, one thing I want to mention --

James Lavish: Now they're rolling over from 1.3% to 1.5%, to 4.5%.

Greg Foss: -- here's how crazy it is.  Everyone focuses on the US National Debt in the top, left corner.

Peter McCormack: I'm looking at US Total Debt.

Greg Foss: Where do you see that one?

Peter McCormack: $93 -- whoa, fuck!

Greg Foss: No, go down to the bottom, Unfunded Liabilities, $170 trillion.

Peter McCormack: Holy shit!  Hold on, we nearly need a new --

James Lavish: Add that to the $31 trillion.

Peter McCormack: What comes after trillions; is it quadrillion?

Greg Foss: It is.  Let's not even go there, because that's $200 trillion.  You take your unfunded here, $172 trillion, plus $30 trillion, you're at $200 trillion of total obligations by the US.

Peter McCormack: Hold on, okay.  So, $200 trillion; what are those unfunded liabilities?

Greg Foss: Medicare and Medicaid, it's right there, you see them right there?  Medicare Liabilities, Social Security Liability.

Peter McCormack: But over what period?

Greg Foss: It's on their books now, it's the promises to the citizens going forward.  30 years?

Peter McCormack: Okay, 30 years.  Okay, shit!

Greg Foss: No, but this is maths, this is the maths.

Peter McCormack: And this is why you need inflation to --

Greg Foss: It's over.

James Lavish: But go down to the lower, lower right.  See where the Liability Per Citizen is?

Peter McCormack: It's fucking insane!

Greg Foss: It's not funny, though.  These are our kids, Peter.

Peter McCormack: No, but it's so fucking stupid, it's funny.

Greg Foss: It's exactly that.  Now, you said, "How did we get here?"

Peter McCormack: Yeah.

Greg Foss: Any four-year President that's going to try and fix this will not be in office for another term.  So, he is not incentivised to fix this, besides it being mathematically impossible to fix.

Peter McCormack: Unless they elect a guy who probably won't be alive by the end of it, and then maybe he can have a go.

Greg Foss: We've had enough people who shouldn't be in office at that age anyway.

James Lavish: But go back up just a couple of lines.  You see US Millionaires down there; you see the number of millionaires?

Peter McCormack: 22 million.

James Lavish: There are 22 million millionaires.  How many Bitcoin are there going to be ever printed?

Greg Foss: 21 million.  This is a great chart, and they do this by country.  You can look at this same thing for Canada; let's not do it.

James Lavish: They will not all be able to get 1.

Greg Foss: It's mathematically not possible.

Peter McCormack: Actually, round it; 23 million millionaires.

James Lavish: Just here in the United States.

Peter McCormack: Yeah, that's ridiculous.  Hold on, that's more than 5%?

James Lavish: Yeah, 50-something in the world.

Greg Foss: You're close to probably 7%.  So, if there's 300 million people, 7% times 300 million is 21 million.

Peter McCormack: Jesus.  This stuff is insane. 

Greg Foss: It's maths, this is why it's so simple to see this.  And then we could get into the credit default swap market and you could see how Bitcoin, even just on the United States, should be valued at somewhere close to $200,000 just because of the insurance on the USA.  And then you get all the other countries for free.

Peter McCormack: What is it you used to say, "Bitcoin is a credit default swap on --" you used to say something?

Greg Foss: On a basket of fiat currencies.  But you could just do it as a credit default swap on the USA and see how cheap Bitcoin is.

Peter McCormack: Oh my God!

Greg Foss: But you see, here's the cool thing, Peter.  We've been involved, you and I, talking about this and I love the aha moment.  You've just had your aha moment.

Peter McCormack: Well, no, there's certain concepts you just suddenly get.

Greg Foss: That's right, but you have to keep repeating it, because most people don't -- it's like when your game's very well -- go ahead.

Peter McCormack: Sorry, one that stands out to me, Savings Per Family: $9,500.

Greg Foss: Yeah, $9,500 versus the liability per citizen, $500,000.  So, what's the average family in the US; four?  So, the average family has $2 million of liability and the savings for a family?  Oh, a whole $9,500.

Peter McCormack: I'd love to see a UK version of this.

Danny Knowles: There is a UK version.

Peter McCormack: There is?  Oh my God, let's have a look.

Greg Foss: You get your public debt-to-GDP 104% versus USA.  Well, that's the public debt, but you've got to take --

James Lavish: Well, the UK just jumped over 100% this year.

Greg Foss: Yeah, but these are cool, but it's not a good scenario.  And the best scenario is the USA.

Peter McCormack: Oh, look, Italy's fucked.

Greg Foss: Well, that's why we always said it.  But let's not spend too much time on it.  It's that simple, you need insurance against this.

Peter McCormack: There's no way back.

Greg Foss: Mathematically, no.

Danny Knowles: So, what do you think they do do, Greg?

Greg Foss: The countries?

Danny Knowles: Yeah.

Greg Foss: We go into something called Financial Repression, and James will expand on this, where you try and run inflation hot and then you use a component called Yield Curve Control, which keeps your interest rates low and you hope that your GDP grows into your debt burden because of the natural inflation to your tax base, which follows inflation.  But bonds get skewered and the printing of money is so crazy, it's QE Infinity and hard assets go parabolic.

James Lavish: So, just remember, you're getting this bump in GDP from inflation, and nominally you're paying back these -- so what Greg is saying is that you're paying back this debt with future dollars that are worth less.  So, if I give you $100 today and loan it to you, you can buy 20 Starbucks, right.  So, in ten years, how many Starbucks do you think you're going to be able to buy with that $100?

Peter McCormack: Maybe five!

James Lavish: Right, that's exactly what they're doing with the debt, it's the same thing.

Peter McCormack: Yeah, well this is a conversation I had the other day.  We run a successful business here and I don't know what the fuck to do with the money.  We've put money by as a runway for the business but also, at the same time, I'm going to lose 15% of that next year by not spending it.

James Lavish: You're totally right.

Peter McCormack: What the fuck do you do?

James Lavish: That's why it's evil, it's ridiculous.

Peter McCormack: Yeah, it is fucking evil and it is ridiculous and it's insane.

James Lavish: It's maddening, yeah.

Greg Foss: Yeah, maddening.

James Lavish: That's why everybody's reaching for yield, they're trying to keep ahead of all this printing.

Danny Knowles: How long do you think they can last before we have to start dropping rates again?

Greg Foss: Well, I said that 4.5% would be where things would really start breaking.  We're starting to see things break already.  LDI in the UK was absolutely something that broke.  So, we're seeing things break and the best economist that I follow, macroeconomist, Luke Gromen, feels the same way.  There's a sustainable amount of interest expense that the USA can endure, and we're at that level right now, and just look at things that are breaking around the world.

Peter McCormack: But to sustain that, that acceptable amount?

James Lavish: You can't sustain at this rate.

Peter McCormack: What I'm saying, if they can find an acceptable rate they can maintain at, that is going to lead to a gradual and insidious erosion of living standards for everyone?

Greg Foss: 100%.

James Lavish: Right, because what they'll do is they'll jack up the rates as quick as they can here, which is what they're doing, and try to get that inflation down to a point, declare victory, probably somewhere around 4%, 5% inflation, which is the number that they're sharing with you, but we all know that the real inflation rate's higher, and then back those rates off so they don't have to pay higher rates for the Treasuries that they issue in the auctions.

Peter McCormack: Is there a sensible option that no one's putting on the table because it's politically unpopular?  Is there something you guys go, "Well, if they did this…", or is it literally fucked?

Greg Foss: They had a chance to do it after the Great Financial Crisis and every time they tried to do it, there was a taper tantrum.  So now there is no return.

Peter McCormack: No debt jubilee?

James Lavish: I wrote a piece on that.  No, it doesn't physically work, you leave a hole in a balance sheet, in the Fed balance sheet.

Greg Foss: What do you think that would do to pensions?  Look, there's one option: all paths lead to Bitcoin, it's that simple.

Peter McCormack: Yeah, and it's going to be a messy, strange transition that won't be pretty.

James Lavish: It could be.  I mean, look at how long it's been going on with Japan.  We don't know how long it takes.

Greg Foss: Well, careful, Japan is a nation of savers.

James Lavish: Correct, absolutely.

Peter McCormack: Also, isn't their currency collapsing?

Greg Foss: It is.

James Lavish: Okay, so Japan is a nation of savers and they're a net exporter, we're a net importer, so it's a different dynamic absolutely.  However, also a different dynamic, we've got the reserve asset of the world, which is US Treasuries, and everybody needs dollars and everybody uses Treasuries.  So, that's our advantage, the United States' advantage.  So, the one that will break first is Europe; they'll break before Japan.

Peter McCormack: But was it Jeff Snider who said it won't break, because the US will actually have to rescue Europe?

Greg Foss: Okay, I agree with Jeff on certain subjects, and I also don't agree with him, but that's what makes a market.

Peter McCormack: When Europe breaks, is it the euro that breaks, and will the pound be independent of that?

James Lavish: It depends on what actually the function of it breaking is.  But I believe, and I've written about this, I believe that eventually, Germany just gets fed up with all the debt that the ECB is allowing these other countries down in the south, Italy, Greece, Spain, Portugal, to take on at the expense of Germany, and there's no function to pay it back.  I wrote about it in TARGET2, they're owed over $1 trillion, and some of that is from the ECB itself.

Peter McCormack: And they're not going to get it?

James Lavish: There's no function to pay it back.  So at some point, Germany will just say, "We're done with the euro, maybe we're done with Europe".

Peter McCormack: If that happened, but say it happened the other way first, say Italy voted for its own Brexit and went back --

James Lavish: How; what would it do?

Peter McCormack: I don't know, I'm just saying any country, just say one did --

James Lavish: I'm not sure how they would financially do it.  If Italy wanted to leave the European Union and not have the ability to use Germany's balance sheet, those banks would fail.

Peter McCormack: Is there a way a country can leave the euro, leave the EU, default on its debt --

James Lavish: Have a reset?

Peter McCormack: Yeah, have a reset, establish its own domestic currency.

James Lavish: What are the other countries going to do?

Peter McCormack: Well, we'll come back to that, but could that lead to a boom?

James Lavish: No.

Peter McCormack: It couldn't?

James Lavish: No.

Peter McCormack: What, people won't trade with them, because they'll have a poor credit rating?

James Lavish: They won't trust them.  How are they going to issue debt?  Who's going to buy that debt --

Greg Foss: If they've just defaulted on their obligations to the EU.

James Lavish: They're not going to buy that debt, and you need to be able to issue debt.

Greg Foss: Let's not overthink things, okay.  The USA will be the last country to fail.  Canada will fail in my opinion 10 to 20 years before the USA does, and Canada hasn't failed yet.  So, let's assume that this can continue.  I think to answer Danny's question, "How long can it go?"  Probably at least another decade.  Why?  This is the Ponzi, it's the FTX.  As long as you don't let people see what the true mark should be, we can continue to pretend this Ponzi will continue to go.

Peter McCormack: And perpetuating the Ponzi, is that oppressing small, developing nations?

Greg Foss: Crowding out of capital, of course it is.

James Lavish: Absolutely.

Greg Foss: It's crowding out the capital.  There's a limited amount of capital in the world and as the USA becomes a greater and greater borrower, it crowds out the ability of capital to flow to lesser fortunate nations, yes.

James Lavish: And the stronger the US dollar just exports our inflation, it makes it more expensive for people to buy US goods. 

Peter McCormack: Does any of this make you suspicious of what's happened in Russia and Ukraine, that this was Russia recognising this and Putin wanted to detach himself from --

Greg Foss: Absolutely.  He doesn't want US dollars for his valuable natural resource energy.  He basically called it out to his Politburo.

James Lavish: Exactly, he said it.

Greg Foss: You take the translations.  He doesn't get that much MSN coverage, but you look at the statements translated.  He basically says, "Why would I want to own a fiat currency --"

James Lavish: "Paper-based currency".

Greg Foss: "-- that they can restrict me from using when I need it?"  It was brilliant.  Putin's a bitcoiner.  I'm not supporting his military or anything like that, but he understands the difference between soft money and hard money.

Danny Knowles: Do you think that's a bit of a peek behind the veil for people like China as well, who won't want those Treasuries?

Greg Foss: Not necessarily China, but how about we extend it to, what's happened with the Saudi Arabia Kingdom and disagreements with President Biden is the same thing.  They don't want their valuable oil resources being paid for in US dollars.  Now, there is that agreement, because they need to have protection from their enemies from the US Military.  It's difficult, but it all comes down to energy, it all comes down to natural resource energy for digital energy; hence Bitcoin, pretty simple.

Peter McCormack: I need a whiskey, man.

Greg Foss: That being said, all paths lead to Bitcoin.  The longer that we can develop a parallel network, the better, and that's what we're doing.

James Lavish: That's right.

Greg Foss: We're developing this rescue network.  Be positive, not negative, because yeah, drink whiskey because the reality is, it's not a pretty situation.

James Lavish: There will be a US dollar and US Treasury parallel system until Bitcoin just takes over.

Greg Foss: And it will replace the US Treasury system as a global reserve asset, and the US dollar can maintain global currency status.

Peter McCormack: Have you independently come to that conclusion, or was this part of --

Greg Foss: No, independently.  That's why I loved it.

Peter McCormack: It's going to replace the bond system, did you say?

Greg Foss: It will replace the US Treasuries as global reserve asset, not global reserve currency.

Peter McCormack: What's the trigger?

Greg Foss: The trigger is Jason Lowery convincing his superiors that the survival of the US dollar could rely on Bitcoin; that simple.

Peter McCormack: I've got some Canadian bourbon here.

Greg Foss: Let's call it a great day of talking.

Peter McCormack: Oh, man, that was amazing.  Thank you so much.  Foss, love you, man.  James, great to meet you.  I don't know if you've got anything you send anywhere.  Have you got a newsletter or a podcast?

Greg Foss: He has a great newsletter.

Peter McCormack: Yeah, Substack?

James Lavish: I'm on Twitter, I'm just @jameslavish.  And I write a newsletter, it's called The Informationist, and it's got a ton of great reviews from people who -- what I do is I take one financial concept every single week and I break it down super-simply for people to understand, anybody, because I know how opaque our world is and I want to get people inside to see exactly what all these things are: yield curve control, the Fed pivot, TARGET2, whatever it is and why it matters.  And it often leads people, at the end of it, is why Bitcoin is so important.

Greg Foss: James and I are partners on the Looking Glass education platform.  He was one of the founders of this free education platform that we're happy that people refer to as an alternative source of education to understand the situation that we're in.

Peter McCormack: All right, man.  Well, listen, we've got to go out to Canada, Danny.  We've got to get out, go watch some hockey, do some interviews.

Greg Foss: Thank you for having us, Peter.

Peter McCormack: Foss, any time.  Lavish, great to meet you.  Good luck with everything.  What's the url; is it Substack?

James Lavish: Yeah, it's on Substack.  You can find it right on my Twitter handle, yeah.

Peter McCormack: Is this the one you've been reading?

Danny Knowles: Yeah.

Peter McCormack: Yeah, we'll put it in the show notes.  Substack's become a bit of a Ponzi for me as well with the amount of fucking newsletters I'm signed up to; I can't keep up with them all!  Doomberg has been the one I've been reading a lot.

James Lavish: He's a good man, he's good.

Peter McCormack: Guys, thank you so much.  James, we'll have to do this again sometime; Foss, whenever.

Greg Foss: I'm a huge fan of what you're doing.  Bitcoin Collective, shoutout to them what they did in Edinburgh, shout to your football team.  I'll tell you what, this movement is growing.  I'm off to El Salvador tomorrow.

Peter McCormack: For Adopting Bitcoin.

Greg Foss: For Adopting Bitcoin, and look, that's what's going to do it, is more adoption, more real-life use cases, and for the kids.

Peter McCormack: Real Bedford's going to be your fourth asymmetric bet!

Greg Foss: Well, is it available for public investment?

Peter McCormack: Not yet.

Greg Foss: So then it's impossible for me to execute it!

Peter McCormack: No, what it is, I wanted to do one season first, go and learn it and go and say, "Okay, I know what to do now.  I've done it, I've learnt it, I can do this".  That's what it is, and then I'm just going to open it up to anyone to invest.

Greg Foss: Awesome.  Well, James and I are starting an investment fund together.  I'm joking of course; our first investment, as much as I love you, kid, it won't be Real Bedford.

Peter McCormack: It won't be that!  Real Bedford investment needs to be an investment of love and fun.

Greg Foss: There we go, just like Bitcoin.

Peter McCormack: Yes.  Alright, thank you, guys.

Greg Foss: Thank you, brother.

James Lavish: Thank you.