WBD663 Audio Transcription
A Debt Jubilee to Save the Economy with Arthur Hayes
Release date: Friday 26th May
Note: the following is a transcription of my interview with Arthur Hayes. 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.
Arthur Hayes is an entrepreneur and the former CEO of BitMEX. In my first interview with Arthur, we discuss the state of the world at the moment: what happened with FTX, money printing, the coming collapse, debt jubilees, the need to acquire assets outside the system like Bitcoin, good and bad AI scenarios, and a powder keg of issues that’ll hit the markets this fall.
“You’re basically putting this powder keg together of a situation that’s going to be exploding in Q3 and Q4 this year. And so, while I think ultimately it will be good for Bitcoin, it could be quite volatile on the up and the downside”
— Arthur Hayes
Interview Transcription
Peter McCormack: You followed Wrexham, the team that Ryan Reynolds bought?
Arthur Hayes: No.
Peter McCormack: Okay, so you've got the Premier League; you've got championship; league one; league two. That's the professional leagues. Then you got six down, that's where we started.
Arthur Hayes: Okay!
Peter McCormack: But we won the league last year, so we go up one. And so, we're a small little town. We'll get you there.
Arthur Hayes: Are there spending caps?
Peter McCormack: There is, it's related to turnover, but we're sponsored by Bitcoin companies, so that doesn't affect us.
Arthur Hayes: Right, but you can't go like, "Yo, Ronaldo, come play for this shitty team and let's take it to the moon"?
Danny Knowles: There's financial fair play, but I don't think that actually starts until you're a little bit further up. You don't have that now, do you?
Peter McCormack: No, we don't have that now, we don't have that. The only thing we have now that came in this year is, nobody associated with the club can bet on any football at all.
Arthur Hayes: That's a very US thing.
Peter McCormack: Yeah, we got that. Anyway, good to see you Arthur, finally.
Arthur Hayes: And you, yeah.
Peter McCormack: Finally get you here. How've you been?
Arthur Hayes: Good, very good. Nice weather, you know, nice and hot!
Peter McCormack: All right, listen, we've got some questions for you because when we found out we were interviewing you, we heard some rumours and we want to find out which are true. Alright, first one. Did you take six Lambos to consensus?
Arthur Hayes: No.
Peter McCormack: No, the one like, was it 2018?
Arthur Hayes: Yeah, so what happened was, the person who ran our marketing department had a very good idea, I think, to do some guerrilla marketing, because as you know, advertising at these conferences is extremely expensive. You get into one of these conference rooms, every company under the sun is advertising, how do you stand out? You have people paying tens of thousands of dollars to put their name on the banner on the elevators and stuff. And so he was like, "Well, fuck that, how do we actually stand out and not spend a lot of money?" And so he rented a few Lamborghinis and parked them outside and put a BitMEX T-shirt on the dash. And photos are happening, media hoopla and then the Lambos drove away, and that was that!
Danny Knowles: I remember the pictures of the Lambos lined up outside.
Peter McCormack: I call that one true.
Danny Knowles: Yeah that's true.
Peter McCormack: That's true.
Arthur Hayes: Not six; three.
Peter McCormack: Three, close enough, we call that true! Okay, you and Nouriel Roubini are good friends?
Arthur Hayes: Absolutely not!
Peter McCormack: I'm trolling you with that one! Do you follow him?
Arthur Hayes: Do I follow him on Twitter?
Peter McCormack: Yeah.
Arthur Hayes: Okay, I have to find one of them.
Peter McCormack: Actually, so we've got a question about that. You only follow like 14 people, and I'm one of them and we don't know why.
Arthur Hayes: I don't know why either! I don't use social media much. I like fucking around with it and then, you know.
Peter McCormack: All right, how about this? You travel with a suitcase of teddy bears.
Arthur Hayes: I do.
Peter McCormack: That is true?
Arthur Hayes: Absolutely.
Peter McCormack: All right, come on, what's that about?
Arthur Hayes: I like plush, I collect them and so I have a whole -- in my various different residences, I have stashes of them. So, a little suitcase, a little bag and I take a few of them everywhere I go.
Peter McCormack: Are they rare ones or something?
Arthur Hayes: No, not rare. I guess I like the Jellycat brand, it's a UK plush toy brand, and then yeah, just take them around.
Peter McCormack: Okay, one more. You sleep hanging upside down?
Arthur Hayes: No.
Peter McCormack: That's not true; we've worked with you enough! Anyway, look, you've been good?
Arthur Hayes: Yeah, absolutely.
Peter McCormack: You're back?
Arthur Hayes: I'm back.
Peter McCormack: Get some time with you?
Arthur Hayes: Yeah, for sure.
Peter McCormack: So, what are you working on; what are you doing these days?
Arthur Hayes: I am working on my fund, so Maelstrom, which is basically a glorified family office. There's a guy, Akshat, who's running around the world doing deals, early-stage stuff, we're super-interested in infrastructure, made a bunch of plays in sort of ETH staking stuff so far, taking a hard look at ordinals and how the market's going to play out, and just having a lot of fun investing in projects that are going to bring the whole space forward. And we want to make a fuck ton of money in the same period of time!
Peter McCormack: Oh yeah, fuck yeah! And, where do you sit in the whole Bitcoin versus crypto? Because we read your newsletter, and I'm trying to figure out, are you a bitcoiner who makes money from crypto; or do you believe in the whole thing?
Arthur Hayes: I believe that there's a few coins that actually have done some cool stuff, like Bitcoin, Ethereum. That's probably the global two, right? And then you have a bunch of other cool apps, like Uniswaps, GMX, some of these things that have done cool primitives based on Ethereum. And then you have 99.9999% dogshit. But the dogshit's really, really fun to trade; I love trading dogshit, and you can make a lot of money trading dogshit! But it's like a testbed, people are experimenting with things. Some of it's a complete joke, some of it's completely serious, but that's the whole point, is that we're just letting people have imaginations about how a financial, social, political system can be created purely on the internet. And so that's why I love it and it's so much fun, and the people are so out there, and it's just I'm passionate about what they do. And that's why I love doing this.
Peter McCormack: Man, should we be trading shitcoins?
Arthur Hayes: Absolutely.
Peter McCormack: We should be trading shitcoins. Every time I trade shitcoins, I lose money. I gave up.
Arthur Hayes: But you have fun doing it, right?
Danny Knowles: Arthur's the one selling you the shitcoin!
Peter McCormack: I buy these fucking bags. No, I don't have fun when I'm losing. I had fun in 2017 when we went up; that was fun. So, what do you make of like, because obviously this is a Bitcoin show, we're just bitcoiners, it's very serious; what do you make of that side of it? Like, do you consider Bitcoin a serious asset?
Arthur Hayes: I think it's serious, it's a serious experiment. We're experimenting, we created together. Obviously, we all didn't create the whitepaper, or maybe you did, I don't know, maybe you're Satoshi, maybe! But we're having this experiment: can we create a hard form of money by this consensus mechanism and these economic games that we're playing over the internet? So far, I think it's been successful, it's worth however many hundreds of billions of dollars of value. I always look at things in energy terms. Take a look at Bitcoin divided by the oil price; Bitcoin is worth more barrels of oil over time. Take a look at the 20-year US Treasury divided by the oil price, and the Treasury represents less barrels of oil over time.
So I think we're being successful at doing what we should do. The currency should maintain purchasing power and energy. So I definitely think it's a serious thing, it solves a serious problem for people. Whether or not it's over the long term going to be successful, I don't know, but it's up to us really.
Peter McCormack: I've never heard anyone say that before.
Danny Knowles: No, I've not, in terms of pricing things against oil constantly.
Peter McCormack: Yeah. Is that something you do across other assets?
Arthur Hayes: Yes, it's more of a mental construct. So I think about like our lives, right? We're sitting in this air-conditioned room in this nice house and drinking these beers, and every single thing, speaking on these microphones, is basically somebody as a company, a government, whoever, individuals came together, they found some potential energy in the earth and they converted rocks and stuff into the useful products that give us enjoyment. And so then, everything is a derivative of how much energy it costs to produce it. So if you want to think about how you're going to save over time your wealth, you want to either have a constant standard of living if you really like how your life is today, or you want to have an increasing standard of living. All that's a function of energy and how much it costs to maintain that lifestyle.
So if I want to think about my portfolio, I want to make sure that the assets that I own, if I'm thinking about saving, are going to maintain purchasing power and energy, and right now it's hydrocarbons, over time. And if they don't, then I need to think about why do I own them? Maybe it's because I have to be in this particular jurisdiction and I have to hold this currency, or it's like I've just been thinking about it the wrong way and thinking, "Okay, the price has gone up in dollar, euro, yuan, JPY terms", not like, "Okay, have I maintained the same purchasing power of oil? Can I actually afford the same amount of energy in my lifestyle that I could yesterday with the money that I made from my job?" And so that's what I think about my portfolio.
Peter McCormack: And what kind of time frames are you looking at? Because these things fluctuate.
Arthur Hayes: I think it's a personal thing, right? So my goal is, okay, I like the way I'm living, I want to keep living this way until I die, so how do I make sure that I optimise for that? So other people say, "Well, I'm in a short-term trade, maybe I've got to buy a house next year", or there's something that they have to do, and so that's their timeframe, right? So everyone has their own personalised timeframe. It is no one-fits-all investment strategy, or this global vision of how you should manage your money; it's a personalised thing.
Peter McCormack: I think it's all just about having fun for you, right?
Arthur Hayes: I love having fun. That's what life is about, right?
Peter McCormack: That's what your main thing is! So we wanted to talk to you a little bit about SBF, FTX, what happened there; you cool to talk about that?
Arthur Hayes: Sure.
Peter McCormack: Did you see it coming?
Arthur Hayes: No.
Peter McCormack: You didn't. How did he get away with this?
Arthur Hayes: Well, let's first backup I think. Okay, so when the Alameda balance sheet got published, I remember I was chatting with one of my boys, he was like, "Did you see this coin discount?" So I was like, "Oh no", I hadn't read it, so I looked through it, I was like, "Okay, maybe their hedge fund is over leveraged. I had heard that Sam loved to trade shitcoins and has blew up a few times before, so didn't put it past him that he blew up his hedge fund, whatever.
But what I did not expect is that he went to the next level and said, "Yeah, I'm going to take $8 billion to $15 billion of my company's exchange's funds, and this exchange was a profitable exchange, held in high regard. I mean, we know that the tech was fugazi in the back end, but whatever, it worked, right, to the extent that we could see what was going on. And I'm like, "Well, there's no way that this guy -- his hedge fund blows up, so what, who cares? He lost his own money, everybody blows up. Not a big deal, right? He wouldn't, like, compromise the functioning of his money printing machine, his exchange, FTX, by commingling the funds, or taking billions of dollars and plugging holes". So I literally had this conversation with one of my good friends who runs a crypto hedge fund and they were like, "Yeah, it's fine, it's cool, all the stuff is good".
In the back of my mind, I was like, "You know what, I'm not going to take the chance". And I pulled all my money off of the exchange just because, what's the point? I'll just wait a few days, it'll clear. If he's good, he's good; if he's not, he's not; just how it works. But yeah, I did not expect.
Peter McCormack: How good was your timing?
Arthur Hayes: I think I got out within 12 hours of them closing things.
Peter McCormack: Holy shit! Wow! That is good timing. Fuck! Yeah, because we didn't see it coming, and I don't think many people saw it coming.
Arthur Hayes: Well, forget what you saw coming the weekend before it happened, but if you see like CZ sells his position. The first tell was when Caroline sent that tweet out, "I defend this level". You never, ever tell anyone the level you defend publicly. If there is a level, she shouldn't have said fuck all, and just shut the fuck up, and defend the level. But now everyone knew this is the level. I don't know what it was, $22 on FTT, or whatever it was?
Peter McCormack: Yeah, $22.
Danny Knowles: I think it was $22, yeah.
Arthur Hayes: And they're like, "Okay, well what's the market going to do?" It's going to test that level. How big is your stack? And she didn't have the big enough stack, and it was game over from there.
Danny Knowles: What I could never figure out is they had the hedge fund, they had all the alpha from the exchange, knew everything that people were trading and they still blew up. I'm not a trader, but is that not mind-blowing?
Arthur Hayes: From the little snippets I've read of people's Twitters of like John Ray and the bankruptcy court, it sounded like the operation was complete Mickey Mouse, right? Everyone thought he was this Jane Street badass trader, but no accounting system, no reconciliation of P&L, no concept of risk management; this is just trading 101. I don't know if he ever managed his own book to a big degree, but I remember my boss sat me down one day and he basically told me, "Everything is your fault. If IT fucks up and you lose money, your fault". And you get a culture of understanding there is nothing that you don't have a handle on. That's your P&L you sign off at the end of the day and you own it, right? And so, I don't think he ever had that sort of ethos about how he traded and he was sloppy.
Peter McCormack: How did he get away with it though? Because when you see massive funds investing hundreds of millions in, my assumption at times is they're going to take a board seat and they're going to be checking that there's certain things in place, like risk management, proper accountancy, proper reporting.
Arthur Hayes: Well, I'm not super into how Silicon Valley large VC funds do DD, but they obviously don't do that much of it. I think a lot of the time, think about 2020, 2021, you're in this VC fund, got a fuck ton of money, because Fed and every other central bank is printing money, got all these subscriptions, you have to deploy money, you've been told, "Okay, I have a crypto bucket, deploy". And so then along comes Sam, he looks like all the other dudes that you invest in, went to the same schools, parents did whatever they did. And you're like, "Okay, cool. This guy looks like me, talks like me, I understand him. Here's $100 million", or whatever the cheques that they were writing, "I'm never going to get fired for investing in Sam".
At the end of the day, as an investment manager, the number one thing you want to do is make sure you don't lose your job, because you get paid a lot of money to do fuck all! And so, maintaining that awesomely nice lifestyle means that if you make a mistake, making a mistake isn't a bad thing, everybody makes mistakes, everybody loses money, that's not a big deal. But you don't want to lose money in the thing that everyone else told you you would lose money in, because that's how you lose your job. So investing in Sam Bankman-Fried was a way to get into crypto, and you would never lose your job for investing in FTX, because he did all the right things, he said all the right things, he looked the right way, had the right background. You're not going to get fired for investing in him.
Would you get fired as a American VC fund by investing in a scrappy exchange located in Hong Kong, or some country that Americans can't pronounce? Absolutely you'll lose your job for that if that guy was a scam artist. So, that's why I think that the DD and the whole mind frame, people had already conned themselves before Sam even got in and started talking his bullshit.
Peter McCormack: And how do you think you'll play out?
Arthur Hayes: In terms of…?
Peter McCormack: What's going to happen now in terms of Sam, and then future exchanges. Because the sad side of it was, we were having a good year. Times were good and then everything blew up, like LUNA, they blew up. We're now in a situation where there's a massive regulatory lens on everything that happens in this industry. So, do you think this is one of the examples they're going to use to kind of clamp down on us all, or do you not even worry about that?
Arthur Hayes: I think that this was a validation of decentralisation. The companies that failed and the people that were at the helm of these companies were all centralised things, Three Arrows, Celsius, Genesis, all those people, FTX, it's all centralised things. What do they do? They took a bunch of money, they levered it, and they bought shitcoins. Or they took a bunch of money, they levered it, and then they led it to other idiot traders, right? And that's how they lost all their money and blew up their businesses. Okay, yeah, the crypto market cap went down because of that, because a lot of these things were inflated higher, but Uniswap still worked, Ethereum still worked, Bitcoin still worked, the quality projects that actually built real things worked perfectly fine. And we literally lost, what, 60% of value in like three months?
Think of that happening in the S&P. Imagine the S&P one day opened and it was down 50% because JPMorgan went bankrupt, something like that, some institution you would have thought would never have failed has now declared bankruptcy. Nobody gets their money, markets are going crazy; does the western financial system still work? Absolutely fucking not, but our system worked. No bailouts, everybody took their humble pie, took their medicine, some people lost a lot of money, it's unfortunate; but at the end of the day, the market kept ticking and that's why we're here.
Peter McCormack: Yeah, I mean look, I guess it was like a kick in the teeth for a lot of people. And it's really sad, a lot of people lost a lot of money, that sucks. But I guess you're right. I mean, Bitcoin still produces another block every ten minutes, we keep going, we learn our lessons from it. But I do kind of still worry about the future exchanges, that's our onboarding, our offboarding, because there's a lot of pressure on them now and I just think it really didn't help. But maybe, I don't know, do you worry about regulation coming in on these exchanges; do you worry about what will happen to the likes of Coinbase? They've been flirting with this idea of maybe not being here in the US.
Arthur Hayes: I mean, I think Coinbase will be fine. Everything's a cycle, right? There's a, "Oh no, Bitcoin in the XYZ jurisdiction is getting challenged", everyone moves over here. And then, people are in this country for a while, "They don't know, they don't like us, so we're going to move back over here", it just goes around in this circle.
Peter McCormack: It's just a dance.
Arthur Hayes: And then hopefully over time, the amount of people who've heard about crypto increases, because at the end of the day we're an attention game. It doesn't matter what the price is, it needs to move, we need people to just make a decision. We don't care if you don't like it or like it, but at least have the cognisant decision-making, "I don't like Bitcoin because of whatever. I like Bitcoin because of whatever". We don't want to be ignored. Being ignored is the worst form of anything; that means that nothing will progress.
Peter McCormack: Yeah, I can't remember who said it, "The worst thing about being talked about is not being talked about"!
Arthur Hayes: Yeah, if you're thinking about that currency that needs to have a network to be valuable, if nobody's heard about it, you're worthless. So, even if there's all these bad things happening, if just people know what Bitcoin is and then maybe something in their life happens and they change, and maybe you're a Russian oligarch and you thought you were super-wealthy, and then all of a sudden you got rugged because some dude that you have no affiliation with launched a war and you're like, "Oh, I understand now. I thought I owned that asset, but I'm just a renter and the landlord said no mas and I no longer have my boat, my fancy apartment, my house, my bank account. I get what these Bitcoin guys are talking about".
Peter McCormack: So essentially, it's the same for him then as the people who held their money on FTX and got rugged. Any chance to get rugged, you need to be looking at something else.
Arthur Hayes: Yeah.
Peter McCormack: Yeah. Oh, by the way, we've got a nickname for you. We call you Arthurdamus!
Arthur Hayes: Arthurdamus?
Peter McCormack: Yeah, we call you Arthurdamus! So, we're fucking idiots though because we read your newsletter we're like, "Look what Arthur says. Arthur says this is going to happen. I'm not sure, I'm not going to do it", and then it happens. So we think you've got this ability like Neo in the Matrix. We see the code, you see what's going to happen, how do you always know what's going to happen; how come you can read the market so well?
Arthur Hayes: I mean I get a lot of things wrong. I try to look at like longer-term trends and then my whole thing is, just like take things to their logical conclusion and try to empathise with people who are making these decisions. Like, all this banking stuff that's happening in the US and other markets, put yourselves in the shoes of a politician. You want to get re-elected, what do you need to do to get re-elected? Give out free shit. Free shit costs money; what do you do when you can't afford stuff? Print it, right? It's just standard.
If you study enough history, you see that nothing that's happening today with how the ruling empires of the world are debasing their currencies, it's all happened before. It's slightly different and the circumstances might be a bit different, but this is the play that we've been running over and over again. And so if you read enough history, "Okay, I can see what they're doing, I see the motivations, I can see how this ends". And thankfully, now we have something like Bitcoin and this whole ecosystem where we can actually take our money out of that system and say, "Okay, yes, this is risky, it's volatile, it's whatever, but I'm solving for this risk that happens in every single large civilisation over time and maybe I'm going to be better off for taking this decision".
Peter McCormack: So your main thesis is everyone's going to print everywhere?
Arthur Hayes: Yes. I don't care if you're a democracy, if you're fascism, communism, every single large nation state has the same construct of their banking system, to a large degree, everybody has the same problem. The US has too much debt, China has too much debt, Japan has too much debt, Europe has too much debt. Every major country has, "We've decided that we want to have less kids because we like living in cities and doing whatever, we don't live on farms", and so you have less people working. So, if you have less humans consuming things, but you pile on a bunch of debt in the last 50 years, there's just not enough people to pay for it. And so what do you do? You print the difference.
Or you could say, yes, some strong politician could stand up and say, "You know what everybody? I'm sorry, but your uncles and your fathers, they fucked you. They took out all this debt, and unfortunately, they had a good time, but now we're going to have to make some changes and that social security, you're not getting that; that free college education, sorry, can't afford that any more". That's not the message that gets you re-elected.
Peter McCormack: They're never going to do that.
Arthur Hayes: Never.
Peter McCormack: They tried that in the UK. We went through this austerity period in the UK that the Conservatives tried for about two years and everyone hated them, everyone fucking hated them. But the flipside, we had the, who was the Labour guy?
Arthur Hayes: Corbyn?
Peter McCormack: Yeah, he tried to offer loads of shit for free and nobody believed him. You can push it too far.
Arthur Hayes: For sure.
Peter McCormack: No one believed him, because he was saying, "I'm going to give you this for free and that for free and this for free", and he still didn't get elected. So, push it too far. But if you're studying history and you're saying this has all happened before, doesn't now feel particularly bad, like one of the worst situations?
Arthur Hayes: Yeah, I mean, 5,000 years of interest rate history, we've had at the peak in 2021, it was $18 trillion of negatively yielding debt. That's like, it means you've inverted time, right? I was like, "What? So you're telling me these economist motherfuckers figured out a way to invert time and we're going to go against the natural order of things and physics doesn't apply? Okay, sure". So, it's just obvious what's going to happen on a long enough time frame. The short-term market moves can catch you off guard and if you're using too much leverage and your position sizing is wrong, then yes, you're going to have to be staring at your phone babysitting your bitcoin and making sure that you're reading the tea leaves correctly. But taking a longer term, higher-level view, I think the path is clear.
Now whether or not Bitcoin or some of these other cryptos perform in that scenario, it's yet to be seen. However, the endgame, we know what's going to happen.
Peter McCormack: Which is?
Arthur Hayes: Print money.
Peter McCormack: But yeah, but do you think they print to the point of being unsustainable and collapse?
Arthur Hayes: I would say probably.
Peter McCormack: Okay, because…?
Arthur Hayes: Because we had a 2008 Crisis, right, what was that?
Peter McCormack: $850 billion.
Arthur Hayes: And then trillions left after that. Has anyone learned any lessons? COVID hits, what happens? Governments print a bunch of money, the central banks buy it, Fed being the most egregious of all of them in terms of money printing. And now they've exacerbated the problems they all know they have. It's not like these guys are dumb, right, they're very smart people, they've talked about it in many papers. We know that we have this problem in the future. If we print all this money, how do we take it out of the system without causing bad effects?
Now, they think they're going to be super-smart and they can figure it out and they're going to have enough time to do it. So it's a lot of people who know they have a problem, they know they've got to fix it eventually, but they think they're so smart that they can time the market, and the market is not going to inflict pain on them, and the market is going to only act in a very linear fashion, it's not going to throw a curveball like all the regional banks failing or something else, like somebody starts a war somewhere and price of oil goes up, right? And now you have energy inflation, which completely screws up everything. So there's a lot of people who know they have a problem but they think they're smart enough to solve it.
Peter McCormack: And so what kind of time frames are you working to? Do you consider in weeks, years, decades; you do it all?
Arthur Hayes: I think, look at more cycles. So, I think this cycle is, we've got the halving next year, 2024, I think that's going to be a good year. I don't think we get up to $70,000 this year. I think next year is when we cross that barrier. And then we get the blow-off top, 2025, 2026, and then it's Armageddon.
Peter McCormack: Armageddon!
Danny Knowles: Is that Armageddon everywhere, or in Bitcoin?
Arthur Hayes: I think it's more of a societal Armageddon. Though I'm sure Bitcoin will go down too, but it's more like, okay, do we have a major war? When you print all this money and have all this social discontent around the world, you get things that happen. And it might not be the thing we all think is going to happen. You know, World War I was started by the assassinations of some random minor royal, and then everybody's treaties triggered and boom, millions of young men died around the world. So it doesn't necessarily have to be super-straightforward, it's just we have this situation, we have this tinderbox of too much money, no trust and people trying to eke out of living for themselves.
Peter McCormack: Or we can just laugh about it and trade some PepeCoins. Did you buy PepeCoin?
Arthur Hayes: I have not bought any PepeCoin.
Peter McCormack: You didn't buy any? I thought you would have bought PepeCoin.
Arthur Hayes: I've got Royal PEPEs, but I don't have any PepeCoin.
Peter McCormack: So I think me and Danny are basically trying to say, "What the fuck should we do?" We don't know what to do, we're not traders! We're long Bitcoin, that's for sure, we're not trading shitcoins. But we worry a little bit about the Choke Point stuff now. Do you think about that much?
Arthur Hayes: Not particularly. I mean, every system -- it's one of those things. If you recognise that at some point in the future, the system's untenable; what happens when systems are untenable? Powers that be try to close the exits. So, you can still buy Bitcoin. Okay, maybe it's not as easy as it was before, but you know the problem that's going to happen in the future, you know what the authorities do when they have a problem, they lock the doors and they say, "Stay in here, please". And pretty please might be an M16 to your head! But you can still get out now.
So, waiting until there's no other option, that's just like, well, what did you expect? You have an opportunity right now. Take what you can afford, buy some asset that's outside of the system. Maybe that's Bitcoin, maybe that's gold, maybe it's property in a particular location, maybe it's an unlevered, cash-flow generating business, whatever it is, whatever you think that's outside of the particular financial system that you might not be able to access in the near future, if what you believe to be true in the future actually happens.
Peter McCormack: So you're thinking financial and jurisdictional?
Arthur Hayes: I mean, you've got to live somewhere, so optimise for where you are. But at the end of the day, you can buy Bitcoin today. It's hard, it's really hard in some places, really easy in some places, but you can do it.
Peter McCormack: And you can move to places where it's easier.
Arthur Hayes: Right, so do it. Stop complaining that, "Oh, it's getting harder". Okay, well why is it getting harder? Yes, there's a problem and they're, in their own way, trying to fix it and so if they're going left, you go right.
Peter McCormack: See, we know this, Arthur, we get it, we're doing it, we're predicting ourselves, but I can't even convince my best friends.
Arthur Hayes: And again, that's the point I always make. Most people will not buy Bitcoin, period, they will go down with the sinking ship. That doesn't mean the price doesn't go up fantastically; it's a small door, a lot of money. I don't know, what's global M2? Hundreds of trillions, right, of debt in the world. Bitcoin is worth, what, $400 billion or $500 billion, or whatever it is, at the current market cap. Not everyone gets saved. Not everybody makes it into Noah's Ark, unfortunately, a lot of people are going to drown!
Danny Knowles: That's terrifying!
Peter McCormack: That BTFP, Buy The Fucking Print, it kind of felt like something big was coming and then it didn't. It kind of felt like we're on the verge of a lot of banks collapsing and they kind of didn't. Are we through that or do you still think there's risk there?
Arthur Hayes: Again, they made it a clever solution that solved one part of the risk. Any bank that held US Treasuries and MBS securities, mortgage-backed securities, cool. But there's a whole lot of other banks, the ones that actually power the American economy, that don't have that on their balance sheet. As I've written about, the large banks are the ones who own a lot of Treasuries and mortgage-backed securities. It's the smaller banks that actually power the heart and soul of the American economy. They've got office buildings, restaurants, personal loans, car loans, all these things that the Fed doesn't want on their balance sheet. I know they run a $1 trillion unrealised loss in their books but again, they're in the business of making money too and so, I don't know. I don't know if I want that office building. Maybe you keep that. But I'll take the US Treasuries. And so, the problem is still there.
Now, if interest rates were much lower and it's not like I can just deposit some money in my brokerage account and I can get 5% in the money market fund, I can lend my money to the US Government, I get 5%. Or I can go lend my money to the bank and I get, what, 50 basis points, 0.5%. So as people start to realise this and they pull out their phone and they go, "Oh, I can 10X my interest income, I've just got to click five times?" why would you stay in a bank? And so the problem is still there, they haven't solved the problem. The market's kind of solve the one issue, "Oh, you've put a little solution together, it's kind of inflationary, cool. It's summertime, just chill out".
In the fall, once the debt ceiling is resolved, once you've had another six months of how many billions of dollars, they're going to walk from the bank and lend their money to the US Government and get 10X their money in terms of interest income; it's going to be billions. And you're going to come into September, October and all of a sudden the market is going to rediscover this problem that we already knew existed which was, "Oh, fucking shit, hundreds of billions of dollars have continued to move from all of these smaller banks into accounts at the Fed and in US Treasury T-bills", and then these banks are going to start getting slaughtered again.
Danny Knowles: So, cutting rates could help because it would stop people moving money out of the banks?
Arthur Hayes: Right, but the problem is that there's a political issue of cutting rates, because inflation is still high. It was 4.9% in the last print, but you know.
Peter McCormack: Not in the UK, it's still 10%.
Arthur Hayes: Yeah, exactly. So, while all the banks want to cut, they know that they have this inflation thing and this inflation thing is a widespread issue. Everybody gets pissed off about inflation and they can't hide from it, it's there. And so they're like, "Well, what do we do?" The banking system, we know we have this problem, they're not dumb, they read all the same stuff that we do. They know exactly what the problem is, but they have this political issue of, "But if we cut rates and reduce markets and inflation doesn't go down, we're going to be accused of just slaughtering the common man over this cross of inflation to save the big bad banks". So it's kind of like, what do you choose? Save the banking system, fight inflation with high rates.
Peter McCormack: What would you do; what do you think they should do? What's the right thing to do, because a lot of people are getting fucked, right? Inflation in the UK is really high and we'll survive it, we're fine, but there's a lot of people I know are struggling, and it feels really unethical what they're doing.
Arthur Hayes: Well, so this is back in Roman times and in Greece, I don't know if he was a, yes, was it Solon? Debt Jubilee, it's a very common feature in a lot of large civilisations. You have a period of excess build-up and then there's a leader who comes in and essentially expunges debt. Now, rich people hate this.
Peter McCormack: Of course!
Arthur Hayes: Right, they hate it when, yeah, I lend money to all these plebs and here's this guy, I thought he was one of us, and he's coming in here and say, "Well, if we want to right society and actually have a productive, cohesive society, we need to relieve the debt burden of those who are less fortunate", and they would do a debt jubilee. Now unfortunately, a lot of these leaders get assassinated by their peers because those in charge don't like it when the money that they've lent out does not earn an interest rate.
So a debt jubilee, student loan debt forgiveness, mortgages forgiveness, write it all off. Again, that's going to really --
Peter McCormack: Everywhere?
Arthur Hayes: You're going to have to write it off. The debt's going to get paid anyways, it's a political decision. So, the people in charge politically have to decide who pays the loss. There's a loss there, you're not going to get away from it, somebody's got to pay it. And so, depending on the particular political structure, maybe you're going to get some strong leader who's going to come in and say, "Okay, we're going to disadvantage people who have a lot of money versus people who don't, and we're going to expunge debt".
Danny Knowles: I know theoretically it's possible, but is it actually possible?
Arthur Hayes: Of course, it's possible.
Danny Knowles: They could actually implement that.
Arthur Hayes: If we write it. Laws are just things written down a piece of paper by humans. So, if we all decide today that the law is this, then the law is this. If we decide tomorrow the law is that, the law is that. There's no reason why we can't do it, it's literally a political issue.
Peter McCormack: Where are those large pockets of debt; where are they kind of sat? And what are they specifically writing off?
Arthur Hayes: There's lots of government debt, there's lots of social welfare programmes that people have signed up to pay for in particular governments, and then you have the things that people own, household debt, credit card debt, auto loan debt, mortgages, those sorts of things, student loans depending on your particular jurisdiction. You have pockets of people who have a debt. You can choose to relieve that debt or not relieve that debt, it's up to you.
Danny Knowles: What happens to the businesses that would fail in the back of that?
Arthur Hayes: That's a political issue, right? It's like, "Okay, am I okay with this cohort of this financial system or society being worse off?" Because unless you're going to discover some massive new form of really productive energy and deploy it immediately, someone's paying the cost. Inflation, businesses go bust, got to choose. There's no good answer for this, it's all bad decisions.
Peter McCormack: Yeah, has it ever happened in modern times? Has there ever been a recent debt jubilee, because the example you gave, I think, was like Roman times; have there been any examples?
Arthur Hayes: I'm sure there have, I can't really think of one off the top of my head. This is not something that we don't understand in the human fabric of civilisation, of debt jubilee.
Peter McCormack: Yeah, but I've not heard anyone talk about that. I mean, you're talking about it.
Arthur Hayes: Well, in the US, there is talk of student loan forgiveness.
Peter McCormack: I've seen that one.
Arthur Hayes: And again, so what happened? I think the Biden Administration floated this idea that they were going to forgive student loans, and yet certain people are up in outrage, understandably so, "I paid all my debt, why do they get their debt unpaid for?" And then you had, "I lent money, why are you abrogating my contracts and taking away my income?" Again, valid concern, and it's a political decision. Who is strong enough politically to enforce a loss on one sector of society?
Danny Knowles: I don't know if I'm getting this wrong, but in that case, is that a jubilee or were they going to print money to pay off the debt; or is it the same thing?
Arthur Hayes: Well, if you owe it to the federal government, they basically say, "Okay, boom, you don't have to pay any more". That's a debt jubilee.
Peter McCormack: That seems like an easier one for the government to write it off, just say, "Forget the debt you owe us". But if you debt jubilee against, I don't know, institutions, banks who are owed money, could those banks collapse?
Arthur Hayes: For sure, absolutely.
Peter McCormack: And then just loan them money to start a new one.
Arthur Hayes: Or, I mean what happens in a true bankruptcy situation, the creditors take over the bank. It's not like if the bank goes bust, "Okay cool, depositors, you took a risk putting your money in this bank, you're going to take a haircut, but now you own a portion of it". So what are you going to do with this bank? That's how things are supposed to work. There's no painless situation, it's just that today we've all decided, in just about every major country in the world, that we don't want to ever have anyone lose any money. And so now in any situation where there's distress, we turn to the printing press. So, "No, don't worry about it, we got you. You made a bet, market didn't go your way, but we're here with the government, we're here to help, we're going to print some money and make you whole".
In the beginning, everyone feels really great, but now towards the end of 80 years since World War II of all this accumulation of debt, it's becoming harder and harder to do that and the consequences are becoming even more dire.
Peter McCormack: That's like that Dan Tubb conversation. We interviewed this guy and he was talking about since World War II, western nations have essentially become insurance companies. They don't allow anything to go wrong for anyone, everyone will fix every mistake in your life. He said that's what's compounded all these issues.
Arthur Hayes: Absolutely.
Peter McCormack: Yeah. Is there a kind of game of chicken that goes on with this though because if the US was to have a big debt jubilee, I don't know what happens to ratings, but we are seeing these kinds of shifts. We've had Lyn Alden on the show a few times and she's talked to us a lot about the rise of the BRICS nations and people trying to escape from dollar dominance. Is there a geopolitical risk to a debt jubilee?
Arthur Hayes: For sure, depending on who you're impacting. So let's say that some politician in the US said, "Okay, all debt owned by country X is no longer payable. We've just lowered our debt burden by Y", whatever that amount is. You could do that. It's perfectly within their right to not selectively choose to repay people. But then obviously, then why would anyone else hold your currency or invest in your bonds? So you can do anything you want, but there's a consequence to the action. Whether or not you like the consequence is the question at hand.
Peter McCormack: Yeah, that's the kind of geopolitical side to it that I think debt jubilee is possible, but the US wants to maintain for as long as it can this kind of dollar thing.
Arthur Hayes: Yeah, it's built a reputation of a contract is a contract is a contract. Cool, all right, well if you pile on a bunch of debt, then there's consequences to that. Do people actually care? I don't know.
Peter McCormack: I think most people don't really know what's going on, Arthur, that's the problem. None of my friends at home have got any idea what is going on, they've got no idea. They don't understand what causes inflation, they don't understand what causes debt.
Arthur Hayes: But no one understands what causes inflation.
Peter McCormack: Is that true?
Arthur Hayes: I mean obviously, it's a monetary phenomenon. There's all sorts of different factors at play. Inflation rates are very volatile when you start going up a lot. There's a cool chart that I think Luke Gromen always posts of the price of gold in the Weimar Republic, and it's like this. It's like a --
Peter McCormack: Yeah, I know the one you mean.
Arthur Hayes: Yeah. Even though in the end, it got devalued massively, if you traded that, you could have gotten rekt, even though you had the right call.
Danny Knowles: I mean, you would have done, you would have got rekt. It goes up and down like hundreds of --
Arthur Hayes: Yeah.
Peter McCormack: Yeah, and that's the risk we're entering into, because I think it might have been Luke or somebody else said, if you look at the charts now, most charts on modern markets, they look like early Weimar; it looks like we're about to go yo-yo. They want to defeat inflation, they raise interest rates; interest rates fuck people so they drop them then; we get more inflation because they print more; and so it feels like we're yo-yoing. But you think, "We're not going to be like Weimar here in the West", but it feels like we could head that way.
Arthur Hayes: It depends on the country, right? I think I've written previously, everyone's like, "Oh, the US is going to have hyperinflation, etc". I don't think so. I mean, the US has sufficient food supply, sufficient energy supply, two neighbours who supply them either with energy, Canada, or labour, Mexico, and so they're fine. They can be an autarky if the country wants to be, doesn't have to be. Other countries like Europe are kind of fucked. They think they're America, but then they continually find out that they're absolutely not, and have all sorts of misguided energy policies and don't have the base stuff. So again, it depends on who you are, where you are.
Danny Knowles: It's like in Europe, they bet on world peace, and they've just figured out that's not happening!
Peter McCormack: Oh, yeah. I mean, we've had that in the UK. I mean, our energy bills are un-fucking-believable. People's bills have, what is it, quintupled?
Danny Knowles: I don't know.
Peter McCormack: People who used to pay £1,000 a year are paying £5,000 a year for their energy prices, and we're having to source our energy in the UK from France, from their nuclear power. I think we have three nuclear stations in the UK, they haven't commissioned any.
Danny Knowles: There's a new one coming in UK; Hinkley Point.
Peter McCormack: Oh, Hinkley Point.
Danny Knowles: In a few years, yeah.
Peter McCormack: I'm pretty sure they were talking about that when I was at school!
Danny Knowles: I think it goes live in like 2027, but it's underway, they're making it.
Peter McCormack: Do you think, obviously you look in terms of cycles, so you're thinking in Bitcoin cycles, which we think about, but there's also larger societal cycles. We are heading to the point of potential collapse of currencies and such. Do you think we'll ever learn, or do you think this is just human nature forever and we're all fucking idiots?
Arthur Hayes: I don't know, maybe our AI overlords are going to introduce some interesting new political systems in our world. I don't know. I mean, obviously we've progressed as societies over time, it's just everything is very path dependent. Being born in 19-whatever, and you had to serve in World War II in whatever country you're from, that kind of sucked. Being born in 1955, 1960, being part of the richest generation in human history, the baby boomers, is kind of awesome. Being born in the 1990s and 2000s, maybe it might kind of suck, you know?
Peter McCormack: You might have to head off to World War III.
Arthur Hayes: Yeah.
Danny Knowles: That will be fought by robots.
Peter McCormack: You're ready, aren't you?
Arthur Hayes: Yeah.
Peter McCormack: Have you played with AI much? What do you think of that?
Arthur Hayes: I haven't played with it. I've read a lot of stuff about it, but I haven't played enough with ChatGPT or some of these other things. I mean I think it's going to be extremely disruptive, extremely amazing at the same point in time. I actually gave a lecture at MIT a few weeks ago, and the thesis was why AIs will use Bitcoin, and that's a series of essays that I need to write over the summer.
Peter McCormack: You don't need to write them. You don't, you could get AI to write them.
Arthur Hayes: Yeah, but that's not fun.
Peter McCormack: Yeah, but isn't that the fun bit of it?
Arthur Hayes: Well, I guess, I think in terms of Maslow's hierarchy of needs. So, most people have enough to eat, they can reproduce, they've got shelter, etc, so the next part is self-actualisation of who you are as a person, which essentially in my view is art. And so, if you have AI who lowers the cost of doing all the things that just keep us going, then we create a whole society of artists, whether that's you play a sport, you play an instrument, you cook, you draw, whatever it is. Whatever non-productive thing that you do that's purely for enjoyment to express who you are as a person, that's a society that we could have. Or we could have a society of extremely wealthy companies or individuals, everybody else toiling, I don't know what the fuck they're doing, and it's a clash, it's not set in stone. This could be a good thing, it could be a bad thing, it really depends.
Peter McCormack: Could we get both?
Arthur Hayes: Probably. I think a lot of it's going to depend on a particular nation state and how their political fabric works and how decisions get made and what sort of regulations they put in place, and do they have universal basic income, can they afford to have universal basic income, do they have a technology or manufacturing sector that's very AI-complementary, or are they like some nations which their only value add is to export cheap labour around the world to do menial tasks, at which point you're like, "Well, I don't need you anymore. I've got AI with robotics. Why do I need to import labour from Southeast Asia and wherever?" So you're going to have whole pockets of the world that are just completely irrelevant. And that's going to be very disruptive because I think these migration cycles are going to get very heated.
If country A, if across the border there's universal basic income and everybody's got a nice apartment and you can be an artist, you can go out to nice restaurants and enjoy the fruits of human civilisation and literally across the border, you live in a dirt hut because we don't need you any more, and your country never really advanced up the manufacturing cycle, well then you're going to try to move across that border. But then they're like, "Well, fuck that. I don't want more people coming in here". And so it's going to be very contentious.
Peter McCormack: Have you heard of BT, British Telecom? I don't know if you'd know them.
Arthur Hayes: I've heard of the company.
Peter McCormack: They're like our Verizon in the UK. They've just announced that 55,000 jobs are being axed to replace by AI. We're using it, we're actively using it all the time. The speed of change is kind of crazy. What I think about is like, well fuck, I mean what was the conversations today? Levi's won't need models because they can AI generate everything; it's going to kill the porn industry because you don't need porn stars because you can generate AI on the fly; you don't need doctors, you don't need the analyst, because AI will do a better job of interpreting MRIs. Like all through society is a whole -- it's an unbelievable amount of jobs are going to go. The speed of which it happens and the how governments can react, that's the bit that scares me.
Arthur Hayes: Exactly.
Peter McCormack: Yeah, just need Bitcoin again!
Arthur Hayes: Of course, I know my audience, right? You know what the answer to every fucking problem is when you read my essays. It's just that you want to enjoy yourself by reading the conclusion that you know I'm going to have at the end anyways.
Peter McCormack: Yeah, answer to everything is buy Bitcoin. Arthur, look, appreciate you coming in, man. It's good to finally meet you. We're going to let you get back to your bachelor party. I think we can do this again sometime.
Arthur Hayes: Absolutely, this was great.
Peter McCormack: Yeah. All right, man. Listen, thank you. You got anything else you wanted?
Danny Knowles: The only question I did have is, you kind of very briefly touched on it earlier, but what do you think is going to happen with this debt ceiling?
Arthur Hayes: Oh, the debt ceiling. It'll be resolved.
Danny Knowles: Are they going to print a $1 trillion coin?
Arthur Hayes: No, they don't need to print a $1 trillion coin. Usually what happens is they delay, delay, delay. Oh yeah, we're having a breakthrough. No, we're not, etc, back and forth. And then you get to the date, the date's coming, the market starts tanking, right, and then they get religion, and they go, "Okay, yeah, sure, we're just going to raise the debt ceiling". It's like, why do we go through this song and dance? So the Republicans are probably going to get some concession on some particular piece of policy they think is going to be important in the next election from the Democrats, and then they're in the last minute, they're going to come to a deal, and they'll raise it by some token amount, and then everybody's happy again.
Peter McCormack: And have some Bitcoin ready.
Arthur Hayes: Yeah, and it's going to be interesting the timing of that, because is that going to coincide with sort of the fall harvest cycle when we usually get financial disruption events with the banking crisis, and you have the federal government issuing trillions of dollars of debt because they need to fund themselves. You're basically putting this powder keg together of a situation that's going to be exploding in Q3 and Q4 this year. And so, I think ultimately it will be good for Bitcoin. It could be quite volatile on the up and the downside.
Peter McCormack: Okay. All right, well don't trade it.
Arthur Hayes: Well, if that's your thing and you're very good at short-term market movements and you're dedicated to your craft and you're on your phone or computer all day, yes, trade it. If you think that you can call the markets while you're at the pub and then you wake up in the morning and you're rekt, well, then you maybe should try a new thing.
Peter McCormack: I'm not going to do anything. Yeah, I've been terrible at it! Arthur, man, great to meet you, thank you for coming on.
Arthur Hayes: Awesome.
Peter McCormack: Good to see you, enjoy your bachelor party.
Arthur Hayes: Thank you.
