WBD669 Audio Transcription
WBD Live in Miami - The Money Printing Debate with Jeff Snider and Lyn Alden
Release date: Saturday 10th June
Note: the following is a transcription of my interview with Jeff Snider and Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Jeff Snider is Head of Global Research at Atlas Financial Advisors and Lyn Alden is a macroeconomist and investment strategist. In this interview, they debate whether QE is money printing, if the Treasury market broke in early 2020, dollar shortages, whether there’s an ideal form of money, the importance of Bitcoin, and the problems with central and commercial banks.
“The Eurodollar system is total bullshit… but the reason we need to focus still on that is because you need to know your enemy, you need to know who is going to resist changing a structural monetary framework. And the Eurodollar is not central banks, it’s the large cartel of banks; and they’re the ones that are the most vocal critics nowadays of cryptocurrencies, digital currencies and Bitcoin…they’re going to fight tooth and nail to preserve their own monetary privilege.”
— Jeff Snider
Interview Transcription
Peter McCormack: So, what an amazing pairing to bring here. Ever since we had Jeff Snider on the show, look, you all know there's no person I love interviewing more than Lyn Alden, but ever since we've had Jeff Snider on the show, people have been saying, "Can you get Jeff and Lyn together?" And so it's like, how do we make it work, because Lyn is the most in-demand, macro person in the world probably right now and her time is very precious, and trying to get the two together, trying to get our Queen here with Jeff Snider's been very difficult, but we've managed to make it work. So, here we are, here we go. So, a big round of applause for Lyn Alden, and can we have a big boo for Jeff Snider? No, I'm only kidding! We love Jeff.
Right, I would be a fraud if I asked this question, so the first question is going to be from Danny.
Danny Knowles: Alright, this is yes or no with a gun to your head, is QE money printing?
Lyn Alden: Yes.
Jeff Snider: You're going to make me do this?
Danny Knowles: I'm going to make you do this.
Jeff Snider: All right. I'm going to get this out, I prepared. This is from the Bank of --
Peter McCormack: Keep the mic near to your mouth.
Jeff Snider: Let me get it up first. This is from the Bank of Canada and you could all go on their website and see it, "There is a common misconception that we are just printing money, but that isn't the case. We pay for these purchases with settlement balances with their bank reserves. In effect, settlement balances act like loans from financial institutions to us. When we buy assets, we borrow from financial institutions by crediting them with a deposit of settlement balances in the accounts that they have at the Bank of Canada. Like deposits that you may have at your bank, settlement balances are an interest. Right now, we pay an interest rate", etc. No, it's not money printing, it's an asset swap.
Peter McCormack: Sorry, Lyn, but is he wrong?
Lyn Alden: I'll point out that nobody more than a central banker wants you to think that QE is not money printing. So, of course the central banks are going to say it's not money printing. And when I hear the asset swap thing, one thing I point out is that it is an asset swap; we have to ask what happens before the asset swap. Did they have an asset that then they may swap for something; or did they create an asset that they then swap for something? And so, it's not that it's not an asset swap, it is, it's that they create a reserve and then they swap for something.
So, you have a situation where, let's say they're buying government bonds, the government is in a position where they're selling bonds and they're not pulling capital out of the market. If I have dollars and they sell bonds to me and I give them dollars, they're pulling dollars out of the economy and they're putting Treasuries into the economy. And from my perspective, I don't really care if I'm just using them as savings. And maybe they do it for the foreign sector, maybe they do it for another sector, but if they run out of buyers or if they want to jack up asset prices, they say, "Okay, we're going to sell bonds into the economy, which allows us to spend money into the economy, but instead of pulling that out, we're not pulling dollars out of anybody". There's no real buyer that's buying these bonds, it's that the central bank is creating bank reserves and then buying the bonds.
The caveat where the money printing question becomes relevant is that if you're just doing QE without super large deficits, or if there's loan destruction like defaults that are happening that are bigger than the deficits, then it won't be inflationary because you're not just sending money to people. The biggest kind of combo that really becomes money printing is when you have very, very large fiscal deficits, especially ones that are direct to, not the top 1%, if you're actually sending people PPP loans to turn into grants, if you're sending them stimulus checks and then you're financing that by QEs to finance that fiscal spending.
Jeff Snider: I think you're dancing around the limitation here, because what you're saying is that the central bank causes money printing when the commercial bank acts in response to the asset swap, right? Because ceteris paribus, nothing else would have happened. I think that's a faulty assumption, which is why we never see any effects from QE in any marketplace, because the assumption is that commercial banks act in response to what central banks are doing, when commercial banks have their own limitations, which is what always thwarts quantitative easing, because the central banks want the commercial banks to act in response to this, exactly how you say it. But that's not the limiting factor.
It's not the level of bank reserve, it's not the central bank purchases, it's the banks have their own internal constraints, usually volatility and liquidity constraints of their own, that forces them to then just do this basic asset swap. They're more than happy to swap a Treasury Bond for a bank reserve, scalping a few pennies along the way, because they're constrained in every other balance sheet way. So, that's why it never becomes money printing, because money printing is done by the commercial banking system, not the central banking system.
Lyn Alden: Let me put it this way. Every single time when a government gets over, say, 90%, 100% debt-to-GDP, one of the biggest buyers of the government bonds becomes a central bank. And it's because you start to get so lopsided, in terms of how many debt securities are in the market versus how much money is in the market, that you need to create more money to buy those bonds. And I think the key thing is to realise that if you're --
Jeff Snider: But then, why isn't it inflationary?
Lyn Alden: Because it's not combined with fiscal spending. So, for example, if you look at Japan --
Jeff Snider: So QE is dependent upon the fiscal authority? I mean, again, you're not talking about money printing.
Lyn Alden: You are, because -- no, go ahead.
Jeff Snider: I was just going to say that the whole point of money isn't necessarily the money stock. We have to keep in mind it's the money in circulation. It's always been the factor that decides whether something is money printing, or whether it's inflationary or deflationary, is how much money is actually circulating, which is why the limiting factor is the commercial banks, because the commercial banks, along with non-banks nowadays, they're the ones who actually do the circulation. So, if the central bank wants commercial banks to circulate money and commercial banks don't want to do it, this is exactly the problem that the Japanese have had, along with every QE in existence. It always ends with the commercial banks and believe me, the central bankers know this and they would love for you to believe that QE is money printing.
In fact, Jay Powell went on 60 Minutes in May 2020 and fucking lied his ass off and said it was digital money printing. He said, "I flooded the world with digital dollars". So, the problem is the commercial banking system, it's always commercial bank factors. In fact, commercial banks don't need reserves. If they were free from constraints, they wouldn't need any reserves at all. They would just use the same forms of liquidity that they used for decades. That's why there were practically no bank reserves in the system before Lehman Brothers. There was never more than $10 billion because commercial banks settled based on their own practices.
So, if commercial banks want to do money circulation, they don't need the central bank to do it for them. In fact in my view, central banks do QE in response to the fact that commercial banks aren't acting the way they're supposed to.
Danny Knowles: Can I just interrupt for one second?
Jeff Snider: No, we're talking here!
Danny Knowles: There's going to be some people in the audience that are a little bit lost, including me. Can we just go back to explaining precisely what QE is, so we can know exactly what we're talking about here?
Peter McCormack: And, will you agree?
Jeff Snider: No!
Peter McCormack: Lyn, from your side?
Lyn Alden: QE is basically when the central bank creates more bank reserves and then swaps them for some sort of asset, usually a government bond or mortgage-backed security, or in rarer cases it could be other assets, like the Bank of Japan will do it with equities, but normally the most common one would be government bonds.
Peter McCormack: Jeff?
Jeff Snider: Yeah, that's it, that's the mechanics of QE.
Lyn Alden: And so going back to your point, for example, during COVID, there's a huge spike in bank deposits, so not just bank reserves, but bank deposits. And so there are people, for example, you're working as a school teacher, you had $10,000 in the bank, the government sends you money, it shows up in the bank. Now, if that was not financed by QE, it'd be coming out of other bank reserves somewhere, it would come out of bank deposits and bank reserves. But because they were able to inject that without pulling it out of anywhere else, they actually increased the amount of broad money in the system.
In that example, it was not from bank lending. Banks were not doing excessive amount of lending during COVID. Instead, it was the fiscal stimulus going around the fact that the banks weren't lending. And so, if you go back to, say, the 1970s and 1980s and things like that, that inflation was not because of QE, it was not because of large fiscal deficits, although the fiscal deficits weren't helping, it was primarily because of demographics and bank lending in the 1970s. That's where most money creation was coming from.
Whereas, the biggest ever spikes in broad money supply, so let's call it bank deposits plus currency and circulation, the biggest spikes ever in those were the 1940s and the early 2020s. And that was when things seized up, banks weren't lending, and there were very, very large fiscal deficits that were then monetised by the central banks, so especially that fiscal plus QE combo. And you can imagine, in March 2020, the Treasure market completely froze. Bid-ask spreads blew out, liquidity blew up. The foreign sector had tens of trillions of dollars of assets, they were starting to sell hundreds of billions of them for dollars, because they had a dollar shortage, which you cover all the time, all the eurodollar stuff; they were selling assets to get dollars, and the whole thing seized up.
So, if you have a completely liquid Treasury market and the Treasury says, "Bad news, we're about to issue trillions more Treasuries into an illiquid Treasury market that foreigners are actively selling", that's where the Federal Reserve comes in and says, "Well, we have a solution. We're going to create more base money and swap them for those Treasuries so that you're able to finance that, even though there's nobody in the real world who's actually swapping dollars to get these Treasuries. You're unseizing a liquid market because of that".
Jeff Snider: I'm going to disagree with a lot of that because the Treasury market was already illiquid. In fact, the Treasury market, that's a misconception that the Treasury market is entirely liquid. It's not. There are actually two different parts of the Treasury market. There's something called off-the-run and on-the-run. And what happened is, what happens all the time, is that foreign reserve managers park their reserve assets because they don't trust the Fed and they don't trust the eurodollar system, nor should they in either one, they park their assets in illiquid, off-the-run Treasuries because they don't need to be liquid. You're just holding them until maturity, recycling through them, maybe you have to sell one every once in a while.
In March 2020, as you pointed out, because of a massive dollar shortage, reserve managers had to suddenly sell these Treasuries in which there was no ready market available for them. So the Treasury market didn't break down, the dollar system did, which precipitated the selling. The on-the-run market was still functioning relatively well because the on-the-run market was where all the demand was. So, the idea that the Treasury market broke down and the Fed needed to come in and save it is a misconception. There is no liquid market for off-the-run Treasuries.
The more interesting part of March 2020 was why did everybody have to sell in the first place? And this is the story we're getting into now with, why are banks failing over the last couple of months? It's why are they forced to sell assets? And they're forced to sell assets because they have a liability mismatch, a liquidity problem, a dollar shortage. The Fed didn't fix it by buying up off-the-run assets, they didn't do much for the repo market to begin with.
Peter McCormack: What kind of dollar shortage did they have, because my understanding of the bank crisis recently was because they were holding Treasury Bonds and they were long duration, there was a run on the bank, so they just didn't have the assets required to service their clients?
Jeff Snider: No, they could have been fine.
Peter McCormack: How though?
Jeff Snider: Those assets were underwater -- what's that?
Lyn Alden: But they weren't fine.
Jeff Snider: Yeah, but they weren't fine because they were forced to sell them.
Peter McCormack: Why were they forced to sell?
Jeff Snider: Exactly.
Peter McCormack: Well, there was a run on the banks.
Jeff Snider: There was a deposit run because regional banks have been bleeding cash for well over a year, going back into early 2020, and the real interesting systemic dollar shortage question recently, not March 2020, but recently, is why they aren't in the wholesale markets to borrow all those funds back? SVB tried to go in the wholesale markets. We don't really have a real answer to this yet, because all you really need to do if you have a bunch of illiquid assets on your book is liquefy them, package them in some form of collateral package, go to Goldman Sachs and say, "I want to swap Treasuries", and borrow funds in the repo market. Why didn't they do that? Why didn't SVB go to the Federal Reserve?
Lyn Alden: Because there's not enough reserves in the system.
Jeff Snider: There's $4 trillion.
Lyn Alden: Yeah, which is not enough.
Jeff Snider: How is that not enough? We used to have a functioning economy with less than $10 billion. So how can we now have this overwhelming need for $4 trillion?
Lyn Alden: Because of the other assets that are growing even quicker. So for example, the amount of foreign assets that are owned, so the massive growth of the Treasury market. One thing to think is that every security in the market is basically a claim for dollars. So, we have tens of trillions of dollars locked in the equity market, tens of trillions of dollars in real estate, tens of trillions of dollars in bonds. And technically, any owners of those securities can sell those with the expectation that they can get dollars in return.
But of course, the problem is that you have literally over $100 trillion worth of these assets and nowhere near as many actual dollars, especially base dollars, let alone broad claims on dollars, to actually satisfy those. So, at any time, when you have a higher than normal amount of net selling for these types of assets, you get a liquidity problem. And we don't just see this in the US. So for example, going back to say, we'll start with the US for a second, so for example, during the COVID crash, and then actually again, during the guilt crisis in September, that kind. So if you look at, before we get to the UK, if you look at the US market, both those times in March 2020 and in September 2022, the Treasury market was getting really illiquid and wobbly. And in March 2020, it was the off-the-run securities that had the biggest issue.
But if you also look at Treasury auctions, so brand new Treasuries coming to market, you were getting fat tails on these auctions. And so a sign of a successful auction is that, when you're bidding the Treasuries out, the first price and the last price shouldn't be very different, right, because it's kind of like there's plenty, there's far more buyers than you're selling, and the first security sell, last security sell are basically the same price. When you have a sloppy auction, there's not enough buyers and it's really shaky, there's bad liquidity, you get a long tail, where the final security sells for a much worse price than the initial security. And you saw that both in March 2020 and then you saw it again in September 2022.
But then of course the worst example was what happened in the UK where they come out, there's high inflation, they're about to pivot and start doing QT, and then they come out and say, "Hey, we have this new budget, bigger deficits, we're going to issue a ton more gilts, UK sovereign bonds". The market throws an absolute fit, yields spike, but then of course the problem is that all these pools of capital hold these assets on leverage, all these pension funds, so they have to start selling. And then it goes back to the thing, there's so many holders of sovereign bonds and all of those are claims for dollars. And so if you get tons of sellers, well in this case, pounds, you have all these claims for pounds at the same time and it just would completely liquefy itself and there's just not enough pounds to meet that demand.
So what happens? The Bank of England had to literally cancel a speech. They were going to talk about balance sheet reduction. They had to cancel a speech the next day and be like, "Just kidding. Even though there's 10% inflation, we're going to go ahead and create new bank reserves to buy these gilts because too many of them are selling at the same time", and so it's a re-liquification. It's basically a buyer of last resort, not with existing pounds, but with brand-new pounds that are just created out of thin air to take those off the market for the fact that there's no actual genuine buyers of them at these prices.
Jeff Snider: But even there, that's the point that the liquidity -- and you're right, every asset is a claim on dollars. But those dollars are not physical dollars, they're not government dollars, most often they're bank claims, they're a claim on a bank. And so the problem with liquidity is not that there aren't reserves, it's that there aren't enough banks that are willing to create those dollars to settle that claim. And so the shortage in money, whether it's UK pounds or anywhere else, it doesn't really matter because everything's always on the other side of the dollar, is that there was a shortage of bank capacity, or really banks willing to take on that settlement liability. So it's a shortage of banks, not a shortage of bank reserves.
Lyn Alden: I think one way of looking at it, going back to the Global Financial Crisis, right before all that broke down, I think there were -- if you look at how much debt was in the system compared to bank reserves, there was a ratio of like 64:1. So there's like 64 claims on dollars, just from debt, let alone equity, just from debt, dollars that are literally contractually owed to in the future at a specific time; there's 64 times as many dollars owed to security holders as there were dollars. And if you're running a bank, you're kind of running it based on faith, that not too many people are going to come back and ask for dollars back at the same time, where you're holding all of these illiquid securities, and you're operating in the system where there's far, far more claims on dollars than there are dollars.
Back then, they had a system because they had so few bank reserves, that if 2% or 3% or 5% of your deposit base comes back at the same time and wants dollars, you have to do all these gymnastics with other banks to make sure you can meet that liquidity redemption, which works for one bank. The question is, what if the entire banking system, what if 5% of people want to pull their money out? Or phrased another way, what if people want to pull 5% of their money out, not from one bank, from the banking system? And the answer is you can't, there's not enough dollars.
We kind of saw a similar thing in these recent banks where now, because of what happened in the Global Financial Crisis, there's higher liquidity requirements, there's stronger capital ratios, things like that, and so banks don't want to be caught out with just having, say, 3% of cash as a percentage of deposits, or 5% of cash percentage of deposits. They want to have way more because you have to be able to meet just arbitrary bank runs, especially ever since March 2023, where at any given moment, even a healthy bank could face 10% of people who want their money back.
Jeff Snider: Doesn't that argue for a shortage? Because, what you're essentially saying, and you're right, I agree with you, the banks have enormous liquidity cushions because they're basically telling you they don't trust the Fed. Bank reserves are not useful as a form of liquidity. If they were, you wouldn't need the liquidity cushion. We would go back to the way it used to be before, where liquidity was created by the banking system itself, because not everything is settled in bank reserves. In fact, there was a time when most financial transactions were settled privately between banks, the old correspondence system, what's still left of it. So, the fact that banks feel they need to hold massive amounts of cash, as well as have constant access to massive amounts of on-the-run Treasuries, basically tells you they don't trust the system.
Lyn Alden: I think the thing is to separate one bank from all banks. And so, for example, that system worked on the premise that the system itself was stable and that any one bank or any small set of banks could get liquidity from other banks at any time. Whereas, when the system gets over-leveraged enough, like it was in 2007, which was the peak of leverage, private sector leverage, you have a situation where it's not just one bank that has a problem, it's that the entire banking system, far and wide, there's so many claims for dollars relative to dollars, relative to base dollars in the system, which are liabilities of the Fed, either in physical form or in bank reserve form. And so the whole system becomes such that if just a tiny, single digit percentage of people want to have physical cash or want to sell something for cash, even digital cash, they can't.
So, I think the key thing is the difference between just one bank needing liquidity, which there's all manner of ways to do it, versus the entire system is short liquidity because there's not enough bank reserves, there's not enough actual cash in the system. And back then, it was because you had bank reserves growing very, very slowly while claims on bank reserves -- so every deposit in a bank is basically a claim for a bank reserve, every debt instrument is a longer term claim for a bank reserve, and the number of those claims was growing exponentially to the tens of trillions, while the number of bank reserves was growing practically linearly, and it was hundreds of billions. And eventually, the ratio got so big that we haven't seen it since the 1930s, or since 1929, and it blew up. And we've kind of seen a similar thing more recently. It's the difference between system versus one bank.
Peter McCormack: All right, I know it's dark, but I do want to see a show of hands, who is completely following this to the extent they know who is correct? I do not believe you! There was like eight hands here, so I feel very fortunate we have you both here. Just from somebody who's not completely following this, does it matter who's right because we're still getting fucked by the system; I mean, does it actually matter? Does the root of the problems, the economic problems that we are seeing here in the US, where people have seen more than 10% inflation, in the UK I think we're still at 10% inflation, you look at other countries around the world 10%, 20%, 30% up to 100%, we all know there is a massive problem in the structure of the fiat economy, and we all know everybody is getting screwed and some people are getting more screwed than others, does why it's happening matter, or we could have you two duke it out, but really in the end, is it more important to know how we fix it? I'll start with you, Jeff.
Jeff Snider: Oh, it's always more important how we fix it. But it does matter what's wrong because we have to get from A to B. So even if you have the best solution in the --
Peter McCormack: A to B?
Jeff Snider: I know what B stands for.
Peter McCormack: We know what B stands for.
Jeff Snider: Yes. Isn't there a couple of lines --
Peter McCormack: It's from F to B.
Jeff Snider: It's what?
Peter McCormack: It's from F to B.
Jeff Snider: We still have to get there. In order to get there, you have to figure out where we are and what we're actually doing. So, in order to get from A, asshole system that we have now, to B, whatever that ends up being, we have to know something about the assholes.
Peter McCormack: Yeah.
Lyn Alden: I agree with that, and the one thing we've always agreed on is that the eurodollar system is absolutely fucked basically.
Peter McCormack: Lyn; language!
Jeff Snider: There's no argument there.
Peter McCormack: I've never heard you swear like this!
Lyn Alden: We've been on opposite sides of debates sometimes, but it's basically that's a common point where the details matter. Number one is if you're an investor, especially in traditional asset classes, and you want to know whether inflation or deflation's going to happen, there are obviously multiple factors. I mean, things ranging from, AI, for example, is a recent variable that we all have to consider, but money creation and what defines money is one of those key things. And so, for example, I've had good calls on markets, I've had bad calls on markets, but one of my highest conviction and most useful calls was this kind of stuff is going to be inflationary, and avoid bonds. And, 2022 was the worst year ever for bonds, basically, bond bulls have been devastated, and getting into hard assets has been a useful strategy during that money printing environment.
I mean, once it started to roll over, we had to make different calls. But that's where getting it right matters. If you're an investor, and you don't know if it's going to be higher inflation or deflation, that will affect the returns. If you should buy value stocks versus bonds, if you should buy Bitcoin versus bonds, if you should buy gold versus bonds, or some sort of combination thereof, and how to weight it, that's relevant. And then, yeah, number two, it's about finding the next system. And that's why, I mean, obviously, an unusually large percentage of my time is on the solution, the B.
Jeff Snider: Can I add one more thing here? Just because one part that's important, again, we agree on that, the eurodollar system is total bullshit. But the reason we need to focus still on that is because you need to know your enemy, you need to know who is going to resist changing a structural monetary framework. And the Eurodollar is not central banks, it's the large cartel of banks, and they're the ones that are the most vocal critics nowadays of cryptocurrency and digital currencies and Bitcoin. So, you have to know your enemy to a certain extent because they're going to fight tooth and nail to preserve their own monetary privilege.
Peter McCormack: Jeff, could you describe the kind of money that you think we need that would fix the system, like what would be a perfect money; what attributes would it have?
Jeff Snider: You mean something like a physical standard or…?
Peter McCormack: No, anything. What are the attributes of a good money?
Jeff Snider: I think just big picture terms, nothing specific here --
Peter McCormack: Nothing specific.
Jeff Snider: No, just big picture terms, you want a system that's able to dynamically match money supply and money demand, right, because those are dynamic forces that change all the time. And the way to best, most efficiently do that will lead to the best, most efficient economic outcomes, which is what we're really doing here because money is nothing more than a tool for the commercial system, or it's supposed to be, not a position of political power and privilege, which is what it's become. So, as any kind of system that fits the needs there, both of those requirements, where we have supply meeting demand without creating too many frictions, and doing so in a way that can change through time because the monetary system, the real economy is always constantly being rewritten, it also needs to be flexible enough to meet with the changing periods. So yes, I'm describing the eurodollar system, unfortunately, so obviously it's the same sort of attributes, it's just not run by a cartel of large banks.
Lyn Alden: Can I ask, so who here wants to hold money for which you don't know the supply of? Any takers?
Peter McCormack: Jeff, why is your hand not up?
Jeff Snider: Because why wouldn't what the supply is? I'm not arguing for the eurodollar, the Eurodollar sucks.
Lyn Alden: So, I guess the bigger point I'm trying to get to is that when you ask perfect money, what is perfect money or what is ideal money, you'll get very different answers from, say, the people who want to issue that money, or people who are academically inclined and systematically inclined and think, "If I were to design the system, what I would make it like?" It'd be dynamically adjusting… Whereas, if you're the user of the money, your answer is, I want the money that's going to appreciate over time, I know the supply, I know the rules, the rules are not going to be rug pulled on me, I want to be able to bring it anywhere in the world, I want nobody to be able to dilute it, I want nobody to be able to just take it from me, especially easily, just with a push of a button, and I want it to be fast, I want it to be secure.
So, you get actually very different answers to that question if you're looking at it from a user perspective. You hear, "A dynamically adjusting system" and users are like, "No, I don't want that, I just want to hold hard money". Whereas if you're a central banker, if you're a normal banker, if you're an academic, if you're a monetary historian, you're like, "Hey, we need this kind of system that's going to meet all these different requirements", and it just doesn't take off because users don't want that money. And I think that's where I go to the Austrian view that money is an emergent phenomenon. And even when you have top-down designs of money, like fiat currencies, it's not an accident that some of those monies are accepted in other countries and ones are not. So, there's a reason that the dollar is accepted more places than the yuan, there's a reason that the Nigerian currency is not accepted everywhere, there's a reason that certain currencies are accepted more often than others and it's because those are actually free market choices.
So for example, my family in Egypt, when they hold physical cash dollars, they're making a choice. In America we kind of have to use dollars, but when you're in Egypt, you could hold yuan, you could hold something else, you could hold Egyptian pounds, that's the easiest one to do, but they're making a decision to hold dollars, let alone, obviously, gold, Bitcoin, all these others. And so money, at its root, is really an emergent phenomenon, but that even includes attempts at top-down money creation.
Jeff Snider: But why are they choosing to hold dollars? That's the question, because dollars are usable. And dollars become usable and became usable, not because they're fixed or everybody knows their supply, but because they became widely accepted everywhere, because they were everywhere. And the only way they could be everywhere is because it was elastic.
Lyn Alden: I would say, ironically, it's because it was the most decentralised system they had. So for example, one of the features of the Federal Reserve is that it was this weird agreement to make it half public and half private. The President can't just call up the Head of the Central Bank and change the rules, there's actually a set of balances and it takes pretty extreme intervention to actually centralise it. And so, no country has perfect rule of law, but the United States has one of the better, more consistent rules of law. So China can rug pull you more easily than the United States can; in a broad sense, you're more likely to get rug pulled. And you have closed capital counts and things like that.
So, the combination of being the largest military power, largest economic power, biggest liquidity, and then some reasonable degree of rule of law and decentralisation, so that there's no one person that can just print a ton of money, the fiscal lever exists, the central bank lever exists, the commercial banking lever exists, and these are in this sort of delicate dance that has allowed it to maintain for decades. It's actually that rules-based system, even though the rules aren't as solid as something like Bitcoin, for example, there's some degree of rules to it, and that's partially what made it trust globally.
Jeff Snider: But, Lyn, you just said that as the eurodollar was being accepted, the eurodollars were being created all over the place. Nobody knew what the supply was, nobody knew what it was. In fact, to this day, nobody knows what it was. Yet, the eurodollar came to be the dominant form of currency anyway. And the reason is because I can go visit you in Australia and take a little piece of plastic out of my pocket, stick it into a computer and get goods and services with it. Because the Eurodollar is usable in lots and lots of places in lots and lots of ways. And you're right, the point about courts of law in particular, that's probably one of the foundational arguments for using the dollar to begin with. But by and large, it became acceptable because it became available.
So, if you don't have a currency that's available, it's not usable. And people will choose to use a medium that's accessible to them. And if it's not accessible, they can't use it whether they like it or not, or whether they know it or not.
Peter McCormack: I think you're actually right. I've experienced that traveling the world, and a lot of places will accept the dollar. But there is one currency that is accepted in every single country in the world from a mobile phone, and there's only one.
Jeff Snider: That's a smile, right?
Peter McCormack: It's a bitcoin. So for example, if you're in Iran, you can't use your plastic card there, it's not accepted.
Jeff Snider: But I'm talking more microgranular scale. Can I go buy a drink here with Bitcoin?
Peter McCormack: If they accept it, yeah.
Jeff Snider: If; there's too many ifs with Bitcoin currently. But that's the thing, the dollar system pervaded everything. It penetrated everywhere precisely because the banks were incentivised to do that.
Peter McCormack: But I don't disagree. I think the point I'm making is that we have this new emergent system, Bitcoin is growing. If they don't accept Bitcoin, I can have them accept it within about three minutes. No, but you can, you can teach it. The thing is, we didn't bring you here to stitch you up. You're one of the most popular guests we've had in the last two years; people love you. When we've made the shows with you, people are like, "Jeff's amazing". But the first time we had you on, which was in Austin?
Danny Knowles: It was here in Miami.
Peter McCormack: Was it here in Miami? Anyway, people said to us, "Jeff described his perfect money", and you basically described Bitcoin, you kind of described Bitcoin.
Jeff Snider: Except for that one part.
Peter McCormack: Which is the one part?
Jeff Snider: It needs to be widely available, that's the problem.
Peter McCormack: Okay, but how do you go from not widely available to widely available? I think the answer is patience.
Jeff Snider: I don't think it is. I think it needs to have some form of infrastructure, technical capability. Think about how the eurodollar came to be dominated. I mean, you had to have investments in technology. I mean, how can I use a credit card in a foreign country that somehow connects to my local bank and settles through multiple mechanisms? I know Bitcoin is a much more elegant solution to that.
Peter McCormack: No, but how long did that take to emerge?
Jeff Snider: Oh, a long time.
Peter McCormack: Okay, so that's what we're talking about, it's patience. That's the only difference.
Jeff Snider: Yeah, you still haven't solved the other problem. Go ahead.
Lyn Alden: You had a situation where after World War II especially, the largest economy in the world, basically untouched by the war, had all the gold, had the industrial prowess, was a trade surplus nation, was trying to rebuild Europe by flooding them with dollars; so you had this incredible foundation and network effect to launch this system from, and even then it already had a legacy stretching back to 1792 when the dollar was defined. You had this long build-up network effect in the United States, then you had all these wars, and then you had a launch pad from that very strong base.
When you look at something like Bitcoin, is Bitcoin more accepted or less accepted than ten years ago? The answer is more accepted. And I had this discussion with George Selgin on, I think it was David Lin, I forget what show it was, but I was talking with George Selgin, and it's like, in any given country, because it's kind of a local monopoly on the currency, unless it's a failed state, ten out of ten merchants will accept the local money. You have a very dense jurisdiction. But as soon as you go outside of that country, that acceptance fades rapidly for most currencies. Even the Norwegian currency is a strong currency, but if you try to find a vendor in New Jersey that's going to just accept physical Norwegian currency, it's almost none.
So, other than the dollar and to some extent the euro and a few others, they quickly lose saleability outside of their own jurisdiction. And then you think, which currencies are somewhat global; which ones are somewhat globally accepted? So one of them is the dollar, that's number one. It's got the entrenched network effect, the most liquidity, the biggest capital markets, rule of law, launched by the biggest economy, entrenched network effects, deals in the Middle East, everything that kind of fed the network effect and then it becomes self-sustaining. Another one would be gold. If you bring a gold coin with you, especially a sovereign gold coin which gives it some degree of authentication and easy verification, if you bring a gold coin, a gold eagle with you almost anywhere in the world, you can find a buyer without much slippage. You might not be able to go to a coffee shop and get a gold coin, but you can find someone within some degree of blocks that'll give you a reasonable amount of value for that gold coin. You can get it convertible pretty easily.
Euro's pretty good, silver's okay, and Bitcoin's already in the top ten. It might be number five or something, but at the bare minimum, it's in the top ten, and that's despite the fact that it's a 14-year-old currency. And so unlike the dollar or the euro, it doesn't have any sort of local monopoly where it has this very dense degree of acceptance. I mean, maybe now El Salvador is an exception. But you don't really have these dense areas of acceptance. Instead, it's a digital currency that you can bring in many places around the world, especially urban cities, and it's already a top ten currency by saleability, despite no monopoly, nobody enforcing it, and despite the fact that it's still very young and the trend is up.
Peter McCormack: All right, I'm going to see if I can get you to agree on something. I'm going to start with you, Jeff. Do we need and should we have central banks?
Jeff Snider: Of course not. We got along a long time without any in this country and it was some of the best times in economic history. Central banks are superfluous in every single way. Even just the idea, set aside any functional differences that we have, just the idea that we need a public utility to manage either the supply of money or the price of money is just stupid. I mean, it's just literally stupid. And the only reason we have it is not an economic argument so much as it is a political one. So in economic terms, we got along a long time. Even the eurodollar's best days were when the Fed did nothing. The Fed sat back and managed the federal funds rate, which wasn't all that important to begin with, and we created unparalleled prosperity, which the Fed then claimed credit for when it wasn't actually.
So, no, we don't need a central bank, we need a sensical monetary structure that if you give it the right rules and right parameters it will be self-contained and therefore doesn't really need any influence from outside forces.
Peter McCormack: Do you feel similar?
Lyn Alden: Yes, I don't think we need a central bank. One thing I would point out though is in the fiat currency system, you kind of do, because when the dollar was created, it was defined as a certain amount of silver. It was actually defined as a tri-metallic standard, there was gold, silver, and copper. And then when it shifted over to the fiat currency system, basically the dollar is defined as a liability of the Fed in one way or another, either physical form or bank reserve form. And so obviously Bitcoin, you don't need a central bank. A Bitcoin is a Bitcoin, it's backed up by energy from the miners and it's backed up by the nodes. But if you try to run a fiat currency system without a central bank, that's kind of a challenge.
I think when something did exist and no longer exists, you have to ask why, anywhere. So for example, people were on a gold standard, gold is harder money than the dollar. For most of commodity money history, harder monies kept replacing softer monies. So, you kind of went up the stack and you found gold was the hardest money. And then why was it beat by the dollar, and to some extent the British pound, which is technically a softer money? And one of the answers was speed.
So when they made the telecommunication systems in the second half of the 1800s, they laid the undersea cables, all these banks from around the world could communicate with each other, and gold was super-slow. You couldn't send around and verify it nearly as fast. And so you had that speed mismatch between transaction speed and settlement speed, and that allowed for centralisation. And then politics is one of those things that exists everywhere and it starts to encroach, and the more arbitrage it has, in this case they had this huge speed mismatch that they could arbitrage. And so of course it's political, but that politics happened literally in every country everywhere and we have to ask why. It's because you had the technological mismatch.
So you had basically a century and a half where it was actually hard to send liquid value long distances with any sort of trust between different countries and things like that. So, they were kind of just relying on whoever's the strongest country to run the ledger. So, it was the British pound in the first portion of that telecommunications era, and then it was the Federal Reserve, the dollar. And so they kind of shifted over to those systems with all their faults. And so, I think 2009 represented the first alternative that says, "Hey, you don't need to do that".
But it's not like when it's born, we can just all get it. It's not like Worldcoin, we can go around and scan everybody's eyeballs and give them all the currency. Instead, there's this emergent thing that's growing and the world has to slowly figure out what this is and decide whether or not they want to exchange other value for it. And I think, by extension, it just has to take a long time; it's an emergent money.
Jeff Snider: I think you guys asked the wrong question. It's not, do we need central banks; do we need banks? Because the larger issue here is, what is a bank? And as Lyn just pointed out, whether it's a central bank or bank, it's nothing more than a ledger keeper. So if we have a centralised ledger, like Bitcoin, or some form of blockchain, do we even actually need the banks? Because one thing that banks are supposed to provide as a service of efficiency is intermediation, which I think you probably -- I don't know if you agree with me or not, banks haven't done a very good job with intermediation these days. So, do we even need banks?
Peter McCormack: Well, no I mean there are bitcoiners we know of who survive without banks. They survive with a multisig wallet or a hardware wallet. We know that that exists already. I think there's certain infrastructure we can't get away from if you've got a mortgage, how do you pay a mortgage from a Bitcoin wallet? I'm sure somebody's figured it out. We perhaps need companies that provide --
Jeff Snider: But why can't you though? I mean, why wouldn't you be able to replicate everything that a bank does without the corporate structure of a bank?
Peter McCormack: I think you can; it's how much of the infrastructure is there at the moment? If you went back nine years, it would be very difficult to live entirely on Bitcoin, but now you can because there's Bitcoin debit cards or there's global liquidity. I mean, you can go to pretty much any country in the world now and exchange your Bitcoin locally for dollars or local currency. So, I think the trajectory is yes, we are heading there, we're just not there on every single part of life.
Lyn Alden: So, banks kind of historically serve two main functions. One was that they sped up money and made it more convenient. So for example, you're trying to bring gold along the Silk Road and you're worried about robbers and you're worried about the weight of the whole thing, you can deposit it with a bank and then get a claim for it and then bring that claim with you and it's assigned to you and it's lighter, and if it gets stolen you can go back and figure out a way to avoid it. Basically, it reduced the friction and the verification of moving gold around or other types of foundational money. So there was this increasing type of technology, this kind of proto-banking and then full banking to try to speed up the fact that the physical qualities of money were limited, so that's number one.
Then number two is the provision of credit. But you kind of got that bastard combination of fractional-reserve banking, where because they're both trying to fix a speed mismatch and they're offering credit, it becomes like a mutant form of it. And so I think in a world, let's say with a Bitcoin world, you don't need banks in their current form. I think it still helps to have financial services companies that can do collaborative custody, they may be able to do time deposit type of credit, so not fractional-reserve banking, but time match type of credit provision, short-term lending for things like that. There's still financial services, that's always going to be a case. It's even, to some extent, a scaling solution for very small amounts of Bitcoin or very vast forms of Bitcoin.
But the role of banks changes based on the underlying technology, and then hopefully becomes much less, because Bitcoin is automating and giving the power back to the user and then what's left for financial services companies to do is much less than the form they've been in.
Jeff Snider: Yeah, that's kind of the point here, is that the idea is that banks, or whatever their successor are, move from the centre of the system to the periphery, and they have to compete to actually perform useful roles in order to survive, whereas today they perform rent-seeking and political cover, which is the opposite of what we want. So a non-bank world should be far more efficient because it moves banks to where they should be and makes them actually perform a useful role.
Lyn Alden: There's something we agree on.
Jeff Snider: Yeah, exactly.
Peter McCormack: Yeah!
Jeff Snider: Don't you feel better? I feel better.
Peter McCormack: But with a non-bank world and a non-central bank world, where does the issuance of currency come from in a fair way, Jeff?
Jeff Snider: See, that's the A to B transition. Where does it come from?
Peter McCormack: It comes from the B.
Jeff Snider: The B!
Peter McCormack: All right, listen, obviously this is amazing as I expected. We're going to open the mic up.
Jeff Snider: There are other B-words too, you know!
Peter McCormack: I'm sure people have got some questions. Please queue up. Just again, please don't give us your life stories, just give us a good, quick question. Lots of people have got some, we want to get through as many as we can.
Audience member 1: Thanks, Peter. I'm a big fan of everybody on stage today. It seems to me that a lot of this discussion is around definitions and around the system. I was wondering if you could talk a little bit about the rules of the system. There are these multinational rules, like Basel III, that govern how banks treat deposits for the sake of lending against those deposits, which is in effect the rules of the game for the fractional-reserve system, and then every country implements their own versions of Basel III. Can you talk a little bit about the intentionality of the civil servants who are writing those rules; are they aware of the problem being caused by those rules; and do you view those rules as being relevant to the challenge that you're talking about, or do you think it's just a technical detail that's irrelevant and it's all central bank money printing?
Peter McCormack: Just very quickly, the people who are whispering and talking at the back, we can hear you very loudly. And so, just out of respect for these, shut the fuck up!
Lyn Alden: Do you want to take it or do you want me to take it?
Jeff Snider: I would defer.
Lyn Alden: So, I think there's a couple ways of looking at it. One is that regulators are usually fighting the last battle. So if a fire happened, they want to put out the fire, and they want to make sure that type of fire didn't happen again; whereas the problem is that usually the next fire comes from something they're not expecting. So, it's kind of like this current environment where they said, "Banks should hold more Treasuries", and now ironically Treasuries are what's giving them a problem, Treasuries and mortgage-backed securities.
But another thing that Basel III does, and similar types of regulation, is it's various ways to have banks and other financial institutions hold more government debt. So, as we've been in this environment of higher and higher sovereign debt-to-GDP ratios, they keep finding ways to have more types of pools of capital need to hold more government debt. So, it was with money markets, it's like they had to increase their allocation of Treasuries and all these things, there's all these regulatory overhauls, and the same with Basel III. It's like banks have to basically hold more Treasuries than they used to.
Jeff Snider: I think most of it is just, as Lyn said, we agree again, that bureaucrats realised that they were outgunned, but for a long time it didn't really matter, because everything seemed to be fine. Then 2008 happens and suddenly they've got to pretend they're doing something. So, they had created capital ratios way back in the 1980s, and there were other ratios that go back further than that, but either way, obviously the capital ratios were worthless so they came up with new ratios, not because the new ratios are effective because as we just saw, the LQ are absolutely meaningless too, but they have to sell the public the idea that we learned our lesson, we took a look at the banks and we fixed the problem. And they fixed the problem in a nonsensical way that doesn't actually impact anything, other than being able to tell the public we did something, because that's what bureaucrats do.
One of the reasons why the eurodollar system was so successful to begin with was to get out from under regulations, because there's always someplace else you can go. But politicians can't let the public know that, because then it would sound like they have absolutely no control and authority, and that's the last thing they want to do. So, they created the capital ratios, and all these banks failed with sterling capital ratios; they created the liquidity coverage ratios and other things in Basel 3.5, and then we just had a bunch of banks fail with terrific sterling, the liquidity coverage ratios; they're going to come out in the next several years, I think there's a Basel IV in the works now, they'll come out in the next several years with a Basel 4.5 that will come up with some other metric that will be completely horseshit too. But as long as they can tell the public, "We're on it", and the public has no clue what the hell they're doing, the shell game continues.
Peter McCormack: Lane Rettig. Lane Rettig, everybody!
Lane Rettig: This is epic, thank you guys so much. Jeff, you said that your form of perfect money would balance commercial supply and demand. I think it's a really useful, interesting definition, but it strikes me as something that maybe Bitcoin is not particularly good at in its current form. And so I'm wondering -- which obviously is a cause of volatility. How do we achieve that without fiat, without central banks? You alluded to a self-contained system; what does that mean?
Jeff Snider: Yeah, that's the real question here. I don't like the question to begin with because I think it's there is no such thing as perfect money.
Peter McCormack: Bullshit!
Jeff Snider: I think I think we have to have enough humility to understand that monetary systems come and go for a reason, and that our grandchildren, if we do this right, our great-grandchildren will be having these very same discussions. So there is no perfect money, so the answer is what is the least imperfect form of money? Maybe that's Bitcoin, I don't know. I happen to believe that it is not elastic enough, it's not useful enough in a wide enough area, but that maybe somebody will figure out a way to do it. I mean, isn't that what the side pools are for and various other, trying to make Bitcoin a little more elastic?
But as it becomes more usable and more acceptable in more places, then what Lyn says, that you build upon network effects and everything else. So, as long as there's some way for it to be able to continually match supply and demand and to be able, and this is what intermediation is so important, to be able to understand the legitimacy of demand and not just simply fund every stupid speculative idea, every subprime mortgage idea that there is, then it can become a self-contained system that can be sustainable that doesn't need a central bank or central authority. But it also has to be smart and flexible, which again requires some form of maintenance and upkeeping too.
Lyn Alden: I think a fundamental issue is that if a currency knows about the rest of the world, right, that opens questions. So, gold does not know what the world's doing. Gold is just gold, it's just atoms, it's very hard to mine, that's why no one can just create more of it rapidly, other than when we find a new continent or something like that. Sometimes you have bursts of new gold, but for the most part, we don't know how to make new gold rapidly. And because of the fact that gold doesn't know what's going on is partially why gold is so effective at money.
Whereas people in the Bitcoin space or adjacent spaces would know this is like the oracle problem, right; how do you gather information; how does a supposed ideal money know how much money needs to be in the system? And so the answer, over the past 150 years, has been central planners looking around and saying, "This is how much money needs to exist". Or, they don't even know how much money needs to exist, but once they actually find a liquidity crisis, they just throw money at it. So, the market kind of tells them when they need more money. But then of course, the cost of that is devaluation and central control.
So, the way I would phrase it is that fundamentally, if you have a self-referential system, something that just is, it doesn't have a mechanism, a central way to test the rest of the world and make a decision, then it's going to be inflexible money and that's why gold and that's why Bitcoin are useful. It's the fact that they don't have some sort of oracle that tries to go out and figure out how much money they think the world needs and adjust the supply accordingly. And you can always have a fluctuating amount of credit based on top of it. I mean, obviously, in a hard money system, you'd have less credit. Hopefully you wouldn't have fractional-reserve credit, but you can have time deposit credit and things like that, and that can ebb and flow based on what's happening in the economy, but the base layer itself, the base amount of units in the system don't change.
One thing you see in these fiat systems or central planning systems, even gold-based systems, when you have gold as the asset and dollars or pounds attached, pegged to the gold, is that all this credit creation happens and then when shit hits the fan, it's never credit that's allowed to fully contract down to the amount of base money; it's that they redefine what base money is. So they say, "Okay, instead of a dollar being worth 1/20th of an ounce of gold, we're going to make it 1/35th of an ounce of gold. And so the same amount of gold can now cover the same amount of dollars that it used to". And so that's always the system in place and when you have a really hard money, it makes it that that's impossible. And that's a good thing for the user perspective.
Peter McCormack: It's Ali, right?
Ali Hamam: Yes.
Peter McCormack: Ali Hamam from Tahinis?
Ali Hamam: Yes, that's right.
Peter McCormack: There you go!
Ali Hamam: Thank you guys. Jeff, Lyn, thank you guys for the debate. This was awesome. Jeff, when you were talking earlier about the characteristics of perfect money, you were talking about --
Jeff Snider: Least imperfect.
Ali Hamam: Yeah, well you were talking about elasticity as being one of those characteristics, and I'd love to get both of your opinions on why is that an important characteristic, as opposed to divisibility, to make money available all over the world?
Lyn Alden: I mean, I can go, but I think you're the one that has that more of a -- like, I don't view elasticity as a key part of money.
Jeff Snider: I know you don't, but I do, yes. And the reason is because divisibility, it's not something we're wired to accept. And it's sticky and it's harder to adjust through divisibility than it is through supply, so supply being a more useful mechanism to adjust given the dynamic world we live in. That's, I think, the overriding factor here, that the world is not static, and so a static form of money is going to require a constant level of adjustment. It's going to have to adjust one way or the other, and historically speaking, fixed money systems do two things. First thing is they lead to huge black markets, so you're always going to have quasi money floating around the edges of a fixed money system anyway. That's an ironclad rule of humanity. You put a constraint on somebody, somebody tomorrow's hired a lawyer to figure out a way to get around that constraint. That's always going to be the case. So you're never going to have a true fixed money system to begin with.
But even assuming that you could, you're asking the system to adjust through prices, and usually the system doesn't adjust through prices, it adjusts through activity. So, if you get into a deflationary period where the monetary system is not elastic enough to expand, then what you end up having is entrepreneurs have to fire all their workers because they don't have the funds to pay them. That's why deflation and depressions historically go together, and that's really where elasticity and the idea of a centralised elasticity came from, was trying to fix this problem in quasi-fixed systems.
Lyn Alden: I think it ultimately ties the problem of debt and that ultimately ties the problem of the speed mismatch between transactions and settlements. And so you have to ask the question, why can so much debt build up in the first place? And it's in large part because the underlying settlement medium, say gold back in the day, was slow and hard to verify, whereas dollars or pounds and things like that were fast. And so banks could get away with creating a lot more deposits relative to the gold and a lot more debts and claims, even compared to the amount of deposits; and when it all blows up, they re-peg the system.
So deflation normally is a good thing, we want prices to go down. We like the fact that electronics get cheaper over time. We like the fact that all these --
Jeff Snider: That's not monetary deflation, that's productive markets, that's different. You're right, we want prices to go down for that reason, not because there's not enough money.
Lyn Alden: Yes. But when you have that kind of long-term deflation, why do central banks fight against deflation so much? And the answer is because they operate in such a highly indebted system, which is only possible because they always bail that debt out. So, you have tons of debt in the system, and if you had a mortgage, and then crazy deflation happened, so your wage collapsed, price of everything else collapsed, but you still owe that mortgage, you'd be screwed. And that's the same true for corporate debt, that's the same true for government debt. Anyone who owes liabilities, especially a lot, generally does not want deflation of their wages and of goods and services and everything else, and that's what breaks the system.
So, when you have this kind of current system we've been in, this very high debt system, most people fear deflation, especially outside of certain niches; they fear widespread deflation. Whereas, if you did not have a highly indebted system, which I think you would have if you had a money that's both fast and hard so (1) it can't be diluted, and (2) it can be pulled around and verified very quickly when need be, it's very hard to build debt on top of that system. And when you have less debt, deflation is less of a problem.
Peter McCormack: So you're basically saying the people with the most debt are at most risk, and the people with the most debt is the government. And therefore, they're incentivised to create inflation because deflation is bad for them, whereas inflation is bad for everyone else.
Lyn Alden: Yeah.
Peter McCormack: I see that.
Jeff Snider: I think that this is the age-old question that monetarists and people who study money and banking have been talking about and arguing over for probably as long as there's been fractional lending and debt, which is, if we limit the amount of debt, do we limit the amount of economic growth that's attainable? And historically speaking, those two things correlate. Debt goes up, economic prosperity goes up. Whether we like it or not, those two things go together. And they have gone together in every instance or nearly every instance. So the question is by limiting --
Peter McCormack: At what cost?
Jeff Snider: -- that's the thing; is it worth it to limit the inevitable deflationary downfall to shave off economic growth on the upside? What would 2008 have looked like, or what would the world today look like if we didn't have a 2008, but we didn't have all the economic growth from the 1980s and 1990s forward? And I think that's really the way to structure the argument.
Peter McCormack: That's a fair question. Next up we have Natalie Smolenski, hello!
Natalie Smolenski: Hello, hi. Long time listener, first time caller. Thank you, wonderful, wonderful conversation. I particularly appreciated the point you made about the proliferation of the eurodollar as a function of the rule of law in the United States, and that serving as a kind of template for the enforcement of contracts which is every lender, creditor, debtor relationship. And this is where we really begin to get into the role of the state in backing the value of money.
So, one of the things that makes Bitcoin such a key innovation is that it has automated one of the functions of the sovereign of the state, and that is the sovereign violence involved in final settlement. So in ancient times, final settlement meant sending your cousins to beat up the cousins of the other guy who owed you money and to settle the debt. That function of routinised violence was then taken on by the state and enabled all sorts of tyrannies, because people, societies were willing to make that trade-off decision in order to not have to personally exert that kind of violence themselves for every economic transaction.
Now we have that violence baked in at the protocol level and so in effect, we've obviated the need for a whole category of sovereign violence. We have a rule-based order that is protocol-based that is fully global. And so what I would ask you is, does this replace the eurodollar system over time?
Peter McCormack: Natalie, do you want my seat here; do you want to take over?!
Natalie Smolenski: By the way, Lyn and I are talking about this Friday afternoon if you are all around!
Lyn Alden: So the short answer is, I think so. And I think we can kind of go through the three phases. So, gold was successful because it had rule of law, with law being nature; just the rule of how physics works, that the supply of gold had certain rules to it. It's not that humans decided, it just had rules. And then when gold wasn't fast enough, we went to fiat currencies. And which ones were successful? The ones that were tied to the largest economies, which generally were ones with rule of law. And that's why even other countries would accept that currency. And so, it's kind of like a struggle version of gold but faster, where you're not as rule of law as nature is, but you're close enough and it's workable and it's faster so it works.
Of course what Bitcoin is, is it takes that rule of law, puts it in a code and then gives it to anyone who wants to run it on their laptop to enforce. So, instead of being enforced by some central collection of powers, it's globally and widely distributed, and I think that it can solve a lot of things. And going back to why the euro-dollar market exists, there's a lot of reasons for it. But I think the two reasons why it's proliferated so much is (1) that it's the dollar, so the dollar devalues over time, and if you have a currency that devalues over time, especially if it devalues slowly, that's actually kind of the sweet spot; because if you have a currency that devalues quickly, no lender wants to lend in that currency.
If you have a currency that does not devalue, most borrowers don't want to borrow in it, other than maybe for short periods of time for high-impact things. But if you have a currency that devalues slowly, like a developed market fiat currency, then lenders want to lend in it because they can borrow it even cheaper, and borrowers want to borrow it to buy something harder or to do something with it. And so the combination of a gradually devaluing currency and then the opaqueness and the fact that you can keep lending more of this into existence has been a really rough combination. So opaqueness plus devaluing.
I think over time, as the liquidity of the Bitcoin Network grows, and as it's useful as a global settlement medium, and as all people in all these different countries can choose to allocate some of their monetary energy to that, rather than to dollars or eurodollars, I think that slowly over time displaces the system. Right now, there are people in developing countries that just literally will hold physical cash dollars as one of their key mechanisms of savings, and I think that that over time becomes increasingly unworkable and undesirable compared to holding Bitcoin as their long term. And it's been in this state where it's very volatile, because it's still very low allocated-to globally. But I think as you get more and more adoption and it becomes larger and more liquid and less volatile, more and more people -- that kind of fuels itself, because then more people view it as something reliable that they can hold. And so I think it slowly chokes out the eurodollar system, but it's not something that's going to happen overnight.
Peter McCormack: Okay, you get the final question again, but because you had it twice, you again have to keep it brief.
Audience member 2: Okay. My question is very brief, which is that -- so, I really enjoyed your discussion on not enough dollars, but too many dollar claims. I read this paper that claimed that if you just convert those claims to equity, so when you deposit it to a bank, you simply get shares of a mortgage-backed ETF, instead of fixed dollar claims, that'll fix everything, because if everything crashed, everybody's bank balance crashes, and there's no run on the bank. Would this system work; are there any problems with such an approach?
Jeff Snider: So, you're talking about converting deposits into essentially equity for the bank?
Audience member 2: Basically, yeah.
Jeff Snider: But then the equity would have to be transferable, right?
Audience member 2: Yes, it's liquid transferable equity. So imagine, instead of depositing into a bank, I just directly --
Jeff Snider: Isn't that the same situation as a depository now without FDIC insurance? Because you're still at risk of loss.
Audience member 2: Yes, but the loss is run-proof because if let's say mortgage-backed securities fall by 50%, I gain no benefit for being in line ahead of everyone else. Like everyone else, my portfolio drops 50%. So, you don't have situations where there's a liability and asset mismatch at the bank because the liabilities drop with the assets.
Jeff Snider: Yeah, but what happens when everybody wants to sell the equity? The equity portfolio is essentially worth 50% less, you still have the liquidity problem.
Peter McCormack: Yeah, I think that's a no.
Lyn Alden: Yeah, well, what he's describing is a bail-in essentially. I mean that happened in a couple of European contexts. It's one of the mechanisms they have in the near term to deal with a bank basically becoming insolvent. They say, "Okay, we can't pay everything back, but here's some devalued bank equity to make up for it", and so you own this mixture of claims of future dollars or future euros, and things like that. But ultimately at the end of the day, you still have a problem, which is you now own a basket of securities that is supposed to pay you dollars or euros in the future, and the question is, where do they get those dollars and euros from? There's still more claims than there are underlying units. And then, to his point, if everyone wants to sell, if people don't want to hold that equity, they don't want to hold that --
Jeff Snider: Nobody's going to hold.
Lyn Alden: And so when they sell it, the question is, who's got the dollars or who's got the euros to buy all those claims from? Bail-ins kind of work in this targeted sense where a swath of banks go bust, but it's still based on the premise that this underlying currency is used and accepted, and that they can then sell it for those claims.
Jeff Snider: If there's enough of it.
Lyn Alden: Yeah, but you can't do it on a broad scale.
Audience member 2: Yeah, I think I get what you mean now. Yeah, so it definitely doesn't work on a systems level scale?
Lyn Alden: Yeah.
Peter McCormack: Great. Okay, brilliant. So, Lyn Alden and Jeff Snider, thank you so much. Come on, louder, come on! That was an absolute pleasure. Danny Knowles, come on! I love this guy. Emma Firman, who organises everything for us, keeps us in check. Connor McCormack, running the cameras at the back. Austin, wherever Austin is.
Big shoutout to my sponsor, Iris Energy. We can't do any of this without sponsors. They pay for us to do all of this and they've been unbelievable to us. They've allowed us to do these events, to make more films. We're making four more films. We're off to Argentina in July to make a film on inflation; we're off to Lebanon, hopefully; we're off to Canada; we're off to so many places. So, big thanks to Iris Energy for doing that. Go and check them out. They're an unbelievable mining company, based on 100% renewable energy. I think some of them are here, so check them out. I have to give a massive shoutout and show my appreciation for them.
We're going to stay here until they kick us out, we're going to be drinking at the bar. We've got a real Bedford booth at the event, come down and say hello. We've got the two trophies we won this year, so come down and see them. And to everybody wearing something that's -- I've got all these Bedford things pointed at me. I live in a shit, like, little town called Bedford. No one would ever have heard of it, yet you come here and there's people wearing Bedford. I thank you so much, it means so much to me. I love you all. Come to the bar, we'll have a drink. See you all soon.
