{ "episodeId": "SLP235", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "stephan_livera": { "name": "Stephan Livera", "role": "guest", "tag": "STEPHAN" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 8.87, "text": "Hi and welcome to the Stephan Livera podcast. Today for episode two hundred and thirty-five, my guest is Neil Ferguson. He is the Milbank Family Senior Fellow at the Hoover Institution, Stanford University. He's also the author of fifteen books, including The Ascent of Money. Neil and I chat about Bitcoin as a store of value, the pandemic and impacts on how we use money. Money, his insights on debt around the world and in history, and also what's in our financial future. This show brought to you by swanbitcoin dot com, the best place to auto stack your Bitcoin in the US with incredibly easy setup and low fees. They've recently announced availability in New York, they are now available in all fifty US states. Swan's service is built around regular stacking, but if you want to wire money in for a special smash buy of Bitcoin, support is coming for this very Very soon also. They are Bitcoin only. They're focused on teaching you to self-custody, so you should send all your new coin of friends there, or if you are new to Bitcoin, this is a great choice for you. This is a company focused on helping customers stack Sats safely and easily. Go to swanbitcoin dot com to sign up. For those of you looking to secure your coins with multi-signature, Unchained Capital are building Bitcoin-native financial services using multi-signature vaults. So these are designed for ultra-secure long-term storage, and if you want a hand, if you want the white-glove treatment in setting it up, their team will teach you about multi-signature, they'll ship you two hardware wallets, they'll answer your questions, and deposit a thousand dollars of Bitcoin in your vault when you sign up for their vault concierge service, and if you use my code Livera, you get a discount. Unchained also offer an OTC desk for purchases fifty thousand dollars and higher, and their products are also great for those of you interested in using a self directed Bitcoin retirement account or if you're a company looking to move Bitcoin to treasury. So go and check them out, go to unchained dash capital dot com. This show also brought to you by Ciphersafe, producing the CipherWheel product. If you've got a Bitcoin hardware wallet and you're just using that paper seed, what would you do if your house went up on fire? Make sure you've got a metal backup. product like the Cypher wheel so that it is fireproof, waterproof, rustproof, petproof, and tamper evident. With the Cypher wheel, you get the wheel and some tiles, and you slide them in to backup the words of your Bitcoin seed. So make sure you or your loved ones have access to your bitcoins if an accident occurs. Go and order yours at cyphersafe dot io and use the code Livera for a discount. Neil, welcome to the show. My pleasure to be with you. So Niall, I, I see you have recently been commenting about Bitcoin, and you wrote an excellent, opinion piece as well. I'd love to start with a little bit of your background on, you know, what was your first impression of Bitcoin, and then how did that shift over time?" }, { "speaker": "stephan_livera", "time": "03:03", "start": 182.99, "text": "Well, Stephan, I, published a book entitled The Ascent of Money in, 2008, almost simultaneously With the publication of the original Bitcoin paper by Satoshi, and of course, that meant that the, there was no discussion of Bitcoin in, in the first edition of The Ascent of Money. a few years later it must have been, let's see now, in the, early 2000s, my then fifteen-year-old son said to me, \"Hey, Dad, there's this amazing thing called Bitcoin that you really need to get into, and we should buy some.\" Thinking back, this must have been two thousand four. No, that can't be right. It must have been later than that. It was maybe two thousand fourteen. Fourteen. Yeah. And I said, \"Oh, come on, Lachie, th-this, this isn't gonna work.\" I did a little bit of background reading and I said In a very kind of patronizing, professor dad way, there's never gonna be, a viable future for something like this because if it were to be successful, it would pose too big a threat to the state's monopoly on money, which has been maintained for most of the four millennia we've had money. So, this is, this isn't something that, that I wanna pay much attention to. Well, you can imagine the conversation that we were having three years later, four years later, in the big 2017 run-up in, in Bitcoin prices, and he was reminding me on a regular basis of the, big bills we'd left on the sidewalk or the bitcoins we'd left on the sidewalk. And at this, this point, I was beginning to learn some humility, as all middle-aged men should. I mean, if you're in your mid-fifties as I am, you better be listening to your teenage children and your, your, your twenty-something children on a whole range of issues. I mean, al-almost every issue, in fact, you need to take their view seriously. So I, I turned off o-over a new leaf at that point and embarked on a really quite serious attempt to understand Bitcoin and crypto more generally. I'd just moved from the East Coast at Harvard to the West Coast at, at Stanford at the Hoover Institution, so I was kind of well placed to educate myself better and spent a lot of the last three years, with people much better versed in crypto than I was, just learning really. Everybody should keep on learning and, and, and so when I came to revise The Ascent of Money to produce a tenth anniversary edition in two 2018, I had, realized how wrong I had been. And in that updated edition, two, there were two new chapters, which dealt with the post-financial crisis, world and with the rise of, of crypto and, and the, the transformation of money generally. And the conclusion that I came to, and this is now more than two years ago, was that Bitcoin was going to have Have a, a successful future. I disbelieve the negative view many people took in the aftermath of the 2017 bubble, if that's the right term. When people like Nouriel Roubini were predicting that Bitcoin and everything else would go to zero, I realized that was wrong and argued in the A Sense of Money second edition that actually Bitcoin would likely appreciate Because it had significant upside as a store of value, a new kind of digital asset, which in some ways resembled the appeal of gold to a, an investor. So my basic thought experiment in twenty eighteen was, if every millionaire in the world puts point two percent of his or her net worth into bitcoins, then you're really talking fifteen thousand dollars as a price, and if it's one percent, well, it's- A lot more. So I was kind of, from that point on, a Bitcoin bull and still am, and indeed what's happened this year has very much borne out that view. But credit where it's due, it was my son Lachlan, who is now twenty-one, who, who put me right and, continues to be a source of insight on, on a whole range of investment issues" }, { "speaker": "stephan", "time": "07:55", "start": 475.48, "text": "That's a really, really cool story, and I think it mirrors the story that many people have, that when first they, they hear about Bitcoin, they think, \"Oh, it's a scam, it'll never work, I don't trust this thing,\" and yet over time, it has grown and it's gone from zero to, call it a three hundred and fifty billion dollar market. And so, it, I think this, narrative as well has shifted now. More people are willing to call it a nascent store of value as opposed- Opposed to, let's call it, gold, which might be the blue chip, store of value for, for some people. so do you-- have you seen that narrative shift as well, even in the last year or two?" }, { "speaker": "stephan_livera", "time": "08:39", "start": 518.81, "text": "I think there's been a remarkable shift, this year in particular, a succession of eminent investors, Stan, Stan Druckenmiller, for example, have said, \"Oh, I get it now.\" others, Ray Dalio, have said, \"I don't get it, but I get that I don't get it.\" And I think there's been, in that sense, quite a, a shift in sentiment. There's also the, the institutional, adoption that you- You're, you're seeing, which I, I mentioned in my recent Bloomberg opinion piece, the PayPal and, and Stripe and others. So I think the, the process of individual, high net worth adoption and institutional adoption is really gathering speed. I think the pandemic, as in so much else, has, accelerated this process it's now a commonplace to say that what typically would have taken ten years has taken ten months in twenty twenty. I think it's true of Bitcoin just as it's true of a whole range of different, tech phenomena. People had to think a lot more seriously about a world in which old school modes of payment and indeed o-old school asset classes were taking a hammering. Would you rather have had value stocks in twenty twenty or bitcoins? It's a no-brainer. So I think, this, this has really been a noticeable feature of the year. And I think as a historian, this shouldn't surprise us, because, the most disastrous pandemic in all history, the Black- Black Death in the 1340s had a similar impact on the monetization of, the English and other West European economies, which in the period between the fall of the Roman Empire and the, advent of, of a recognizably modern Europe Had really become not quite cashless, but close to cashless, with feudal relationships based on barter and the payment in labor, as the dominant form. That was the essence really of feudalism. And the Black Death changed that, to a remarkable extent. It wasn't something I could go into in detail in the article, there wasn't space, but it's really a very important point about Western Europe in the mid-fourteenth century, that, that monetization is one of the real consequence sequences of the Black Death. So I think if a pandemic or any really big historical disruption, there's potentially an accelerant of, of, of monetary change. And, we had these innovations already, not only Bitcoin, but a whole range of other, forms of cryptocurrency, Ethereum, and we have the phenomenon of decentralized finance. All of this, I think, has been accelerated by the events of this year, and that's a good thing because from my vantage point There are a number of plausible monetary futures for the world. one of them is a world in which fiat currencies, the post- Bretton Woods currencies produced by central banks and banking systems are debased, and we've seen a remarkable expansion In the supply of dollars this year as a result of the policies that have been pursued in response to the pandemic. That's not a particularly appealing future if we imagine, higher inflation in a bunch of countries, potentially a weaker dollar The second and even more worrying future is one in which, Chinese central bank digital currency starts to become widely adopted, not only in the, second largest economy in the world, but in many of its trading partners. And that, and that's a system for monetary surveillance. The fundamental points of the way the PBOC is designing its central bank digital currency is that all transactions will be on a centralized database immediately accessible to the common- This party, that is definitely not a monetary future that I like the look of. The third monetary future is one in which, there are, a multiple, multiple forms of money coexisting And Bitcoin is one of these and perhaps, potentially, a very important one. I'm gonna say something that not everybody listening will agree with I don't think that Bitcoin is going to be, as it presently, exists, a means of payment that we use Directly, you're not gonna be, unless you really are, very different from me buying Starbucks espressos or lattes with Bitcoin. But Bitcoin is unquestionably working as a store of value and a, a digital asset. I called it a, an option on digital gold in the ascent of money. I quite like that phrase. I got it from my friend Matt McLennan, who runs First Eagle, and I think as, as such It has the potential, and here I'm gonna be a little speculative, to be a reserve asset, to be the basis of a, a system. the idea of a Bitcoin standard's not an original one, it's been discussed before But that's where this parallel with gold makes the most sense, because Bitcoin is something with finite supply in a world of technological abundance, 'cause everything else online is just infinitely re-re-replicable. I mean, Bitcoin is this potentially, unique scarce asset in a world of digital abundance, and you could imagine a situation in which We would want to have a significant portion, not only of wealth, but of reserves in this form, and that would then be the, like gold in the late nineteenth century, the way in which large scale transactions were cleared between nations or between large scale entities. but you and I would be buying our lattes with some other currency, but that currency might actually be connected, to Bitcoin. So that's a much more appealing monetary future than the other two. In my mind, not least because we get back to one of the characteristic features of, previous monetary eras an era in which transactions weren't all under the direct supervision of the state. I mean, it's true that the state had, for most of history, some kind of monopoly over money But a monopoly over coins doesn't allow you to trace every transaction, because cash transactions are by their nature anonymous. I think for people who are law abiding, there should be some, in a free society, some right to privacy, in our, in our payments. we, we shouldn't really be subject to a completely arbitrary surveillance of every transaction we carry out. So I'm increasingly attracted to the idea of a Western financial future, because I think that should be distinguished from the Chinese financial future, in which, there is not a completely libertarian paradise when we can do what we like, but a world in which, as in previous eras, we have some monetary autonomy, some financial privacy, provided we remain within, the law." }, { "speaker": "stephan", "time": "16:25", "start": 985.12, "text": "I, I think you made some really interesting points, and, certainly your point about scarcity in this world was very, Julian Simon inspired, right? It's very, it's this idea that anything that we really want, we can go and make more of it. So now we actually need to think of ways to forcefully or programmatically make our money scarce and have that as our actual reserve asset, and we can build layers up on top of that that are used in a more transactional, you know, day-to-day context. Commerce way, an example of that might be the Lightning Network, but certainly I think, most Bitcoiners, would probably agree with your assessment there that most of the, you know, longer term, day-to-day commerce will not be done on the Bitcoin blockchain, it will be on higher layers, and some of that may be, you know, Lightning Network, some of that may be through our bank, so our bank, our retail bank may help manage kind of those connections, but I think part of the revolution of Bitcoin is that now if you- You want to, you can be your own bank, and you can spin up your own little node and, run your own, lightning channels and do your own, kind of aspects of this. but I think to bring it back to what's really important, I think a really in-interesting concept, and I'd love to hear your thoughts on this, is, it's by Nick Szabo. He's one of the pioneers in this space, and he's spoken about this idea called deep safety as opposed to shallow safety. And so what he's trying to get You're just thinking shallow, oh, I want one asset that zigs while the other zags, and I just want kind of a diversification, and it's just numbers on the screen, and you know, that's one thing. But he's saying here, deep safety is more like a fundamental analysis of the underlying political and legal environment. And so the point that someone like Nick Szabo would make is that, real estate and gold have, you know, some level of safety based on local kind of security, but using Bitcoin in the trust-minimized way gives you another whole level of safety, and that potentially is why it makes sense to be the base of a new monetary system. I'm curious what your thoughts are on that idea. I have a lot of respect for" }, { "speaker": "stephan_livera", "time": "18:38", "start": 1117.63, "text": "Nick, but full disclosure, I, I haven't read the relevant, essay on that point, but I, I'll take your summary of it and try and work with it. I think the, the notion that you can get safety from diversification is quite central to most, modern ideas, theories about finance, but when the correlations go to one, diversification can't save you, and there have been a number of periods in the recent past when we've seen that, and diversification strategies have been remarkably poor. if you think back to what happened in March When the world had a really acute financial spasm, that was a moment when, you actually didn't get a whole lot of protection from a standard diversified portfolio, especially when there were wobbles around the treasury market. So I think there's an important point to be made here that diversification isn't really, it's not really safety in, in a meaningful sense. At least it, it can be much of the time. It's one of the arguments arguments I've made for holding Bitcoin, my basic view is that if, if Bitcoin behaves eccentrically relative to other assets, that is a good and desirable feature. But it's right to draw a distinction between that benefit of diversification and some deeper notion of, of financial security. Of course, in a world of, of states capable of confiscation, there's really no such thing as a, a truly secure asset. Remember that, the Roosevelt Administration was able to make it illegal for Americans to hold gold in nineteen thirty three, and I know it's hard to imagine, but there were literally FBI agents tracking down people with, holdings of gold above the legal minimum and prosecuting people who did that. Land is of course, a wonderful thing, to own. I, I'm a big believer in, the fact that they're not making any- Any more of it, and indeed, that there is a certain erosion of the available land, not least because of climate change. But you can have that confiscated too. I mean, think of all the regimes in the last hundred years that have expropriated landowners. most of the revolutions, the most obviously the revolutions led by Lenin and Mao, were associated with wholesale expropriation of landowners. If you want to be given a- sense of what that's like, read Frank Dikotter's amazing books, including his book on the, the 1949 revolution when landowners were, were just shot, for the crime of owning land. So Marxism, remember, it's an amazingly potent ideology that refuses to die, and, and its basic objective is to expropriate your land. So I'm not sure there's a, a state of the world in which we can say we, unassailably and impregnable own wealth, because in every form, it, it is capable of being confiscated in a revolutionary situation. And I think that's an important lesson of history, pa-part of what intrigues me Is that we as human beings struggle a bit to foresee disasters. It's partly because disasters don't happen that frequently, it-- to the, let's say, the average developed country, they happen pretty frequently in some less developed countries, but it's also because the incidence of disaster can be quite random or disasters can be governed by power laws, not normally distributed. So psychologically, we struggle a little bit To envisage them. And this is where Nassim Taleb's idea of a black swan is helpful. We just kind of are evolved and educated to expect normal distributions, and we struggle with power laws. But in fact, the big disasters in history, and this is a theme of my forthcoming book, Doom: The Politics of Catastrophe, is that most history is just disaster, punctuated equilibria, and disasters, whether you're talking about an earthquake, a volcanic eruption A wildfire, a pandemic, a war, a financial crisis, disasters are just very, very difficult to foresee, because none of them, no, none of the things I've just listed, is normally distributed. So I think in thinking about Bitcoin, you have to consider the world, a state of the world in which there is actually a significant level of, of political dislocation, in which a one-party totalitarian state is significantly expanding its power, and that is what is happening right now under Xi Jinping, and that therefore what Bitcoin offers isn't perfect security, but a form of security. I mean, as long- As long as the internet's working, and that's a pretty important, precondition, a-and you have mobility and have your key, then there is some form of, of wealth which is quite tricky to confiscate. Compared with the money in your bank. So that, that's, I think, an important reason why Bitcoin has a-attracted adherents among some of my South American friends. I've learnt a lot in recent years from Wences Casares, an, an Argentinian. I have a good friend also from Argentina, Pier Paolo Barbieri, who's taught me a lot about fintech. If you grew up in a country where overnight the currency could just be changed or the bank accounts could simply be seized or devalued Naturally, you find attractive the idea of money that isn't dependent on banks. And let's face it, most money in the world today is bank money, not central bank money, but bank money. and it, it exists, because of a strange evolution that, that began with fractional reserve banking And gave us the world today in which most countries have a relatively small number of very large banks that extract rents from people because we all need to have bank accounts to get paid, to pay our bills, all the rest of it. And the essence of banks is that they kind of charge, they charge their, their fees, they extract their rents because they can exploit informational asymmetries. And, and, and actually that doesn't need to be, that doesn't really need to be the basis for financial life Life in the twenty-first century. So that's what's exciting a bit about Bitcoin. Above all to me, it's exciting that you can have peer-to-peer transactions without third-party verification because you no longer have that third party extracting rents from the informational asymmetries. That, that is a very exciting phenomenon, and it doesn't really have any, any obvious precedent in history." }, { "speaker": "stephan", "time": "25:49", "start": 1549.31, "text": "Yeah, that's really fascinating, and, I'm also reminded, from your book, The Ascent of Money, you, you mention as well, I think, some of the work of Peruvian economist Hernando de Soto, and you were talking about how bureaucracy and the difficulty of establishing property title in places like South America, that can actually be why some of the poorer countries are poor, because they just don't have that same infrastructure. And so perhaps it's like, in a similar line of thinking, it's that Bitcoin is providing a new line of infrastructure that Store, their value and, in doing so, they can start to accumulate capital and that helps start that process of, society, or at least, speed that process of a society advancing and, and becoming more prosperous." }, { "speaker": "stephan_livera", "time": "26:34", "start": 1593.82, "text": "Hernando de Soto is a remarkable man who's, inspired me for many years. his mystery of capital made, made the point which I guess I'd seen with my own eyes that a significant proportion of the world's wealth is outside the financial system and therefore can't be used as collateral. And he wrote that before, we had even heard of Bitcoin. More recently, Hernando's been exploring ways in which blockchain can be the basis for easily titling the property of the poor, something that he's been working on in his native Peru, but has also looked at, in North Africa. Everybody listening to this should, should make a point of reading Hernando's work. He's a tremendous Mostly creative and, and unorthodox economic thinker. He's one of the few people who came up with a really good explanation for the Arab revolutions, the so-called Arab Spring, again looking at ways in which insecurity of property rights rendered the small business class of countries like Tunisia and Egypt revolutionary. so I do think Hernando's really one of the most interesting, thinkers in this whole area. And that ultimately what we're seeing in the twenty-first century is a revolution in financial inclusion, which is taking all kinds of different forms. The key point in a place like Peru, and it's also true in Argentina, it's, it's true actually in much of, of South America, is that really large proportions of the population are outside the financial system altogether. They don't have bank accounts. Similar things are true in Africa, and even, even more so. The combination of the advent- Smartphones, and the technology that you can, you can put on a smartphone is really changing that. And I think Bitcoin's part of that wider story where financial innovation happens online, lowers the barriers to entry, makes it possible for a working class, kid in a Buenos Aires slum to have an account, with an online, payment, site. And he can therefore enter the financial system which his, his mom and dad really couldn't do. So I do think that, that's part of-- that's what Bitcoin is part of. Now, to, to get to the point where you're actually able to, own a Bitcoin, is a stretch for most people in the slums of Buenos Aires. but I think what's happening in those countries, and especially in the most screwed up of countries like Venezuela Is that people who do have some wealth see Bitcoin as a really invaluable store of value that, it's very hard for a renegade state to, to get its hands on. And, and that's why, I think that's why Latin America is an important part of this story, 'cause there have been so many bad monetary experiments and so many arbitrary acts of confiscation that people instinctively know, \"Oh, this is a solution to a problem that we've had repeatedly,\" to say nothing of all the in- Inflation that there have been. I mean, part of the interesting thing about the world today, to take a step back, is that it's not a very inflationary world. And I remember when I first moved to, to California, I was struck by how many people pitching me crypto ideas or talking about Bitcoin would say, \"Uh, well, this is gonna be a terrific protection against inflation.\" And, I would say to them, \"Why are you worried about inflation? If everybody in the Fed is worried about deflation, and we haven't really...\" We've had an inflationary problem in the developed world since the 1970s, and so you're kind of solving a problem that seems kind of like last generations. And I, I think that's, that's been one of the little headwinds that, that Bitcoin has encountered in the northern hemisphere, that, that the argument you need to protect yourself from inflation doesn't actually resonate. Certainly with anybody much younger than me, I remember double digit inflation in the UK in the 1970s, but I'm quite old. And the first, my first ever contribution to literature was a letter to the Glasgow Herald complaining about the price of school shoes because I couldn't believe how much more they cost each year, and my mother had to go buy them 'cause my feet kept growing. It was actually my introduction to the problem of inflation at the age of ten. But for most people your age, there just hasn't been an encounter with double digit inflation unless they have lived, somewhere like, Argentina or Brazil, or in an African country. The most-- the few hyperinflation episodes we've seen in Zimbabwe and in, in Venezuela are really conspicuous by, their low number. So I think part of what we've forgotten about is what real monetary instability looks like, because in the developed world, it's, it's largely- Faded from memory, and the problem of the last twenty years has actually been avoiding deflation rather than worrying about inflation." }, { "speaker": "stephan", "time": "31:39", "start": 1899.34, "text": "Back to the show in a moment. Knox is a Bitcoin custodian dedicated to ensuring their insurance protection covers the full value of their customers' assets. For example, suppose a fiduciary wants to hold two hundred and fifty million dollars of Bitcoin with Knox, Knox will seek to obtain two hundred and fifty million dollars of insurance dedicated exclusively to that account and adjustable to volatility, no fractional coverage. Or narrow scope insurance for what it's worth, a tool to transfer risk. If you are a Bitcoin company, investment fund, trust, or family office, check out Knox for your insured custody. That website is knoxcustody dot com. And finally, Lend at HodlHodl is a global Bitcoin backed lending platform that allows you to lend and borrow anonymously on your own terms. HodlHodl offers a peer to peer lending solution, ensuring a secure and transparent collateral storage system by providing a unique multi- Multi-signature escrow for each deal. This is a way to grow your savings and earn attractive returns on your investment. So if you have any stablecoins lying around, create your offers and earn interest by lending on Lend at HodlHodl, or if you are a bitcointer and you need some liquidity, you can borrow stablecoins and keep on hodling. With HodlHodl's Lend platform, you set your own terms and put up offers depending on how long you want to borrow or lend and interest rates. Go and check it out at Lend dot hodlhold" }, { "speaker": "stephan", "time": "33:00", "start": 1979.87, "text": "It may, it may well be that, certain nations, as you mentioned, certain South American nations, they see the anti-inflation case much more clearly than we do in the Western world, right? Me, me here in Australia, people in the US, the UK, they may not feel it as often unless they're more acutely aware of these kinds of things. And I think, this is another point that I've seen you mention as well, which is that just the general level of financial literacy isn't that great, and so I think it's just that most people- You know, wouldn't like if you talk to the random, you know, guy on the street, lady on the street, they may not really understand, you know, the concept of, they might not be thinking deeply about, \"Oh, what's my real rate of return? What's my return after inflation?\" and if, if you were to ask sort of basic financial questions, they may not necessarily get those right. And perhaps that's just part of the journey. I'm also interested to get your thoughts around, just in a broader macro sense, where, where Or going into more debt. And what, what does that mean from a, are there historical insights there around the typical things that happen when governments reach a certain level of debt, and what does that mean for the currencies? An example might be that, people are less inclined to borrow from, or rather to lend to that currency because they have less confidence that they won't inflate their way out of it." }, { "speaker": "stephan_livera", "time": "34:27", "start": 2067.32, "text": "Well, this is a very live question, because we've seen an enormous increase in public debt this year, even larger actually than the increase that followed the financial crisis of two thousand eight, two thousand nine. The trajectory of the US federal debt is, looking more and more like that of World War II, and it's breaking through the one hundred percent of GDP ceiling and, and going rapidly upwards, towards a hundred and fifty percent. Now, most economists, certainly, the mainstream economists, at the, Harvard, MIT kind of institution Would say to you, it's not a problem. So Larry Summers and Jason Furman just published a paper this week saying there's a new paradigm in town because of secular stagnation, interest rates are gonna be very low for a long time, and therefore the government has considerable latitude to run up a large stock of debt. No downside risk here. Olivier Blanchard has, has essentially said the same. This is the new consensus amongst, the mainstream Keynesian influenced economists, and I think it will influence, the Biden administration as it thinks about its options, starting next year. Now, you've got to be a little careful taking on Larry Summers, it would be significantly easier to take on, charging rhinoceros because there's no more competitive, and powerful intellect, in economics than, than Larry. And I think one of the lessons of the post-financial crisis period was it's a smart move, to be on Larry's side, because Larry's argument from twenty fourteen was, \"We're in secular stagnation. You don't need to be worried about inflation. Interest rates aren't about to normalize, and it was a mistake to dial back the fiscal stimulus in the Obama administration, and it's a mistake for the Fed to try to normalize rates.\" And Larry won those arguments. And those who took the other side, and I came- Originally did and said, \"Oh, idea, quantitative easing is going to generate some inflationary pressure.\" We were wrong. So that makes me very cautious, because I think I don't wanna get back into those Bitter battles over austerity, which I think ultimately, were, were won by the secular stagnation school. However, and this is a big however, the aftermath of a pandemic is quite different from the aftermath of a financial crisis. The reason that the financial crisis had this long hangover was that it was about fun-- some, some very fundamental things like bank capitalization The inadequate capitalization of American banks was a major reason why it was a slow, a slow process to get, the economy back to full employment, and it turned out that just as the Keynesians had argued, you needed to do additional fiscal stimulus. Of course, when Trump did it, or when Mitch McConnell did it, when the Republicans did it with their tax cuts, the Keynesians didn't cheer because it was the wrong kind of stimulus politically. but oddly enough, Trump was the Keynesian Candid in 2016, and the Republicans did fiscal stimulus, it was just that they did it through tax cuts, rather than, increased expenditure on a whole range of public works. So here we are in 2020, and we've just been through this high-speed depression where the events of ten years were compressed into ten months. the economy had recovered, but as I remember predicting earlier in the year, back in April, it was like, a- Giant tortoises or a reverse square root where it kind of went down very steeply and then it came back up the tortoise's neck, but then it got to the tortoise's head, which was some way below where the tortoise's shell was. And that's because as long as we've got COVID-19, there is about five percent or maybe more of GDP that we just can't bring back online because there's a whole bunch of service sectors that can't function. and whether it's adaptation by people or rules issued by state governments The economy is, is down there on the tortoise's head. It can't get back up to where it was on the back of the shell at the beginning of this year. But vaccines are coming with high efficacy and they're gonna be distributed pretty rapidly, and I think many economists underestimate how rapidly we will therefore bounce back More rapidly than we did after two thousand eight, two thousand nine. American households have probably about a trillion dollars of forced saving ready to spend, and they're itching to spend it. The idea that the savings rate's gonna remain very elevated through next year after we've got vaccinated and we can get back to restaurants and bars and cruise liners and crowded planes and parties, all those things that people are missing I think it's wrong. So, imagine the following scenario. We bounce back faster than expected next year. By the summer, things are really frothy because everybody's enjoying the return to normality. There are some supply constraints left over from the disruptions of the lockdowns. I don't wouldn't be wholly surprised if inflation surprised the Fed a little bit to the upside above the two percent target. Now, the Fed has said It's relaxed about overshooting, it wants to overshoot, sure, and I can get the, rationale for that. But remember, there are these spectators called the bond market looking on and asking themselves, \"Are they really sure they know what they're doing?\" There are people like me who read Alan Meltzer's History of the Federal Reserve many years ago, the late lamented Alan Meltzer, and we remember what the mistakes of the late sixties and seventies were, where essentially the central bank, the Fed and other central banks around the world were were too passive in the face of changing inflation expectations and fiscal imbalances. So I put it to you that there is a non-trivial probability that things do surprise, in terms of inflation, inflation expectations, and that the bond market reacts to that. You don't need a significant move in rates To make the debt burdens of the developed and developing world suddenly quite scary, it's all about the debt service. I pointed this out twenty years ago in a book called The Cash Nexus. The debt GDP ratio is not really a meaningful number. I mean, essentially you're looking at a stock relative to a flow. What really matters is this Are your debt service payments, are they actually sustainable relative to your growth rate? And if not, then you're in what's known as nasty fiscal arithmetic very quickly. So that I think is the key issue. What if secular stagnation? Turns out to have been true after the financial crisis, but not after the pandemic. Then I think the central banks of the world are gonna be in a very nerve-wracking game of chicken with bond investors. And although the Fed has been buying every new bond that the Treasury has issued this year, pretty much If you imagine the situation a year from now, I think the credibility, credibility of the Fed could be on the line if there is a significant exit by foreign investors from dollar-denominated bonds because people look at the numbers and they look at inflation and they think, \"Oh dear, it's the 1970s and Joe Biden is Jimmy Carter.\" I mean, that's, again, not a kind of high probability scenario, but it's not a zero percent probability scenario either." }, { "speaker": "stephan", "time": "42:35", "start": 2555.29, "text": "That's a big, however, but, a big one I wanted to get into with, you were mentioning around bonds and interest rates. So I think it'll be interesting to get your views on where we are in terms of interest rates, you know, today in twenty twenty, they're obviously very low. How does that compare historically, and what other times in history can-- would interest rates have gone this low? it, it doesn't not seem like a bit of an aberration that we've got almost zero percent rates and- if you consider from a real perspective, people are earning negative, because of inflation." }, { "speaker": "stephan_livera", "time": "43:11", "start": 2590.68, "text": "Right. So the nominal rates are very unusual, the real rates not so much. Let me take a step back. My student Paul Schmeltzing did, an amazing doctoral dissertation at Harvard. It's been partly published, by the Bank of England in a couple of working papers. There'll be a book soon. Now, what he shows is by going all the way back to the 1200s and looking at, at interest rates from a whole variety of different debt instruments There has been super secular stagnation in that nominal rates have trended down century after century, since even before the Black Death, and therefore our present nominal rates are very remarkable in history. It's hard to find periods when nominal rates were this low. In fact, it's pretty much impossible. And, and so that, that is one of those rare occasions when the economic historian can say unprecedented. But the real- Real rate story isn't so straightforward because in fact there have been lots of periods in history when real rates were negative. That, that, for example, happened in the 1970s, and it was one of the reasons investors, in bonds, had a torrid time in that decade. So I think the nominal rate story is remarkable, the real rate story not so much. so I-- in other words, a relatively small amount of inflation at the moment. Can get you negative rates 'cause the nominal rates are so, are so low, and it's the real rates that matter in the end to an investor who's thinking rationally about, about returns. And that, I, I guess, is another reason to think that there'll be some pretty nervous, trigger happy, bond vigilantes if inflation does, start to surge at any point. And that, that I think is the, the great unknown. We've seen a little bit of life in inflation expectations ever since the vaccine breakthrough news came. But I think what really, for my money, matters is where we'll be by the summer of next year. given that, as I said, a vaccine that works is a form of stimulus more powerful than anything in the Keynesian playbook, because it is a, a promise to consumers that they can go and do stuff that they've been prohibited from doing for the better part of a year. And the analogy here that I quite like is with the aftermath of a war. You know, when peace is declared, there typically is, a little boom. That was certainly true, af- After World War Two in the, in the United States, when control started to be removed, you saw a great surge in consumer spending because people had really been forced to save. I think this is, is one of the ways in which COVID-19 is a bit like a war. And when, you know, Moderna and Biotech come along and say, \"We've got a vaccine,\" that's a-- that's like saying peace. So it's not so much VE Day or VJ Day, it's sort of V-COVID, Day. A victory over COVID, and I think people will respond to that in, in a way which will be exuberant, to use a word that, has, has done its, has, has done the rounds in, in modern financial history. As I said, we can't be certain. It could be, after all, that there are problems with the vaccines that we haven't foreseen, and that would be enormously dispiriting and, and depressing to people. it could be that, in the course of next year, some- Some new form of disaster arises that we didn't quite think about, because we're always surprised. We're always looking at the last disaster, expecting to repeat itself, and then along comes some new form of disaster. But if everything else is equal and people can spend a trillion dollars in bars, in restaurants, on vacations, et cetera, in a mood of it's over, I think we could see quite a, quite a frothy middle of twenty twenty-one, and that will be the moment that, that the Fed is tested and it'll- will most likely be tested because the dollar will slide, and foreign investors will, will want to exit US-denominated, US dollar-denominated bonds in preference for, say, euro-denominated bonds, or for that matter, even RMB-denominated bonds, because, there will just be more attractive, real returns in, in those instruments." }, { "speaker": "stephan", "time": "47:44", "start": 2863.52, "text": "Right, and, also wanted to get your thoughts around, the concept of financial repression, right? So if, if governments are in this very high debt situation and they essentially don't want to let interest rates rise, do we risk seeing that kind of Japanification in other countries around the world that simply don't want to let the rates rise, so they just keep everyone in that sort of low-growth sort of environment?" }, { "speaker": "stephan_livera", "time": "48:13", "start": 2892.71, "text": "I certainly think that Japan is a little bit of an experimental laboratory for all that we're discussing, because in Japan, in the wake of its, financial crisis at the end of the 1980s, there was a great surge in, in government debt, far, above the levels in other countries. at the same time, Japan had the, the extreme case of the aging population, and, it has spent Decades trying to, solve the, the problem, of very low inflation expectations, very low inflation, and, and very low growth. And I suppose when I look at Europe, I, I think to myself, that's kind of the future for Germany, because it will be very difficult with the rising debt of the eurozone, the aging population, and what I- I think will be quite low growth to avoid being a version of Japan. I don't think it's necessarily the future of the United States, because the United States has fired bazookas, in a way that Japan never did. I mean, the bazookas fired back in the spring in terms of the, the level of government debt issued and the expansion of the, the Fed balance sheet, these are really big, big, big bazookas. And the key issue here is that when, life returns to normal I think that both consumers and banks will be quite eager to expand, and so I don't think it'll feel at all like post-crisis Japan and the US, next year. If it, if it feels like that anywhere, it'll be, it'll be actually in, in, in Germany, and, and in Japan itself." }, { "speaker": "stephan", "time": "50:10", "start": 3010.14, "text": "Yeah. I guess we're sort of coming to the end of our time, I wanted to just kind of take a step back and look a little bit further into the future. And let's imagine this idea that, you know, Bitcoin does become seen more like a reserve asset, right? So people aren't necessarily doing day-to-day stuff with it. What kind of a financial system, what kind of a, you know, do you see it being, like a credit system or an equity sort of style of system if you had to kind of project out maybe ten or fifteen years, if you Imagining what it might look like. Do you have any ideas what that could look like?" }, { "speaker": "stephan_livera", "time": "50:44", "start": 3044.37, "text": "I think that we'll spend a lot less time talking about banks in the financial future. And there'll be a kind of platform-based system for buying and selling financial services. I think that seems like a, a plausible future. we'll therefore see a significant, compression of the fees that financial services, companies can, can charge. and there'll be a decentralization of the system, in a whole range of different ways. So that, it will look, I think, radically different ten years and twenty years from now. One of the points I made when I was updating the ascent of money was that not much actually changed between two thousand and two thousand eighteen. We spent those ten years putting patches on the system to make sure it didn't fall apart. But my prediction was that the next ten years would see a financial revolution propelled by technology, and that financial revolution would do for familiar institutions such as banks what the technological revolution in e-commerce is currently doing to department stores. It will render a whole structure of finance, obsolete or at least obsolescent. I think most of us will, be able to conduct, our daily financial transactions on our smart- phones with a variety of apps. I think the competition, to allow payments to be done at low cost will be such that I won't no longer be, fleeced every time I need to send remittances to my wife's family, in Kenya and Somalia. And I think the whole remittances business will cease to be the, the nasty racket that it is, frictionless and low cost payments, across borders will suddenly be a, a reality, which will be a great boon For the, poorer, poorer proportion of humanity, I must say, because if you, if you look at the fees that are charged for typically relatively small transactions across borders, they're absolutely extortionate. They are usury in the modern world. I think that it'll be a, a different world in terms, of the ways in which, we finance new ventures. and this, I think, is a, a thing that people struggle a bit with. Because- Because they're so pre-programmed to think in terms of, of equity finance and the IPO is the culmination of your career, when you sell securities, through public markets. I'm not sure that that will necessarily be the dominant mo-mode of, of financial, capitalism by the time we get to twenty thirty, because there will actually be simpler ways, of raising money for, for operations. And I sense that the e-era of private equity The, the era of the, the asset manager was, is passing, because, ultimately it will be possible to, to manage a portfolio with technology, and not pay the kind of fees and, and, and rents that have been characteristic of, of the last, of the last twenty or thirty years. Bitcoin's future, which is really what we, should focus on in our final minutes, is to me the great unknown because it's- In the hands of financial regulators. It's ultimately up to, I think, to the US Treasury and the US Federal Reserve whether the United States is creative about the financial future or conservative. It's been conservative for years. Washington's attitude has been for the last twenty years, \"We love SWIFT, we love payments, between banks, with this cranky, cranky, cranky, clanky, clunky, what's the word I'm looking for? Clunky, technology dating back to the nineteen seventy-s It is, 'cause it allows us to do financial sanctions, and financial sanctions are the US superpower so much easier than sending the eighty-second Airborne. So please, can we leave things as they are? That's not really a viable strategy. It's an opportunity for China to build an alternative payments architecture. I don't think it is smart to let that happen. The US, if it's smart, is going to use Bitcoin, a successful, proven blockchain-based technology for peer-to-peer payments, as part of its plan for an alternative financial architecture that is decentralized, that, allows, that kind of peer-to-peer payment to happen. With minimal state surveillance, and therefore creates an alternative to China's centralized artificial intelligence based one party rule panopticon, essentially the totalitarian dream, no human action outside the surveillance of the party. We've really got to offer people something better than that, and I don't think the answer is, \"We'll do the surveillance through Facebook, don't worry, Zuck is a good guy.\" We, we need something that is more Authentically American. Remember, the American system of banking was designed from the outset to be decentralized and to guarantee significant privacy to the individual. The whole point of the United States is the liberty of the individual. And what's exciting about Bitcoin is it kind of fits into that model of American decentralized and relatively state-free finance. So the argument that I would make to the incoming bi- The Biden administration is, for heaven's sake, don't feel that you have to replicate the, the People's Bank of China playbook and build a digital central bank currency for the United States. That, that's like turning Chinese. Let's think about what's already working, what the United States has been good at, which is building cryptocurrency as a, as a new kind of, of money, and let's, let's make that part of our system. And if ultimately, Bitcoin becomes Comes a reserve asset, which will take time, with its price volatility obviously diminishing over time, then that's actually quite an exciting prospect, because it makes, to my mind, more sense to have, at the root of the system, a, a, a unit, of account that can't be debased. I mean, why not? And we, we used gold for the better part of a century in the United States to provide that kind of anchor. We've been drifting Seeing anchorless since 1971, we've had one bout of inflation and a near bout of deflation. I don't think one could look back and say, \"The fiat currency is awesome, let's keep it going.\" I think there's an opportunity to come up with something better, and, and we don't need to reinvent it because it's been around now, for eleven successful years, and that's what for me is so exciting about, about Bitcoin and why my then fifteen-year-old, now twenty-one-year-old son, Lachlan, was Right, and I was wrong, and I'm still old, not so old that I can't, I can't learn a new trick." }, { "speaker": "stephan", "time": "57:59", "start": 3478.63, "text": "That was a phenomenal, Neil. finally, just for listeners who would like to follow you online, where is the best place for them to find you and follow you online?" }, { "speaker": "stephan_livera", "time": "58:09", "start": 3488.86, "text": "Well, I, I was once upon a time bullied into using Twitter, by my publisher. I kind of hate Twitter, as a friend of mine once observed, it's like, you know, the biggest urinal wall in history. but used carefully, it's not a bad way to follow writers. So I'm on, on Twitter, on Twitter at nfergus. I have a website, which is just, as you might predict, nealferguson dot com, where you can find all my journalism. I write every two weeks for Bloomberg Opinion, a rather lengthy column. The most recent one was about Bitcoin, and it just came out, a little less than a week ago. And I have a book, as I mentioned, Doom, coming out, which will be my sixteenth book, published at the end of April, next year. So there are lots of ways you can, you can follow my stuff, and if- If you like TV more than any of the, previously mentioned media, I did a PBS series called Net World back at the beginning of this year, which, not, not wrongly, pointed out some of the dangers of a highly networked world. I think that's still available to watch via PBS." }, { "speaker": "stephan", "time": "59:23", "start": 3563.09, "text": "Fantastic. So listeners, I'll put Niall's links in the show notes. And Niall, I've really enjoyed chatting with you. It's been, really, truly interesting conversation. Thank you for joining me." }, { "speaker": "stephan_livera", "time": "59:33", "start": 3572.83, "text": "Thank you, Stephan. It's been a pleasure." }, { "speaker": "stephan", "time": "59:35", "start": 3574.91, "text": "Show notes are available at stephanlivera dot com slash two three five for this episode and make sure you share the show with your friends and family. Thanks, and I'll see you in the citadels." } ] }