{ "episodeId": "SLP247", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "luke_gromen": { "name": "Luke Gromen", "role": "guest", "tag": "LUKE" } }, "segments": [ { "speaker": "stephan", "time": "00:09", "start": 9.23, "text": "Hi, you're listening to Stephan Livera podcast episode two hundred and forty-seven. Today my guest is Luke Gromen. He's the founder of Forest for the Trees, and we talk about a range of things, Bitcoin as store of value versus Bitcoin as the medium of exchange, and also we explore this question around whether Bitcoin is recreating the Hunger Games. This show brought to you by Swan Bitcoin. This is the fastest way from zero to Bitcoin. They've got a really easy sign up, they have no altcoins, they are really cheap, they're available in all states in the US. Swan Bitcoin allows you to create a recurring purchase plan like a hundred dollars a week or twenty dollars a day, and you can also make one time buys. 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It's also got a website link for recovery to help you or your heirs in recovering the coins on Electrum, so it really adds that value of helping you recover in practice. Go and get yours at ciphersafe dot io and use the code livera for a discount. Luke, welcome to the show." }, { "speaker": "luke_gromen", "time": "02:50", "start": 169.87, "text": "Glad to be here. Thanks for having me on, Stefan." }, { "speaker": "stephan", "time": "02:51", "start": 171.47, "text": "So Luke, we, you've been chatting a bit about Bitcoin recently and thought it'd be great to have a chat with you, but first, could you tell us a little" }, { "speaker": "luke_gromen", "time": "03:02", "start": 181.66, "text": "Sure. So by way of background, I spent, almost twenty years, on the sell side in investment research and investments, equity sales, a couple different regional brokerage firms in the Midwestern United States. We were doing very bottoms up in the weeds type of fundamental research, pioneers, in both of those, at both of those firms. At both of those firms, I had a role where I was one of the founding editors of a weekly product that we put together that married both our deep fundamental work with macro and thematic work. I was doing on my own, and both products ended up being very popular with our client base, and as we went into the two thousand eight timeframe, and then in the aftermath of it, in particular, where the world was becoming increasingly macro and central bank driven, I was spending more of my time doing that. By twenty thirteen, I was looking to do macro full time, at a conversation with my partners to talk about me doing that, and from a marketing standpoint, we just couldn't quite figure out how to position a macro product, in the way I was looking to do it with what we were In terms of that deep in the weeds, bottoms up fundamental research. So we decided the best thing to do is part ways amicably, and I hung out my own shingle as FFTT, which stands for Forced for the Trees, and in, in early twenty fourteen. What we do is aggregate a large amount of publicly available data from a whole disparate array of resources and trying to identify developing economic bottlenecks and, and because it's been my experience throughout my career over the last twenty five years now that, excess investment returns accrue to the Those areas set to either benefit from or be hurt by economic bottlenecks. And so we're just looking for things that are, that are coming to a head, whether that's things like the housing bubble in '08, or whether it is tech bubble, or whether it is the benefits where something we discussed a lot last year, where the Fed was going to have to step in and increase their balance sheet in a big way, and that implied positive things for certain asset classes. those types of things are what we're looking for. So we've been, at it for seven years" }, { "speaker": "stephan", "time": "04:59", "start": 298.56, "text": "and As you say, looking at the forest for the trees. So where did Bitcoin come into it for you, and how did you come across it, and how did you do your own process of learning about it?" }, { "speaker": "luke_gromen", "time": "05:11", "start": 310.69, "text": "So where Bitcoin came in for me was really, it was a process. It started in two thousand and eight for me, when I was very well positioned, personally and, and, and our clients were very well positioned for what happened in two thousand seven, two thousand and eight. Personally, I was in all cash by October of '07, because based on a number of things we were In our research, at Cleveland Research Company, it seemed pretty clear to me that there was significant risk of the financial system collapsing. To me, that was apparent by October of '07. We remained in cash until four Q '08, and at that moment, you started to see the Feds start to do QE then, but where it really started to hit home for me was in March of '09 when the Fed did the first round of what I called the big QE, where instead of just buying mortgages, they started buying treasuries with printed money. I think it was a trillion That to me was a real game changer because it, it seemed like the Fed was just effectively financing the US government. And so I think I did what a lot of people did then, which was, okay, they're printing money and buying sovereign debt, and that's what, the most famous episode of that, of something like this happened, which was to say, Weimar Germany in the nineteen twenties. And so I went home and got on Amazon and bought some books on Weimar Germany and started researching, okay, what's gonna happen when the result of this? And I went from a view that You realize as you read these books on Weimar Germany that there were a number of, things that, while similar, were, were also very dissimilar, primarily in terms of the domestic political situation in the US relative to that in Weimar Germany, it was, was much more cohesive. there was huge political unrest, violence, political assassinations regularly in Germany, it just wasn't the case in the US. And then secondly, the fact that the US was the reserve currency issuer and had a much more diversified economy. So I began thinking about it in more nuanced terms, but the thing that seemed clear to me is that it, it would be good for assets. And so I, I started off by owning gold. I started off by going from being in all cash, where I'd been since October '07, to going all in on, on equities, and, and went there. Now, the next step from there to me was, okay, historically, the way the system has worked since the early 1970s is that part of the reason the US dollar has the reserve- status that it does is because oil in particular, and commodities more broadly are priced solely in dollars. And to me, there was just the splinter in my brain that it, it just didn't make sense to me that the, the most important commodity in the world, oil, could still be priced or maintain sort of the same pricing a-a-as it had always had in a currency that was just being printed and then spent the way, the way it was happening. And so I, I began to think that it, it just- It just didn't make sense to me that that would happen, and so there needed to be some other pricing mechanism. And then from there, so I started with gold. At any rate, when I started hearing about Bitcoin, which was probably about two thousand ten, two thousand nine, two thousand ten, I didn't know where to buy it. I was intrigued by it, but it just seemed to be blunt, just too, too painful, too faddish. I didn't understand the technology. I, I think a lot of people, like a lot of people at that time, but I What Bitcoin was doing with the difficulty adjustment and with the basically swapping electricity costs for, a hard store of value, it was solving for this, this splinter in my brain, which was it made no sense that the US could, could print dollars and get finite oil for that. And, and so it was always interesting to me, I finally bought some Bitcoin in twenty thirteen, when, I think it was right around then that Coinbase, maybe a little before, came out And I had a friend say, \"Hey, you can buy it here.\" I, I bought Bitcoin for the first time in twenty thirteen. I'd love to say that I, I bought a whole ton of it and went all in, but that is just not the case. I think everybody says that these days. but that's, that was really the journey to me was really around what the US was doing as a result of this crisis, and then the, the energy connection in terms of-- It just didn't make sense to me that the US could just print money out of thin air" }, { "speaker": "luke_gromen", "time": "09:31", "start": 571.12, "text": "Ability to, have oil only priced in dollars and, and then the implication of that had, or, or how that related back to Bitcoin with the energy connection as I saw it." }, { "speaker": "stephan", "time": "09:41", "start": 581.33, "text": "So in those days in twenty thirteen, it was a big thing around this whole idea of merchant adoption. So it was this idea that, oh, we're all just gonna be using Bitcoin for day to day transactions. Now that was one big narrative at the time, but also there were people thinking, now, the, I guess it wasn't as well advanced and, put out, but this idea of Bitcoin as So Bitcoin as a store of value was also there. So I presume that was also your thinking about it, that you were thinking more store of value." }, { "speaker": "luke_gromen", "time": "10:09", "start": 609.35, "text": "I was, I thought, I was thinking of it that way all along. I had done, a lot of work and reading around Triffin's Dilemma, which was, an economist Robert Triffin laid out that basically if you had a currency system where the reserve currency was, and, and the reserve currency was the, was, was the, the currency of a state single sovereign, and that system required that sovereign to run increasing deficits to supply the world with that currency, then the dilemma is that sooner or later the solvency of that issuer is going to be called into question and create a problem for the system. And so my thought was we had reached the, the Triffin's dilemma moment, and it was, it's particularly a problem with the system as it's been structured since, structured since the late seventies, due to the Treasury bond Being the primary global reserve asset. And so once you got that to zero percent interest rates, it, you can't really appreciate, that bond can't really appreciate nominally that much more, and so to me, the fix has always been separating, the fix to the global currency has always been separating the primary global reserve currency from the primary global wealth reserve asset. In other words, basically finding some neutral reserve asset to replace treasuries. And I had- I'd always been working under the assumption that it was gold, but when I saw Bitcoin, to me, it was something that made sense from a personal standpoint of, \"Hey, I own gold, I'm gonna buy some Bitcoin too, because this could be-- this, this speaks to me as a, a wealth reserve asset, a neutral wealth reserve asset that floats in price for the individual.\" but like I said, ha, ha, and I know now what I would knew, would, would, would know now what I know now, I would have liked to have been much bigger in" }, { "speaker": "luke_gromen", "time": "12:01", "start": 721.16, "text": "Case for it as, as an individual currency, I saw it more as a store of value." }, { "speaker": "stephan", "time": "12:05", "start": 724.72, "text": "Gotcha. And so I guess fast forward to today, January twenty twenty-one, are you seeing it more like Bitcoin could be the reserve asset and that we, you know, society just broadly speaking would use something else as the day-to-day transactional currency, or how are you viewing that?" }, { "speaker": "luke_gromen", "time": "12:22", "start": 741.78, "text": "I still view it that way, I still view it that way partly because I think that the sovereigns are going to want to retain, the ability to respond quickly in crises, whether that is, you know, the COVID crisis, for example, they have the ability to quickly, marshal resources because they can print up fiat currency and spend them, as opposed to if it was more, Bitcoin based, they wouldn't be able to print the Bitcoin, to do that. It would be, a bit more challenging, particularly given the implications for ex- example of a, of, of a response to a, of a, of a, of a, of a pandemic crisis where if it's true that as some say that ultimately the, the, the productivity of the globe backs Bitcoin, then Something like a pandemic, if you were using Bitcoin for both your currency and your store of value, the, the pandemic would severely impact the productive value or the production of the, of the globe, and then you would be in this sort of deflationary spiral. So to me, having the fiat currency separate, which gives the government the flexibility, but then having a neutral reserve asset floating in price, to basically, it's the best of both worlds. It gives the sovereign the flexibility to do what it wants to do in terms of its domestic political agenda, but then you also still have a system with a neutral reserve asset that floats in price in all currencies that protects savers from, from confiscation by inflation effectively. And so that's, that's how I still think about it. I, I think two, three years ago, of course, to, to even have the discussion of could it be a global wealth reserve asset or sit on sovereign balance sheets, I think probably you, you know, we would have been laughed out of the room, but I think all of a sudden, as it's got closer to a trillion dollars in market cap, if you will, that's suddenly a discussion that starts to need to happen, and I think, I think it makes sense, that it, that it could. I think it is something that could serve that role very well. It's ultimately a political question of sorts, but I think you can make the case there are sovereigns that actually would prefer that to gold, and that's-- So it's gonna be an interesting discussion to, to see going forward." }, { "speaker": "stephan", "time": "14:36", "start": 876.19, "text": "Right. And I suppose, so for me, I would see it like, I think, Separating what I would want to happen and what I think ideologically should happen, right? I, I want the government to be smaller or zero if possible, but recognizing, as you said, that politically, that, you know, governments will want some level of control and typically they want to be able to stimulate and they want to be able to say, \"Look, we did this and we helped fix it or we helped, you know, correct the imbalance.\" And so I guess to that extent, they would still want to have some form of fiat money and some level of control into how How people are transacting and spending and so on. So I suppose the question then is, is that m- really more like a shorter to medium term thing, and as over time, more and more people will literally just be holding Bitcoin, and they'll see the number going up on one side of holding Bitcoin, and then they might eventually try to transition more and more of it over into the Bitcoin economy, even from a transactional point of view, not purely a store of value point of view." }, { "speaker": "luke_gromen", "time": "15:36", "start": 936.23, "text": "I think that's a very-- I think it's a possibility when you start thinking about it, and, and That on, on Twitter, where I had, when we started that conversation, I felt much more strongly about that separation of, of, of medium of exchange and store of value was the solution. But the more you and I interacted on it, on Twitter, the more I could see clear to what I think is the point you're making, which is the, there's the more the government spends, the more there's going to be, the more deficits they run, the more there is an incentive, the more the price of Bitcoin is going to rise, and the more incentive- If there is, like you said, to basically, to, to save in Bitcoin and, and not to save in, you know, not to store any wealth in government fiat or the paper associated with it, and that feeds on itself, and that's-- I hadn't really thought of how that feeds on itself, but, but it does. I mean, it's almost a little bit like, like Bitcoin in that case is almost like, the, the, the, the punctures in the hull of the Titanic, right? In the, in the movie, twenty-five years ago, God, Morse code holes in the hull, and it just filled up a little bit of the front, and then it went in, and because none of the airtight, airtight parts in the hold were capped, it just flowed over the first wall, and then into the second, and then over the second into the third, and it, it went faster and faster and faster, and the same kind of thing would happen there, unless the government basically reined in their deficit spending. And so to your point, the-- having the separation of the two, medium of exchange and government fiat and Bitcoin as, as a floating store of value would still ultimately enforce discipline the government, because what would happen if they refused to bring their spending under control would be a run into Bitcoin, and the more that ran into Bitcoin, the more the central bank would have to print to fund the government, which more would run into Bitcoin, and it would, as, numerous times, is, is these things don't go linearly, they'll go very non-linearly. So that is something I, I think I, I've, you know, in as a result- In no small part of our interaction a month or so ago, I've thought a lot about and I've wrestled with, and I don't know, I don't know the right answer other than Bitcoin really s-- is, it ends up serving as, as the, the smoke alarm that they can't disable, that they being policymakers, can't disable, as they have with others, because the way for them to-- the way for them to disable it is pretty simple mechanically. It's, it's don't run really big deficits and, and raise interest rates enough so that Their government debt than I am in Bitcoin. the challenge is, is given the promises that they've made, et cetera, et cetera, that result-- the, the what they would have to cut and how much they'd have to raise rates and what that would do to the economy isn't politically, unpalatable at the very least and impossible more likely." }, { "speaker": "stephan", "time": "18:28", "start": 1108.28, "text": "Yeah, very interesting. And so, yeah, this interesting characterization of Bitcoin as smoke alarm, I like that idea. and so I guess your earlier characterization where you were saying, okay, it could potentially be Creating the Hunger Games. Do you still see that idea or maybe, maybe one way to think of that idea might be if a transition happens too quickly, that maybe that could be bad for society. What, what's your view on that whole idea?" }, { "speaker": "luke_gromen", "time": "18:53", "start": 1133.0, "text": "Yeah, that's when, when we were talking about that, we were talking about using Bitcoin as both medium of exchange and store of value, and, and I think if it happened too fast, I, what I said was, y-y-it would lead to a global, basically a global Hunger Games where either you add enough value to earn Earn it, or you starve. And, given if, if it happened over too compressed a timeframe, the political ramifications of that, would be extraordinarily-- they'd be very painful. It would be basically, a hyper-in-in-inflation of sorts with no government help coming, right? So, in terms of food assistance, in terms of, et cetera. So that, that's when I, when I said that, that's the thought I'd had in terms of if you, if, again, if the- The government doesn't have the flexibility to act, it has to come up with the Bitcoin. Now, I suppose you could tax, they could tax the Bitcoin, etcetera, but that gets into, you, you have to have, it would have to be uniform across nations, etcetera. and so to me, it's more, a, if you had a merging of, of, of Bitcoin as fiat currency and store of value, medium of exchange and store of value, I shouldn't say fiat currency, but if Bitcoin served as both medium of exchange and store of value, and if Really get into this, it, it would really, reduce the flexibility of governments to, in the short run, address some of the more vulnerable portions of society, and that would be very politically, it would have some pretty severe political ramifications. Now, I, I just from earlier, I think it's, it's unlikely that we'll get, I, I still think it's mo-the most likely scenario is a store-of-medium exchange remains fiat currency and, and Bitcoin continues gaining share as a store of value, but, you know, to your point, there is a scenario where That, that can happen pretty fast." }, { "speaker": "stephan", "time": "20:43", "start": 1242.87, "text": "Right. And I think the way most people are thinking about it, I mean, once they've kind of been in the Bitcoin space for long enough, they treat it like, \"I wanna hold onto the Bitcoin, and if I get fiat money, I will preferentially spend that fiat.\" And so, I guess what happens over time, and this is, we don't know when, but this is kind of the whole cyclical nature of Bitcoin as well, and some of this comes into the whole, you know, four-year cycles idea, and maybe that kind of really" }, { "speaker": "stephan", "time": "21:11", "start": 1271.03, "text": "The quote-unquote final cycle, like a discussion I had with Preston a little while ago. So I guess one way to think about it is, how should we anticipate a quote-unquote deflationary spiral to look like? Because I think one way to appraise that and assess that is to think that, well, hold on, the productive materials of society still exist, right? Like the office buildings and the computers and the printers and the factories and the tractors and so on, these things still exist. It's just a question of who owns what and then repurposing those things. things into being productive machinery and things that are used to produce food and et cetera. So I, I guess that for me is how I'm thinking about the so-called deflationary spiral. But what, what's your view on what that might look like if it were to happen, kind of in a quick, I guess, quick way?" }, { "speaker": "luke_gromen", "time": "21:57", "start": 1316.58, "text": "We're thinking it have to be an externality, like the COVID crisis. If you're, if you're talking about just in a, in a Bitcoin world, in a where Bitcoin is medium of exchange and store of value, is that what you mean?" }, { "speaker": "luke_gromen", "time": "22:11", "start": 1331.09, "text": "Pandemic, war, something like that, and war gets very expensive with, with, if you have to pay for it in Bitcoin, right? but I would think the biggest one would be some sort of pandemic, and I wouldn't have even thought of it until, you know, a year ago. but I had a conversation actually with Preston and, and Lynn not that long ago, and it was when you talk about it, 'cause you're right, it, it, the, the productive capacity is there, it's just a question who owns it Everyone has to stay home, indefinitely. And now all of a sudden you're into sort of this deflationary, this deflationary spiral where we, we could take a real life example. We, we start doing shutdowns, we leave the markets open, and we could see what happened, right? Bitcoin went to thirty-four hundred, stocks went down and down and down, gold went down, everything went down except the dollar. And what we were telling clients at the time is, look, the, the, the financial system with the leverage involved, with everything involved, is uniquely uns Pandemic, which is to say, we said you can't shut down economies and keep markets open because the world runs short dollars naturally and it will sell everything to, accomplish that. And so it's to the, to the extent that you had this drawdown of materials, if you substitute Bitcoin for dollars, in that scenario, if everything was running on an equity-based system where everyone had Bitcoin, then everybody needs-- you see a deflation in Bitcoin terms as you- See a breakdown in global supply chains, and that, that would be a deflationary in Bitcoin terms scenario if Bitcoin was both medium exchange and store of value. Now, these pandemics only come around not that often, thank goodness. it's, it's maybe, it's, it's maybe a one-off tail risk thing, so I don't know how much time we need to devote to it, but that would, that's the type of-- it would have to be a physical world interruption, something like that or something like, some sort of" }, { "speaker": "luke_gromen", "time": "24:11", "start": 1451.49, "text": "oh heck, the, the rays from the, from the sun that periodically can come in and theory wipe out big parts of the electrical grid, something like that, where it's a physical interruption would be deflationary instead of some sort of market event, if that makes sense." }, { "speaker": "stephan", "time": "24:24", "start": 1463.72, "text": "Right, I see, I get you. Yeah, yeah. So I guess it's, it's also about, you know, how does society adjust to that? And look, I think no matter what monetary standard the s-society is living under, it's, you know, that-- those kinds We're using US dollars over on the Bitcoin standard. So, I think that's one point there. I'm also curious, so my friend Saf Dean Amoo, you might have read the Bitcoin standard, one view that I've seen him share is this idea that if we consider the world as it is today with the fractional reserve banking system, as new loans are created, that's the creation of new money. so safety in view is actually one view I've seen input is this idea that because Bitcoin is more like an equity based system, more people might just not-- they might just save into Bitcoin and it might become more of an equity based system, and in some way, it might slow the creation of new loans, which in turn slows the creation of new money. So I'm wondering whether that might actually create less demand for holding dollars because there's less demand for borrowing dollars. What's your, reaction on that idea?" }, { "speaker": "luke_gromen", "time": "25:30", "start": 1529.67, "text": "I would think, I would think there'd be less demand for, for, Dollars as the, as Bitcoin gets bigger, it, it ultimately is such a hard currency, it resembles a gold standard in a way where historically, the governing mechanism of the gold standard, right, was, when the sovereign is being irresponsible in terms of deficits, you show up and you demand gold. And the way the sovereign gets the gold back, and for, for, for many decades, centuries, excuse me, that was the, the Bank of England would raise rates. So if the UK went to Of, of a big expensive war, and there were concerns about the, the, the pound, so people would, would go to this, go to banks, take gold out, and gold would flow away from London, and then, in order to control that, the, the, the Bank of England would have to tighten policy, raise rates, and make sterling more attractive than gold relative to whatever what was happening, in the world, and basically call that gold in by raising rates, by strangling the economy, by putting things into a deflation. And it's kind of similar here, where you're seeing the run into Bitcoin happen in real time. I don't think anyone can argue that that isn't happening. And the reason that's happening is the fiscal situation of the reserve currency issuer, the US, and, and, and Western sovereigns more broadly, is a mess, and they're paying, I mean, the way I've looked at it is the last twelve years, the, the, the growth of US federal debt has risen by between nine and ten percent, Kager, maybe it's eight to ten percent, Kager And the coupon on that that's never been more than three percent at the long end. And so you're, the, the money supply, if you will, the, the supply of debt out there is growing anywhere from five hundred to eight hundred basis points faster than the coupon on that is, right? So you're, you're, in, in on one measure, it's a significantly negative real rate relative to the issuance of, of debt. And so the, the fact that there is a release valve, that Bitcoin is a release valve that can't be manipulated, I think, is said, which is, it's, it, it for-- it's, it's like a gold standard, right? The way that this has been, that why gold hasn't worked is, is the gold has been managed by allowing unallocated paper derivatives to expand as fast or faster than the debt and the money supply. So if you have paper claims rise on gold, and, and because gold's centralized, and most people won't take physical delivery, you can control the price of gold. So the smoke detector of gold has been managed by, policymakers in this way, and that otherwise would have if these paper derivatives didn't exist in gold. If the unallocated paper claims didn't exist and weren't able to expand, as, as rapidly as they've been allowed to expand. Bitcoin doesn't have that, and so what Bitcoin's price is doing is, it's just telling us what's happening. and there's, I think, a catch-up aspect to it, and I think there's momentum chasing aspect to it, and I, all the-- but I, the underlying fundamentals, I think, are this escape out of fiat currency whose supply is growing well" }, { "speaker": "luke_gromen", "time": "28:33", "start": 1712.61, "text": "Officials can stop that anytime they want. All they have to do is really ratchet back spending and/or really ratchet up rates, right? So it's basically running the old bank-- what the Bank of England used to do to, to bring the gold back is really all policymakers, and in particular the US, have to do to bring Bitcoin back in. The challenge is, is that the, the political implications of slashing spending, the, the, the, the market implications of raising rates enough to do that, I think, are at a point where they can't- Couldn't do that without forcing the US to default on its own debt, which means they can't do that without, you know, and they're not gonna default nominally, but what I'm saying is, is it basically they wouldn't be able to pay the interest or pay the entitlements on a pay-as-you-go basis without help from the Fed, which then gets us right back to the point of they can't, they can't do it. So I, I think the way you described, you know, and the way he's describing that, basically Bitcoin is serving as a, as a very hard" }, { "speaker": "luke_gromen", "time": "29:33", "start": 1772.63, "text": "And, and, you know, a few gold bugs and, you know, people like myself who owned a little bit, and I think it's really changed the tenor of what Bitcoin is doing, has really changed in the last nine months, I think in no small part to how the crisis evolved with the US back in, and, and, and globally with COVID, and the implications it had for the US fiscal situation since March. So I think it's really, when now you're seeing corporations looking at it for treasury, you're seeing institutional interest, it's, it's become much more of a mainstream" }, { "speaker": "luke_gromen", "time": "30:03", "start": 1802.61, "text": "The reason for that is exactly for what the reasons you described." }, { "speaker": "stephan", "time": "30:06", "start": 1805.91, "text": "Back to the show in a moment. Lend at HodlHodl is a global Bitcoin backed lending platform so you can lend or borrow anonymously on your own terms. This is a peer-to-peer solution using multi-signature escrow for every deal. You can grow your savings and earn returns on your investment. So if you have stablecoins lying around, you can create an offer and earn interest by lending. On the other hand, if you're a Bitcoiner and you hold bitcoins but you don't want to spend them now, you can borrow against them so you can borrow stablecoins and keep on hodling. So with HoddleHoddle's lend platform, set your own terms and put up offers depending on how long you want to borrow or lend and interest rates. Go to lend.hoddlehoddle.com. Knox is a Bitcoin custodian dedicated to ensuring comprehensive insurance coverage for client assets. Much of what passes as insurance today isn't purchased for the sake of protection, but for pure marketing. Reasons, Knox believes insurance should exist to make fund recovery possible, no sharing coverage between customers. Knox takes a unique approach when it comes to purchasing insurance for customer assets. Coverage is set aside exclusively for every customer in a one to one capacity, all with a comprehensive policy covering a range of loss and theft events, including internal collusion. If you are a Bitcoin company, RIA, fund, trust, or family office, make sure to contact Knox to discuss Bitcoin custody and insur- Insurance. Back to the show. Yeah, really, great explanations there, and I think we could summarize, in terms of the US government situation there, it's kind of like either the Fed has to keep printing or the world defaults, right?" }, { "speaker": "luke_gromen", "time": "31:39", "start": 1899.19, "text": "That's basically it. Like if you said, \"Luke, I want you, I want you to stop Bitcoin,\" I would-- if I was Luke, I want you to stop this, how would you do it? And the first way I would do it would be to attempt to roll out a cash settled, futures exchange on Bitcoin, And, those futures still exist, but it just isn't, it isn't the same as a cash settled futures, on, on Bitcoin. And, and that's part of it. Then you would also need an unallocated Bitcoin market where-- and that's the real issue for gold, which is, you can go to London and say, \"I wanna buy a hundred million dollars in gold,\" they say, \"Done.\" And now, you don't own a hundred million dollars in gold, you own a hundred million dollars in gold credit, and as long as you don't try to get" }, { "speaker": "luke_gromen", "time": "32:27", "start": 1947.02, "text": "Physical gold and it's taken two months to source, at least. So physical gold supplies are extremely tight, Dale. it's still hard to source physical gold, it's very easy to source paper gold, but that's partly this, the, the, the speaks to the centralization weak point of gold relative to Bitcoin that a number of the, Bitcoin, proponents have talked about, which is because gold's centralized, they-- this, this can be done. Bitcoin's not centralized, and so you-- and because of that, it's, it's easier to buy," }, { "speaker": "luke_gromen", "time": "32:57", "start": 1976.94, "text": "Buy Bitcoin on my phone much easier than I can buy physical gold, anytime I, I want to do that, and, and, and more importantly, it's much easier for me to buy physical Bitcoin, if you will, than it is to buy Bitcoin futures. And so because of that, this cash settled futures and the unallocated gold expansion, it doesn't work. So step one would be to try to, try to recreate the, the paper, the unallocated paper markets that exist around gold that help control gold's price and thus far, because of the decentralization of Bitcoin, it's been difficult to do, it hasn't worked. So step two for me, if I was, if I was tasked with controlling Bitcoin, would be I would revalue gold enormously that sits on government balance sheets, take gold to fifty thousand dollars an ounce in the US, use the proceeds, and then we're doing that in the United States would, deposit by virtue of the calculation, it would deposit about twelve trillion dollars into the general account of the US Treasury, and they could then spend that money however they saw fit, whether they- They wanted to just go out and buy back twelve trillion dollars of debt outright, they could do that, they could turn around, spend it into the economy, get some sort of multiplier effect on infrastructure. The point is that they could use it to massively deleverage the government's balance sheet. Because remember what I said before, the reason the government can't raise rates and sort of call the Bitcoin back in, if you will, is because calling it-- They can't raise rates without bankrupting the government. The, the, the US government wouldn't have the tax revenues to pay the interest on the debt He levered the government's balance sheet enough by revaluing the gold, then the Fed could raise rates enough to bring the Bitcoin back in without bankrupting the government. Now, the devaluation of the dollar against gold would likely be massively bullish for Bitcoin at the same time, and so there'd be sort of Bitcoin up huge, gold up huge, but then the government'd be able to take rates up to seven or ten or twelve percent or whatever they needed to do to sort of bring the Bitcoin back in, and at that point, Bitcoiners, gold holders, et cetera, would have Continue to hold my, my Bitcoin, and my gold, or do I want to own the, the, the sovereign debt of the United States of America, who has zero debt effectively, or much lower debt effectively, and is gonna pay me ten or twelve percent per year? And that's a different discussion than, I've got the, than the discussion today regarding our fiscal situation, the zero percent yielding debt, negative real rates relative to gold and Bitcoin. So I, that's, I think sort of the discussion, when you sort of think about, okay, hey, what, To bring it back in, but until you do one of those two things, yeah, they're, they're, they're, they're in a tough spot where they can't, they, being the United States government, can't make whole-- They, they can't make their, they, they, they can't, they can't make their obligations nominally money good without help from the Fed, basically, if they raise rates." }, { "speaker": "stephan", "time": "35:46", "start": 2145.74, "text": "Yeah, so interesting thoughts there. I guess my first reaction with the idea of the gold revaluation is that it's effectively like trying to play an accounting trick, The US magically would have more productive resources all of a sudden. It's just kind of revaluing and saying, \"Oh, well, actually, all this gold we have, we're just gonna treat it as though it's worth more than what it was before.\" And so I guess that's probably-- I don't know how easily that would fly, amongst the international community. I mean, potentially, I guess if there's enough kind of sense of power coming, being projected by the US government, and I guess the other point I'd just-- I guess I'm curious what I guess give people more incentive to hold US government debt. The problem I could see, or one problem I could see, is that Bitcoin returns have, I mean, if you look at, you know, over the last ten years or so, it's something like two hundred percent return per year annualized. So it's almost like they would have to bring the reserve, the interest rates so high that it would just be crazy. so I guess, but I guess the point you were saying is that they would have, it would have already gone up a lot as a result of this, and so maybe Try to, you know, encourage people to hold US government debt. Is that how you're thinking about it, or how are you thinking about that?" }, { "speaker": "luke_gromen", "time": "37:03", "start": 2222.91, "text": "No, I, and I, I, I can't remember it was, it was Safedine's book that, that made that point, that when you look at the, the return, the, the amount of, of the, the interest rate that would have to be paid on sovereign debt to make that competitive, I don't know if it has to go to par, but the, the point stands, right?" }, { "speaker": "luke_gromen", "time": "37:23", "start": 2242.98, "text": "I don't know if it's It's not five percent all of a sudden, right? Yeah, exactly. Some of that would depend on the fiscal situation, some of that would depend on, you know, again, is it a gimmicky and wonkish in terms of that gold revaluation? Absolutely. That said, it's no less gimmicky than what we did to the world in nineteen seventy-one when we said, \"Yeah, we're gonna back it in gold at thirty-five,\" and then one day President Nixon got on TV and, and said, \"Hey, kidding, it's your problem now.\" Right? I mean, Thirty-three, right? Which was, hey, you know, it was twenty yesterday, thirty-five today. Have a good day, right? So, i-i-it's, we've done these things before, and it's just been a long time, and so people think we won't do it again. I mean, it was, you know, we did in two thousand two, hey, Iraq has weapons of mass destructions, and you're all either with us or against us, and so it is gimmicky, it is wonkish, it would work," }, { "speaker": "luke_gromen", "time": "38:22", "start": 2302.36, "text": "to dollar terms, right? because of the, the inflationary, you know, the dollar will be falling sharply, you'll have inflation, you'll be, you would, you, economic growth would absolutely rip. So it would be, it would effectively amount to a reset, and it would, you'd basically, you would, you would have to raise rates to a really significant level. And so the question would be, what, what would I as a Bitcoin holder say that would take Bitcoin to, I don't know, it's at whatever thirty-five thousand today, after they To five hundred thousand, at five hundred thousand dollars with the US government balance sheet com- you know, largely delevered, would I wanna have my Bitcoin holdings making twelve percent in the US government? maybe. Is it fifteen percent? Is it eight percent? It's probably not below, you know, I, that's a question you, that's, that's sort of the calculus, and I don't know what the right rate would be, but it, it really, that's really the calculus that basically of, of, of what Bitcoin as global gold standard would require is basically Sort of that, and particularly, oh, by the way, if the US isn't no longer running deficits in any real way, right? If this, in the aftermath of all of this, the answer is, is, yeah, the US is running a balanced budget, its debt to GDP is twenty percent, and we're paying twelve percent interest right now, what do you want to do? Boy, that's a really productive economy making twelve percent. I, I'd be tempted, right? You know, so that's, that's the calculus, and I don't know what the" }, { "speaker": "luke_gromen", "time": "39:57", "start": 2397.1, "text": "Government bonds? No, but would I sell some of it? Probably." }, { "speaker": "stephan", "time": "40:00", "start": 2400.03, "text": "Maybe, maybe enough to sustain the, government debt market. But I mean, look, we're, we're talking like obviously Bitcoin today is very small. It is what, six hundred billion dollars as a total market, where other markets are just dwarfing that. So I, I guess, and, and I know you'll have some interesting things to say on this, is that the, with the US fiscal situation and the way the government bond markets are, it, it really does boggle the mind why people are holding these Probably three main ones. One of them is greater fool theory, right? It's this idea that I'm just gonna buy it and sell it onto somebody else and that's it. secondly, you know, there's this idea of the collateral and the safety implications of holding US Treasuries or other near money rather than cash in the banks itself because of the safety perspective. And then I guess thirdly, you could also say maybe there's a regulatory reason. It might be, Basel standards that mandate holding some level of government bonds, and that's why these big, Investing, entities are holding government bonds. I, from your perspective, how would you explain that? Why do people hold these bonds that are literally paying out negative?" }, { "speaker": "luke_gromen", "time": "41:06", "start": 2466.47, "text": "I think it's a combination of the regulatory side where you're incented to hold them or, or mandated to hold them. I think there's the, the derivative and, and, and, collateral side where they can be levered up, on, as, you know, you hold them as collateral and they can effectively be levered up to buy other things. They need to be held for, for sort of falls back into the regulatory side. I think, another big part of it is really portion of the industry or holdings that are, duration matching, which is to the ex-- you know, to the extent you have liabilities, you don't care what you are, earning. Nominally, you are just trying to match as close as possible, your, your, your cash flows with those liabilities. And so when you're talking about insurance companies and certain, fixed, fixed pensions, et cetera, it's, it Matching liabilities, and so I think it's a combination of those things, and I think too, it's, it's central banks. I think it's, it's, it's policy, which people tend to leave out 'cause I think it's, all those prior are, are, are, are very important, regulatory and collateral and, and, and de-rate, de-rat-- liability matching. But you look, the Fed's, the Fed's grown their balance sheet by three point seven trillion dollars in the last eighteen months, last fifteen months. What would the yield be 2019, when repo rates spiked to eight to ten percent, and the Fed jumped on that immediately, within forty eight hours, began growing their balance sheet again to bring those back under control. And so, I, I, I think some portion of the answer is rates are where they are because that's where governments can afford to keep the wheels on the cart, they can afford all of their fiscal obligations without interest expense spiraling up to, a, a, an ever growing portion of ever declining tax revenues as rates rise. And so it's the release valve is Is, the release valve can always be either rates rising or central bank balance sheets rising, and the answer can't be rates rising, and so it's, it's been foreign central bank ownership of government and increasingly in the last several years, corporate debt markets, mortgage markets, and, and I think that's ultimately, really when you talk about what the marginal, what the marginal bid is doing, every time they've needed a marginal bid, the, the central banks have been there, and that ultimately ties back to, I think, why Bitcoin has done what it's done is I 2020 in particular made it very obvious that when tr- when the treasury markets sold off sharply in, in March, it started crashing alongside the stock market, I think was a very big eye-opening moment to a lot of investors around the world, where they suddenly realized that, oh my gosh, in, in the next deflationary crisis, in this deflationary crisis, that the safe haven is crashing alongside stock. Okay, they aren't going to let that happen. Well, then that means, boy, that means the central bank balance sheets are gonna have to rise a lot more than we" }, { "speaker": "luke_gromen", "time": "43:57", "start": 2636.94, "text": "That, that hedges that, that basically does well when central bank balance sheets are rising, and that's, that's Bitcoin, that's gold. So I think that's, that's really the dynamic driving it." }, { "speaker": "stephan", "time": "44:05", "start": 2645.33, "text": "So I guess we could say then, as more and more people wake up to this dynamic, there'll just be more and more people running for the, heading for the hills and buying gold and Bitcoin." }, { "speaker": "luke_gromen", "time": "44:14", "start": 2654.1, "text": "I, I think it is, I really do. It's, I, I, I think it was very eye-opening to people in terms of just what happened with, in" }, { "speaker": "stephan", "time": "44:20", "start": 2660.36, "text": "particular And, you know, state control of money. So it's, you know, AML regulation and so on. I know you were just recently commenting about, Lloyd Blankfein. So he was the former CEO of, Goldman Sachs. What was your view on, what he was saying about, government control of money?" }, { "speaker": "luke_gromen", "time": "44:43", "start": 2683.29, "text": "You know, I just thought it was really interesting how in, over the last, you know, since Nixon closed the gold window, we've moved to this, this, this period over the last fifty years where because it's happened little by little, About the, the normalization of complete state and government control over sort of every aspect of financial privacy. And I, I understand the need for KYC, AML, these kinds of things. It just was fascinating to the degree to which, they are painting the bit-- painting Bitcoin with that brush, because the reality is, is, is, I mean, at least for me, I, my Coinbase account, I've been twenty-five years in, in investment, research and, and sales I had all the compliance, KYC, AML stuff ramped up in compliance after two thousand, one, of course, and to open Coinbase and, and participate in Bitcoin markets in the United States, there's very rigorous KYC and AML compliance measures in place. And so for me, what Blankfein was talking about today on CNBC, I just, it was really twofold. It was number one, the focus on Bitcoin as it relates to KYC, AML, when those measures are already in place, to me smacks, it seems a bit of disingenuous. feels like they don't like the message of what Bitcoin's price is telling them, and so they're trying to beat it over the head with the KYC AML club. And I, and then from a bigger picture perspective, it's just interesting to me to see the CEO of a broker, a former CEO of arguably one of, if not the most important systemic brokerage firm out there, effectively sounding like a, like a, a, you know, a CCP apparatchik, right? In terms of just, hey, we need to make sure the state has control over the money and over the," }, { "speaker": "luke_gromen", "time": "46:27", "start": 2786.96, "text": "Very antithesis of sort of where we started this process fifty or sixty years ago, where there was, it was much more capitalism from, from, from the ground up as opposed to from the state down. So it just, it just struck me just hearing him say that more than anything else." }, { "speaker": "stephan", "time": "46:41", "start": 2800.83, "text": "Yeah, we've just seen this continual erosion of people's any poten-- any possibility of having financial privacy, and it seems to me that people have just overwhelmingly accepted, \"Oh, this massive amount of control, this massive amount of intrusion,\" and asking about, \"Oh, hey, where Get this money, what is the ultimate beneficiary, all this, et cetera, et cetera, stuff that they'll ask you, but it just seems like everything is becoming KYC, bureaucracy, papers, please." }, { "speaker": "luke_gromen", "time": "47:08", "start": 2827.97, "text": "Yeah, for me it's a little-- And, and, and to be clear, I'm not against KYC or AML, but I look at a system where, when I-- it always left me scratching my head, right? So if you go back and you can find this story online from two thousand eleven, two thousand twelve, there was a US bank that was, Didn't do anything, it was Wacovia. And at any rate, they had, they, they laundered like three hundred sixty billion dollars with a B for a number of different elements, and it finally it took like six or seven years to get anything done. And around the same time, they were able to, basically politically discredit one of our politicians, Eliot Spitzer, New York politician, by finding that he had passed a three thousand dollar check to a prostitute. And I just always wondered how they couldn't find three hundred sixty billion dollars in, in, in A politician to a prostitute as quickly as they were. And what it speaks to me is that it's, that it, it, it runs the risk of being unevenly or politically applied, which isn't the spirit of, of the Constitution, et cetera. I'm all for KYC AML, but I also, as a sovereign person with a finite lifespan on this earth, I don't want-- I want to have the ability to protect my savings, from what I have earned throughout my life to this point. Confiscation by inflation or currency collapse as a result of bad decisions that I really didn't have a vote on, and those decisions range from, you know, entitlement programs approved before I was born to wars fought before I was born to wars fought when I was born in which I, which, which I thought probably didn't make sense and have clearly in hindsight not made sense. Ultimately, that's where I, for me, where I re- I really get caught up, which is, listen, I'm happy to tell you where I got the money from, 'cause it's not coming from an illegal place" }, { "speaker": "luke_gromen", "time": "48:57", "start": 2936.94, "text": "However, I don't want those, those protections to morph into an excuse for not giving me the avenue to protect my, the efforts that I've put in my life to date for my family, for my kids, for productive investment for this country, and, in terms of, bottoms up capitalism like we were talking about before, as opposed to state down directed investment. So that's how I, how, how I come at it is, is, is less a full, I, I'm not a full on libertarian, hey, don't, you know, I don't want And, and, and, they need to do some of the KYC AML, but I just don't want that to be used against, that, that lens to be used or that hat to be used to try to stop me from protecting the, the real value of the, the work and the time, and the percentage of my life that I've expended, so far." }, { "speaker": "stephan", "time": "49:45", "start": 2985.3, "text": "Right. And I think I can appreciate that view. I would say even, even considering just the AML regulation, I think there, there was actually a recent study showing that, very few AML get discovered because of all the AML compliance, so the net result is just that all the banks and financial institutions and all of us who have to deal with the compliance burden basically end up, we just, we're just paying this huge cost and all this reporting goes into the government, you know, in, in the US it's FinCEN, in Australia it's Oztrak, and the so, basically the AML regulator, all this reporting goes into them and even sanctions as well. So now we're talking OFAC. All this reporting just kind of goes into them and, and at the end Slip through the cracks anyway, because they find other things, they find other ways to do it. So it's just, it just seems like a very ineffective system, even at, even taking them on their own terms, at, at solving their own stated purpose. So it just seems a very odd and, unusual system in that regard to me." }, { "speaker": "luke_gromen", "time": "50:43", "start": 3042.61, "text": "Yeah, it's, it's a fair point. I mean, you, given the amounts, you've got to be able to see, given, given the sensitivity of the system in terms of the ability to track flows, where you can, you" }, { "speaker": "stephan", "time": "50:57", "start": 3057.32, "text": "Yeah, exactly. so look, I think we're sort of coming to the end of time, but I guess, if you've got any thoughts for listeners in terms of, you know, outlook over the next year or so in terms of Bitcoin or even just kind of, you know, macro in general, if you've got any thoughts to leave for the listeners?" }, { "speaker": "luke_gromen", "time": "51:11", "start": 3071.11, "text": "Yeah, I really come at Bitcoin more from the macro side, than the technologist side, and for me, it really comes down to what's the next marginal step for, for the United States" }, { "speaker": "luke_gromen", "time": "51:27", "start": 3087.06, "text": "position as a result of the COVID crisis really became, what I would call irrecoverable, which is to say, the way we've defined it, if you look at the US's big three expenditures, it's defense entitlements and, and interest expense slash treasury spending, and those big three are a hundred forty percent of tax receipts, as of the third quarter of twenty twenty, as a result of the COVID crisis. And so you really, it's, it's very difficult for the US to raise rates, tighten, basically operate without ongoing Fed support. And so to me- To me, it really comes down to what is the marginal level of Fed support going forward relative to the amount of stimulus out there going forward, relative to the amount of Treasury issuance going forward. Because if Treasury issuance ramps, but the Fed's balance sheet doesn't-- the Fed doesn't effectively monetize it dollar for dollar or more than dollar for dollar like they did in twenty twenty, then you're talking about the United States beginning to effectively suck dollar liquidity out of the world, and that's gonna be a tough macro environment. That's not gonna- It's not gonna be a great macro environment, I think you'll start to see the dollar rise, I think you'll start to see cracks emerging in the weakest emerging markets, so I'd start with the Argentinas and the Turkeys of the world, and before long, I think you would start to see it show up in the price of gold and Bitcoin, and eventually in more broad risk assets, and eventually the Fed's gonna have to come back and do a lot more, in our view, but that to me is the one thing I'm really paying most attention to on the macro side is In terms of treasuries, because if they don't, it's gonna be a little like the first half of, two thousand eighteen, where, you saw the dollar strength, you saw Bitcoin weakness, you saw assets flow to the United States, the US stock market did well for a while, dollar did well, gold sort of floundered, and then fourth quarter of eighteen, of course, the wheels came off the cart and, the Fed had to reverse course and that took us into twenty nineteen and, and, and sort of the re-expansion of the Fed Much faster this time around. So then it took, call it, from the time the US started sort of tightening a little bit, the, it would take, it took four to five, maybe six months for basically US markets to blow up and force the Fed to reverse course. I think it would happen a lot faster this time, but I think that's sort of the one big macro question at this point that is still unclear, 'cause there's a number of different moving parts. There's, US has a big Treasury general account it can spend, the policies of the Biden administration are still" }, { "speaker": "luke_gromen", "time": "53:57", "start": 3236.94, "text": "relates to what Treasury's gonna do, Powell, kind of a little bit of the same in terms of what Fed will do. So we're in a little bit of a holding pattern, you can kind of see that reflected in markets, but that's the thing I'm really watching foremost closely." }, { "speaker": "stephan", "time": "54:08", "start": 3247.73, "text": "Excellent. And Luke, before we let you go, make sure you tell the lis-tell the listeners where they can find you online." }, { "speaker": "luke_gromen", "time": "54:14", "start": 3254.26, "text": "Absolutely. So if you're interested in learning a little bit more about our research product, we have product for both institutional and individual investors. It's at f f t" }, { "speaker": "luke_gromen", "time": "54:28", "start": 3267.72, "text": "If you're interested in following what we're, doing, talking about, et cetera, I've got a pretty active Twitter feed at at Luke Gromen. It's l u k e g r o m e n." }, { "speaker": "stephan", "time": "54:37", "start": 3276.93, "text": "Excellent. Well, I really enjoyed chatting with you, Luke. Thank you for joining me." }, { "speaker": "luke_gromen", "time": "54:40", "start": 3279.71, "text": "Thanks for having me on, Stefan. It was a great conversation. I really appreciate it." }, { "speaker": "stephan", "time": "54:43", "start": 3282.95, "text": "Subscribe to the show in your podcatcher applications, and you can find the show notes at stefanlivera dot com slash two four seven for this episode. Thanks," } ] }