{ "episodeId": "SLP40", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "vijay_boyapati": { "name": "Vijay Boyapati", "role": "guest", "tag": "VIJAY" } }, "segments": [ { "speaker": "stephan", "time": "00:02", "start": 1.5, "text": "You're listening to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Listen in and learn alongside me as I interview some of the sharpest minds ranging from economists, software developers, investors, entrepreneurs, and writers." }, { "speaker": "stephan", "time": "00:18", "start": 17.5, "text": "Hey guys, my guest today is Vijay Boyapati. If you're a regular listener of my podcast, you already know Vijay as he appeared on episodes two and seventeen. If you're new, Vijay Boyapati is a software developer by trade and Austrian economist in Bitcoin, well known for providing high quality analysis on his Twitter feed at real underscore vj and in some of his earlier articles and work. Most relevant if you're new is his article \"The Bullish Credit Cycle\". case for Bitcoin, though today we talk about an earlier article of his. Vijay, welcome back to the show, how are you? I'm doing great, Stefan. Great to speak with you again. Yeah, thanks very much for coming back on. You're basically one of my regular guests at this point, I think you're a real crowd favorite, and, you know, just last time you were on, we agreed to do, do the next episode about one of your old articles, which is called \"Why Credit Deflation is More Likely Than Mass Inflation.\" And An Austrian overview of the inflation versus deflation debate. Now, this is back from two thousand and ten, so eight years ago. So, Vijay, maybe you just wanna start with a little bit of background on, on the paper just generally, and also what was the prevailing attitude and thought amongst Austrians and amongst non-Austrians at that time?" }, { "speaker": "vijay_boyapati", "time": "01:37", "start": 97.21, "text": "Yeah, sure. So before we start, I, I wanna tell you a story of how I got interested in all of this. at the time, I was already suspicious that the standard story of how inflation and bank lending works was wrong. and in, in 2010, I was invited to an event hosted by the Mises Institute on Jekyll Island, which is, sort of playfully ironic because that's the location of the conspiracy. Currency that created the Federal Reserve. And it was a really awesome event, and I got to, sit next to Ron Paul at dinner, which was super cool. Wow. but what I really remember, was that on one of the nights that I was there, I got to speak with Doug French, in a back room of a smoky bar, and ask him about banking, and at the time, Doug was president of the Mises Institute, and he had previously been the CEO of a bank in Nevada, so he knew how this stuff actually worked. and the amazing thing I discovered was that Doug basically confirmed my belief that the story of how bank lending works, that's, you know, generally taught by both Austrian and classical economists, was completely wrong. It, it turns out, that he didn't really make a big fuss about the fact that, you know, what was being taught, was wrong or correcting anyone at the Mises Institute, because the standard story, honestly, is kind of, Rothbardian gospel, and, you know, I don't really blame Rothbard, 'cause some of this stuff actually changed, So, but he, he didn't really point out that people were talking about this incorrectly. so anyway, to get, to get back to the original point, the standard narrative is that the Federal Reserve creates money out of thin air, often called reserves, which are deposited in the banking system. The banks then immediately lend out these reserves into the economy up to the point where they only keep a fraction of the deposits that were put into the bank, The money that they lend out is then deposited into other banks, 'cause it's been circulating the economy, it was lent to someone, and that person then, you know, spends it on something, and the next person puts it in a bank, and these next banks lend out the money again, and this leads to a multiplier effect where the total amount of money is greater than the initial amount of deposits. and it's called fractional reserve banking, and the theory behind it is called the money m-mul-multiplier theory. So, for example, if, if the, the Fed creates a trillion dollars of new reserves in the banking system, this leads to a multiplier of, at least as the theory goes, a multiplier of, say, ten times that amount of money circulating in the economy, which then leads to, price inflation. And in two thousand and eight, when the financial crisis hit the Fed did exactly this. They created trillions of dollars of new reserves which are deposited into the banking system. And the view, that most Austrians had at the time, people like, you know, Bob Murphy and Joe Celano and Gary North and those sorts of guys, was that this is gonna lead to massive inflation or perhaps hyperinflation. And, and my view and, you know, what I discussed in the paper was that they were basically wrong." }, { "speaker": "stephan", "time": "05:10", "start": 309.83, "text": "Yeah, right. And so- So the, the view that, you know, if I, as I recall it, was something like, \"Oh, look, there's money that is parked at the Res- at the Federal Reserve by these large banks, but they're just not making loans out to customers.\" So, you know, the view was, \"Okay, maybe they're sort of pushing on a string that, you know, there might be a lot of money as kind of base money or, money that can potentially be fractional, fractionalized or whatever the, the correct term is, but they're just not doing" }, { "speaker": "vijay_boyapati", "time": "05:42", "start": 341.55, "text": "Yeah, yeah. and I, I think you, you're describing it pretty well. And that's, so the basic thesis of my paper, which may seem a little arcane, is that the causality of inflation that's generally believed, where the Fed creates reserves and the banks then lend these out, is basically backwards. and so the main point that I was trying to make is that loan officers at banks don't loan out the bank's deposits up to the reserve Requirement and then stop and then wait for more reserves from the Fed. Instead, what's happening is the bank officers are making loans regardless of the reserve position, and if they need more deposits, they'll go out into the market and buy more, causing demand for deposits to increase and interest rates on deposits to increase. a-and one of the issues that I had with, the, the reserve requirement story was that since the nineties, Banks effectively had no reserve requirement. They began using a program that allowed them to sweep money from checking accounts, and checking accounts actually do have a reserve requirement, but they use this program to sweep money from checking accounts to savings accounts on a daily basis, and savings accounts have no legal reserve requirement. And I cite a paper in my article that explains this and sort of goes into the history of when and why this happened. again, it's a little bit arcane, but the basic point is that a regular loan officer making loans at a bank isn't worried about whether the bank is about to run out of reserves, and that's really the part that was confirmed for me by Doug French in that, you know, smoky bar on Jekyll Island." }, { "speaker": "vijay_boyapati", "time": "07:32", "start": 452.09, "text": "so one other thing I want to say is basically, the way it works is that banks make loans into the economy, and if the total amount of reserves backing those loans gets small, and this begins to drive up short-term interest rates, the Federal Reserve will accommodate the banking system by creating more reserves. And the idea here is that, the banking system is the dog and the Federal Reserve is the tail, not the other way around. The standard story is the Fed is the dog and the banking system is the tail. That is, the, the Fed is controlling the amount of inflation, and the banking system's kind of going along with it rather than the other way around, So my view is that inflation is caused by the banking system's propensity to lend, and the Federal Reserve accommodates that propensity. The Fed isn't driving inflation in a mechanical way by increasing or decreasing reserves and expecting to see a very precise amount of inflation come from that." }, { "speaker": "stephan", "time": "08:30", "start": 510.29, "text": "Right. And then the other component to that is just this aspect of-- a-and I think you touch on this as well. So we're talking about this whole idea of multiply- But then there are other effects in place as well. So as you mentioned, the banks weren't necessarily constrained by reserve requirements, however, there are other requirements such as capital requirements, for example, the Basel capital requirements." }, { "speaker": "vijay_boyapati", "time": "08:56", "start": 535.91, "text": "Yeah, yeah, exactly, that's right. So the fact that reserve requirements don't really restrain the banks, so like I was saying, you know, the sweeps from, say, checking accounts to savings accounts made it so that the, the re-reserve- Requirements didn't really restrict bank lending. That doesn't mean that there aren't any restraints, and, and like you say, the, the, the regulatory restraints now are in the form of capital requirements. how much capital, which means how many valuable assets do the banks have on their balance sheets relative to the size of the loans they've made? and, and you know, one of the major problems in two thousand and eight was that the banks were claiming to have assets that backed their loans, but they were marking the value Of these assets using all sorts of crazy models, internal models that they had. The assets themselves weren't worth anything near what the banks were saying they were, were worth. So they were in effect failing the capital requirements that they had. So for example, if, if a bank tried to sell the loans that they had on the books on the market, they would get almost nothing for them, yet they were saying they were worth their full face value." }, { "speaker": "stephan", "time": "10:08", "start": 607.98, "text": "Right, right, and you see that in the popular movies like things- Things like The Big Short and so on. Exactly, yep. Yeah, and then, so I suppose one way to think of it is these capital requirements do act to constrain banks in terms of how much fiduciary media they can generate through, quote, unquote, loaning money into existence." }, { "speaker": "vijay_boyapati", "time": "10:30", "start": 630.07, "text": "Yeah, yeah, that's absolutely right. And, one of the problems at the time, so the ratings agencies also played a large role in this, the banks could get away with seeing- That they met their capital requirements and that the assets they had on their balance sheets were worth a certain amount, 'cause ratings agencies were saying, \"Hey, all of these mortgage backed securities are triple A, even though, you know, the, the people that these loans- Were made to, a lot of them didn't even have like steady income, and so they couldn't even pay, pay the loans back. yet they were rated the same as like government bonds, like US Treasuries. It was, it was ridiculous. So The ratings agencies played a, a big role in this as well, and, and the regulators really weren't scrutinizing what was going on," }, { "speaker": "vijay_boyapati", "time": "11:27", "start": 686.95, "text": "a-and so the, the banks were, basically drunk on- On the boom that had happened in the early two thousands in the housing market, they were loaning to everyone and they didn't care, they didn't, they weren't restraining themselves in any way, and, the regulators, u-as usual, were asleep at the wheel, because the regulators also, to, to be fair, have no incentive to really police these markets. There's this incestuous movement of regulators, you know, from the government to the banking sector and back and forth. so they, they didn't- They didn't wanna, they didn't wanna stop the party as well, because like if you come in and you scrutinize these things too closely, then maybe you're not gonna get a job when you, when you leave, the government. so yeah, it was, it was a whole, mess of failings at different levels. but, but really what it came down to was the banks had made a massive amount of loans, and the assets that they had to back these loans weren't worth anything." }, { "speaker": "stephan", "time": "12:30", "start": 750.47, "text": "I guess the next point then is just to think about what are the predictions that were being made by people at the time, right? So there were some people who were predicting, \"Oh, look, I think, you know, a...\" As soon as the banks start lending money out again, well, then we're gonna have hyperinflation. And then you had some other people who were arguing something different. Could you outline a little bit on those sorts of views?" }, { "speaker": "vijay_boyapati", "time": "12:54", "start": 773.65, "text": "Yeah, so the, I guess it gets back to the money multiplier theory that Austrians- sort of thought that because the Fed had created so many reserves, the banks were just gonna start loaning money out immediately. and the problem was, There really wasn't much more demand for loans in the economy. You can't keep loaning to people if they don't have the ability to service those loans. Eventually, the loans are gonna have to default and, and you, you hit reality." }, { "speaker": "stephan", "time": "13:26", "start": 805.75, "text": "Yeah, definitely. And I think another really important component of your article is just around the politics of deflation versus the politics of inflation. So Vijay, in your view, who are the winners and losers from an inflationary policy versus a- Deflationary policy." }, { "speaker": "vijay_boyapati", "time": "13:43", "start": 823.08, "text": "Well, the win, the winners of an inflationary policy are always those, who get the newly created money first, which are the banks and the people who are most closely associated with the financial sector. the losers are the people who get the money last, which is regular people working regular jobs like doctors and teachers and, you know, policemen and people like that. this is why this system is, in my- My view, not, not only economically bad, it's really morally un- unjust. it, it's regular people who get screwed over" }, { "speaker": "stephan", "time": "14:20", "start": 860.13, "text": "the most. Right. And then there were different angles in terms of who, Who is likely to be preffered by the state and by state bureaucrats and state regulators and so on. So, do you wanna offer a commentary on that?" }, { "speaker": "vijay_boyapati", "time": "14:39", "start": 879.47, "text": "Yeah, so the problem with- an inflationary policy, policy is that, during an inflation, it seems like every, everything and everyone is profitable as, as prices start rising because of the inflation, even though it's only a privileged few who are actually benefiting from the inflation. Inflation's, are kind of insidious because they transfer, the transfer of wealth that happens is hidden and it's not really obvious to the public." }, { "speaker": "vijay_boyapati", "time": "15:10", "start": 909.93, "text": "when the bust happens and, and you, you get into the inevitable deflationary people, people who are running marginal businesses or who took loans that only made sense during the inflation, are bankrupted and their property is taken back in bankruptcy. in the def- in the deflationary bust phase, the redistribution of wealth isn't hidden anymore, it's very obvious and public. property is, you know, visibly taken back by collection services, for example, and, and, and that causes a lot of social unrest because the redistribution of wealth then is, you know, in your face and it's obvious to everyone, whereas during the, the inflationary phase, people like the bankers and, and people in the banking system are getting rich, but it seems kind of like everyone's getting rich 'cause prices are going up, but i-i-in the deflationary period, it's really obvious. obvious that the wealth is being transferred because it's actually physically being taken back." }, { "speaker": "stephan", "time": "16:09", "start": 968.84, "text": "Right. And so that is why I think in the, in the article you, you outline that thesis there that the answer, that's the answer to why the state prefers a policy of controlled inflation, because it's only in the inflationary environment that, as you say in the article, it says, \"Only in an inflationary environment can state largesse be conferred to the politically well-connected without raising public ire.\"" }, { "speaker": "vijay_boyapati", "time": "16:33", "start": 992.93, "text": "Yeah, I mean, if If, if it were the case that the government, you know, was going into people's houses and saying, \"Here, we're gonna take your car, and we're gonna give it to this, you know, bank CEO,\" people would be pissed. They wouldn't, they wouldn't stand for that. But inflation essentially allows them to do this in a hidden way. So, so that's why the politically well-connected love inflationary policy, they're the ones who benefit the most from it." }, { "speaker": "stephan", "time": "17:04", "start": 1024.09, "text": "So with that said, then, what was sort of the basic overall kind of conclusion of your article? And then how do you think that's fair since?" }, { "speaker": "vijay_boyapati", "time": "17:14", "start": 1034.02, "text": "So my, my overall conclusion was I thought, Austrians At the time had, misapplied the Austrian methodology and, and because I didn't, while, while I think I, I'm, you know, I believe in the Austrian methodology, I consider myself an Austrian economist, I didn't think a lot of the Austrian economists were really familiar with how the banking system worked, and so my view was that Despite the fact that the Federal Reserve had created trillions of dollars of reserves that wouldn't result in inflation. And honestly, I, I, I stand by what I wrote, and I think it fared much better than the predictions that were made by, you know, several prominent Austrians in 2008. I, I just think they misapplied Austrian methodology and, and sadly I think, I, I, I really feel like it was an opportunity, to, to revisit Why the, the predictions they made went wrong, because some, some of the predictions you go back and read them from 2008, it's like, \"We're gonna, we're gonna see hyperinflation really soon.\" Or mass inflation, but we didn't, and we, we never have, and, and, and I think that should at least have given some of these guys pause to, to, to, to revisit why that was the case and potentially why their thinking on this was wrong." }, { "speaker": "stephan", "time": "18:44", "start": 1124.3, "text": "Right. And now, one of the, and related to what you were just saying, one of the key points in your conclusion was that the Fed would pursue a controlled deflation, keeping the mortgage market in a sort of stasis. And do you think this part was mostly correct?" }, { "speaker": "vijay_boyapati", "time": "19:00", "start": 1139.87, "text": "Yeah, I do. and, and one of the points that I made in my article that there are two main classes of people who try to control monetary policy. One is the banking class and one is the political class. And when the political class is in control, you have political motivations for monetary policy, and this generally leads you down the road to hyperinflation. You saw this in places like Zimbabwe and, and the Weimar Republic. The banking class, on the other hand, parasitically profits from inflation, so it never wants it to get out of control and, you know, kill the animal it's feeding from, so to speak, like a mosquito sucking blood from an elephant, like it wants to keep sucking blood from the elephant, doesn't want the elephant to die. and my view is that the banking class is currently firmly, in, in the US, it's firmly in control of monetary policy. and instead of wanting to create hyperinflation and kill the whole system, the banking class would wanna try to control the bust and allow the losses that the banks were facing to be realized not all at once and create this, you know, massive deep crash, but allow those losses to be realized over many years, which would result, In, in, in my opinion, in, in 2010 when I wrote this, it would result in very low or sort of mild deflation over several years. And, and I think that's exactly what happened, to be honest." }, { "speaker": "stephan", "time": "20:32", "start": 1231.5, "text": "Yeah, I think so. I think it, it was maybe if you were a more mainstream economist or commentator, you might think of it more like, \"Oh, it's a controlled, controlled letdown.\" Yeah. Rather than just kind of letting it all go to bust, but at the same time, from an Austrian point of view, it may be better to, as it were, rip off the band aid." }, { "speaker": "vijay_boyapati", "time": "20:56", "start": 1255.74, "text": "Yeah, I think so because Really what's happening when you're doing a, a controlled deflation or a controlled bust is you're pre- you're preventing real resources from being reallocated in the economy, and the reason you have a bust is because real resources are being allocated to doing stuff that's not productive or not profitable. And, and if, if you don't let them be reallocated, you, you know, you, you eventually get a zombie economy, kind of like Japan had for a decade. so, so to make it really concrete, if you have like a ton of people laying granite Making new kitchen countertops, and there really isn't demand for that, or that isn't like a sustainable, healthy, profitable, wealth-creating exercise, then you need those people to be doing something that is, you know, wealth-creating and, and profitable. And if you, if you sort of draw out the bust, you're just slowing down that process of reallocation, which means that you're reducing the future, wealth creation that would happen if those people were doing something that was productive." }, { "speaker": "stephan", "time": "22:04", "start": 1323.89, "text": "Fascinating. And that really aligns well with some of the points that, you know, we can learn from reading guys like Huerta de Soto and, you know, Rothbard and Mises obviously, and they speak of the economy really as a, you know, they have a theory of capital, and they have- Have a theory of the understanding of the, you know, the time structure and the capital, there is a structure to production, and that it matters where the different, you know, heterogeneous, you know, pieces or components of capital are allocated, and that really is what has been, thrown awry by the discoordination of capital or discoordination caused by central banking." }, { "speaker": "vijay_boyapati", "time": "22:45", "start": 1364.55, "text": "Yeah, absolutely. I think that's a, a really great explanation. And, and it, it's important to think of capital as not being homogenous and, not, not everyone can do exactly the same thing. A-and part of the misallocation is that, people who have certain skills, their, their skills are being used in completely the wrong way. And, and you can't, you can't really fix it. The government's way of fixing the problem is just to create make-work programs like just you know, create a bunch of money and then hire people to, to dig holes and, and refill them kind of thing. But that's actually even worse, that's prolonging the problem even more, because it's not allowing people to use the skills for what? is actually productive, it's putting them into tasks that they're not suited for. So your point that capital isn't homogenous, actually heterogeneous, is, is something that's not widely appreciated." }, { "speaker": "stephan", "time": "23:48", "start": 1427.86, "text": "Yeah, and that's a very, quintessentially Austrian insight, because when you talk to, or if you listen to economic commentators in the sort of more mainstream world, they tend to think of capital as this kind of blob." }, { "speaker": "vijay_boyapati", "time": "24:00", "start": 1440.24, "text": "Yeah, the, I mean, the idea that you can create make-work programs and that they're suitable for anyone And, of any profession is just absolutely ludicrous. you know, y-y-you don't want to hire a dentist to do, A computer scientist job, and, and you don't wanna hire a laborer to be a dentist. So you can't just create jobs, have the government create jobs and, and, and fix the unemployment problem. What needs to happen is, the companies that were misallocating capital need to go bankrupt, and, and the people who work there, need to find different productive professions within the workforce that suit their skill set." }, { "speaker": "stephan", "time": "24:46", "start": 1485.94, "text": "Precisely, precisely. Now, one area that I think might be relevant to talk about as well is that there was this recent debate between George Selgin and Bob Murphy, and it was on fractional reserve banking versus full reserve banking. Now, you know, I'm a big fan of Bob Murphy, and I liked-- h-his line of argument was great in that he really explained part of it was what really drives the Austrian theory of the business cycle. It's, it's really, it's the expansion of credit beyond the amount voluntarily saved. Saved, rather than necessarily being about central banks themselves, though he is careful to, obviously, we have to be careful to understand it's central banks that enable this overarching system because they are the ones backstopping the fractional-reserving commercial banks, but then it's an interesting, there's two different forms of money creation in that sense. So then the question to you, Vijay, is more like, how, how do you think about, or how do you contrast the money made by the Fed through, say, open market operations versus the money that is lent into existence by US commercial banks? So which one is bigger, and which one has a more negative economic impact?" }, { "speaker": "vijay_boyapati", "time": "26:00", "start": 1559.95, "text": "that's a good question. so again, I think it's important to understand, you know, going back to my earlier point that the banks create the loans and the Fed accommodates, a-accommodates the banking system. So, to, to use another analogy, the economy is, is like an addict that's addicted to credit, and the banking system is the drug dealer feeding the economy the drugs. and eventually, the real economy overdoses. And it can't take any more drugs without dying and basically has to go into remission. so the point is that the banks, are no longer able to sell more drugs because the addict simply isn't able to handle anymore. It doesn't matter that the Fed prints a trillion dollars more in reserves because there's no longer any more demand for the loans, from the economy. or, or to think about it another way, another analogy I sometimes use is, imagine In a forest fire, the Fed is kind of like, the match that starts the fire, but the extent of the fire, how much is burned, is controlled by the strength of the wind, which is akin to the propensity of the banks to make loans and the desire of the population to take these loans and, and, leverage themselves on credit, in two thousand two to two thousand six. Everyone and their dog wanted to take out loans to buy bigger houses because they were convinced that housing was, housing prices would, would go up forever and it was an easy way to get rich. but after the crash, no one believed that buying a house was the easy path to riches anymore and, and no one really had the ability to take on more debt anyway because so many people were unemployed or underemployed. so, so to kind of connect that to your question, i, i, i think it's kind of hard to say which is, more important or better or worse. I think they're just kind of two different causalities, like I was saying, like the Fed is kind of like the match and the banking system is the wind. So you can, you can light the fire, and I think having the Fed there basically makes all of this possible, it starts the fire, but how big and how bad the fire will be is, is really controlled by the banking system and the loans they make." }, { "speaker": "stephan", "time": "28:20", "start": 1700.2, "text": "Yeah, fantastic explanation. Okay. So Vijay, do you think there's anywhere in this article that you got it wrong, or maybe you could have had a slightly different focus?" }, { "speaker": "vijay_boyapati", "time": "28:30", "start": 1710.15, "text": "I, I don't. I don't wanna give the sense of hubris or anything, but I honestly, I think the article stands up really well to the test of time, and I, you know, I wrote it a long time ago and After you wanted to, chat about it, I went back and I read it, and I, I, I honestly think, I wouldn't change anything that I wrote. I think the prediction I made about, very low inflation bordering on mild deflation is what happened, and, I, I think I, I still really believe that the story of bank lending that's generally believed by, most Austrians is wrong, And so while I, I'm, I'm a huge fan of Austrian economics and Aust-Austrian methodology, I think you do need to understand how the banking system works to apply that Austrian methodology correctly. so I, I wouldn't honestly change anything about the article." }, { "speaker": "stephan", "time": "29:33", "start": 1772.77, "text": "Excellent. Okay. so then I think the, the next thing then is to consider what, where do we go from here? So the Fed and central banks around the world, they've effectively painted themselves themselves into a corner. Can they raise rates at this time, or is it, you know, let's consider some scenarios. So maybe we can talk about an inflationary scenario and then the deflationary scenario. So in the inflationary scenario, if we were to paint that, what would it look like? Would it look like central banks attempting to influence rates to stay low?" }, { "speaker": "vijay_boyapati", "time": "30:05", "start": 1804.85, "text": "I, I think an inflationary scenario, you know, based on what we've been talking about, would be one where the demand for loans in the economy Economy picked up and the banks started making loans like crazy to anyone who wanted them, like they did in the early two thousands. I mean, it was really crazy. People who were on, you know, minimum wage were able to buy houses which were hundreds of thousands of dollars. It was, it was crazy. That's actually much harder now because there's, a lot more regulatory scrutiny for loans being made. for example, if you, if you want a loan for your house, banks are much more discriminating in checking your credit history And, and, and insisting that you put a large down payment, a-a-again going back to the early two thousands, banks were making loans to people who were on minimum wage for, you know Fairly expensive houses, and they weren't even insisting that the people who wanted the loan put any money down. So the, the people who get taking the loans didn't even have any skin in the game. So they, they could just go to a bank and say, \"I wanna buy this five hundred thousand dollar house, I'm not gonna put any money down.\" Basically because they wanted to, you know, make free money, put, get a loan for a five hundred thousand dollar house, wait two years when it's worth like, you know, hopefully seven hundred two hundred thousand dollars because of, that was a view how's, housing prices only go up and then sell it and then, and someone working on minimum wage, you know, was aspiring to make two hundred thousand dollars in a couple of years," }, { "speaker": "vijay_boyapati", "time": "31:41", "start": 1900.57, "text": "So, so my point is that, the, the loan standards were just horrendously bad in the early two thousands, and, and, and the regulatory scrutiny increased so much after the bust, there was so much more oversight of banks and, Regulators really their only motivation is to not look like a fool, and they look like fools in after the bust, and so they really clamp down on loans. So I think it's pretty unlikely that we see You know, that kind of, crazy, reckless lending or demand for lending, or, you know, I, I also think people in the economy in general are, are much more wary now about going out and, and leveraging themselves and getting a ton of credit. At least, at least they are in the US. so the scenario, an inflationary scenario would be there'd be a huge pickup in demand for loans and people would start getting reckless and leveraging themselves up. I, I honestly just find that very unlikely right now, where we're only, you know, a decade since the financial crisis, and people's memory of these things actually lasts a long time. People who lived through the Great Depression in the thirties were affected by it for the rest of their lives, and generally, the-- those kind of people who lived through the depression were much more financially conservative, so, so- You know, it, it might be like even a couple of generations before we see that kind of craziness again." }, { "speaker": "stephan", "time": "33:17", "start": 1996.86, "text": "Right. And so I suppose that would be maybe the high inflationary scenario. Could you see what maybe a low inflationary scenario might look like?" }, { "speaker": "vijay_boyapati", "time": "33:26", "start": 2006.19, "text": "Yeah, I, I think the economy has actually been puttering along, just by the fact that the losses from the banking system were put on the Federal Reserve's balance sheet. and this is the controlled deflation that I was talking about. The Fed sort of went around buying up these mortgage securities, which were worth a, a lot less than they bought them for. So it was taking the losses off, the, the bank's balance sheet and, and, and they're, they're now, Unwinding their balance sheet slowly, which is, you know, getting back to the point, it's like a controlled deflation, but the fact that they're unwinding their balance sheet tends to raise rates on mortgage loans because, you know, they're selling off the, the mortgage loans that are on their balance sheet. And, this also tends to slow the whole economy as it reduces the wealth effect. So the interest rates on mortgages go up, people are less likely to buy houses, and so that slows down, the increase in housing prices, and so people can't really bank on, you know, thinking that, that they're sitting on like, you know, two hundred thousand dollars of equity in their house anymore from the house continually going up in, in value. the wealth of- Effect is, is when people think they've made a bunch of money or equity in their house, so they end up spending more by, you know, either refinancing or taking money out of their house or selling their house and spending the profits. So the fact that Fed's unwinding its balance sheet and this is increasing mortgage, rates, and this is reducing demand for houses, which then in turn reduces the wealth effect, That eventually also affects the banking sector because people are, are less, you know, they desire real estate, less because it's, it seems like the whole thing is cooling down, so that reduces the profitability of the banking sector. And eventually, you know, what happens is you, you go back into recession and, the unprofitable banks that made bad loans again, go out of business and you just generally have less credit in the economy and so- So, it, it starts unwinding, and I think the signs are, at least in my opinion, that, that a new recession might be on the horizon in the next year or two." }, { "speaker": "stephan", "time": "35:46", "start": 2146.27, "text": "Right, yeah. And then, I guess, that sort of ties into the next aspect around the deflationary scenario. So, do you wanna paint a little bit on that scenario and what that might look like?" }, { "speaker": "vijay_boyapati", "time": "35:57", "start": 2156.59, "text": "The, the deflation, I think, basically is what I was talking about, it would, it, it, end in a recession where, you'd have, Basically, a clearing out of all the losses that accumulated, the real losses, that accumulated during this period after the financial crisis. And, and you'd see unemployment in, increase, I think fairly dramatically. you'd see a lot of companies going out of business, and you'd probably start seeing prices decrease, in general. I mean, it wouldn't be a massive decrease 'cause the Fed's there to kind of try and backstop that or control that, but I think you wouldn't see inflation. You'd, you'd see also, probably a, a, a big deflation in, Commodities as well, because i-i-it's usually," }, { "speaker": "vijay_boyapati", "time": "36:57", "start": 2216.73, "text": "factors of production like oil and wheat and things like that which are the first indicators that a-recessions about to hit because they just, they crash through the floor." }, { "speaker": "stephan", "time": "37:07", "start": 2227.13, "text": "Right. And that's kind of an indicator that the entrepreneurs are now not- Taking so much, or, or trying to get so many resources to run their projects, so that, I guess that's one way to understand it, and, and other way to think about the Austrian theory of the business cycle is that it induces a mass entrepreneurial error. And so as you were saying with the inflationary scenario and just, you know, what we saw, was all these people rushing to try and become a housing entrepreneur. Yeah. So I think that's one way to think about it." }, { "speaker": "vijay_boyapati", "time": "37:37", "start": 2256.79, "text": "Yeah, absolutely. It's the, the price signal gets warped, by the inflation that's cre created and the money, the money goes somewhere and then entrepreneurs kind of chase, chase the money and you get a misallocation of resources as you say, where you have a lot of people working on whatever sector it is that got, got the most money first, it happened to be housing in the financial crisis, but it's not always housing, in, you know, two thousand it was like dot com companies and there, there've been like so many, booms and busts over time where the money went to a particular sector like rail ways or the canals or that sort of thing." }, { "speaker": "stephan", "time": "38:14", "start": 2294.47, "text": "So then bringing it to Bitcoin, do you think there's a, a chance, and I think Saftein has, outlined some of these thoughts on some of his recent interviews, perhaps on Noded as well, he spoke about this idea of Bitcoin becoming more like a parallel financial system, and people can just try and opt out of the mainstream system by buying into Bitcoin. Do you have any thoughts on how that parallel financial system could develop?" }, { "speaker": "vijay_boyapati", "time": "38:40", "start": 2320.11, "text": "I think we're still in such early- stages for Bitcoin in terms of its monetization, I, I really feel like it's still transitioning from being a co-collectible to becoming a store of value, and I, I, I don't, I, I think that needs to play out for longer before an, an alternative financial system can be built on top of Bitcoin. so while I, you know, I really admire the, the brilliance and technical abilities of people who are, trying to build payment services and, and, and so on and so forth on top of Bitcoin. I, I don't think the demand is there yet. I think there needs to be enough savings in Bitcoin for that financial system to be developed. but I do, I, I, I do think that will happen. It's just, it's, it's a matter of time. Right, right now I think we're in the phase of getting more people, aware of the value of Bitcoin as a store of value and, and, and why they should hold some. And, and once, once it's widely held, then it makes sense to have a financial system built on top of it. Like, it doesn't really, it doesn't make much sense to build a financial system on top of, gold because very few people own it, So yeah, we just have to wait. It's gonna take some time." }, { "speaker": "stephan", "time": "40:04", "start": 2404.01, "text": "Yeah, I like that insight. It's a very insightful, way to think about it that really we need more people to own Bitcoin before it really becomes more viable that the world moves to a Bitcoin financial system as well. And I think you're taking a very, you know, long term view there as well. Okay, so then, I guess the, the next thing then is, just to discuss a few thoughts around, you know, bring it back to Bitcoin as well, is just around how do you think Bitcoin will react in a recession scenario?" }, { "speaker": "vijay_boyapati", "time": "40:34", "start": 2434.15, "text": "That is, it's a very interesting question. I, i-in a way, just observing it. I almost feel like Bitcoin has become like a leading indicator for the, the greater financial markets, which is astounding when I, I, I almost feel like the bust that happened at the end of 2017, preceded or led the bus that's kind of, I think, is gonna happen in, in the, the, the fi-greater financial sector. The interesting thing is that," }, { "speaker": "vijay_boyapati", "time": "41:09", "start": 2469.26, "text": "Gold kind of, is very non-correlated with other major financial assets like sta- stocks and government bonds, and the good thing about gold is during a, a financial crisis, gold usually does pretty well, and so is, You, you say it's an anti-correlated asset." }, { "speaker": "vijay_boyapati", "time": "41:31", "start": 2490.59, "text": "I, I'm not sure, I think that's gonna be true for Bitcoin yet. Again, I think it's a, a matter of scale. Bitcoin is quite small and, I, it, it, its price could, could move a lot based on like fairly small things happening, like, you know, a pension fund or something says, \"We wanna have like an allocation to Bitcoin,\" and they, they put in, you know, twenty million dollars, and that spurs a bunch of other pension funds doing it. It, it's still small enough that the flow of funds in Bitcoin," }, { "speaker": "vijay_boyapati", "time": "42:08", "start": 2527.95, "text": "is, is tiny, is really, really small compared to the greater financial system, so i-, i-, it's not clear to me that the base of ownership as well is very different from, the o-base of ownership in traditional financial assets. You still have like You know, a fairly small number of, technically savvy, computer scientists and cryptographers who own a, a fairly large fraction of all of Bitcoin. so Bitcoin's movement is determined a lot by what a fairly small number of people are gonna do. So I don't think you can correlate the two things, and in, in my opinion, it's, It, it's, it's not easy to predict what's gonna happen to Bitcoin, based on, you know, whether the market crashes or not, but I, I will say that, I, I think there may be some relationship in Bitcoin leading, the stock market crash because you had so many retail investors investing in crypto at the end of 2017, and a lot of these, investors took fairly substantial losses, like the market capitalization of crypto, at the end of 2017 was close to a trillion dollars, and now I think it's down to something like, you know, a hundred billion, so like that's, that's almost a ninety percent loss. So a lot of retail investors who, and probably some funds as well, which suffered substantial losses in crypto and who don't have that long-term mindset. And so To make good on those losses, I'm sure a bunch of people, a lot of people sold other things to make up for those losses, to cover their losses in, in crypto, and that, that potentially, was a Precipitating event in, in driving stock markets down." }, { "speaker": "stephan", "time": "44:02", "start": 2642.5, "text": "Yeah, yeah. And I think, so what you're sort of articulating is similar to another view I've seen, which was that it's almost like Bitcoin is of sorts, a canary in the coal mine, but ultimately, it's still very small. It's a function of size and time, and that really we're just gonna need more time for this to play out, and it could be decades." }, { "speaker": "vijay_boyapati", "time": "44:22", "start": 2661.52, "text": "Yeah, and, and, and, and saying it, saying it another way, Bitcoin or, or crypto in general is like a, Risk on asset, like when it's going up, you can tell that the mood of the population is, they're, they're willing to take on a lot of risk. a-and the fact that, like you, the way you described the canary in the coal mine, when, when you see something like Bitcoin crash, then you know the risk appetite in general is decreasing, and that, that has the population at large having a lower risk appetite is gonna have consequences for all other assets as well." }, { "speaker": "stephan", "time": "44:58", "start": 2698.28, "text": "Right. And then I guess that, that, that brings me, brings to mind Trace Mayer's comments around this idea of, well, the world is deciding which one is gonna be the money, right? And in, in his view, it's gonna be the US dollar, gold, or Bitcoin. And so he has this explanation of, okay, look, Bitcoin's reaction to a crisis, you know, Bitcoin is gonna be like that little rubber ducky that just floats on top of the water even as it, as, as the overall bathtub water goes up or down. Do you have any thoughts on that sort of" }, { "speaker": "vijay_boyapati", "time": "45:29", "start": 2729.26, "text": "and I think that's kind of a cool metaphor, a rubber ducky that, that won't, can't be kept down. I like that. I think of Bitcoin, my view is I think of it more like an amoeba or a cockroach. it's something that multiplies easily and is very, very hard to kill off completely. and the fact that it's hard to kill off means that people will recognize its value in time, by the Lindy effect. and, and my view is that Bitcoin will al- Obviously, this is obvious to me, well, it's obvious that it will exist ten years from now, and, and the very fact that it will exist ten years from now means it'll be much, much more valuable than it is now." }, { "speaker": "stephan", "time": "46:11", "start": 2771.21, "text": "Yeah, exactly. Right. Okay, well, I suppose, that's probably the key points I wanted to touch on for this, interview. But I suppose if you've got any closing thoughts or maybe any wisdom for Bitcoin hodlers as they have to, you know, go through the phases as, as- As we usually do, I think you've talked, you've talked about this as well around, you know, disgust and then capitulation. Do you have any wisdom for them?" }, { "speaker": "vijay_boyapati", "time": "46:35", "start": 2795.3, "text": "Yeah, the, the, the people who have been most successful, in, in the crypto space are the ones who, who have had the fortitude to, to weather these bear markets, and it's really, really hard. I'm not gonna, make light of it and say, you know, it's easy to deal with a ninety percent decline, But the, the people, who, you know, have, have transformed a small amount of wealth into a huge amount of wealth have gone through this kind of cycle before or have gone through it multiple times. and, and I think each time we go through it, the cohort of people that, see the, the value of Bitcoin and, and why this is like a long-term generational bet in creating a new financial order it grows, and, and I think this last cycle saw tens of millions of new people exposed to Bitcoin, and, and my view is that a very significant number of those people have now understood why Bitcoin is important and, and will form a base for this cycle. I don't know if we, if we're there yet or if, we've, we've hit the bottom, but- I definitely don't think this is the end for Bitcoin. I think ten years from now, Bitcoin is gonna be much, much higher than it is now, because there's, there's no scenario in my mind where I can't imagine Bitcoin not existing ten years from now. and the fact that it has existed ten years from now will mean it, it will, people will essentially believe it's a permanent institution on Earth. And, and if that is the case, there's only twenty-one million of them, it's, it will be very valuable to have some of them." }, { "speaker": "stephan", "time": "48:29", "start": 2908.52, "text": "Okay, Vijay, I think that's pretty much it. but just for the listeners, make sure you, if you don't already, follow Vijay. His Twitter is real underscore vj. Look up his article, \"The Bullish Case for Bitcoin discuss today why credit deflation is more likely than mass inflation, and I'll put all the notes in the show notes. I think that's it from, from us today. Thanks very much, Vijay." }, { "speaker": "vijay_boyapati", "time": "48:52", "start": 2932.4, "text": "Thanks, Stefan. That was awesome." }, { "speaker": "stephan", "time": "48:56", "start": 2936.03, "text": "Check out the show notes for this episode on my website, stephanelivera dot com. If you enjoyed it, remember to subscribe so you don't miss out on the next episode, and please share the podcast with your friends. You can also follow me on Twitter, my handle is at stephanelivera. Thanks for listening." } ] }