Merryn Talks MoneyBest Of: Lyn Alden Talks Bitcoin and Explains Why Money is Falling Behind the Times
For every listener who has written in to say "You must speak to Lyn Alden"--we're reposting our interview for you.
So this holiday break, please enjoy investment and macroeconomic analyst Lyn Alden exploring the history and future of money with Merryn. Alden discusses her book Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better.
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This week we're bringing you our conversation with Lynn Alden, author of Broken Money, While our financial system is failing us and how we can make it better. We picked this episode because I get a lot of tweets from people suggesting I speak with Lynn, and I have already spoken with Lynn. So if you haven't heard this one, listen in because it's a great conversation on my money is falling behind the times and what roll bitcoin has to play in the future. So this week we've had or were should we say were This week we've had results out from Saint James's place, and boy they've been a shocker.
I'm sure you've seen them. Everything is lower, cash props is a slightly lower anyway, but that's entirely overshadowed by the provisions they've taken a version of four hundred and twenty six million pounds, which they say is linked to evidencing and delivery of client servicing. I they can't prove that they have been providing clients with the advice that they should have been gotting on the ongoing service they should have been getting, and they may have to pay an awful lot of them back. It's absolutely huge. So the share price fell. We're talking, by the way, everybody. On Thursday the twenty eighth, the share price fell around thirty percent first thing this morning. Is back up a little bit now, but it is still down over one year sixty two percent. And that is a direct result of the regulatory authorities starting to look at what represents value in the financial services industry. So a lot of people will get a nice little bit of money. It's a bit like the cars where everyone didn't get quite what they're expecting from their interest rates and may now get a pile of money back. But do you know what I want to talk about when it comes to Saint James's Place is not so much the advice that people weren't getting, thought they might be getting, didn't know they were paying.
For, or whatever it was.
It's ESG because I like to bring a lot of stuff back to ESG. Now, yeah, I have had a look at Saint James Place ESG risk ratings and here we are on Sustainalytics and the ESG rating for Saint James Place is eighteen point six and that is considered to be low risk. So if we look, you can be negligible on zero to ten and the at medium twenty to thirty, high thirty to forty, and severe forty. Now, if you were an investor fund manager who invested with an ESG overlay and you held Saint James's Place, which I think some do, would you have fulfilled your brief even though the company has technically rated low risk for ESG purposes. I would say it, and I'd like to hear your view on this that for S and G purposes, this was a very high risk STOC to hold.
I mean, I think you're absolutely righty. I think that anyone who read the papers, the financial bits of the papers, including no very very mainstream, high profile newspapers the Sunday Times, did a lot of good work on this from what I remember, they would have realized that there was at the very least some controversy around Saint James's Place and the fees that it was charging and exactly how that fitted in with the FCA's overall view of how customers should be treated. And that's been saying it in the most diplomatic way possible. So yeah, I think if they'd actually been doing any other than box ticking, then they should have realized that. I do think it also points to the fact that grouping ES and G it's kind of a mishmash of compute bollocks. If I'd allowed to say that, you know, it's like, as far as I can see, the E is the bit that gets all the attention. That's what people think of. So it's like, if it's a wind turbine creator, then yes, I'm going to buy that because it's E, and they don't really think about the S or the G. And if there's an oil major, then not going to buy it because they just think about but they don't actually think, actually, this is a well driven oil major. And that's before we even talk about how we meant to do with forceil fuels, you know, et cetera, et cetera. So yeah, I think it's more just it just points to that it was always a you know, a marketing tool at best, and a weird kind of metastasization. All of the stupid ideas that have come out during the zero percent interest rate.
It al seems to me that if you look at the G, that should be the only one that really matters, because if the G is good, the rest will follow, right, A well management a well managed company will obviously have an I to an S and an I to an E to environmental and social issues. But the G is the core thing. And you could say, and you know, we'll we'll look more closely. It's in games places over the next couple of days. But you could say that it's the G that has fallen down here. I've just looked up when they announce their new fee structure, because everything changed again under regulatary pressure the end of last years and change place introducing a new fee structure. And if you look at what these CEOs said at the time, given our confidence and making these changing there is also no change to our ongoing dividend guidance, which continue to be based on blah blah blah. But what we found out today was that the dividend has been slashed fairly significantly. So there's a you know, there's a G issue there and that seems to be the one that we should be looking at going forward. Anyway, that gave me an excuse to round about ESG briefly, but we'll move on from that just to say this is complicated, look at it more carefully than you ever might have thought that you needed to. Now, the next thing that's coming up is the budget quite soon. There's a lot of G issues going on there. Right, we can't tell you exactly where's the G anyway, so inadequate G coming up next week definitely. We can't tell you what's going to happen, but we can tell you in advance to make absolutely sure that you have done everything you can to use all your tax allowances. Might as well use that ice rub now, might as well put what you can into your sip. Now, you just never know, right, doohant anything else we should be doing in advance?
Well, it's well, the ISA SEP. If you're in the marginal income tax rates, obviously look at things like salary sacrifice. If you have got a lower learning spouse or your spouse is the higher earn in one make sure your assets are distributed in a sensible tax efficient way. I don't see anything wrong with that. VCTs and the ses are obviously options if you really have an awful lot of money and you've used up your SIP allowance and your eyesa allowance. But I think the other thing is and I mean I think it almost feels that it should be redundant to say this by now, because this has been the case for at least ten years now. But if you have your money and anything that even smells faintly like a tax dodge vehicle, then you shouldn't have because nowadays it's all about the spirit of the law rather than the letter of the law. So if the HMRC comes across the scheme that says that it's a bit avoiding tax, but they didn't intend it to be allowed to avoid tax, then you're going to carry the can for that at some point, and they are pretty aggressive it pursuing this. So don't be invested in anything dodgy. Basically, just use the government approved tax efficient vehicles as best you can and then crush your fingers because the tax burdon is going to be high for a long time.
Probably.
Yeah, it's interesting in a Johinay and I was looking for a new accountant about five six years ago for various reasons, and I went round a couple of accountants, you know, just saying who would suit, et cetera. And they're seemed to be an incredibly easy way to decide which accountant not to use because several of them just did to me various tax avoidance schemes which turned out, of course in the end to be classed evasion schemes to do with films being the obvious, etc. And it turned out the very very very easy way to check which accountants you want to use, and anyone who offers you that stuff is not the accountant you want to use. That fascinating.
It's interesting.
I mean, I do think.
Something that sort of felt at the time. I think it's not ideal that we have sort of moved to a situation where it's all about the intent of the law rather than the letter of the law, because I think that that's a blanket for lots of bad governance. And also, I mean, I do wonder how much that's kind of influenced the way that a lot of politicians seem to want to now just say things and make it so, and that whole virtue signal and idea where you think you've passed the law and therefore you have dealt with the problem, as opposed to haven't you think about what the consequences of the law may be. So I do wonder how much of that is don't Well, Okay, now that the spirit of the law rather than the later of the law, kind of saying, but you just have to live with it. Unfortunately, you have to operate in the world as it is.
That's interesting how often we have to remind people of that, isn't it?
This is quite striking.
Welcome to Merren Drook's Money, the podcast in which people who know the markets explain the markets. I'm Maren sumset Web. This week I speak with Lynn Alden, the author of Broken Money, Where financial system is failing us and how we can make it better. This book came highly recommended. Lots of other people have read it and told me I should too. I have no and I have now and I have it. It's a tremendous guide to the history of money and where we are now with the modern money system. Lynn, thank you so much for joining us today.
Happy to be here. Thank you for having.
It's interesting you put money in the context of LEDGIS systems. So in the very beginning people you used always talk about just barter and trading shells, et cetera, et cetera. But you take a slightly different approach to the beginnings of money. So I wonder if you could just talk to us a little bit about that.
Sure, and so in kind of historical economic literature, there's really two camps for what money is at its foundation, and so the most common one that people hear about is that before money, people had to use barter, so they had to trade different things, and then eventually they realized that if they all agree on a shared unit of account, that it can make trade way easier. And this tends to be an emergent phenomenon that happens in societies all over the place. They choose different types of money based on their technological development, based on what's available to them, but those moneys tend to have certain attributes and certain technical changes tend to obsolete certain types of money, and it tends to be like an iterative process. So if you choose the wrong type of money, someone else can basically exploit your wrong choices until the society settles on the right Money's basically the good that you'd like to hold. It's liquid, that's portable, that's long lasting, and that you can basically always have a high likelihood that you can trade it for something else. That's not the one camp of money. The other one less from the economic side and more from the anthropology side, which is to point out that not a lot of barter is found even in hunter gather societies or in kind of history as we know it, the barter tends to be a pretty rare state. And instead they point out that societies tend to sidestep the need for barter before it even arises. It's basically such a basic problem that, even pre dating commodity money, usually they use credit to try to reduce the number of times they actually have to make a physical transaction. They say, but instead of trying to trade spears for furs and trying to figure out exactly what you need when I need, instead I can just give you what you need, because I happen to have a surplus of many things at the moment. And that's based on the premise that at a layer time and I might be deficient on something, you owe me whatever I need at that time. And so credit is an early tool, a long way commodity money to mitigate that. And I think that the two ways to summarize that are if you're trying to avoid the double coinstence of wants, basically the challenging thing of having a surplus is something that someone else has a deficiency in, and having a deficiency is something that someone else has a surplusit and therefore being able to make a trade. The two ways to make that easier are either a shared unit of account that we can use for one side of every transaction that's basically commodity money, or that we can delay that over time by making it so that our double coincidence of wants doesn't have to be for the same thing. At the same time, that as long as there's a period where you need something and there's a later period writing something that can be extended and therefore have a higher probability of success. Those are kind of the two paths of where money has originally.
Yeah, and you use a wonderful example at the very early part of the book with Godfather to explain about this kind of social credit use of money.
Yeah, that was a key example because Veto in the movie has most things that he needs, and so when people come to him he doesn't really need anything from them and want a little bit of money from them. He doesn't want anything they really have at the time. But instead of what he does, it says, I'll do this favor for you now. Because he's in the position where he has a surplus of many things, many resources, and in their shadow economy that he's got a lot of resources to deploy, and what he asks for in favor is an unspecified favorite of future time. So he's basically saying, there's absolutely nothing I really want for you right now, but I perceive that there's a chance in the future that I will, And so that's basically a way of him granting them something even though he doesn't get anything from them, because he employs the usage of credit.
Okay, interesting, Now, one of the other examples that you use is one of my favorite examples in this island in the South specific. Yeah, they've always have historically used these very big round stones with a hole in the middle, which they called ry stones. Is money, right, And this has been very interesting to everyone who's been interested in bitcoin since the very beginning because it really did operate as what we now think of as a proper ledger system, right.
Yeah, And that's a useful example because in the book, for example, when I talked about those two types of money that I talked about, either credit or commodity money, the thing that they really have in common is basically people are deciding on what ledger they're going to use, what is the unit of account, and what is the record system that they're going to rely on. And so if you're using commodity money, you're basically using nature as your tool for saying, Okay, here's the number of units that exist at a given time, here's and then those units are updated by physical possession, whereas if you're relying on credit or similar systems, you're relying on human administers of that ledger, either orally or in writing. And the aap stones are interesting because they were an early combination of both. They kind of get to the root of money, being a ledger itself, and so that's an instance where a unique set of circumstances gave them a particularly unique type of money. So most commodity moneys in early times were things like grains and shells and cocoa, and they tend to have these kind of common attributes, whereas the yap stones the rise stones were quite different. So they were on a small island and there's another island two hundred and fifty miles away or so, and on that other island they had very attractive limestone, and so they did not have it on their own island, and so they would go on fairly simple boats and they would go across this kind of treacherous water. They'd go mine the limestone, bring it back, carve it into big circles, and they'd have different sizes that some of them could be moved, and some of them were so big that they could never realistically be moved again. And they had all these these stones, these limestones, now on their own island, and when they transacted with each other from major things, they would just orally say, this stone now belongs to this person. So the big stones themselves don't move, and instead it just basically the island has a mental and oral ledger of who owns all the stones, but then it is backed up by the physical properties of the stones themselves. It's very hard to add new stones to the system. It takes a lot of work to do it. It's very dependent on the time and play. So, for example, the fact that a small island makes oral transmission of the ledger possible. And two, the technological error that they existed in made it so that the stones were very hard to acquire, and that was eventually broken by the fact that as people from industrial societies came to the island saw how to exploit the system. They would use their advanced technologies to more rapidly increase the number of those stones on the island, or otherwise use forced to coerce them through their appreciation of the stones to do things. But in that era, that served as a particularly unique type of money.
But both parts are interesting, aren't they First when the money system was working well, and then secondly when it was effectively destroyed by people with better technology bringing in more stones and hence too much flow, destroying the whole thing. So both parts of it are interesting in the context of looking at how money works today.
Yeah, and it also shows that even dying money systems can have a second wind or a way to try to fight back. So, for example, when the stone system started being disrupted by those more industrial technology, the people that use that money system would say, well, older stones are more valuable now because they are provably prior to this technology. And so all these newer stones, they're kind of like modern art. We're not going to treat them the same way, whereas like these older stones are like Da Vinci paintings, right, they're not able to be reproduced, even with better technology, because we're now adding age as a factor, and so there still were attempts to make that system go longer, and just of course over the long arc of time it became more of a relic of the past.
Now I'm slightly wondering how to approach the rest of the history of money before we get to the today, because there's so much going on here, from money being connected to commodities right through to the beginning of fractional banking, etc. What do you think of the sort of key points on the journey from effectively app to hear.
I think the main thing is that as different moneies came together, so as all these societies met each other, there is an iterative process where the weaker moneies increasingly got sorted out, like the stones we just talked about and other types of monies, until basically the ones that kind of were left standing given all of humanity's shared technology was gold and silver, because they were resistant to debasement even with better technology, and they had better properties of money in the more universal sense, and each society had their own moneys based on what was available, what was technologically suitable. But then as time progressed and as societies met each other, there were objectively better answers than other answers for what constitutes good money, and as those came together, the more suitable money would win out until the whole world found itself on a shared standard.
Okay, So then we end up with gold and silver effectively being a global money system. And what was the next big step after that?
The next big step after that was so that was you know, thousands of years of kind of finding out what is the best physical money. But the other big step was how do you move money around? So even those top money still had limitations for verification, a physical transfer to visibility limitations in some cases. And so the other kind of technical path was different proto banking and full service banking arrangements that people and cultures would develop on top of those money systems so that they could move the ownership of the money more like more easily and faster and cheaper. They didn't have to move the physical money itself. An early example in the book that I used is the Hawala system, which is prevalently even before Italian city state banking basically throughout North Africa, the Middle East and stretching into India basically along the silk road path, there would be these money changers called houalidars, and if you wanted to transport gold from one city to another city, for example, the expensive ways physically transport it, which you might do if you have a sufficient amount and you're highly secure, you might want to do that. But if you're doing that on a regular basis, a service that was provided was that you could deposit gold with your local haualidar. They would give you a receipt for that gold, and then you or your messenger could transfer that receipt to another city, and in that city, that houalidar has a contact with another haualidar and you would redeem the gold from that other haualidar, and those haualidars between those cities would do multiple these transactions in a given month or a given year, and they would net out, so maybe every six months or every twelve months they would actually do a physical settlement to sort that out. But they're able to do multiple transactions between them just by transferring kind of the knowledge that was made, and so we can think of that as a series of analog encryptions. Because when they invented paper, it was improven over papyrus. When they invented book binding, that was an improvement over scrolls. When they invented the printing press, that was an improvement overhandwriting. They had to have analog encryption techniques to make it so that people could not just forge different types of receipts or copy different types of receipts that are redeemable for gold for obvious reasons relating to fraud, and so on top of all that kind of global contest to see what types of moneies are most suitable, there's also this kind of global growth in terms of all these different methods to more efficiently transfer the ownership of those underlying especially gold and silver, but really any sort of physical object.
Okay, so now we're moving towards papers is bearer assets, and we're moving towards the possibility of fractional banking, right.
Yeah, Because basically any sort of money change or any sort of monetary entity would realize that a lot of people would deposit their gold. They'd have these paper receipts for gold, and they would find that way more convenient than holding their gold themselves, and so they would realize that most people do not redeem their gold all at once any given time there's a small percentage that might be being deemed or being deposited, but that they have a common float there, and so the temptation there is, so, okay, we can lend some of it out, earn interest and therefore reduced the fees that you charge your depositors, maybe even give them a share of interest, which allows you to outcompete other custodian type entities. And that works for a period of time, but it leads to obvious some systemic issues. If you do get a bigger than normal attempt to withdraw the gold, and your assets are denominated partially in gold and partially in these less liquid loans and other assets other types of collateral, then you could fail to meet that, and so they started to introduce basically systemic instability into some of these arrangements. Because the way I put it in the book is there was an increasing speed gap between transactions and settlements. So over time, as all these different layers on top of gold and silver became more and more efficient, it allowed those number of claims to grow compared to how much underlying metal there was, until it became systemic and a big technology I focus on which people don't really think of the telegraph as a monetary technology, but it was arguably one of the biggest technologies for how we use money and how banking works. Because prior to the telegraph, anytime you transferred to information, you still had to get there. You had to physically move people, ships and horses and all that to get the information to another city. Whereas in the eighteen sixties, once we had the telegraph over continents and acrossed oceans, you could update each other's ledgers at the speed of light, and you had a huge gap between all these kind of banking arrangements and the physical gold, and you had a very kind of elaborate, hierarchical system of multiple claims for every unit.
Of underlying sounds like the beginning of the end.
That's how it ended up going. Basically. One of my favorite sources in the book is in eighteen seventy five, William Stanley Jevins wrote a book called The Money, Money and the Mechanism of Exchange, and I cited that in the book, and it's a fascinating read because it's one hundred and fifty years ago and he's describing how the monetary system works and how technologies are making their monetary system more efficient. And he's very precient because he's on one hand, he's saying, look how efficient we've become. Every friction we encounter, we just centralize it. So you know, basically all global trade can just go through London now and everything can net out and gold rarely ever has to ever move, and it's hyper efficient, and this is great. The other hand is we have to remember that all of these claims are redeemable for gold, and the system's now levered twenty to one, and so if five percent of people show up and want their gold back, the system is illiquiated and not solvent, not able to make those claims. And so it's like we he's balancing these kind of observations around efficiency and stability. And of course we know from history that a few decades later INLD War One, that whole leverage system unraveled and we had to go through major transformations of what we use as money because that increasing kind of leverage, that increasing speed gap, really changed how humans interact with money.
Well, you have them. I'm glad we've made it to World War One. We've skipped hundreds of years. We've done brilliantly, And in the middle of the book there's a really terrifying chart of the buying power of one hundred pounds over time seventeen fifty to twenty twenty three. And by the way, Stelling is it is the oldest existing currency in the world, isn't it. I mean, it's been going for so many hundreds of years. It's really quite impressive. Was it's lost the majority it was value over that time, but nonetheless, Sterling it is the oldest consistent currency.
Yeah, it's the oldest consistent currency that is still alive today. And it's interesting because for centuries it had a very slow debasement rate. It was an average of something like zero point one five percent per year. There were these occasional mild devaluations. It used to be a pound of silver now it's a couple of grams of silk. But over like the first you know, six seven plus centuries as a very kind of steady, slow debasement rate. But once World War One happened and once kind of this huge gap opened up between efficiency of trading all these claims around and being able to fraction reserve everything, you started to get this rapid deterioration in the pound sterling compared to the underlying precious metals and for perching power in general. And one of the observations I make in the book is that that opened up a kind of a problematic in setive structure, because debasement has been something that has existed for thousands of years, I mean going back to Roman times and prior coinage has always been debased to varying degrees. But the modern system allowed that debasement to happen practically overnight instead of over years and decades. And so basically with a stroke of a pen, when entity a government can now print a lot of money and then break all the pegs to base all the money, and then as in the years that follow, as the inflation follows, then they go back and try to address what happened. And so what would normally take many years in a long period of time can be compressed into it really with a stroke of a pen. And that's the modern era of money that we find ourselves in.
One of the extraordinary stories around this that you tell in the book is about the UK Warlon, which was only paid off relatively recently, and there was a publicity campaign at the time that suggested that the Warlone was an easy sell and it was hugely subscribed, and the British rushed to buy the Warlon to help finance the war, and that was what was put about at the time. But it turned out, of course not to be true at all, and we only found out much later in twenty seventeen that the Bank of England blog was called Bank Underground wrote a piece explaining the in fact this hadn't happened at all, and effectively the money is simply been printed. And then in a wonderful little end point of this saga, the ft that had written stories at the time saying how wonderful it was that everyone had rushed to buy the Warloonne printed an apology in twenty seventeen saying that everything they had written was not true. We are now happy to make it clear that none of the above was true. So this is when the central banks started this money printing process in real earnest and also started not quite telling us the truth about it.
When we think of government finances, we often think of taxation and spending, and that is a fairly transparent process and that can be kind of debated each year and each electacieson to see, Okay, what a tax is going to be, what is the budget deficit or surplus, and what kind of thing is are we spending on? Whereas inflation is a more opaque form of taxation that can be done first and then sorted out later after the consequences have already occurred. And for example, in that arrangement to finance that war, they could just lie and say, Okay, the loans have been met, when really what they're doing is they're just printing money. They're financing the loans through new money creation, and therefore they're spending into the economy money that they did not withdraw from the economy. Therefore they're expanding the overall money supply, and therefore all of the holders of the currents to all the holders of the bonds, including foreign holders of currency and bonds, or getting sharply devalued without knowledge that it's happening, and without having given any sort of consent or any sort of process to make that happen, and then only in hindsight in this case comically like a century later, but even if it takes place three years five years later, the consequences to smooth out over time, they go back and realize that they never actually consented to this. It was basically taxation without input or knowledge, and therefore it could not be debated, could not be protested, it could not be discussed in a way that would normally be done with taxation. I guess one of the themes in the book is that as technologies come, it can sometimes change the power structure, or the incentive structure, or where the source of power is. Prior to that kind of era of telecommunications and heavy use of banking, money was intrinsically hard to debate. It was a very challenging, physical process, slow process to do it. But in this modern era, because it can be done so quickly, it really shifts a lot of that power to those who wield the power of the printing press.
And it makes central banks extraordinarily powerful, doesn't it. And it's one of the bizarre things about recent times has been the idea that an independent central bank is a very good thing, whereas in fact, in some ways it's a bit of a threat to democracy because if the central banks have the power to do this, to create the inflation and effectively to transfer wealth between different groups and an economy. It's not necessarily something one likes to think of happening outside democracy.
Yeah, and it's one of those things where so central bank independence, the main purpose of it is so that the like a president or a prime minister, some sort of leader can't just call up the central bank in a week leading up to an election and say, hey, I need you to cut industrates, or I need you to reduce the economy, or I'm going to fire you, right, so that it's trying to avoid those kind of near term abuses of the system by instead having some sort of separate powers. The challenge is that, especially during crises, central bank independence tends to go away. The government just captures the central bank and says, look, it's a war, you're going to finance the war, So it's not really independent anymore. And then two, even when it is independent, people are end up therefore very reliant on the competence and the ethics of the central bank, which can be people that they didn't necessarily lack. Obviously, each country will have its own process for how the central bank is structured, but these are generally appointed rather than elected officials, a rather small number of people dictating what the price of money is what the price of money and time is essentially able to make low credit loans to certain entities and not other entities, and therefore they get quite a bit of power, the power of the purse, the power of even defining what our money is, something that is both powerful but opaque.
And as I say, uncomfortable outside the democratic Now, let's flip forward another few decades and talk about today. And the keep going to the book is that our money system is broken and that were being failed by the system as a whole. So let's talk about what's broken now more than has been in the past. What's so terrible? And that for most people money works. You know, they have a bank account, they invest a bit, they buy this out. There are debit cards work, that bank accounts work. Now they're getting some interest on their bank account. That I was saying, this is marvelous. So for most people they would say, well, I don't know what you're talking about. My money works.
Yeah. I distinction I make in the book is between developed and developing countries. I argue in the book that there's problems with money everywhere, but they're more obvious in certain areas than others. So when zoom out, there are about one hundred and sixty currencies in the world, and outside of the handful, many many listeners of this are probably in the handful of me and you and others listening are in the handful of currencies that are the least bad. These are the ones that lose value that the slowest, despite all the problems we just discussed, outside of major wartime, they are kind of slowly debasing currency, Whereas when you look at the long tail of most currencies, which is actually where most of the people in the world live, they experience much more rapid currency debasement. And therefore all of those issues we just talked about the opaqueness of say, financing government through inflation, for example, things like that happen way more magnitude and way more frequency in many other countries in the world. So that's one big problem. And two, there's actually a shocking number of people in the world that are still unbanked. So you know, banks have been now around for centuries even longer in some forms, and yet there's in a fairly short period of time more people have smartphones than have bank accounts. In the current era, there's basically an inherent kind of limitation to two banks and so the combination.
But if you have a smartphone, do not automatically have a bank account. I mean, in Kenya, I noticed it's all now, but there was empessa, et cetera. There's always something you can do with the phone to create the equivalent of a bank account.
The equivalent, yes, And I think that's one of the kind of pieces of my book is that technology is kind of enabling people to go around these issues. So you know, in these countries I just talked about, all these countries with failing currencies or mixed access to bank accounts, technology is now enabling people to have more choice over their money. So things like bitcoin or stable coins allow people in all these different jurisdictions to say, instead of my local rapidly debasing currency that my wages and my savings are denominated in, I can go round that system and I can say I want dollars from this jurisdiction, or I want this decentralized currency bitcoin, or whatever the case may be, depending on their preferences, their volatility tolerance, their technical understanding. And so that's basically a way to break into all these different silos and the other point I make in the book is that when we look at developed countries, so obviously we have a lot fewer obvious problems with our money. Like you said, we don't really have problems making payments, we don't really have problems with rapid debasement. But instead the problems tend to be more subtle. So, for example, the rapid accumulation of government debt is one of those things where it's this kind of slowly growing instability outside of our kind of immediate concern, but something that long terms an issue, and I think a more kind of short term issue. Something that kind of happens on a regular basis is that people underestimate the importance of credit. And so, for example, during major crisises, when credit locks up, when governments and central banks give selective credit to some entities. For example, in the United States during the Global financial crisis, they gave credit to large banks, but they would not give credit to say, some smaller banks or homeowners and entities like that, And so they can selectively basically bail out certain entities more so than other entities. And this is kind of a recurring cycle that happens recession after recession after recession, and it's one of the key forces of wealth concentration that's happening under the surface. So in some way, the kind of the problems of the money that we have in developed countries are more like the problems of having a bad diet. And we talk about the quality of food, for example, we might say, well, when we eat it, we get full, we function, we don't really see a problem. But of course if we're eating bad food over a long period of time, those problems tend to accumulate, Whereas in developing countries the money problems tend to be more bad on the surface. It's more like the food is poison, and it's more obviously in your face a problem. And so there's all these kinds of inefficiencies built up in the system. And I argue that a lot of it is just because of the technological path that we've you know, kind of the deterministic technological path and the order of technologies that we've had up to this point.
Okay, so how do we fix it? Linn.
The book basically doesn't have a firmly prescriptive view, but it basically emphasized that some of these open source technologies that are still somewhat dismissed by academia and kind of mainstream journalism, are I think a lot more powerful than they get credit for. Basically, within that kind of one hundred and sixty different currency framework that I mentioned, the fact that these currencies can go around borders, the fact that they can provide people more choice of what money that they want to hold, regardless to where they are. As long as they have some sort of basic internet connections, some sort of basic phone service, they're able to go around these types of blockades. And that's over the long arc of time, I think able to put a lot more restraints on the types of manipulations that can occur outside of their purview and give them more options. For example, I personally spend part of each year in Egypt, So I live most of the year in the United States part of each year in Egypt, and that's because some of my family and friends are in Egypt. My husband and I are kind of by country, and whenever we're in Egypt, we see a lot of these problems a lot more acutely compared to when we're in the United States. And I'm always reminded when I go there. How in the twenty first century are technological aspects of money have not really caught up with the technological aspects of other parts of our lives. And so, for example, an anecdote that I'd like to share a lot is I know a physician in Egypt that holds physical cash dollars that he buys on the black market as his primary liquid savings because he doesn't trust the local currency. They have thirty seven percent inflation, They've had double digit inflation more often than not over the past fifty years. That's in the twenty first century, in twenty twenty four, that's his chosen monetary technology. And it just shows that this whole system I think is right for disruption. And I think that these kind of open source things, and I tend to focus on bitcoin and stable coins have thus far kind of had the most utility in these areas, serve people in these different jurisdictions and kind of go around and present a alternative to somebody's more centralized and kind of rapidly debasing or rapidly kind of financially abused systems.
One people like me say that quite get their head around the likes of bitcoin as a long term entity because they can't see the use case that is simply because we're not looking outside the developed world for a use case.
I think that's a big chunk of it. So in the developed world, for example, we don't really have a rapid like a major payment problem, And for our savings problem, we have some issues with it, but not really so for example, we can hold money in the s and P five hundred. Our equity markets are fairly good and we don't really face problems too often with bank accounts being frozen or for kind of arbitrary reasons or things like that. Whereas when you go to many other countries one the currency is rapidly debasing generally faster too. They don't really have access on average to as good equity markets as we do. You know, they'll have a lot of volatility, not a lot of upside. If the country even has a significant equity market to the extent that they can get access to offshore assets, it's usually more restricted to the wealthy end of the spectrum. Right. If you can afford an offshore bank account, if you can afford an offshore brokerage account, you're generally in a better position. And so there's a lot of these technologies are kind of an equalizer. They basically say, if you have a smartphone, then you can access the type of things that historically we're more accessible to the wealthy. And then also, for example, if your bank accounts are just arbitrarily frozen, right, there are a lot of countries where if you protest or things like that, your bank account's just frozen, confiscated. And so there's actually you know, human rights organizations or democracy advocates and things like that that make use of stable coins, bitcoin and other sort of decentralized financial systems to go around the fact that their local jurisdictions got a monopoly over the monetary system. And I think that those are these things that often go overlooked in a lot of these discussions around the usefulness of this type of technology, which to some extense understandable because there's been so much fraud, there's been so much hype in the broader space. And I think it's a shame because underneath all of that kind of hype and fraud and problems, there are the seeds of really important use cases, at least for a subset of the technology.
Now, let me just ask you about one of the other things that the skeptics such as me to say, you mentioned earlier that in times of crisis, a central bank is no longer independent because and we know that it isn't a time of crisis that we understand properly the sovereignty of the nation state. Right, So if stable coins, bitcoin, any of the new cryptocurrencies were to become a threat to an existing currency, surely the same thing can happen, and that if they become a threat, we find out about the power of the nation stage and they stop being a threat.
So I think that depends on the authority of the nation state. And so an interesting case study in recent years was Nigeria. So that's a country of two hundred million people. They ban cryptocurrencies from their banking system, so they basically said banks can no longer send money to known crypto exchanges, and they introduced their enira, the CBDC, and yet for you know, years, three years or so, they had very limited adoption of the enira. And they have one of the highest adoption rates of cryptocurrencies, mainly stable coins and bitcoin in the world, and specifically they have really high peer to peer trading volumes because that's how they go around their local banking system. And so there are certain technologies or certain kind of transparency things that make it pretty hard for governments to always get away with specifically what they want to do. Now, obviously, a country like China would would likely have more success at pushing things that it wants to do than say, a country like Nigeria.
I wonder if we can briefly move away from the book and talk in general about markets and economics, because you're not just an authoro strategist, And the most important thing at the moment for everyone investing, for everyone is to think about where inflation is going next. And we talk a lot on this podcast about how we have not expected inflation to go up, come down, and stay down because mostly when you have these inflationary episodes, they tend to come and go. You get inflation, and get a little disinflation, you get inflation again, et cetera. And having looked at your work, I see that's a viewpoint that you agree with or repair to agree with.
Yeah, And I think a big factor to focus on that's going to really dictate the pace of inflation is the energy side. So if you look back at all the major of modern history they always coincided with spikes and energy prices because that's been underlying input for a lot of things. It's the underlying input for wages, it's transportation, automation. Now even currently things like AI run on quite a bit of power. And if you have abundant energy then some of those other inflationary forces in the economy. They're present, but they're not as severe as one might think. Whereas when the energy itself is inflationary, almost any reductions in other areas tend not to be sufficient to offset that inflation. So my kind of expectation is that on average this decade is going to have higher average inflation than the prior couple decades, but the timing and severity of any kind of further inflat waves you might experience are likely to be quite coincident with energy. So I think basically, if one wants to have a strong opinion on that, they really have to dive into, especially in their particular country, the sources of energy that they use, the likelihood of, for example, global oil disruptions, the growth rate of US shale oil, and the ability to meat demands of the next five years or so, And so my expectation is that by the time this decade's finished, we're probably going to have another energy price spike and another inflation spike, And so I think that's where I'm focusing. I think aside from that, it's just the ongoing issue of the money supply growth that occurred a few years ago is still working its way through the economy. It's still working its way through weight growth as a price growth, and so I think that process still has some time to go. But that if not for an energy spike that can eventually settle back down about the energy side, that I think will determine the timing or magnitude of future inflation waves.
Okay, and how would that affect markets?
So if you were to get another sustained inflation wave, that probably of the market would then price bond you'll hire. And I would be concerned about some of these really high valued equities that are trading at thirty forty fifty times earnings in some cases, because you tend to have a thing where during periods of low inflation, equity valuations and can get very high because the cost of money is very low, Whereas in environments where we have more of these inflation of core inputs. Some of these more disinflation type of assets. High valued equities or bonds and things like that tend to do very poorly, so a lot of investors are invested with structural disinflation in mind. The classic sixty to forty portfolio of equities and bonds, and especially market cap weighted equities, so they're very geared towards the large gross stocks, especially in the United States markets. I like having a separate segment in a portfolio focused on energy because that is, in many cases a better hedge against the rest of the assets during decades that are more inflationary on average. So during disinflationary decades, bonds are a better hedge for equities, whereas during inflationary decades, energy tends to be a better hedge for the rest of an equity portfolio. So I certainly like to have that slice of protection.
Now, Lynn, I always ask at the end of the podcast, I always asked the same question. I'm feeling slightly embarrassed and a little pointless asking you this question, but I have to because I ask everybody. Okay, if you here we go, if you were to only be able to invest in one acid over a ten year period, and you were only given a choice of two assets. One of those was gold and one of those was bitcoin. Which would you choose?
So bitcoin is the risk your choice in the sense that there's a non zero chance that the investment gets heavily disrupted in some way, whereas gold by the end of the decade that you're still going to have you know roughly probably what your perching power is. But between the two, I would have to probably go with bitcoin.
Okay, So you still have some confidence in gold. That's interesting.
So gold has had this place as a kind of a mental backstop for kind of the global financial system. It's kind of this this like hedge, this kind of bar asset that you can hold that can't be rapidly debased. And in a world of bitcoin and digital assets and equities, I think gold is still an analog backup. It's basically people say, what about cyber attacks, what about Internet outages, what about power disruptions, all this kind of tail risk that people can imagine. I think gold just transfers over to that new world and still serves that kind of similar mental backstop. And it's also still what central banks prefer as their main underlying collateral aside from other currencies, other countries, bonds.
Final question, everyone going to go out and buy your book and read it now if they haven't already on any also well listen as they've already got it and already read it. But your book aside, is there are there any books that well one book in particular that you see as an investing bible that you would recommend to everybody that they should read. Do you have a favorite?
So? I think actually a really simple one is the most important thing by Howard Marx, and it's the reason I like it. It's a very accessible read. It's not really about the like the detailed mechanics of investing. It's based on just investing principles. And so if people that aren't familiar with him, Howard Marx is a billionaire investor primarily in junk bonds, but the book itself applies to He's well known for his kind of macro or insightful articles on multiple topics, and the book itself is not about any specific asset class. It's more about the mindset and kind of the joke of the book is that Howard found himself whenever people say would talk to him and say the most important thing is this, and then like in another conversation, you'd be like the most important thing and it'd be like a different topic. So, as a joke wrote, the book in every chapter is a different most important thing, And so the book itself is a fairly concise set of independent descriptions or recommendations for how to think about investing, how to think about finance.
Wonderful, Lynn, thank you so much for all those fascinating insights. We hugely appreciate you.
Johnnie, thank you for having me.
With me now to reflect to what we just had from Lynn alden or through a Broken Money. As senior reporter John Steppeck, John, I'm so glad you're had to talk to me about this one. This was just the most fascinating podcast, wasn't it.
I know, I thought it was great, actually, really really the history of money is so interesting, and I would say that Len's basically summed it up. You know, you listening this, you actually probably don't really have to go and read my cha about the hard book obviously, So no, I thought I thought it was great.
Yeah, I mean I just loved the way. I love the way that she looks at money from the very beginning as being ledger based, you know, because people don't think about it. We talked about this a bit about about how people look at the origins of money of being about barter, where in fact it's much more likely it was never about barter. It was always about credit, credit in people's heads, credit to credit, using stones, using shells or whatever. But what we're not talking about barter. We're talking about keeping ledgers. And I wrote about this years ago. Atically I wrote about bitcoin first appeared, I wrote about it ledgers and wrote about how the the ry stones of yapp were a ledger currency and bitcoin was the modern version of that. And you know, she's really expanded on all that stuff in this book and taken her through the entire history of money with this idea of the ledger of the background. And I think it's absolutely fascinating, brilliant.
I mean, I give you because one thing I remember, when of FoST started getting interested in history and myn which I guess was about twenty years ago, the prevailing idea was the commodity idea, the idea that we'd kind of gradually found better and better substances for solving the you know, the the timing of kind of wants, and so we've gone from whatever salty shells to gold eventually, and I think it was I can't. I think it was David Graeber's book that eventually kind of displaced that in the popular imagination at that point where you start to realize, well, so that's it's really daft to imagine that that's how things started, because you couldn't get anything done then until someone had come up with the idea of a currency where it's like you say, this ledger thing. If you've got small enough tribe of people, then everyone can remember, well, you know Dave Owes Merrin, who was John who owns Summer, you know, this amount of money, and then you don't have to have any real you know, there doesn't have to be a kind of anything that represents it, that passing things sort that way. You've just got all that big store is yours or know what it's made now? So no, I do I think that that made a lot of sayense, Yeah, I mean.
You think about the point here being that all money does is moves goods and services through time, right, That's all it does, and so you only need it. You don't need anything physical for that you simply need the record. And we didn't talk about this, but my favorite favorite bit about Ryes right stones and Yap is the story which may or may not be true, but I think it is about one of the boats coming back from the distant island with very large ry stones on the boat thinking, and so the stones are then lost under the sea, but they still exist as wealth. They're still owned. Everyone knows they're there. They don't need to be seen.
To be part of the system.
I love that, are you?
Yeah?
You owin that one that's under the sea. No, I know you win it? Yeah, exactly, I just I just swapped to you for some I.
Do I think.
I mean, I think my question then low after this, and probably the main thing that that actually I was thinking was so, has this changed your view on Bitcoin of crypto currencies in any way? No, No, because I mean it's very it's all very logical, and it makes an awful lot of sense. And I think that a lot of lens points about the difference between developed markets and developing markets were interesting as well.
Yes, absolutely, she's right with that one thing. She is definitely right about And I thought it when I when I looked at her work before is that you and I and our conversations have very often overlooked the fact that developed markets don't have the semi reliable money systems that we do. But the bit where I didn't find Lens replied to me to be satisfied, and where I'm still concerned is that I believe in the nation state and the sovereignty of the nation state and the reassertion of the nation state in times of crisis. Right, And we do find that that whenever there is a financial crisis, or indeed any other kind of crisis, we see the nation state showing who holds power. And interestingly, I think back to the podcast we did a few weeks ago on space, and that conversation has come up again. Now, how do you control space? Who wins in space? What are the rules in space? Why can't Elon must just take over Mars if he feels like it, And the answer is because he has to take off from the territory of a nation state. Right, So therefore you can't Nothing private can have power over the nation state, be it in space or be it a new kind of money. And that's the bit where that's the bit where I really was hoping that Lin would give me an answer that I could work with. But that was the one point where she couldn't and didn't. So I still think that you can't have a currency operating out with a sovereign currency and hold its value indefinitely.
See I mean, I think that's a really good point, and I agree because basically, what I mean, what it bogs down is that in the absence of actually building his own robot army, you're right, Eel and Musk can't do anything about the permission of the nation state, and the nation state has the monopoly over violence. And that's basically what it boils down to. But I mean, within all that, then it's that thing of well, we can still, I guess, recognize that something like bitcoin does have value within the context that it may or you know, it's not going to go on and replace the dollar, and it's not going to go on and replace the pound. It's just but but I guess I guess the argument that is digital gold makes the fear element sense.
John, You've been one over.
Oh well, you know, I've always been a bit wobblier or nice than than you.
I've lost you to the other side.
The question is always a bit well what value is it there? You know what place is it? But it's got it has a function. It's not a scarmp think that.
Okay, if you are listening to this, you've done something nobody else has been able to do. Your broad John Steppic round the cryptocurrencies.
So I'm gonna finish change my mind.
On something I've never managed changing mind on anything. Don't forget that. Limb finished by saying bitcoin is riskier than gold in the sense that there is a non zero chance that the investment gets heavily disrupted in some way, whereas gold you know that by the end of the decade, adding a little to a quota, you're still going to have it.
I mean that's it was the fact partly that she acknowledged that that I thought, well, you know, you're not You're not one of these you know, idea logues or one of these people is going to come on Twitter afterwards and harasses because we didn't mention their particular favorite crypto coin or something like that. You know, it's clearly has a very deep understanding of the money system. But I say the thing also I wanted to bring up was I was recently reading an Old Bank for International Settlements report on digital currencies because I was bored and I was on a plane and it was the only thing in my bike. And what was interesting about that is because I think this is the other part of what Linn's talking about in the cryptocurrency thing in general, is that it's very clear that severeigns want their cut, and they are taking this seriously, like central bank digital currencies are the you know, the suffering the equivalent of basically recognizing the threat posed by something like bitcoin or more accurately, stable coins. The thing that's freaking them out is stable coins because those are kind of like, I guess, almost like counters, not counterfeit.
But.
Private versions of the dollar, but they're backed by dollars, but they're being used in the digital realm, and if that realm is gonna what the BIS was basically saying is the central banks, and it was doing in a very cuddly way, but was saying that central banks should be part of that world so that they can provide the asset elast resort, the currency elast resort basically for all the future applications that will be on the blockchain, if you like, and then when they were talking about the applications, it was that was a bit fuzzier. I think the problem there is it's like, if I want to send money to you from my bank account, then fine, there's about ten different transactions behind the curtain. But I don't care, and you don't care because yeah, it takes seconds, and if it doesn't arrive, then we can shout it somewhere.
You know.
It's not as from an end user point of view, it doesn't matter.
I always use it something. I always use a calm voice when I call customer services.
By the way, oh yeah, but it's a shouty cam voice. I just use my accent. That helps a lot of the time, unless it's a Classwegian call center. But sorry, no, it's a trade finance. So where you've got to you know, you've got to order a shiploaded goods from something from you know, somewhere across the world. And the problem is that you don't want to pay them before you've got the goods. They don't want to send the goods before you pay them, And then there's a whole load of complicated bits and the middle where the person on the other side of the world might also be staking the goods is collateral to like five different people and you don't know anything about it. So that's sort of areas where they were talking about how kind of programmall bow contracts and smart councies and all the rest of it might actually work better for these specific applications. So I guess a long way round, what I'm talking about is that it's clear that this technology does have some use in certain financial areas, and I think perhaps the biggest threat to something like bitcoin is that central banks are just going to come in and occupy that space. But it is again, it is a real area of technology. It's not something that is just, you know, a problem, kind of looking for a solution, looking for a problem.
Well, I think we better leave with the John, leave it with John the convert. And you know they were saying nothing worse than a convert. Thanks for listening to this week's Maren Talks Money. We'll be back next week. In the meantime, If you like us show, rate, review, and subscribe wherever you listen to your podcasts, and of course tell your friends. And finally, we now have our show emails those enderlong ideas, questions or comments to merin money at Bloomberg dot Net. This episode was hosted by me Maren Sumset Web produced by Sumasadi. Special thanks to Lynn Alden and John Steppe.
