SLP409 Steven Lubka – What’s the True Meaning of Inflation?

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Steven Lubka, Managing Director of Swan Private joins me on the show to chat:

  • How to think about inflation
  • Scenarios where we can get high CPI
  • Whether Bitcoin is still an inflation hedge
  • Orange pilling HNW
  • Macro and Bitcoin cycles

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Stephan Livera links:

Podcast Transcript:

Stephan Livera – 00:00:08:

Hi and welcome to Stephan Livera podcast, a show about bitcoin and Austrian economics today. My guest is Steven Lubka. He is the managing director of Swan Private. And we’re talking about the true meaning of inflation. This has gone back and forth. All kinds of people are discussing about whether it is an inflation hedge. Is it not an inflation hedge? What’s the right meaning of inflation? Now, this show is brought to you by Swan Bitcoin and Swan is making it easy for you to buy bitcoin and also learn about bitcoin. Now, the big event coming up is in November on the 10th and the 11th. It’s pacific bitcoin. This is a two day experience filled with all kinds of bitcoiners education workshops and all kinds of fun. There’ll be panels, there’ll be fireside chats, there’ll be a swan dome, there’ll be a bitcoin lab where you can get in-person support. There’ll be so many awesome experiences. So make sure you book your tickets for this event. It’ll be for that whole week, so make sure you come into town early. There are so many awesome speakers. I’ll be there as one of the hosts and I’m looking forward to seeing you all there. To get your ticket, go to pacificbitcoin.com and use the code “Livera” to get a discount on your ticket. And remember, just think, stop and think. Do you have any friends and family who could really benefit from this exposure? I think if you bring your friends and family along, there’s a good solid chance they get orange pill. So that’s November 10th and 11th in LA. Go to pacificbitcoin.com and use code “Livera” for a discount. Are you interested in bitcoin mining? Braiins.com is the place to go. They’ve got all kinds of content on their website as well as Braiin’s OS. Plus this is firmware that you should be looking at and considering installing on your bitcoin mining ASIC machine because you can increase the hash rate and improve efficiency by as much as 25%. You can point your hash rate to any pool or get zero pool fees on Slash pool which will soon become Braiins pool. Also, don’t forget to check out their analytics and insights dashboard where you can run a mining profitability calculation. You can also keep an eye on the bitcoin mining space and look at statistics like Hash Price and others that’s available over at the braiins.com website. That’s braiins.com. Are you in the market for bitcoin hardware security? My favorite is the cold card. It’s such a practical device you can get this over at coinkite.com. So if you are new to self custody or perhaps you’re looking to upgrade, cold card is a great choice. You can start on it as a beginner. You can just directly plug it into your computer and use it easily with wallets like Sparrow wallet or if you’re more advanced, of course you can use multi signature and you can use all kinds of advanced techniques and features that the cold card offers. I really like the address explorer. This helps you verify the address that you are receiving to because this is actually a common or a very juicy hacking or attack vector. So by verifying our receive addresses, we’re helping stop the hack happened in the first place. So if you’re interested to get your cold card, go to coinkite.com and use the code “Livera” to get a discount on your cold card. And now on to the show with Stephen. Stephen, welcome to the show. Hey.

Steven Lubka – 00:03:05:

Thank you, Stephan. Happy to be here.

Stephan Livera – 00:03:07:

Yeah. So obviously I’ve known you for a while working together at Swan and everything, but I wanted to get you on to chat about what’s going on in the world with inflation, macroeconomics, bit of energy and just what’s going on. And I know you wrote a piece recently on inflation. So do you want to just tell us a little bit? Where did the impetus for that come from?

Steven Lubka – 00:03:29:

Yeah, so that came from obviously there’s been this narrative, right? There’s been this kind of view of bitcoin as an inflation hedge. And so people, you know, people bought Bitcoin, they’re investing in bitcoin, they’re thinking, okay, I’m doing this because I want to hedge inflation. And so obviously CPI in the US goes up to 9%, bitcoin goes down. And so obviously investors are asking questions like, hey, I thought this thing was supposed to be an inflation hedge. Did it fail? Should we be concerned? And so I wrote this article to try to push back against that because contrary to popular belief, I don’t believe that bitcoin failed as an inflation hedge. And not just that, I think it will do it in the future, but I think it has functioned as one today. How do I arrive at that conclusion? It has to do with the definition of inflation. Right? So if we define inflation just as like, CPI, like consumer price increases, no other nuance, then, yeah, it looks like bitcoin didn’t perform well. Although you can make the argument that if you bought it before CPI went up, obviously you did pretty well, right? Like even at today’s prices, 23, if you bought it before they printed the money, you’re more than double. So you can make that argument. But even with that aside, we need to look at inflation the right way. And in the article, what I talk about is that inflation really is the expansion of the monetary supply. And this isn’t just my idea, this is actually how it was historically defined. So in the past, that’s where the word inflation comes from. When you think about the word, like, why did they choose that word? They chose it because they were talking about the money supply. And when we use that view, bitcoin performed perfectly before they printed money, before they expanded the money supply, or as they were doing it, it went up tremendously. It had a huge bull run to from 8000 to 69,000. It responded better to the monetary expansion than basically any other asset, certainly any other asset class, anything significant. And then what happens, and I think this is something that isn’t appreciated, they started contracting the money supply. And so it’s not just that they stopped printing, they’ve actually been contracting it. And while I certainly don’t believe they can sustain that for long periods of time, the reality is that it’s been contracting. And part of the reason I say that is not just not just rates and not just some of the Fed policy, but that actually, I’ve argued that asset prices are actually like stocks and houses in our economy, in our world, are part of the money supply and those going down tremendously as a contraction. So that was a few things but the point of the article was just to push back against that.

Stephan Livera – 00:06:25:

Right, I see. So as I read you, basically it’s pushing back on this argument that people are saying, oh, bitcoin is not an inflation hedge. It’s about looking at what is the definition of inflation. Firstly, and obviously as many Austrian economists have been talking about for a long time, they’ve always been looking at it as money supply. Inflation and CPI is a different thing. So that’s kind of the first thing that most people should understand. And then secondarily, as you were saying, is to look at what is the actual supply of money. Now that’s where I think things get more into the weeds because there are different definitions, right? You have base money, there’s M1, M2, there’s euro dollars. There’s people think about our bonds considered. Right. And so I think that’s perhaps where the debate and the discussion goes as well. But I also noticed from the article there was an interesting example you made where you had two hypothetical societies and do you want to just explain that little example just as a concept for people to think about?

Steven Lubka – 00:07:24:

Yeah, absolutely. So I wrote this because I think it helps contextualize what we’re really looking at, you know, of what causes CPI. So there’s two examples here. In the first example, let’s assume that, let’s just say Saudi Arabia, let’s say tomorrow Saudi Arabia stops producing oil and this huge amount of oil supply just goes totally offline. What would you see after that? You would see the price of energy shoot up. You’d see the price of manufacturing shoot up. You’d see the price of almost everything shoot up. Because oil is kind of a master resource, right. And with that you’re going to see CPI, let’s say that happens. CPI goes to 14% or 15%, right? We have this huge spike in CPI but no money has been printed, there’s been no monetary expansion. What’s really happened is the world has become less abundant in real terms. So like in the world of actual stuff, of real economic activity, of like the things that actually make our lives good and function there’s less abundance. We are poorer, right? Like if having more commodities and more abundance makes us richer, a bunch of oil production going offline, the world has become poorer, right? And so we see a spike in CPI, not because of any expansion, but because of like actually a physical, tangible crisis. So that’s scenario one. That’s one way you can get CPI to 15%. The other way you can get CPI to 15% is I give an example of the MMT rebels take over the government and they say, okay, we need a better society. And the way we’re going to get there is we are going to print our way there. And they decide to give everybody $2,000 a month cash every month. And so they create a huge amount of additional money. And so this money goes into the economy. It increases people’s purchasing power. They buy more goods and services and you see the same thing. You see the prices of goods go up, you see the prices of energy goes up because now people want to use more energy and we don’t have more of it. You see the prices of food, all these things. And so let’s say CPI also gets to 15%. Maybe we get higher in that scenario, but let’s just say it also gets to 15%. And so while the increase in money does, I mean, there’s not enough goods, right? There’s an element where there is a shortage of physical things because people have more money to buy it. But the directionality and the way we get there is via monetary expansion. So you have two scenarios, both of them result in a CPI print of 15%. But they’re very different, right? One is because we have expanded the monetary base, which is kind of this abstract thing, right? It doesn’t involve cars or oil or production or energy. It’s just like the accounting system for the economy. We’ve messed with the abstract accounting system. The other is incredibly physical and tangible and all of the price increases we see from that are very driven by the real world. And so my argument in looking at those two scenarios is that bitcoin protects investors from the monetary expansion scenario because bitcoin is a monetary good. And so when they mess with the supply of money, bitcoin as a fixed monetary commodity and pristine money and pristine collateral can increase with it. But when there’s a crisis in the world and we become poorer as a civilization, that’s not constructive for bitcoin and it also isn’t constructive for gold. So I make the example that while people debate if bitcoin’s an inflation hedge, it’s commonly accepted that gold is. And yet we saw gold not do well in this supply driven CPI crisis. So I think that backs it up as well.

Stephan Livera – 00:11:32:

Yeah, I think that’s a really useful thought experiment for people out there just to think about and understand the nuance of what’s happening because over the last call, it two or three years, we’ve seen global shutdowns. We’ve seen a lot of examples of scenario one, right? We’ve seen shutdowns forcible shutdowns, but in some cases, we’ve also seen a lot of government stimulus. We’ve seen a lot of governments taking out loans. We’ve seen a lot of expansionary, monetary expansion at the same time. So I guess from your perspective, how do you, let’s say, disentangle these two components because they’re both happening at the same time?

Steven Lubka – 00:12:11:

Yeah, that’s a great question. And this doesn’t necessarily mean that my view is right. These are tricky things to untangle. I don’t think anyone can like, draw a clean line and say, okay, this part was money printing, this part was supply. But my basic model for looking at it is that when the big stimulus came out, so we do the stimulus checks and we do the PPP loans, we do QE, and then you see asset prices start rising, you see Bitcoin start rising, and you also see CPI starting to head up. So that first kind of leg of CPI increases, I’m, I would say is driven entirely by monetary expansion, stimulus checks, and then the direct effect of that money in the system stressing supply chains. Right? So, you know, that tangible stress. Well, that’s driven by monetary expansion, not, you know, commodities going offline. So that first increase, a lot of the CPI we saw in the beginning, and obviously we’re still experiencing impacts from it today, was driven by monetary expansion. And that follows very closely with a period where bitcoin did very well. This was the bull run, this was the big increase, right? So bitcoin performs well. You also see gold perform well, and you also see stocks perform well, which at this point have just become a liquidity proxy for monetary expansion in a lot of cases. But then what happens is you hit this other stage of CPI increases. And I would say this is marked by two things. One is the war in Ukraine breaking out. Now, I want to be very clear, I reject the notion that we can attribute all of the commodity shortages and energy stresses just to the war breaking out. Like, I view that as like the match that lit the fire, right? And the kindling that was built up was decades of underinvestment in energy production, decades of underinvestment in nuclear, in commodities. We set ourselves up for that weakness by our industrial and energy policies. So I’m not somebody that just like, points the finger at Putin, but it is a scenario, and it is a very real scenario that set off this real shortage, this real lack of Europe can’t get enough natural gas, countries can’t get enough fertilizer. Right? There’s not enough oil and refined petroleum products, or stress. So you see the war breakout that really influences the supply of essential goods to the world economy. And then you also see the Fed flip into tightening mode and you also see assets starting to go down. So at this point, the direction of monetary expansion has inverted. It starts to contract. And so you have the monetary supply contracting via money, via assets, via rates, and you also have real commodities going offline, yet CPI continues to head up. That part I look at as, again, it’s not black and white, but more supply driven, more fundamentally, like fundamental economic disruptions and much less coming from any sort of ongoing monetary expansion. In fact, there’s a contraction.

Stephan Livera – 00:15:41:

Right. And that is another complicating factor as well. So do you want to just explain your view of the monetary contraction that you were just mentioning there?

Steven Lubka – 00:15:51:

Yeah, so there’s a couple of things here. So starting from the more traditional and accepted view, the Fed starts raising rates and tapers off QE. Right? So there’s obviously decades of debate of is QE monetary expansion. People go back and forth on that. I’m going to make the argument that actually I see stocks as a money substitute. And because QE, it recapitalizes the banks and ultimately that money flows into stocks and assets. So in my opinion, yes, it is monetary expansion. We’ll get to that. So you have QE and you have the raising of rates sorry, you have the end of QE, you have it tapering down. And so in a very traditional lens, those are seeing the monetary expansion contract, reverse, and taper off. So that’s one form where that comes in, but the other form is that in our economy today, I take the stance that most of the appreciation, a lot of the appreciation in stocks, in equities, also in homes, is essentially just driven by monetary expansion, more so than those companies becoming more productive of technological breakthroughs. I would argue that growth, like real, real growth and innovation and advances in physics and advances in engineering, that that has really kind of flatlined. Over the last 50 years, we’ve made very little tangible progress. And so, you know, the growth, the massive bull run we’ve seen in US equities, it’s very difficult for me to attribute that to like, fundamental economic progress. And if it’s not driven by economic progress, then it’s driven by monetary expansion. And so at this point, stocks have essentially become a money substitute, which is a term from the Austrian school, where something that functions like money, close enough becomes money. And, you know, I’ve made the example. Like, let’s say we were conducting a real estate transaction. Let’s say you wanted to sell your great spot in Dubai and I wanted to buy it. And I said, you know what, I’ll buy it. I’ll give you a 5% premium, but I’m paying in Apple shares. That’s it. If you want my bid, it’s in Apple shares. And as long as you had a guarantee that I’m not tricking you in some way, like I’m not pulling off some sleight of hand, you’re going to accept it. You’re not going to be like, oh no, those aren’t good money. The Apple shares and Google shares and these things have come to function as the primary source of value for most people in America and around the world and basically function as money, right? And so when they go up in value, there is an increase in the money supply. There’s an increase in like the actual dollar denominated value that households, people, businesses own. And so if we accept that, if we accept that view that stocks function as money, they’re part of the money supply. And so if we accept that view, then this big decline, we see this huge drop off in the stock market. It’s particularly bloody in tech, but the S&P goes down. I don’t know what it is. It’s 20%, but that number is a little distorted because energy went up a lot and kept got killed. But most people didn’t own energy, right? So the total decline in the S&P, I think it kind of underestimates that most people were in tech and very few people were in energy. So you get this big decline in essentially like dollar denominated wealth. People own less dollar denominated wealth via the stock market. And so this is a monetary contraction. So you have QE ending and going into QT and you have rates rising, which slows the pace of lending and increases, you know, that interest that’s getting paid. You can think of dollars being absorbed by the banks and then you have the stock market falling off a cliff. And so all of these are monetary contraction.

Stephan Livera – 00:20:09:

Yeah. So I think you’re broadly right. I think I might slightly disagree a little bit that say the stocks are part of the money supply, but I think your point is still correct. Right? Like, I think I put it this way. I don’t consider Apple stocks part of the money supply, but I see other people are right. So I think of it like in that way. So I think some of the Austrian economists might kind of be more tight and strict about exactly what is money because they may say, well, is it immediately redeemable? But in this case, let’s say it’s Apple or it’s Google or it’s one of these very Liquid tech stocks and the home where buying and trading is some small tiny fraction. And let’s say we both know that in practice you give me these Apple stocks and I can instantly go and sell those stocks for some bitcoin or some cash, which I then straightaway turned into bitcoin, then okay, I could see that scenario. And I think the conclusion you’re going at is right. I think the conclusion is that we are just seeing assets prices going number go up, right? Because the Fiat and the Keynesians have set up this world where they just believe the number has to go up and they don’t deal well when the number is not going up because now there are pensioners and people who are dependent on stocks and property number go up, and that’s a very dangerous scenario for society to be in. So I think and that’s obviously part of our message, as bitcoin is, and we’re trying to help explain this for people. So how do you explain that? So let’s say you’re talking to a person who is maybe more advanced in their age, and they have assets in the form of property and stocks, which is quite typical. How would you explain to them why they should consider bitcoin?

Steven Lubka – 00:21:49:

Yeah, absolutely. And before I answer that, I just want to say I totally agree with you on the definition of money. And that’s actually why I use the word money substitute. It’s not really money, but it has the aroma of it, right. You know, so I agree with you there’s. Definitely you can’t really say it’s literally money, depending on how you define it, but in practice, it walks and talks like money. So agree with you there and then on your question, right? I lead the swan private team for swan bitcoin, and that’s dealing with all of our high net worth clients, companies, trust, those sort of things. And so I’ve had the absolute pleasure of running that team for the last year and a half or so. And it’s taught me a lot, like, I’ve learned a lot doing it from interacting with all sorts of different people that are investing in bitcoin, interested in investing in bitcoin. And I think one of my biggest takeaways is that everyone’s different. There’s no one story, there’s no one angle, there’s no one view of bitcoin that resonates with everybody and everyone. I think there’s maybe like four or five main reasons, but people get into it for different reasons. For some people, they have a principled stands against the state control of the money supply. For other people, they just want to protect their retirement value, right? Like, it’s just a very utilitarian either I want to protect it or even I want to make it I want it to go up. And those are different people. And, you know, it’s not to say that one is right and the other is wrong. And so, you know, my presentation of bitcoin, you know, it changes. And so when I’m talking to someone, let’s say I’m talking to a retiree, it’s a very different scenario, and I want to be more conservative there, right? Like, I think in the bitcoin community, we can be very passionate and we can be willing to take larger risks, right? Like, larger percentages of our portfolio. And also, we’re probably like, not a lot of us are retirees. Like, retirees are probably a smaller segment of, like, the people on bitcoin Twitter, right? So there’s a reality. We’re also young. We have time to earn money. We’re not living off our savings. But so talking to a retiree, like one, you need to be more conservative because that person is selling down their assets every month to pay bills. And so if you go all in bitcoin, right, that means they’re selling their bitcoin at maybe they bought it higher, right? So that doesn’t work out super well, right. They’re forced sellers every month. And so for a retiree, I think there’s a very strong argument that you want to keep some if your expenses are in dollars, like, you want to have some either dollars or something lower volatility or something, at least until we start hitting really high inflation or there’s a crisis in the faith of the dollar that changes, but we’re not fully there. So I think a retiree, they need to have other assets. They need to have something that they can reliably sell down, let’s say, over the next five years, to pay for living expenses while they hold their bitcoin. And if they want to start selling into their bitcoin in five years or ten years to pay for their retirement and their food and their housing, then I think that’s more reasonable. But they need to make sure they have other assets for the long term, and that’s just being pragmatic here. And it kind of gets into more boring, traditional portfolio construction stuff. So it’s a different world, right, when you’re living off your assets compared to living off your income. So those are kind of my first thoughts.

Stephan Livera – 00:25:46:

Yeah, sure. How does it change then if we let’s say we’re talking about a typical swan private customer, so probably someone who’s a high net worth person, maybe they own a business, but let’s say they’re a little bit younger now. Let’s change the example. Let’s say maybe they’re a Gen X business owner, high net worth. How would you approach the conversation with that person then?

Steven Lubka – 00:26:05:

Yeah, so basically, the younger you get, the more risk tolerance you have. Like, you can be more aggressive. Now we get into this interesting thing of actually, like, how educated are you on bitcoin? I’m a believer that, like, if you don’t understand bitcoin very well and have at least a measure of risk tolerance, you’re not going to be able to handle holding it over, like, the swings. Right? Like, you need to know what you hold. If your understanding of bitcoin is limited to, like, I don’t know, like, you know, my friend told me this would go up, so I’m putting some money in. You’re going to get shaken out on the volatility, most likely, and that’s going to be bad, right? That’s going to be a bad experience and it’s going to turn them against bitcoin, and they’re going to think bitcoin is bad, and then they’re going to make a no coin or Twitter account and then we’re going to fight with them. So, you know, it’s important to me that people, they need to have the right experience. They need to have a good experience. That doesn’t mean Bitcoin doesn’t go down or goes up tomorrow. But we need to set people up for an allocation that they given their current level of understanding, their emotional temperament, and the risk tolerance and their financial situations can hold for the long run. And so if somebody comes in that scores highly, right? Like they understand Bitcoin very well. They’ve got a lot of cash flow, they don’t have a lot of fixed expenses, they got a lot of savings and they’ve got some money. Like they’ll be okay if they have to use other money for a few years. And that person can afford to be, I mean, I would say, like as aggressive as they want to be, right? Like whatever. Like if they want to do a large allocation, they’re very bullish on Bitcoin like we are and they understand what they’re doing, then I think that’s totally appropriate, right? It’s sizing risk. And that’s the conversation right now. But there’s a caveat, right? Like there’s a caveat that a lot of the reason a lot of us are into this is because we think there’s actually like a failure, like a systems failure that the current financial system is facing. And again, I try to approach this in a measured way where I do think, I do believe that the inevitable trajectory unavoidable is the dollar is going to need to be inflated by at least 30 or 40% to reduce the debt. I think there’s a very high probability that the US Treasury stops being the reserve asset of the world. I think the dollar hangs in as the larger fiat currency for longer than most people think. I think the treasury gets replaced is the most likely scenario. But eventually over a long enough time horizon, the dollar can be replaced hopefully by Bitcoin. But so that’s the caveat is like as we get closer to those cracks, as we get closer to that, it’s not one year of 9% CPI. We’ve got 9% CPI every year. Then that changes and that changes, right? So, you know, I like to work with people where we are today and tailoring their investment strategy to their personal financial circumstances and everything else. And so that’s the conversation right now. But obviously if the dollar weakens and the system becomes more fragmented, which could be a very real possibility in the near term, I’m not saying that that necessarily is a long ways away. That advice changes.

Stephan Livera – 00:29:48:

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Steven Lubka – 00:32:12:

Yeah, absolutely. Yeah, we get that question. I get that question all the time. So the short answer is, I think that’s very unlikely. Right? So if we’re going to define the government banning it as like, this full frontal assault of, like, bitcoin is illegal or something effectively like that, like you can’t build on an ofacs, like, violating block or something, right? I think that’s pretty unlikely. So, first of all, my answer would be basically no, like, low probability. But here’s why I don’t have the right number because I did this calculation when prices are higher. But the last time I did this calculation, I added up all the bitcoin that American zone that we can know about the value of all us bitcoin linked equities. So the miners and part of Coinbase valuation and just all the MicroStrategy, the funds, VC funds, hedge funds that own bitcoin in the US. Right? So all of these, like, bitcoin and bitcoin proxies these assets that would lose value if bitcoin were to go down. And at the time I did the calculation, when prices are higher, I got something like $600 billion of total american exposure to bitcoin and disproportionately, right? Like, the wealthy and the powerful in America, they own a good chunk of it, right? Like it’s not just like, you know, lots of just normal hardworking people, they own bitcoin, but lots of people with political power own it too. And so there’s the scenario that if the US. Government were to try to go nuclear on bitcoin, they’re destroying a huge amount of american wealth that not only is a big hole in the system, but is enormously politically unpopular. So many people own some bitcoin in America now, so it’s enormously politically unpopular. Like, the current administration, for example, is polling extremely low. They’re already really concerned about reelection. And the thought that they’re going to do this thing that pisses off like, a huge amount of people in this country and destroys a huge amount of American wealth, I think is pretty unlikely. And then you also have kind of the views of Government, right, where, like, the Government is not a monolith. Not everybody in government hates bitcoin. You know, you’ve got obviously senator Lumis, you’ve got other senators that have fought for it. And with this comes, there’s tension and there’s defenders. Bitcoin has defenders in Washington and there’s lobbying firms and there’s all these big, you know, funds. And I think we saw this play out in a real way, right, during the infrastructure bill. So this was a little while ago for those that maybe weren’t around for this, but during the COVID infrastructure bill, they snuck in some, like, bitcoin legislation at the last minute. And I think that the view at that time was that, oh, like, the government can kind of do whatever it wants. If they want to regulate bitcoin, they’re going to regulate bitcoin. And instead what happens is there is uproar, there is just total political pandemonium. Like, there is chaos. The senators are banding together. They’re freezing the discussions. They’re educating congress on proof of work. There’s 50,000 phone calls coming in to people’s representatives. The entire bill got stalled for like two weeks over. I’m not saying it’s insignificant, but it was nothing close to a ban, right? Like, it was like tax reporting. Like the biggest problem with it was that miners technically can’t comply because they don’t have the information. But I don’t think the government knew that. I think they just didn’t understand bitcoin. And so basically it was like, hey, give us more tax information, which is very different from what we’re banning bitcoin. And even that, it got totally waylaid and pushed back against Janet Yellen was forced to make a statement in favor of proof of work, which was kind of crazy. She expressed formal support for the proof of work protection bill. Not that’s not what it was called, but it protected it was an amendment that protected proof of work. And so we saw like, some very tangible statements and we saw this political game theory, like, play out in a real way. And ultimately the bill passed because of, like it was like a weird technicality. They’re working on it right now, but they had support for the amendment. Basically, the amendment would have passed if there wasn’t this weird arcane rule where, like, if a single person objected to it, it didn’t go through. So it didn’t pass on a technicality, but it did have popular support. And looking at that, to me, I think that was like a precursor for kind of bitcoin’s immune system in congress, bitcoin’s immune system in the US. Which acted very well.

Stephan Livera – 00:37:11:

I see you. And so on a related topic is all the energy stuff, which I’m sure that’s also coming up as well. So people seem to continually be raising this whole question around energy usage. And I know energy is definitely one of your hobby horse issues also to talk about and think about and reason about. So do you want to firstly give us your thoughts on that whole question? If you had to give a short answer for somebody who’s asking you that question, why doesn’t bitcoin use all this energy? What’s your sort of go to answer there?

Steven Lubka – 00:37:44:

Yeah, I’m definitely an energy hobbyist, which I credit to bitcoin. Right. This is one of those cool things about bitcoin. I knew nothing about energy, and in order to respond to the criticisms that get hurled at bitcoin, I was like, I need to really learn about energy more, because I was working off, like, just very wrong priors, you know, like a lot of people energy is a very politically charged topic right now, and I believed a lot of that stuff. Like, those were my assumptions too. Just not looking into it too much. And bitcoin, I have to credit bitcoin with it got me incredibly interested, and I’ve spent kind of years studying energy. Now it’s one of my favorite topics. And not only is it relevant to bitcoin, but I think it’s like the most important thing for human civilization too. Like, it just is a master resource that governs so much of what we do in the quality of quality of life that people live. So to answer the bitcoin question, first of all, traditionally, okay, so first of all, the way the bitcoin energy question is normally answered, and there are people that have done a very good job with it. We’ve all read Nic Carter was like the coin desk champion for years, writing all the energy articles and tons of other people and sailor and the Bitcoin Mining Council. So it’s been tackled from a lot of angles. And those angles have primarily been actually bitcoin. Like a large, large percentage of mining is basically zero carbon to piece it apart. Why is bitcoin’s energy a problem to critics? Well, it’s carbon, right? Essentially what they’re arguing is it emits carbon. So if the energy didn’t emit carbon, then they shouldn’t have a problem with it. They might still because they believe in degrowth, but they shouldn’t. So what we’re looking at is like, a lot of it is zero carbon, whether that’s hydro, whether that’s solar and wind, or whether that’s waste energy, which is like just any form of energy that had been produced and then was just going to be discarded. And this includes methane, right? So when they do the methane mining, well, that’s actually like negative carbon, like, weirdly enough, probably a whole other topic, but so it’s been addressed from that angle. It’s also been addressed from the angle that, like, bitcoin uses, like global energy use or something minuscule. It’s been addressed from the angle that, like, washing and drying machines use more energy. And it’s also been addressed from the angle that the energy consumption is worth it. Right? It’s just like, bitcoin is valuable. It’s worth it. Like, it’s okay if it uses energy. And so people have done very thorough jobs on this. What I like to discuss is that bitcoin’s energy consumption is good because it causes us to use more energy, and using more energy is good. And I think this is true for right. So there’s kind of two camps of people in the world today. There are the people who are primarily focused on, let’s just say, climate issues, and there are the people who are primarily focused on human wellbeing and economic growth. Right? And my argument is that actually more energy use is good for both of those camps, regardless of which one you are in, obviously it’s very clear for the economic growth and human wellbeing people, because more energy, more abundance, better society, better control over our environment. Right? So that’s simple. But why is more energy good for the climate camp? And the way I’ve answered this, and I’ve got an article that’s coming up soon on it is that so there’s this great guy, Cesar Hadalgo, and he’s a researcher in this field called economic complexity. And he has this really awesome view on human knowledge. And basically he makes the argument that there is like a categorical difference between the sort of knowledge that is like in books and can be taught in universities and what he calls productive knowledge or process knowledge, which essentially means that the things we learn by doing, like that we can only learn by doing, like riding a bike, for example, is productive knowledge, right? You can’t read a book on riding a bike and do it but in the same way I would make the example of like you do not want to have your nuclear power plants run by PhDs, like only PhDs, and nobody who has ever worked in a nuclear power plant, right? Like no matter how smart they are on the science of nuclear technology and energy, they do not know how to run the power plant. There is productive knowledge there. And so in that we come to the conclusion that the only way to get better at energy is to produce energy, right? Like we have to actually do it to get better at it. And so regardless of whether you think we should be doing nuclear power or we should be doing solar and wind or even some people think we should just do more fossil fuels and grow, the only way we’re going to improve our energy technology is by producing more of it. And the great thing about bitcoin is that because of the difficulty adjustment and the economics of mining, bitcoin provides capital to the most efficient energy producers. So whoever can produce energy, the cheapest. Boom, there go the miners. And so if you’re in the climate camp and you think renewables are like God’s gift to humans and you think it’s the cheapest energy, then that’s what bitcoin is going to use. Like it’s a foregone conclusion in your world view. Like if it actually is the cheapest, then that’s what miners are going to use and it means they’re going to funnel capital into those energy resources, which we’re going to get better and better at making them and running them and producing them. And whether that’s true or not, whether that’s true of renewables or maybe we should be doing nuclear, I’m obviously a kind of a nuclear fan getting better at controlling energy, it gives us more control over our environmental impact. And the only way you can get around this fundamental situation is to say, well, we’re just going to use less energy. And I do not believe that works. I think that is essentially an academic utopian pipe dream, right? I think it’s politically impossible. I don’t think people will ever accept it and I think it doesn’t work. Like the road forward is to become better masters of energy and learn how to produce it cheaply, efficiently and with minimal environmental impact, right?

Stephan Livera – 00:44:26:

And I think the world is slowly having to learn that lesson in some ways because for some time people have just been saying and just saying whatever delusional ideas they had in their minds. And so they’ll say, oh look, net zero. And you know, perhaps fine to their credit, they might think of it like, obviously I disagree with socalled renewables or unreliables as Alex Epstein calls them. But even on their own terms, some of them might theoretically think, oh yeah, we’re just going to get so good at, quote unquote, renewables and be really productive in that way. But I think in practice what’s happened is we’ve seen this massive unreliability and we’re seeing energy prices skyrocketing around the world and particularly in Europe and other places around the world too. And so we’re seeing in some sense many of these countries and politicians are having to wake up to reality. They can’t just kind of say these nice sounding things now. They actually have to deliver. And I think to your point is they have to have productive knowledge.

Steven Lubka – 00:45:32:

Yes, absolutely. And we’re on the same page, right? That is my personal view too. I think Europe is case in point, right? Germany is the most vulnerable country in Europe right now from an energy perspective and they’re the country that pushed renewables the hardest. Like the proof is in the pudding. They embedded structural reliance on natural gas into the safety of their people. My personal view is that nuclear is the only viable zero carbon energy technology besides hydro. But you can only build hydro. Sometimes I think the world would be better off if we did almost all of our base load power from nuclear. So yeah, I’m critical, I’m critical of renewables. But my point to people that disagree with me is even if you disagree with me, bitcoin is good and using more energy is good and the proof will be in what wins out. Like we’re going to see what works and hopefully we’re going to learn that without too much human suffering, which is what we’re seeing now. And is the price of bad energy policy. It’s a human price. And I think that people who don’t place enough seriousness on the drawbacks and consequences of different energy policies, they don’t take that into account enough. And I just think there’s a real overestimation of the scale, pace and magnitude of human suffering that will come from climate compared to the damage that will come from wrong energy policies. The wrong energy policies are immediate, they’re near term and they’re bad. And I think we should take this debate much more seriously because I feel that the main problem is that there is not open debate, right? The debate has been kind of like captured within a certain academic boundary of permissibility of what you’re allowed to support or say and it makes it very difficult for anyone who disagrees with like the renewable batteries, like structure to say, hey, wait a minute, there are some problems with this. Why aren’t we doing nuclear? Why aren’t we okay with Africa using more fossil fuels? Because they’re still fighting for economic stability and those discussions are very hard to have. And whether they’re right or wrong, that’s kind of my argument to people. You don’t have to agree with my conclusions but you should agree with the right and the value for us to discuss them.

Stephan Livera – 00:48:24:

Yeah, absolutely. And on this topic, I’m looking forward to meeting Alex Epstein. He’ll be at Pacific Bitcoin. So listeners, check that out. That’ll be in La November 10 and 11th. So, pacificbitcoin.com, just while we’re here, we’ve spoken a bit about energy and I want to also just kind of switch a little bit back to the macro aspects of it. So kind of where are we going from here? Because we started the conversation day today about inflation, monetary supply. Inflation versus kind of supply blocks inflation, let’s call it. So I guess if you had to sort of look at what’s the likely case, what’s the likely outlook from here over the short to medium term? What are you looking at going forward?

Steven Lubka – 00:49:11:

Yeah, so my base case is that I think the Fed is more trapped than most traditional commentators think. Right. I think there’s this traditional view where the Fed can kind of do whatever they want, they’re in charge, they can raise rates as high or as low as they want, and it’s like real economic growth and earnings and that’s going to drive everything. And that’s maybe true over very, very short time periods. But I think the thing they miss, and I got a shout out, Luke Groman, because he’s probably been the largest advocate and clearest communicator of this, so definitely shaped my views. But what they don’t take into account is the debt we are at. I think it’s like, I don’t know, it’s changed by 130% debt to GDP. Actually, we did a private interview with Lyn Alden last night and she said if you take household debt into account, we’re at 370% debt to GDP. And all private sector companies and households, which I had never heard before. So even like, you know, wow. But even just the government debt hundred, 2030 debt to GDP. When you look back, people will keep referencing the 70’s Im like, oh, well, you know, Volcker was a total badass and, you know, he just really crushed inflation and raised rates. Debt to GDP was a fraction. This isn’t the right number, but I think it was like something like that, it was multiples lower, and that’s not the case today. Right. And the economy is also more financialised. And one way this shows up is that almost all growth in consumer spendings is essentially attributable to capital gains. Right. So assets going up is a huge proportion of the money that people spend into the economy. And so the flip side of that is when assets go down, spending falls off a cliff, which means tax receipts fall off a cliff. Right. And so you have this scenario where just on a very baseline level, the US has to pay out a certain amount of money every month to keep Social Security, Medicare going, to keep the army operating, and to pay interest on its debt. And so as the Fed raises rates, not only does the interest expense go up because it has to keep borrowing at higher rates. There’s a maturities kind of curve. So it doesn’t happen immediately, but it starts to happen. But also, as they raise rates, assets go down, which means tax receipts fall. And so you have this like, dance between tax receipts and spending. And the challenge of raising interest rates is spending goes up and tax receipts go down. And at a certain point, the US. Can’t pay its bills. And we don’t have a lot of buffer, right? The buffer is really thin. Our tax receipts barely cover our expenses. And that includes no spending packages, right? That includes nothing additional. Those are just entitlements defense and interest. And so the moment we get to a negative kind of balance there, the Fed has to print the difference. That’s the only way. So the moment that is like, our tax receipts are lower than our spending, the Feds essentially got to finance the deficit, which is printing money, right? Which is like, I don’t care what rates are at the moment. They’re printing money. They’re printing money, and they’ve essentially been invalidated in a sense. So I’m skeptical. That argument, I think, has held a lot of is a very solid argument to me. And there’s even probably more uncertainties of other things that would break. Right. The global financial system is so complex at this point that nobody understands everything. There’s no human alive that understands the whole thing. And so there is this kind of it’s a little bit of like a hand wavy argument of like, well, something’s going to break. Well, what is that something? I don’t know, but it will happen. And that kind of seems weak, but it’s also kind of true. And I think it is true, right? Like there’s so many dependencies and so much complexity that you really can’t interest rates have basically done nothing but go down over the last 50 years. There’s been small jumps up, but you look at the curve and it’s just down and trying to reverse that and have like a consistent federal funds rate of five or 6%, which would still be below inflation. It would still be like a negative real yield, assuming inflation stays where it is. I think it’s just very unsustainable. And Lin made this comment, too, when we spoke the other day, that we cannot have positive real yields. Like wherever it goes, the bottom line is basically we cannot. It’s got to be negative. So the interest rate has got to be below inflation. So, I mean, if inflation goes up to 15%, okay, maybe they can take rates up. If it comes down, maybe they got a lower. But all that to say all that to say that I think the Fed is relatively trapped. I don’t believe that they can fully get inflation under control. I think inflation will be with us for a decade, and not just consumer price inflation, but monetary expansion, which is the relevant point for bitcoin investors. I think money will need to be printed. There will be expansion, and ultimately to keep the country running at this stage of financialization asset prices must go up over the long term, like, bottom line. So does this downturn last for another six months? I don’t know, maybe not. Maybe we’ve already bottomed. But can it persist for years?

Stephan Livera – 00:55:06:

No, I think that makes a lot of sense. And ultimately, as you say, the Fed and central banks and governments around the world are basically painting themselves into a corner with the conditions that, as you’ve just outlined, they have high government debt in many governments around the world. They have all these issues and they are, in a sense, putting populations into what’s called financial repression because they’re putting the interest rates down so low, while at the same time inflation is so high. So most people, if they just leave their money in the bank account or if they leave their money in bonds, they are just losing purchasing power over time. And so what better case for bitcoin could there be? Of course there will be short term movements and of course, yes, I understand right now people can laugh at us and say, oh, look, see, bitcoin was $69,000 last year. And now as you speak, what is it, $21,000? Ha ha. But I really think it takes zooming out to really understand that bitcoin right now is a small market and that’s actually a bullish thing. We should be bullish because of that because it’s still early days. So I think that’s probably where I would, I guess, summarize where things are at. But any final closing thoughts there for the listeners, Stephen?

Steven Lubka – 00:56:14:

On the macro topic? Yeah, yeah, I think the closing thought is just these are great prices. Like, I really believe these are value prices for bitcoin. Buy it in a way that’s consistent with your personal financial situation, your income, your savings, right? But these are great prices to be accumulating bitcoin. I’m deploying capital here and, you know, that’s what we help people do at swan private. So if you want to talk about that, if you want to have a discussion and evaluate your personal, you know, how to balance the bitcoin investment, that’s what I do all day. That’s what we do all day at swan private. But our view is these are great prices. The long term conviction in bitcoin hasn’t changed. And actually, I think that’s one of the more interesting things, right? Like, you and I were both here during the 2018 bear market, and the thing that I would say was the most different then is like, maybe you weren’t, but a lot of people were seriously doubting whether bitcoin was going to succeed or fail. It was like an existential, like, oh my god, maybe this thing is like bullshit. Like, maybe it’s just going to fail. There was real worry and concern over the future and fate of bitcoin in 2018. And one thing I will say today, in 2022 and 2021, that’s not how that’s not how it is. I rarely, rarely talk to somebody who thinks that this downturn is evidence of bitcoin’s failure. They just see it as like, yeah, prices are down. It’s a tough macro environment. Like, there’s these cycles, but compared to 2018, very few people are questioning the longterm prospects of bitcoin. And not just not questioning, but I think people are obviously no one wants to ride an asset down 60 or 70%, but people, I think, are a lot less troubled. Right? There might be anxiety over losing money, but as far as, like, is the government going to have to print money? Is the money supply going to be expanded? Is there going to be increasing financial repression around the world? Yeah. And so you need bitcoin, right? And so I think that’s something I take I think maybe it could be a comfort to investors, right? Maybe for people listening that weren’t here in 2018 or in previous cycles, it’s a notable difference, and I think it reflects the growth and solidity of bitcoin, like, how solid the market has become and how much capital has come to it, the infrastructure that’s been built. There’s so much infrastructure today around bitcoin that was not there previously. So I’m proud of the growth of the asset. I’m proud of what the community has accomplished and yeah, and maybe just one more thing for the listeners. So I’m fortunate, based on my position, that I get to talk with sophisticated investors every day. I’ve talked to thousands of high net worth investors that have been putting capital in bitcoin. And by virtue of doing that, I’ve gotten to see certain things that maybe aren’t visible on the surface. But what’s really cool to me, based on my conversations, is I’m just constantly in conversations with CEOs, with people from Wall Street, lawyers, accountants, doctors, founders, entrepreneurs. There’s so many people from across the world, internationally, from within the country, from different industries, highly sophisticated investors, highly sophisticated, brilliant people, right, that are deploying their capital into bitcoin, right? Like, it’s not just, like a bunch of, like, iconoclasts on Twitter that are, like, trying to fight the state. Yes, that’s part of bitcoin’s DNA. But at this point, it’s become- it’s so broad. So many people from across all walks of life and even all political spectrums are investing in bitcoin today. And that’s really encouraging to see, right. Because I’m of the opinion that if bitcoin is to become money, like global money, global money isn’t political. It isn’t ideological, right? It’s not just, like, only used by one type of person. That’s not a global money. Like, a global money is something that is used by everyone. And that’s what I’m seeing bitcoin become. I’m seeing it grow from, like yeah. It’s birth and its start and its passion was people that they were very specific sorts of people that had the constitution and the willpower to try to drive this thing. But I’m encouraged now to see all sorts of people now getting into this, storing their capital in Bitcoin and just seeing the value in what everyone that came before us worked so hard to build.

Stephan Livera – 01:01:10:

Yeah, I think it’s really interesting you mentioned the point as well around I mean, I largely agree with what you’re saying, and it’s interesting the point you mentioned about how 2018 for some people was the moment where they thought, oh, bitcoin is it dead kind of thing. Now, for me, the time I had that feeling. Now, I didn’t necessarily sell all my coins, but I sort of I had that kind of gut check moment was the 2014-15 cycle, right? I was like, oh, right. And look, bitcoin has had multiple 80% drawdowns in its history. In 2012, it had two. In 2013, it had one after 2018. And this one that we’ve seen, I think, peaked a trough so far from 69 at 17,000 or so, was about 35%. So the way I would explain it for people is, look, it’s been through 80% drops before and it may happen again, so just be ready for that. But to the point you’re making is you have to Zoom out and look at what governments have to print money. There’s just not an easy way around this, right? They’re either going to default or they’re going to print money. And in either scenario, it’s bullish for bitcoin. So that’s how I’m seeing it. But that’s probably a good spot to finish up. So, listeners, make sure you follow Steven. You can find him on Twitter. His handle is at how do you pronounce it? Zambala Hodl.

Steven Lubka – 01:02:22:

So you can look me up on Twitter. Just type in Steven Lubka. Lubka. The handle is Zambala Hodl.

Stephan Livera – 01:02:29:

Got you. Zambala Hodl. And of course, Swanprivate.com is where people can find Swan privacy. Steven, thank you for joining me and I had a great time chatting.

Steven Lubka – 01:02:36:

I hope to see all you guys at Pacific Bitcoin. I’ll be there all week before the conference. Love to get together. It’s going to be great. Stephan, I’ve had an awesome time talking. Thank you.

Stephan Livera – 01:02:46:

Just a quick note before we finish up the episodes over the next few weeks might be a little bit slower as I’m traveling. I’ll be over in Austin for Bitblock Boom coming up, and then straight after that over to Riga for Ball tiny Badger. So I’m looking forward to seeing a bunch of bitcoiners and hope you all enjoy yourselves out there. Get the show notes@stefanlivera.com for the show. Thanks for listening. I’ll see you in the citadels.

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