Lyn Alden, macro analyst rejoins me on the show to talk about her new book, Broken Money. We discuss Lyn’s thoughts on:

  • Ledger money and who controls it
  • Different theories of money
  • Speed of transaction vs settlement
  • Warfare funding under fiat
  • Base money and Broad money
  • GFC and the response to it
  • Fiat standard incentives
  • What kind of debt makes sense under a Bitcoin standard



Stephan Livera links:

Podcast Transcript:

Stephan (00:00.65)
Lin, welcome back to the show.

Lyn Alden (00:02.715)
Happy to be here.

Stephan (00:04.662)
So Lynn, I had a chance to read your book. I really enjoyed it. So the book is called Broken Money for listeners and I found it really well researched and quite thorough in terms of some of the different topics, right? You talk about, you know, a bit of, there’s a bit of history of money, a bit of, you know, central banking as contrasted with free market banking and also obviously discussion about Bitcoin and where we’re going.

I think an interesting theme that came out to me, and I think this is a motif that you kept returning to, was this concept of money as a ledger and who gets to control that ledger. So maybe let’s start with that. So if you wanna just tell us a little bit about this concept of money as a ledger and why is it so important to focus on this concept as opposed to other concepts.

Lyn Alden (00:53.627)
Sure, and this was a concept that was originally popularized by Wintus Casares many years ago, but it’s not really something that appears much in literature. And so I really like that framing. There have been a number of people that have kind of maintained that idea since. He doesn’t really do a lot of content anymore, but there are other people that kind of make that reference. And I eventually came across that reference, not from him directly, but just from others talking about it. And I…

took that pretty literally and I felt that was probably the best way to describe money and it’s also a unifying tool between different views of money and it kind of reconciles kind of the two initial ways that money emerged and so when we think of what money is most definitions I think capture like 80% of it but then there’s like a little bit they don’t capture and so different definitions kind of capture most of it but I think that one might be the most complete because on one hand

you know, humans control their own little ledgers, right? So if you’re trying to solve the double coincidence of wants, right, you’re trying to trade, there’s really two main ways to do it. One is that you can defer it over time so that you make the coincidence easier to solve by the fact that you don’t have to have a surplus of what the other person needs right now. You can just exchange a value for something and then that person owes you at a later time. So that’s been around since, you know, hunter gatherer times.

partially as gift culture, partially as kind of just local, kin and family and neighbor types of arrangements. And of course, the other way to do it is with a highly saleable commodity that acts as a unit of account and basically the most tradeable good that can be on one side of every transaction. And that’d be the commodity theory of money. And one way of kind of reconciling those as a broader concept is that they’re both types of ledgers. One of them is a human controlled ledger, either in a small community,

or with an administrative state of some sort, like the temples of Babylon, of course the modern day equivalent would be central banking, or you let nature be the maintainer of the ledger in the sense that, whether it’s hunter-gatherers with say shell beads or it’s gold coins and bars, nature sets the parameters for how much of this unit can exist, how hard it is to create, how to create it.

Lyn Alden (03:12.347)
and people kind of defer to that natural scarcity as their ledger. And they don’t necessarily see the whole ledger, but by physical exchange, by physical possession, they update the ledger. And so each one can kind of assess the properties of the ledger without necessarily seeing the full picture, just by looking around and seeing how rare is it, how hard is it to make, how often do I see it with other people. They can come to, you know, assessment of that commodity as a useful type of money.

And then of course, Bitcoin is interesting because in many ways it reconciles these views together in the most perfected form we’ve seen, which is you have a literal ledger that you can fully audit and it’s fully transparent. But at the same time, instead of being like a centralized ledger run by community or a temple or a central bank, it’s a decentralized ledger that does have scarcity associated with it. So I just generally found that to be an interesting way to think about money.

and it can potentially reach to different schools of thought and kind of bring them together to some extent.

Stephan (04:14.794)
Right. And as you were explaining there, there are different views of how people, you can call it different theories of money, right? So obviously, the commodity theory of money, as you said, and I think the Austrians, people like Carl Menger and people like that, and Ludwig von Mises are obviously, that’s mostly their view. And then let’s say there’s this other camp of people who maybe they see it as money is credit money. And this is like a David Graeber sort of view.

of course you reference his work in your book as well. And there are debates between these different camps on which view of money is more precise or what is the methodology by which you come to this idea of what is money. And then I guess we could also throw in maybe some people have let’s call it like a charter list view, right? It’s this idea that just the state or the king just sets the money.

And that’s just the lay of the land. But you do a good job in how I was reading the book because you can see how different views are prevalent depending on the society. So for example, a lot of Bitcoiners are familiar with, let’s say this example of the Isle of Yapp, right? And these stones. And because it’s a small community, they can sort of get away with just having this kind of ledger in our heads, or even, you know, if listeners are thinking with their friends.

oh, okay, I bought this guy, I paid for the dinner last time, maybe next time he’s gonna pay for it and things like that. And it’s kind of an informal, nobody’s really explicitly tracking it that way. But that maybe is a little more aligned with the debt or credit view of money. But then that obviously breaks down when you get to bigger societies because obviously we can’t keep track mentally in our head of, oh, Lin Alder knows me this much and Stephan knows Lin that much.

it’s just not feasible. And then you don’t have an actual way to have a single unit of account. Because then, maybe you make, if you make meat and I make whatever milk, and we need a way to account for that too. So I think that was nicely done in terms of spelling out, I guess, keeping track of favors, right? In a ledger sense. And so one other interesting area that you get into

Stephan (06:40.878)
is this idea that…

you can rely a little bit on nature’s difficulty adjustment, if you will, right? As you spoke about with gold, the mere fact that it was hard to go and mine more of it was what enabled people to, let’s say, have trust in gold as money, isn’t it?

Lyn Alden (07:04.363)
Yeah, and that’s something that was explored back in the Bitcoin standard and other works, basically that as technology improved over time, we were good at kind of eliminating certain types of commodity monies that were previously useful. So in a pre-industrialized society, seashells and other bead-like instruments were very useful money. But once we had the Industrial Revolution and that type of technological ability, and even somewhat before that in many cultures,

that really kind of ruled out that type of money as being supply constrained any sort of realistic way. And so we kind of went up the hierarchy of different types of commodity hardness until we got to silver and gold. And those are the ones that are still, especially gold, still relevant for today. Central banks still hold significant amounts of gold usually. And what I found interesting is that progression of technology that affects what commodity monies are useful also plays a role in kind of the rise of the credit theory of money.

And I would put chardalism kind of in that camp. It’s kind of like, you know, within the credit theory money of a couple of different camps, you have kind of the more emergent credit money, like a small community running its own ledger. And then you have like kind of the bigger nation state type of ledger system, but they’re both basically types of credit theory. And what’s interesting about those is that although credit itself extends back to hunter gather times, these more explicit…

monetary theories based around credit mostly arose with the invention of the telegraph. So, for commodity money theory stretches back millennia and that’s been around for a long period of time. Whereas the credit theory, once they invented and specifically once they deployed and made common use of the telegraph, when you could send information around very quickly and gold had to be abstracted heavily to keep up with this arrangement,

people kind of started naturally thinking, what is money anyway? Why do we need to tether it to gold? And you can see why intelligent people at the time would start asking these questions. And you mentioned David Graeber, I cite his work, but I mean, he, for example, heavily cites Alfred Michelin’s in his work. And I think that’s kind of the, if you’re looking for

Lyn Alden (09:22.039)
some of the strongest source material in that camp. You probably go back to his essays. It’s also way shorter to read. It’s, you know, you can read his two major essays from like the early 1900s over a century ago. They kind of lay out his case. He’s clearly an intelligent person. And, but there’s others at the time as too, including the development of chartelism where they were kind of making the case that commodities are not money. That’s kind of arbitrary. And of course I disagree with that view in many ways. And I go over the disagreements in my book.

but it’s really the rise of the telegraph and this kind of information-based transaction system that even gave them an opening to make this type of argument and to sound somewhat sophisticated in what they’re saying, whereas pre-telegraph, it’d be very hard to make that argument. And one of the big themes in the book is that kind of century and a half where we had

The speed of transactions at roughly the speed of light, but the speed of physical settlement of things like gold or other scarce money, so the speed of matter created basically a huge arbitrage for banks, central banks, it required abstraction and credit in order to kind of bridge the gap between that transaction speed and that settlement speed. And eventually it kind of completely broke that tether. And so we find ourselves in a world where there’s 160 different fiat currencies.

Each person is kind of just finds themselves in a bubble and they hope that they’re born in one of the areas that’s more developed and has a stronger currency system compared to the long tail where most of us end up in weaker currencies where it’s very hard to build liquid capital. And the kind of the theme of technological determinism is a play in the sense that we don’t see one country with a gold standard today. We don’t see one country with full reserve banking today.

the technology kind of enables or empower certain incentive structures that just kind of become ubiquitous. And of course, what’s notable about Bitcoin is that it’s the first credible way to have settlements that are as fast as transactions, which is that the ledger itself can be updated in a similar way that back in the shell era or the gold era, by physical possession, you’d update the ledger less credit needed.

Lyn Alden (11:36.907)
Now you basically have that in digital form where you can agree over the internet and things like that to do a transaction and the settlement itself can happen either in real time or near real time with that type of transaction. And so that potentially collapses the need for abstraction, centralization, credit, at least certain types of credit for that whole arrangement. So that’s one of the reasons why I find that framing to be useful because…

for a century and a half, there really wasn’t better technology. And finally there is. And another point is that order had to happen that way. There’s no world where Bitcoin’s invented and then the telegraph’s invented. It’s like telegraph is invented, transactions only need a minimal amount of data. And then over time, as we have the internet, as we have bandwidth, as we have radio, as we have more complex mathematical proofs, as we have encryption,

eventually you can get something as complex as Bitcoin that allows for that digital settlement. And so I just think that’s another thing that maybe is not as covered as it could be in a number of Bitcoin books.

Stephan (12:44.922)
And you focus on this idea being the technology enabling and let’s say the path of history being determined by these things, because historically, what did people do? Well, maybe they had to trust in smaller gold and silver coins, and maybe they had to find a particular branded coin, because that’s what they could trust, or at least put some level of trust in that. Or maybe historically, there were different banks and maybe they would issue their own coin.

And that used to be what people did, right? Hundreds of years ago, because they didn’t have Bitcoin, obviously, but, you know, and that, unfortunately, for a lot of people is where people can get abused, because maybe those coins can be debased, you know, those bankers can later turn fractional on us. And so I think it’s an interesting way to spell out the technological constraints that we were under, like as humanity, right? As a broad…

massive people that we were just under these constraints and we didn’t have better ways. Now, of course, the Austrian libertarian in me could say, well, we could have theoretically tried to stay to a gold standard, but we all know that didn’t actually play out in practice because again, there’s an incentive for somebody to cheat. There’s a certain centralization factor of that. And I think that’s why we have to sort of move forward into a Bitcoin standard way of thinking.

So in terms of looking at the previous technologies that people had, I think as you mentioned, some of that was where credit systems can come in. And in some cases, it’s more just like having to place more trust, isn’t it? That you’re just placing trust that this gold coin really is gold and it’s not something else.

Lyn Alden (14:33.899)
Yeah, and the rise of banking over time and those trust relationships are interesting to map out. In some ways, banking emerged kind of the opposite of Bitcoin. So in Bitcoin, we have the base layer and then we have Lightning on top of it. Whereas early banking looks more like the Lightning network where it’s channel-based rather than broadcast-based. And so you’d have something like a MoneyChanger or a Hualadar.

and they would have a specific set of relationships in other cities, could be their kin, could be close business associates, and they would have an arrangement where if you wanted to send money from you know city A to city B, you could go to your ho’oladar, give them the gold, and they would you know basically provide paper to a messenger or to yourself, and you could have that withdrawn from a ho’oladar money changer in another city. And of course you’d have to rely on that network for a period of time, although by knowing the person

you have an ability to exact consequences on them should something happen, right? So it’s the closer you are to the community member, the more trust can make sense to varying degrees. And then as these kind of paper markets got more sophisticated, so I mean, some of it’s the basic technology of things like the printing press, right? And other things, just faster communication and just more overall civilization, that kind of channel-based system gravitated more towards these institutions that were…

big and recognized enough that they could issue bank notes, like bearer asset money and things like that. And of course, the challenge there is that if you’re the state and you know banks are where the money is, it’s kind of easy to capture the banks and then you control the money now. And then when you have the telegraph and you have a digital world and you need that speed to operate, it’s very easy for nation states to kind of capture the money system and create their own individual bubbles.

And so it’s one of those things where to your point, it’s fully possible theoretically to have like a gold reserve, a full reserve system. It’s just in practice, the incentive structure is now so weighed against that the probability of that emerging and then sustaining indefinitely is hard enough that we just don’t really see it. And so it kind of keeps gearing towards that other solution up until something like Bitcoin is like a new refreshed way to approach that. So I think that.

Lyn Alden (16:52.983)
approaches of just saying if we only did it this way, it’d be better. That kind of approach has been trying and failing for a century now. And I think a much stronger approach is to say, well, because technology kind of provided this opening that kind of rewards the wrong types of behavior, we have to look toward technology that can emerge, that can shift that back. And I think Bitcoin and kind of adjacent technologies built on top of it or around of it are so far what we have is the most credible way to…

make it so it’s actually incentivized to have those kind of more sound money type of operations.

Stephan (17:28.042)
Right, and as you said, even though there were some mechanisms, let’s say reputational systems, so in that example with Hawala and the Hawala-dar, if let’s say the Hawala-dar cheats you, well then you could go tell people and that could wreck his reputation. And so there’s some check against his bad behavior there, but maybe not enough of a check, right? And then also as you spell out in your book, and of course many other books talk about this, which is that…

there used to be a check on government’s expansionary behavior, right? So as they spent a lot of money, they would have a, this effect of draining of gold reserves out of their current, out of their government’s coffers into some other government coffers. And so that historically was what used to happen. But again, what we saw was this kind of custodial nature of gold holding.

And a lot of the gold being held by, for example, the United States, because a lot of the other countries are worried that they would get invaded and have the gold stolen. So it just had these kind of difficulties around custody, around securing your gold, historically, that made it difficult to stay on a full reserve Bitcoin, on a full reserve gold standard. And so I think that is also helping explain a little bit of how we got here, right?

Lyn Alden (18:48.459)
Yeah, and I think what’s ironic is that the efficiency of the international gold standard system ended up partially being its own downfall. And I cataloged this by referencing the 1875 book Money and the Mechanism of Exchange by Jevons. And he provided interesting data and analysis at the time. And it’s written in such a way that it’s still very accessible today, despite the age of the book. And basically, he described it both favorably, but also provided warnings, which he’s like,

the system is becoming so efficient, we barely ever need to move gold. It’s just like by telegraph and paper, we’re able to update all of our transactions globally, things net out, everything kind of centrally clears through London, it’s hyper efficient, but we can’t forget that every one of these claims is supposed to be redeemable for gold, and we’re currently operating at like 20 to one leverage. And so if this should encounter a problem, it could be catastrophic. And of course, decades later in World War I,

As soon as that system was faced with some sort of international breakdown and conflict, it collapsed like a house of cards because of how leveraged it was. And part of why it was so leveraged is because gold itself was slow. People didn’t want to readily withdraw it. Even he in the book mentioned that most people just didn’t want to hold the physical gold. They’re like, no, I’ll put it in my bank and now I can move it around quicker. It’s more divisible. It’s better. It’s more efficient. But by doing that and not having an incentive to pull it out and kind of test the system from time to time, it just became so abstracted.

And that’s how it, you know, once that system broke, all the claims for gold were the things that made money good rather than letting those claims collapse back down towards the monetary base of gold. So they said, well, we’re gonna break the gold peg, we’re gonna either change the gold peg or eventually just do a rate with the gold peg altogether. And gold was too slow to really keep up with this new abstracted system, even though the new system is more inflationary. And it’s, and.

Then to your point, like basically kings in old days, if they wanted to do war, they’d have to drain their reserves to do it. They’d have to raise taxes on the people, which could, you know, if they do it too much, could get like a revolution or a revolt. And then they’d have to be successful enough that when they go and like defeat their enemies, they get their gold. And if they failed on that, then they’re kind of out of the business of war for a while. Whereas in this current arrangement where everything is just credit based, they can just print more money.

Lyn Alden (21:12.003)
so they can fund war without transparent taxation even, so that people don’t even fully know the scope of what’s happening to their money. And so instead of just draining their own vaults, they’re draining the savings of their entire citizenry. And then if you’re the global reserve currency issuer, like Britain was going into World War I, and like the United States is in today, you can drain foreign reserves as well. So for example, when the UK entered World War I, they were able to drain the reserves

of development countries throughout the world that were holding the UK pound denominated assets as part of their savings. And so that kind of dramatically boosts the duration and magnitude of war that can occur and it reduces the transparency with which how it’s funded, which is it kind of kills one of the potential feedback loops that people would have access to, to either revolt against the war or slow down the war in some way.

that’s kind of removed from them and that’s this modern era we’ve been in for more than a century.

Stephan (22:13.642)
Yeah, and a great point while we’re on this topic, you mentioned in the book as well how there was this UK government war bond funding project and that they were basically trying to obviously get the citizens to go and help pay for the war by buying this government debt, war bond. And you point out that they actually weren’t that successful with filling up the quota. And in the end, they ended up just basically faking it till they made it, right? And they just sort of said,

Yeah, yeah, we’ll just print out this extra money and, you know, and the public, well, you know, unknowing of this. And so they had their, their purchasing power basically stolen from them by the government.

Lyn Alden (22:56.407)
Yeah, and that’s what I mean. World War I was such a like a tragic thing because it wasn’t even like World War II. It was it was just like kind of needless conflict and more and more countries got involved purely because they had pre-existing military alignments. And then the UK didn’t even really have any pre-existing alignments, but it wanted to get involved because it didn’t. It wanted to put a check on Germany. And when you’re trying to sell to the public, hey, we need to go fight a war.

in continental Europe, it doesn’t directly affect us, but for vague strategic reasons, we have to go do this. So we’re going to do a draft and a tax to go do it. That’s super unpopular. So they tried to issue debt to finance the war and it was like a massive amount of debt relative to their GDP. And it just only like a third of it was bought, which was catastrophic. And so they just lied. They just said, well, it was very well funded. And what they really did was print it with the central bank.

And so that kind of was like the early shot of this whole kind of fiat currency era of doing things and then deferring the consequences to the future and in a non-transparent way so that the people kind of get caught up in something that they didn’t necessarily sign up for. Or even things that were opposed on them, but transparently enough that they have a shot at kind of refuting it when it just happens and it both happens without their consent and it’s not even known. That’s

that’s much harder to deal with. And another example I use is that there’s an analysis of US wars. And if you look at each subsequent war over the past century, they get less and less funded by special war taxes and things like that. And they get more and more funded just through credit, which defers the kind of pain of dealing with that war. And so for example, when they did a poll of Americans, do you want to, should we invade Iraq? That was this kind of post 9-11 environment.

It was still very kind of patriotic, propagandist, that kind of thing. And over 70% of people were in favor of invading Iraq. But if you had instead phrased the question, are you in favor of invading Iraq? Oh, and there’s a 10% income tax to do it because we’re going to pay for it in real time. You can imagine, I don’t know what the poll numbers would be, but they would collapse shortly. And so this idea that you have a free lunch, or at least it seems like a free lunch where you’re like, well, if I don’t have to pay for it.

Lyn Alden (25:20.683)
sure that kind of encourages things that wouldn’t otherwise be allowed or supported if the cost is more transparent upfront.

Stephan (25:30.826)
Certainly, 100% agree with you there. And then from a, even from a libertarian perspective and you’re looking at things, it’s only through this kind of fiction of the state that enables this machinery of basically lying to people at scale and stealing their wealth at scale. Because it’s not just that, it’s also, I mean, certainly your point is correct, I fully agree with it. But it’s also that they can hide the future cost. They can kind of stuff that cost into the future and stuff that cost onto future generations.

Right, and as you point out in your book as well, the cost estimates for some of these forever wars, like the Iraq war and so on, they end up being multi-trillion dollar wars that people back in 2003 would have had no idea that they would have been this much of a failure and this expensive and just weighing on not just them but their children and maybe their grandchildren.

Lyn Alden (26:26.699)
Yeah, exactly. And I think that’s the kind of the one of the main downsides of the system is this, this opaqueness that is allowed because everything’s so credit based. And again, it’s one of those things that as long as they can do it, they will do it. And so one approach is to keep trying to say, no, don’t do this, don’t do this. And I think, of course, there should be people putting their voices up against that type of thing. But on the other hand, if it’s going to be like either cured or mitigated kind of more globally and permanently.

I think that’s where technology comes into play, that basically that type of money has to become bad enough compared to alternatives, like let’s say Bitcoin, where eventually more and more people shift their monetary savings towards something that can’t be diluted to base. And so it starts reducing their ability to do that. So for example, there’s countries today that have mismanaged their ledger badly enough that they’ve kind of lost money printing privileges in a way, like they either get dollarized or partially dollarized.

And so as soon as they print money, it kind of shows up in inflation right away. And it just becomes very ineffective because so many people are holding their assets in other things, including foreign currencies or Bitcoin or whatever, you know, gold housing, whatever the case may be. And if that word eventually happened to develop countries so far, there’s nothing really been good enough to do that to them, but you know, Bitcoin’s right now, the shot we have, if that’s strong enough and good enough to do that, that can eventually reduce or eliminate their.

power to do that. And that even to the extent that say nation-states still exist, it’s just that they have to operate on a more transparent way, which probably limits them in ways that they’re not currently limited in.

Stephan (28:07.306)
Another area I found interesting from your book was your discussion around base money and broad money. And so this kind of gets into obviously central banking and how the money gets created. Now there are different ways, there are different, let’s call it transmission mechanisms by which that new money can be created. But do you want to just start with offering an explanation? What is base money? What’s broad money? And then we can take it further from there.

Lyn Alden (28:31.163)
sure in the context of fractionals or banking, we end up getting two very different layers of money and what money is. And both of them in some sense are quite valid because they both have very important ramifications. So the base money in say the free banking era would be gold essentially. And then broad money is basically the full amount of bank deposits and bank notes and gold itself. So it’s basically base money plus…

the things that people have claims for base money. And of course, in a fractional reserve banking environment, that disconnect can grow quite large. And in the modern sense, the monetary base is no longer gold, but it transitioned over time. So first it was in say a free banking context, it was literally just gold. And then in a gold-backed central banking context, it was the central bank balance sheet, which we partially backed by gold.

And then in the modern sense, it’s backed by treasuries and mortgage-backed securities. But basically, in the modern sense, the monetary base is money that it’s a direct liability of the central bank. Right? So that’s the closest thing we have to the definition of a dollar, which would be a direct Federal Reserve liability, either in terms of bank notes or bank reserves. And the former is accessible to the public, whereas the second is only accessible to banks.

And so that’s the monetary base of the country. We can also add a couple of things like the treasury general account, which is really another type of bank reserve, but it’s kind of part of the monetary base. And so when you have that together, that’s like base money. And then banks, because they fractionally lend it and they create new deposits and they’re able to change how much leverage they have relative to their liquid assets, far more of us have claims for dollars than there are actual base dollars.

And then at a higher level than that, there’s the Euro dollar banking system. So there’s, there’s kind of foreign banks that are loosely connected to domestic banks and they’re fractionally reserved, a layer that is already fractionally reserved, or we have things like debt securities, which are dollars owed at a specific time in the future. And all of that can reach very, very large numbers compared to the monetary base. And so back in the classical gold standard era, the international standard, like in the, in the late 1800s and going into the early 1900s.

Lyn Alden (30:51.839)
That was like in England, for example, it was lever 20 to 1. And in going into 1929, the whole kind of 1920s period had this big credit growth, which is basically that broad money supply was growing a lot faster than base money. And by the time 1929 hit, that ratio was like insanely high. And the same thing happened in 2008. And when that happens, if it was like a purely free banking system, and you started to have a credit collapse,

then that broad money would have to collapse to being a lot closer to the base money because nobody can print more base money. But in an environment that’s more centralized in the post-Telegraph era where gold’s not fast enough to keep up with the kind of the unit of account that people are using and that nation states are enforcing, instead what happens during those major crises is the base money is expanded to kind of mostly support that existing number of broad money units. And so…

all those years and decades of fractions or banking get made money good by an expansion of the base money, which occurs depending on the time period due to the breaking of a gold peg, changing of a gold peg, disregarding of a gold peg, or if it’s already a fiat currency system, just printing a lot more base money. And so that kind of makes it so that constant money supply growth is allowed to continue indefinitely. And that’s what gives us a permanent

degree of money supply inflation, price inflation, and the basement of the unit of account that everybody uses.

Stephan (32:23.166)
Yeah. And so in a modern context, especially in the US financial system context, as we’ve seen, you know, listen as a familiar over the last, you know, 15, 20 years, we’ve had, you know, this series of events happen like the global financial crisis in 2008. And then the Federal Reserve and the US government come out with new programs. And in your book, you also talk about how they are.

in some sense, manipulating those ratios, because maybe they wanna manipulate the liquidity in the system, or maybe, as you were saying, we have the base money, right? Like that can be physical cash or bank reserves, or the broad money, which is obviously, you know, once that’s been pyramid-ed up, and, you know, new fiat currency has been created. And could you explain a little bit about how some of these programs can help them manipulate that, whether it’s QE or QT, as an example?

Lyn Alden (33:13.883)
Sure, and I think one thing to know the difference of is between a normal banking crisis and one of these structural massive generational banking crises, because under the hood, they end up being very different. In most recessions or issues in say the past several decades, you’d have a gradually increasing base layer of money, a gradually increasing broad layer of money, and that ratio was increasing over time. There are more and more claims for the base.

And you have occasional issues, but it wouldn’t really change the nature of the system too much. And partly because you had steadily declining interest rates, higher levels of debt could keep being supported by the fact that their cost to maintain that debt was going down due to lower interest rates. But both in 1929 and then again in 2008, when you have the combination of that you build up so much claims relative to the base, and you run into zero interest rates.

you kind of run out of room to keep kicking the can down the road, at least with those methods. And so that’s when you see a sudden jump in the amount of base money in the system. Basically, that’s where they kind of just default on what the unit that they’re using is, and they create more of those units to support that whole system. So one of the things that people thought at the time was that rapid QE would be inflationary or even hyperinflationary. And they say, well, if that wasn’t inflationary,

Maybe money printing is not inflationary. And I think what people miss is that it was inflationary, but the default backdrop is not zero inflation. It’s massive deflation. So basically if there was not QE in 2008, you would have that broad money stack start to collapse down towards the base layer. But by creating all this new base money and providing liquidity to any banks they needed it, they stopped that money supply growth from collapsing, which is a type of inflation, but it’s against deflation.

So instead of, you know, rewarding people that were holding dollars or gold or things like that, it basically rewarded people that were still taking on a risk in that regard. And so…

Stephan (35:06.766)

Stephan (35:15.614)
Yeah, and that’s why you use the term anti-deflationary in the book, right?

Lyn Alden (35:18.903)
Yes, yes, because we have to compare what the counterfactual would have been and zero is not the counterfactual. And what you see with these kind of generational banking crisis is that they tend to be one, two punches. So the first bubble is the collapsing of private debt bubble and an expansion of the monetary base that kind of offsets that collapsing bubble. And so you don’t get rapid inflation. Instead, you get like a period of stagnation and just like a shift of where the leverage is. It goes from the private sector up to the public sector.

And then it’s that second crisis that’s the more inflationary one. So back in the Great Depression, first you had the Great Depression itself, which was disinflationary. Then you got kind of a small burst of inflation when you had all the recapitalization and the peg break and stuff like that. But you didn’t really have the major inflation until you had you know World War II and that’s when a lot of the debt got shifted up to the public level and then inflated away and you had a massive increase in the amount of broad money in the system, not just base money.

And we’re kind of seeing a similar thing today, which is that during the whole 2010s decade after the 2008 crisis, you had economic stagnation. You didn’t have a sharp jump in broad money supply. You just had a sharp jump in the base money supply to keep that broad money supply from collapsing. But then what we’ve seen here in the 2020s is that after a lot of that debt was transferred from the private sector to the public sector, now it’s more inflationary. And now when crises happen, money supply gets directly sent out to the public.

trying to raise interest to rein in that inflation is somewhat inflationary itself because now it’s causing a high interest expense from the government, which is a type of ironically deficit stimulus, which can be inflationary. And so that we’re kind of in the second wave of that now. And I find that studying these dynamics has been very helpful for understanding periods of deflation, periods of inflation, and how these things can go together. And one final point, because this comes up in a lot with some of the debates I’ve had,

is that when you’re in an environment where banks really trust each other, they’re able to get away with this like, you know, having very little base money to support the claims because whenever a bank has any sort of liquidity challenge, they can just borrow money from another bank. And so you’d have an environment like say the 1990s or the early 2000s where someone will say, look, they had almost no base money and there was no problem. But that’s because banks trust each other. So kind of like how in the 1870s when with Jevons.

Lyn Alden (37:45.271)
He’s sitting there saying, look at all this exchange that happens and almost no gold ever changes hands. You kind of have a similar environment for that with bank reserves. But the problem is when you have that highly leveraged system, the second it runs into a crisis that’s truly big in scale, like you get so highly leveraged, index rates are already zero, there’s really not much else that can be done. Banks don’t trust each other, and rightly so. And so a bank finds itself with like

percent of its assets in cash and the other 97 percent is like these less liquid assets and almost every bank finds itself in that condition and no bank is going to lend to another bank or the amount of lending is very constrained and that’s when the central bank comes in and says well we’re just going to print a lot more base money and we’re going to reliquify the system ourselves so that banks become less reliant but that’s what again retroactively justifies all that fractions are banking

and makes all those broad IOUs money good rather than letting them collapse down towards what the base money would be.

Stephan (38:41.934)
Gotcha, yeah. And obviously, it also can be seen like a bit of a bailout, right? Because some of these banks may have taken on loans or in this case, extended loans to people who are simply not credit worthy. And they, you know, in a real free market, they would have gone under. But actually, what’s happened is the government has said, oh, okay, let me just take those assets off your balance sheet, and I’ll put them on my balance sheet. And here’s some reserves. And they just sort of try to keep the system alive. And like you said, it’s an anti deflationary sort of effect.

Lyn Alden (38:46.702)

Stephan (39:11.246)
to just sort of stop the house of cards collapsing. I’m kind of loosely putting it, but yeah.

Lyn Alden (39:14.935)
Yeah, and it is a bailout and to your point, and there’s kind of two methods of bailout. There’s the direct bailout, which is when you just give someone money or give a bank money, you say, look, we’ll buy this toxic asset from you for real money and you’re good now. So that’s like the most direct type of bailout. But another type of bailout is the provision of credit at below market rates at a time when no one else is being lent to. And so…

you know, a lot of banks will say, look, we paid at, we weren’t bailed out. We were paid back everything we were given by the government. But the mere fact that you were given access to cheap credit by the government at a time when others were not, and you were able to go and survive and buy other assets that file so prices was a type of bailout. And if you look back in that kind of 2008 era, you know, a lot of homeowners went under and lost their homes.

But in theory, if you gave them a few year emergency loan at blue market rates, they could have gotten through that. Yeah, they might have made it through because those house prices did eventually mostly recover. And that’s basically what happened to banks. They were given the liquidity to get through and the money supply was expanded and they were eventually kind of made good. At least most of them were made good. That was not extended to homeowners and other parts of the economy and wasn’t even extended to certain banks versus other banks. And so that’s what sparked…

Stephan (40:13.058)
they might have made it through. Yeah.

Lyn Alden (40:38.051)
Things like Occupy Wall Street or Tea Party and things like that basically pointing out that this is, you know, it’s obviously selection bias. It’s obviously corrupt in various ways. And we see kind of similar things here during the, you know, the kind of the recent crisis, which is that you’d have some direct bailouts, but then you’d also have things like the provision of below market credit. And so for example, when credit markets seized up in like March 2020, one of the first things the Federal Reserve could do was buy.

corporate bond ETFs and corporate bonds broadly. Once they got authorization from Congress to do that, because that’s not something they could fully do on their own, but once they got authorization to do that, it’s very easy for them to go out and reliquify the corporate bond market. So very large corporations like Coca-Cola and McDonald’s and Apple could go back to issuing bonds with no problem, whereas there were not similar mechanisms in place to restore credit to small businesses.

These businesses are more reliant on things like bank loans with their local bank. And so that’s kind of a more decentralized, more relationship driven type of market. And it’s very slow to help that market. So if you’re a big restaurant chain, you got bailed out a lot quicker than if you’re a small mom and pop restaurant. And almost nobody would be in favor of billing out a big corporation and not small ones. And then they try to fix it with the PPP loans that turn into grants.

And of course, the challenge there is that while you do save certain businesses, when you actually kind of look at the numbers, the majority of that money went to very wealthy people because we go to things like law, there was not really like a strong filtering mechanism for who actually needed it. It wasn’t like it only went to restaurants and other things like that. It went to like law firms, investment managers, investment research that were not planning on laying anyone off anyway, because they’re not really harmed by the current environment. Yeah.

Stephan (42:26.738)
Right, they just sort of like, I hate free money, let’s take it.

Lyn Alden (42:29.663)
So it’s like some people got like, you know, $5,000 in stimulus checks and other people got $500,000 in stimulus checks. It was just under a different name. And so that’s the challenge with those types of things is that whenever we have these crises, there’s always bailouts and they’re not, they’re always like targeted. So someone somewhere is getting money siphoned away from them in a non-transparent way and someone else is getting rewarded in a non-transparent way.

Stephan (42:54.286)
Yeah. And so one other area I’m curious to ask about is fiscal spending. Is that inflationary? Because this is a common area of debate and discussion. Some people say, well, no, that on its own is not the inflationary thing. Where do you come down on that? Or how would you explain that for somebody who’s asking the question, is government fiscal spending inflationary?

Lyn Alden (43:17.723)
So there’s a little bit of nuance there, but generally it’s inflationary, but we can conceptualize a couple of ways in which it can be inflationary. Basically especially when you have monetized fiscal spending, so basically the government is spending, but instead of extracting that with taxes or something else, it’s just having a central bank print most of that to buy their bonds. That results in a direct expansion of the broad money supply. And there’s a couple of ways that can be inflationary.

just the money supply growth itself, even, you know, let’s step back for a second. So when the government spends the money, we can imagine a spectrum of productivity for how that money can be spent, right? So they could go out and they could build a bunch of petting zoos and that’s just, it’s not productive, or they could go out and build a bunch of nuclear reactors, for example, and they could, you know, have a lot of basically power infrastructure.

There’s kind of a spectrum of things they could do with that money. And of course, the more productively they spend that money, the less inflationary it’s likely to be because you’re expanding the money supply, but you’re also expanding good and services or at least certain types of goods and services. But the challenge there is that even by doing that, even if you’re on the more productive side of the spectrum, by increasing the money supply,

very scarce goods like waterfront property and fine art and things like that, those are likely to increase in supply along with the money supply, whereas whatever was spent on might not increase. So for example, maybe power prices wouldn’t increase if most of that money went towards building new power sources, for example, if that was part of the program. Now, of course, if that money is terribly spent, they go out and do all sorts of malinvestment and it’s just driven towards consumption or things like that.

then it’s likely to be even more inflationary because in addition to the expansion of the money supply, you’re not really getting any more goods and services. And so, for example, a lot of, I think, M of T years will point to the 1940s as one of the more constructive examples. And I would agree that in the spectrum of things that money was spent on, outside of the war itself, a lot of that went towards manufacturing facilities that could be repurposed after the war. It went towards putting GIs through college and technical school when they got back.

Lyn Alden (45:30.803)
It went towards later the interstate highway system. So that was among the types of things that money could be printed for. That was not really the worst case scenario. So you had inflation in some things, but then you kind of got that under control after that period of time. But most fiscal expenditures or rapid increases in the money supply would be even less efficient than that. And they would go towards things that are not creating new factories, not creating new power sources, not resulting in rapid trading of the public.

And instead they’re generally going towards either consumption or boondoggles, whatever the case may be. And that’s even more likely to be inflationary than semi-productive spending.

Stephan (46:11.106)
I see. And another area that I found quite interesting from your explanations in the book was your explanation of how kind of paradoxically in the fiat standard that we live under, it has benefited people who found the Goldilocks zone of how much debt to have, right? Like obviously there were people who were in too much debt and then maybe they were overleaved and they got wrecked somehow. And then maybe the people who had zero debt.

they were the ones getting inflated away. So they were the ones losing out, right? If you’re saving fiat currency and they’re printing more of it, you’re losing out. But if you were in that sort of goldilocks zone, of course, setting aside the moral considerations, it’s interesting that in the fiat standard, that’s almost the behavior that gets rewarded.

Lyn Alden (46:56.607)
Yeah, it’s kind of that bell curve example. And so because the unit of account itself is depreciating, and because bank accounts and other things are paying interest that is largely below the rate of new money creation, if you’re a saver, your share of the pie is gradually getting diluted, whereas other people are getting expanded. And if

even take it a step further, let’s say you mostly know this is happening and you decide to buy real assets, but without leverage. So you buy things like real estate, gold stocks, things like that. The problem there is that those are for real estate is taxed on a regular basis plus taxed when you sell and it’s taxed on the nominal gain rather than just the real gain.

And same thing is true for equities although they don’t have the recurring tax. They just have like the capital gains. And then the same thing is true for gold that has a tax at the end. So the government still manages to recoup a lot of the value appreciation for most assets if that asset just mostly increased at the rate of broad money supply growth. Basically, you know, if you invest in Apple at the right time and hold for decades, you’re going to vastly outperform money supply growth. You know, if you’re going to if you’re a really good stock picker,

But if you’re, say, buying the index or buying a typical piece of real estate or gold or something like that, you’re just treading water after capital gains taxes. And so the one way to really win in that system, if you’re not a top 1% superior investor that always picks the right stocks, is to buy solid things with very inexpensive long-term credit if it’s available to you.

And that’s the more you get wealthy, the more that becomes available to you. And so the kind of the smart thing to do is if you’re going to buy real estate, buy it with a 30 year low fixed rate mortgage and refinance it whenever you get, whenever you can, you know, buy high quality activities on very low amounts of margin, things like that, because that, that behavior is what constantly got rewarded because kind of like how, if you’re a saver,

Lyn Alden (49:07.831)
and you’re getting paid an interest rate that is below the rate of money supply growth, you’re getting diluted. Well, on the opposite side of that, if you’re taking out long duration loans with interest rates that are below the rate of money supply growth, you’re basically shorting that fee of currency and you’re accumulating real assets and you’re getting a boost so that you overcome kind of the capital gains taxes and other sort of ways that the government calls back some of the non-leverage exposures to real assets. And so in that system…

access to credit becomes very paramount. It becomes kind of the easiest path towards wealth creation and then that of course benefits those that hand out credit or kind of closely tied to the system or that have easy access to credit. And then that also ends up applying on the broader scale. So for example, you know, the whole kind of multi-decade era of private equity was really leveraged buyouts. Basically a large well-connected firm that had access to cheap capital.

would go by smaller businesses that don’t really have access to cheap capital and they kind of accumulate them under their umbrella and then potentially spin them out with higher leverage in a larger entity. And then you’d also see things like large hardware stores like Lowe’s or Home Depot would be able to kind of eat all their small mom and pop competitors around the country because they had access to much lower cost of capital. And there’s I think two parts to that.

market driven, a larger, more diversified entity is going to have access to lower cost of capital. That’s just generally the case. And that’s, it’s not a bad thing. But a lot of these companies, what they do is they hold debt as a permanent part of their capital structure because they can’t. So it’s like, if you ask, why does Coca-Cola have debt? I mean, they’re like a century old, super profitable, successful company. Why do they hold debt?

And the answer is that they’re choosing to short the fee of currency for long durations because they can, because that’s something that they can do that a small business doesn’t really have that same type of access to. And exactly.

Stephan (51:10.402)
Right. It’s a competitive advantage for them. And they can hit economies of scale that the small businesses can’t.

Lyn Alden (51:16.663)
Exactly. And then that’s the part of it that only really makes sense in a fiat currency system. So if you had a gold standard or a Bitcoin standard, you know, and there are certain entities that want credit, a larger, safer, more diversified entity is still going to have access to lower costs of capital, but there’s no reason to borrow for very long durations because you’re buying a unit of account that appreciates first most things. Whereas in this kind of environment of constant fiat currency dilution,

larger entities get extra rewarded by being able to have these kind of permanent like 30-year shorts on the fee of currency that they keep rolling over at lower rates.

Stephan (51:53.354)
Yeah, and it really changes our behaviors. And I think a lot of people just don’t understand this point. So they maybe sort of loosely act in this way because that’s the incentive that pushes them that way. But they’re not sort of thinking at the level of, oh, I need to be structurally short the fiat currency over the long term. They’re not thinking in those terms, of course, like most people. But then that also brings the question, what would it look like on a Bitcoin standard?

like our friend Safeteen, who believes that it’s going to be basically a very no or low debt sort of situation. Now I sort of agree with him. I think it’ll be a very low debt, full reserve style credit system that maybe there’ll be some small forms of credit, but maybe not at the same level like we have today simply because like we said, the technology we’re post the telegraph, right? Like once we have this technology, it simply won’t make as much sense to just be structurally short.

the fiat currency or structurally short the actual unit of account.

Lyn Alden (52:55.607)
Yeah, I think that the overall credit would be vastly reduced in that type of system. I don’t think it’d be zero credit, but I think it would be much reduced credit. And again, you can kind of separate into two types, which is things like debt as a permanent part of a capital structure or long duration debt would make a lot less sense. So for example, it wouldn’t make any sense for Coca-Cola to have gold denominated or Bitcoin denominated debt on their balance sheet for 30 years.

It wouldn’t make, you know, governments wouldn’t be able to have these kind of like 30 year bonds that they just keep rolling over and just kind of ever growing debt to GDP ratios. It wouldn’t make sense to have a house that you buy at a 30 year mortgage denominated to things like gold or Bitcoin. If you look at the average, like let’s say the median home, you know, it generally does not outperform gold, especially when you consider maintenance and taxes and things like that. And so you wouldn’t short gold and use it to buy a house. You’d only short fee of currency to buy a house.

And so in that type of hard money environment, you know, the types of debt that would still exist, I think would be highly productive, shorter term debt. It could be, for example, you’re a business and you want to have like a revolving credit line for seasonal changes in your business. That kind of thing is collateralized by the equity of your business. Maybe if you’re a homeowner, you want to get a very small loan to do an expansion of some sort. There could be a liquidity provision collateralizing your home with a very low loan to value ratio.

If someone wants to get education, I mean, there’s multiple ways to do it, but one of the ways could still be taking out small amounts of credit if you’re doing something that’s going to probably increase your income substantially. You can have a business expansion where you don’t really want to give away your equity permanently so you’re able to secure a little kind of a maybe a two-year loan that’s again collateralized by your business for that expansion. Maybe you’re buying a home and you get like a five-year payment term. That’s common in Egypt. I was just in Egypt.

We’ll generally buy homes with like three year, five year, seven year installment plans rather than like this third year because no one’s going to lend for super long-terms in the Egyptian pound for opposite reasons. And so I think there are still credit provision that makes sense in that world. But it’s just much smaller because most of those kind of long duration, permanent rolling debt balances no longer make sense and only high impactful, high rate of return.

Lyn Alden (55:15.827)
very safe types of debt are what makes sense. And again, and then they wouldn’t be fractionally reserved, or at least it wouldn’t make sense safely to fractionally reserve them. That would be backed up by capital that is duration matched or that is kind of permanent capital of a lending institution.

Stephan (55:33.438)
Yeah, good way to put it. And so we can think of it like the, maybe one way to put it is the borrowing cost in that world will be so much higher. And because of that, there’ll be very few projects that let’s say meet the quote unquote hurdle rate or the IRR, right? The internal rate of return. That if you’re a businessman and you’re looking at my project, I’m like, okay, do I do an expansion to build out a new factory? And oh, look, I can see instantly it’s gonna be very profitable. It’s got an IRR of 40% and I can borrow at.

10 or 15%, well, okay, yeah, good. It’s a profitable play for me, I should do that. But for most people just buying a home for 30 years, it’s not gonna be like, they’re not gonna get that kind of profitability on just simply buying a home to live in. And so I think that may be one way to sort of distinguish the fiat standard and the debt that exists under the fiat standard and the debt that may exist or is likely to exist under a Bitcoin standard.

Lyn Alden (56:29.611)
Yeah, debt in the fiat standard is a core part of the system because most fiat currency comes into existence through debt creation and the incentives to have some degree of debt are very high in the fiat currency system and people that avoid having debt for more reasons or other reasons end up getting kind of punished for having that view even though historically that view was often rewarded. Basically, you know, in this environment, savings kind of…

de-emphasized and having modern amounts of debt is emphasized because that’s what works well over time. Whereas if you had Bitcoin as the base layer of money, that goes back to rewarding savers. You don’t have to lend it out to maintain your stack. That’s just like an optional thing that professionals could choose to engage in. And the borrowers will not get rewarded unless they’re doing something very high impactful.

basically engaging in some degree of entrepreneurship or something like that, rather than just making use of the fact that they’re able to short something that depreciates over time.

Stephan (57:35.05)
Fantastic. Well, look, I think that’s about all we’ve got time for, but I just want to say to listeners It’s a great book go and check it out. Lynn, where can people find your book?

Lyn Alden (57:44.151)
So it’s on Amazon, Broken Money, and I expect to have it out in a couple other online bookstores shortly. And it’s available in hardcover paperback and ebook, and I have an audiobook coming out shortly as well.

Stephan (57:57.474)
Fantastic. Well, I’ll put the links in the show notes and Lin, I’m looking forward to catching up at Pacific Bitcoin.

Lyn Alden (58:02.243)
Yep, looking forward to it.

Stephan (58:07.802)
Okay, just give it a second to finalize and upload. But yeah, great job. And yeah, I really like the…

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