@habits

Host: Robert Breedlove
Guest: Raoul Pal

Start with peak of British Empire
Late 1800s, British start series of wars with Germany (the rising power)
Shooting of archduke Franz Ferdinand —> WW1

After WW1, power vacuum, collapse of Ottoman Empire, the bloodiest global war in history (20M deaths)
Treaty of Versailles – UK, US, Germany, and France – negotiated peace terms
Demand large war repatriation payment from Germany – half a trillion in today’s USD

Germany tries to pay in the 1920s, fail, decide to debase currency —> hyperinflation —> German collapse —> rise of Hitler

Then WW2 happens
70M people die – 3.5x more than WW1
Leads to largest baby boom in history – global population grew by 30%

Transition from British to American dominance
UN, Nato, EU – super infrastructure, centralization of power – all built around America / Pax Americana
New Deal – financial repression + large fiscal stimulus – created 1950s and 1960s boom (golden age, rising real wages, rising living standards)

1960s-70s – baby boomers enter workforce; Massive increase in workforce
Consumption and prices explode
It’s a demographic phenomena, not a monetary one

In 1970s, Nixon move away from gold standard
Wages stopped rising in real terms – since 1975, have only risen 0.3% / year
Asset prices and GDP rise, but real wages and living standards don’t —> Poor / lower classes gets angry —> Populism

In 1980s, Reagan + Thatcher
Thatcher – council houses (cheap / free housing for low income) – genius political move
But turned all of poor into debtors – now they’re slaves
Reagan does same, but for credit
Massive de-regulation for credit, financialization explodes: 401k, housing

Process accelerates, more retail borrowing, more asset price growth, but real wages still not growing
Leads to liberalization of Wall Street, power of free market

Politicians don’t think explicitly about currency debasement – they kinda delude themselves – it’s about incentives

1987 – Alan Greenspan cut rates to stabilize economy, becomes tool for Central Bankers, believe they can control business cycle

1990 – Berlin Wall falls, Communism falls, China opens and begins to reform

1996 – change from GATT to WTO – globalize and liberalize markets, reduce tariffs
Now American worker is competing against global worker
Baby boomers now facing debt burden, rise of tech, global labor competition

1998 – lots of leverage in emerging markets, first Thailand, Asian currencies crash against USD; too much USD lent to these countries
Good for American influence

Late 90s – growing financial speculation especially in housing and stocks
Banks making record margins, then LTCM blows up
Greenspan cuts rates, world stabilizes – now people think “Central Banks have got your back”
Start of largest stock market bubble in recorded history (2000s crash)

Rates cut again
Housing begins to boom
Leads to 2008 crash

Labor force participation rate begins to fall in 2000s – exactly maps velocity of money; similar to birth-death rate
When you retire, you spend less
When your population is growing less, there’s less economy activity

Hyper-financialized system
Weakest balance sheets are households, backstopped by banks

QE starts – it’s printing money but “magic sleight of hand”
In debt crisis, collateral can’t go to zero
Didn’t think it would debase currency, most people didn’t notice
Fed is papering in cracks of demographics – all trying to offset an aging population

Debasement is making us poorer – eg, S&P 500 prices aren’t rising when divided by money supply
It’s an “everything bubble” – everything follows the Central Bank balance sheet – same with many developed countries

Only 2 asset classes have outperformed (money supply growth) since 2008 – bitcoin, and Nasdaq (tech) – when incorporating this money printing / QE

Rise of the Internet
People are angry – “people realize they weren’t going anywhere”
Facebook is perfect place to divide everybody
Rising education costs, healthcare costs

2010s – 4th turning
Transition of power from one demographic (the boomers) to another (the millennials and younger)
After 2008 housing bubble, new bubble is corporate debt bubble – especially since rates are low
Could have fixed things as late as late 90s, Asian financial crisis – last unforced error – but now it’s too late

2020 – Pandemic
Fed + government = fiscal stimulus, no defaults
Fed even buys corporate bonds
“Horror story but it worked” – world saved (for now)
Asset prices go up, but not when accounting for money printing
Now they’re (Central Banks + govs) incentivized to do even more

China’s GDP will collapse with shrinking population
Japan has same

Financial repression = inflation > bond yields

Bonds = GDP growth + inflation

“No one knows who the hell owns what in an overly levered financial system”
At the top (eg, the DTCC) – assets aren’t segregated (between government / Central Banks and private holdings) – thus a collapse means everyone’s assets are at risk

2008 – Satoshi whitepaper – function of all the money printing, financialization, debasement
Debasement hides reality
Bitcoin changes the equation – ubiquitous global scarcity – the migration begins to a parallel financial system
People don’t trust financial intermediaries anymore

What you’ll see
-Ongoing gradual debasement (of fiat)
-Ongoing gradual migration (to bitcoin and crypto)

Corporate cash
What can you do with it: share buybacks, M&A, real estate
But only earn 3% on that cash while assets rising 15% / year
So next year you can buy ~12% less

Population is reducing everywhere – self balancing mechanism of humanity, can’t afford to have kids
Peak around 9.5-10B people globally
Robots will replace humans

Where this is going
-Bitcoin
-Online nation states
-Metaverse – everyone will live in different worlds

RB: Real world is becoming a video game

Next 15-20 years will be very hard transition – currency debasement, gov debt, demographic shift, rise of crypto

CBDCs – will let governments fiscally stimulate in more targeted ways
Programmable money – all govs will do it
How do you stop people revolting – you have to give them money
Redirect from capital to wages
86M millennials are pissed at what’s happening – and are more progressive – will force progressive policies
Big 4th turning – everyone shifts Left

If deflationary world – what happens?
You’ll stop spending as much – velocity of money could go to zero if you’re not careful
In long run, crypto price growth could settle around eg, demographics / GDP growth – but what happens from here to there?
Could in theory stop allocating capital to everything else (eg, real estate, stocks, bonds)

Digital ID will become important – right now we’re being exploited (eg, Facebook, Google, Twitter) – that revenue should go to you, could become basis for UBI

Everything digital goes to 0 in costs of production – electricity costs will go to zero
Positive shock – what happens?
Lower population, more robots, energy costs trending to zero – everyone is rich?
Where does the power go? Who owns the AI & robots? If world run by AI, can it be distributed?