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SLP235 Niall Ferguson Bitcoin & Monetary Revolution

by Stephan Livera
December 7th 2020

Niall Ferguson, MA, D.Phil., is the Milbank Family Senior Fellow at the Hoover Institution, Stanford University, and a senior faculty fellow of the Belfer Center for Science and International Affai... More

I am. Welcome to the Stefan Lovera podcast today for Episode 235. My guest is Neil Ferguson. He is the Milbank family senior fellow at the Hoover Institution, Stanford University. He's also the author of 15 books, including The Ascent of Money. Neil and I chat about Bitcoin as a store of value, the Pandemic and Impacts on How We Use Money, his insights on debt around the world and in history, and also what's in our financial future. This show brought to you by swan Bitcoin dot com The best place to order a Stack your Bitcoin in the US with incredibly easy set up and low fees, they have recently announced availability in New York. They are now available in all 50 U. S. States. Swan service is built around a regular stacking. But if you want to wire money in for a special smash by of Bitcoin, support is coming for this very soon. Also, they are Bitcoin only. They're focused on teaching you to self custody, so you should send all your new kind of friends there or if you

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this cipher wheel product. If you've got a Bitcoin hardware wallet and you're just using that paper seed. What would you do if your house went up on fire? Make sure you've got a metal backup product like the cipher wheel so that it is fireproof, waterproof rust proof, pet proof and tapper evidence. With the cipher wheel, you get the wheel and some tiles and you slide them in to back up the words off your Bitcoin seed. So make sure you or your loved ones have access to your Bitcoins. If an accident occurs, go in. Order yours at cipher safe dot io and used to code Lovera for a discount. Neil, welcome to the show. My pleasure to be with you. So, Neil, I I see you have recently Bean commenting about Bitcoin and you run excellent opinion piece as well. I'd love to start with a little bit of your background on you know, what was your first impression off Bitcoin And then how did that shift over time? Well, Stephan, I published a book entitled The Ascent of Money in

2000 and eight, almost simultaneously with the publication of the original Bitcoin paper by Satoshi. And of course, that meant that there was no discussion of Bitcoin in in the first edition of the Ascent of Money. Ah, few years later, it must have bean. Let's see now, In the early two thousands, my then 15 year old son said to me, Hey, Dad, there's this amazing thing called Bitcoin that you really need to get into on. We should buy some, um, thinking back. This must have bean. 2004. No, that can't be right. It must have been later than that. It was maybe 2014. 14. Andi, I said, Oh, come on. Lucky This, uh, this isn't gonna work. I did

a little bit of background reading, and I said in a very kind of patronizing, uh, professor dad way there is never going to be a viable future for something like this. Because if it were to be successful, it would pose too big a threat to the States monopoly on money, which is being maintained for most of, uh, of the four millennia, we've had money. So, uh, this is this is not something that I wanna pay much attention to. Well, you can imagine the conversation that we were having three years later, four years later in the big 2017 run up in Bitcoin prices on Dhere was reminding me on a regular basis of the, uh, big bills we'd left on the sidewalk or the Bitcoins we'd left on the sidewalk on things Point, I was beginning to learn some humility, as all middle aged men should. I mean, if you're in your mid fifties

as I am, you better be listening to your teenage Children in your 20 something Children on a whole range of issues. I mean, almost every issue. In fact, you need to take their few seriously. So I I turned off over a new leaf a that point, and embarked on a really quite serious attempt to understand Bitcoin Aunt Crypto. More generally, I had just moved from the East Coast at Harvard, toe the West Coast at Stanford at the Hoover Institution. So I was kind of well placed to educate myself better and spent a lot of the last three years with people much better versed. Encrypt. So then I was just learning. Really. Everybody should keep on learning on bond on DSO. When I came to revise the ascent of money to produce 1/10 anniversary edition in 2018, I had realized how wrong I had bean Andi in that

updated edition two there were two new chapters, uh, which dealt with the post financial crisis world and with the rise of crypto onder the transformation of money generally on the conclusion that I came to And this is now more than two years ago, Waas that Bitcoin was going toe have, ah, a successful future. I disbelieve the negative view many people took in the aftermath of the 2017 bubble. If that's the right term, when people like Nouriel Roubini were predicting that Bitcoin and everything else would go to zero, I realized that was wrong. Andi argued in the ascent of money second edition that actually Bitcoin would likely appreciate because it had significant upside as a still revalue, a new kind of digital asset which in some ways resembled the appeal of Gold

Thio on investors to my basic thought experiment in 2018 waas. If every millionaire in the world poots 0.2% of his or her network into big coins, then you're really talking $15,000 as a price. And if it's 1% well, it's a lot more so I was kind of from that point on Ah, Bitcoin Bull and still am. And indeed, what's happened this year has very much born out that view. But credit where it's due. It was my son, Lachlan, who is now 21 who who put me right on duh continues to be a source of insight on a whole range of investment issues. That's a really, really cool story, and I think it mirrors the story that many people have that when first they they hear about Bitcoin, they think it's a scam. It will never work. I don't trust this thing. And yet over time it has grown and it's

gone from zero to call it a 350 billion dollar market. And so I think this narrative as well has shifted. Now more people are willing. Thio call it a nascent store of value, as opposed Thio. Let's call it gold, which might be the blue chip historic value for some people. S o. Do you Have you seen that narrative shift as well, even in the last year or two? I think there's been a remarkable shift this year, in particular ah, succession of eminent investors. Stan Druckenmiller, for example, have said, Oh, I get it now. Uh, others Ray Dalio have said, I don't get it, but I get that I don't get it on. I think there's Bean in that sense, quite a a shift in sentiment. There's also the the institutional adoption that you're you're seeing, which I mentioned in my recent

Bloomberg opinion piece, PayPal on Destroyed and others. So I think that the process of individual high net worth, adoption and institutional adoption is really gathering speed. I think the pandemic, as in so much else, has accelerated this process. It's now a commonplace to say that what typically would have taken 10 years has taken 10 months in 2020. I think it's true off Bitcoin Justus. It's true of a whole range of different tech phenomena. People had to think a lot more seriously about ah world in which old school modes of payment and indeed old school asset classes were taking a hammering. Would you rather have had value stocks in 2020 or Bitcoins? It's a no brainer, so I think this this has really bean, a noticeable feature of the year on

I Think is a historian, that this shouldn't surprise us, because the most disastrous pandemic in all history, the black death in the 13 forties, had a similar impact on the monetization off thieving Galicia Andi, other West European economies, which in the period between the fall of the Roman Empire and the advent of recognizably modern Europe, had really become not quite cash lis but close to cash lists with feudal relationships based on barter and the payment in labor as the dominant form that was the essence really, of feudalism on the black. Death changed that. To a remarkable extent. It wasn't something I could go into in detail in the article. There wasn't space, but it's really a very important point about Western Europe in the mid 14th century that the monetization is one of the rial consequences off the black death. So I think of a pandemic or any

really big historical disruption. There's potentially an accelerant of of monetary change. Onda. We had these innovations already, uh, not only Bitcoin, but a whole range of other forms of crypto currency, Ethereum and we have the phenomenon of decentralized finance. All of this, I think, has Bean accelerated by the events of this year. And that's a good thing, because from my vantage point, there are a number of plausible monetary futures for the world. One of them is a world in which Fiat currencies, the post Bretton Woods currencies produced by central banks on banking systems. Our debased on We've seen a remarkable expansion in the supply of dollars this year as a result of the policies that have bean pursued in response to the pandemic. That's not a particularly appealing future if we imagine higher

inflation in a bunch of countries, potentially a weaker dollar. The second on even Maura worrying future is one in which Chinese central bank digital currency starts to become widely adopted, not only in the second largest economy in the world but in many of its trading partners. And that's a system for monetary surveillance. The fundamental points of the way the PBOC is designing its central bank digital currency is that all transactions will be on a centralized database immediately accessible to the Communist Party. That is definitely not a monetary future that I like the look off the third monetary future is one in which there are a multiple multiple forms of money coexisting on Bitcoin is one of these and perhaps are potentially Ah, very important one. I'm going to say something that not everybody listening will agree with. I

don't think that Bitcoin is going to be as it presently exists means of payment that we use directly. You're not gonna be unless you really are very different from me buying Starbucks espressos or lattice with Bitcoin. But Bitcoin is unquestionably working as a store of value and a digital asset. I called it a new option and digital gold in the ascent of money. I quite like that phrase. I got it from my friend Matt MacLennan, who runs First Eagle on I think, as as such, it has the potential on here. I'm going to be a little speculative to be a reserve asset to be the basis off a system Theo idea of a Bitcoin standards, not original one that's being discussed before. But that's where this parallel with gold makes the most sense because Bitcoin is something with

finite supply in a world of technological abundance, because everything else online is just infinitely replicable. I mean, Bitcoin is this potentially, uh, unique, scarce asset in the world of digital abundance, and you could imagine a situation in which we would want tohave a significant portion not only of wealth but of reserves in this form on that would then be the like gold in the late 19th century, the way in which large scale transactions were cleared between nations or between large scale entities. But you and I would be buying our lattices with some other currency, but that currency might actually be connected, had to Bitcoin. So that's a much more repealing monetary future than the other two, in my mind, not least because we get back to one of the characteristic features off

previous monetary eras, a new era in which transactions were not all under the direct supervision of the state. I mean, it's true that the state had, for most of history, some kind of monopoly over money. But a monopoly over coins doesn't allow you to trace every transaction because cash transactions are by their nature anonymous. I think for people who are law abiding, there should be some in a free society, some right to privacy, Uh, in our in our payments. We shouldn't really be subject to a completely arbitrary surveillance of every transaction we carry out. So I'm increasingly attracted to the idea off a Western financial future, because I think that should be distinguished from the Chinese financial future in which there is not a completely libertarian paradise when we can do what we like, but a world in

which, as in previous eras, we have some monetary autonomy, some financial privacy provided we remain within at the law. I think you made some really interesting point. And certainly your point about scarcity in this world was very Julian Simon inspired, right? It's very, um it's this idea that anything that we really want, we could go on, make more of it. So now we actually need to think of ways to forcefully or programmatically make our money scarce and have that as our actual reserve asset. And we can build layers up on top of that that are used in a more transactional, you know, day to day commerce way. An example of that might be the lightning network, but certainly I think most Bitcoin is Ah would probably agree with your assessment there that most of the, you know, longer term, day to day commerce will not be done on the Bitcoin Blockchain. It will be on higher layers and some of that maybe, you know, lightning network

, if some of that, maybe through our bank, so our bank retail bank may help manage kind of those connections. But I think part of the Revolution of Bitcoin is that now, if you want to, you could be your own bank. And you can spin up your own little note and run your own lightning channels and do your own kind of aspect off this, Um but I think to bring it back to what really important, I think really interesting concept. And I'd love to hear your thoughts on this is, uh it's by Nick Szabo. He's one of the pioneers in this space, and he's spoken about this idea called Deep Safety as opposed to shallow safety. And so what? He's trying to get out there. Is he saying, If you're just thinking shallow are, I want one asset that zigs while the other zags and I just want kind of a diversification and it's just numbers on the screen and you know, that's one thing. But he's saying here, deep safety is more like a fundamental analysis of the underlying political and legal environment. And so the point that someone like Nick Szabo would make

is that real estate and gold have, you know, some level of safety based on local kind of security. But using Bitcoin in the trust minimize way gives you another whole level off safety. And that potentially is why it makes sense to be the base of a new monetary system. I'm curious what your thoughts are on that idea. I have a lot of respect for Nick, but full disclosure. I I haven't read the relevant essay on that point, but I'll take your summary off it and try and work with it. Uh, I think the notion that you can get, uh, safety from diversification is quite central to most modern ideas. Theories about finance. But when the correlations goto one diversification can't save you. And there have bean a number of periods in the recent past

when we've seen that on diversification strategies have bean remarkably poor. If you think back to what happened in March when the world had a really acute financial spasm, Uh, that was a moment when you actually didn't get a whole lot of protection from a standard diversified portfolio, especially when there were wobbles around the Treasury market. So I think there is an important point to be made here. The diversification is not really eyes, not really safety in a in a meaningful sense, at least it it can be much of the time. It's one of the arguments I've made four holding Bitcoin. My basic view is that if Bitcoin behaves eccentrically relative to other assets, that is a good and desirable feature. But it's right to draw a distinction between that benefit of diversification and some deeper notion of financial security. Of course, in a world of states capable

of confiscation, there's really no such thing as a truly secure asset. Remember that the Roosevelt administration was able to make it illegal for Americans to hold gold in 1933 and I know it's hard to imagine. But there were literally FBI agents tracking down people with holdings of gold above the legal minimum on DPA, Secu ting. People who did that land is, of course, a wonderful thing to own. I. I'm a big believer in the fact that they're not making any more of it. And indeed, uh, there is a certain erosion of the available land, not least because of climate change, but you can have that confiscated two. I mean, think of all the regimes in the last 100 years that have expropriated landowners. Most of the revolutions, most obviously the revolutions

led by Lenin and Mao were associated with whole scale expropriation of land owners. If you want to be given a sense of what that's like, read Frank Dakota is amazing books, including his book on the 1949 Revolution, when Landowners Were We're Just Shot for the Crime of Owning Land. So Marxism Remember, it's an amazingly potent ideology that refuses to die. Andi, it's basic objective is to expropriate your land. So I'm not sure there's a state of the world in which we can say we unassailably on impregnable e own wealth because in every form it is capable of being confiscated in a revolutionary situation, and I think that's an important lesson of history. But part of what intrigues me is that we as human beings struggle a bit to foresee disasters, and it's partly because disasters

don't happen that frequently, uh, to the Let's say the average developed country. They happen pretty frequently in some less developed countries. But it's also because the incidents of disaster can be quite random or disasters could be governed by power laws not normally distributed. So psychologically we struggle a little bit to envisage them. This is where Nassim Talibs idea of a Black Swan is helpful. We just kind of a revolved and educated to expect normal distributions, and we struggle with power laws. But in fact, the big disasters in history and this is a theme of my forthcoming book, Doom. The Politics of Catastrophe is the most history is just disaster, uh, punctuated equilibrium on disasters. Whether you're talking about an earthquake of volcanic eruption, the wild far a pandemic, a war of financial crisis, disasters air just very, very difficult to foresee because none of them know none of the things

I've just listed eyes normally distributed. So I think, in thinking about Bitcoin, you have to consider the world a state of the world in which there is actually a significant level of political dislocation in which a one party totalitarian state is significantly expanding its power. That is what is happening, right now under Xi Jinping, and that therefore what Bitcoin offers is not perfect security, but a form of security. I mean, as long as the Internet working on, that's a pretty important precondition. Um on. Do you have them ability? Andi, have your key? Uh, then there is some form of wealth which is quite tricky to confiscate compared with the money in your bank. So that that's, I think, an important reason why Bitcoin has attracted adherents among

some of my South American friends. I've learned a lot in recent years from Wences, Casares and in Argentinian. I have a good friend, also from Argentina, Pierpaolo Barbieri, whose taught me a lot about Fintech. If you grew up in a country where overnight the currency could just be changed or the bank accounts could simply be seized or devalued, naturally you find attractive the idea of money that is not dependent on banks on Let's face it, most money in the world. Today's bank money, not central bank money, bank money. Andi. It exists because of a strange evolution that began with fractional reserve banking on gave us the world today, in which most countries have a relatively small number of very large banks that extract rents from people because we all need to have bank accounts to get paid to pay our bills or the rest of it on the essence of banks is that they kind of charge, uh, they charged their their fees. They extract their rents because they

can exploit informational asymmetries. Andi. Actually, that doesn't need to be. That doesn't really need to be the basis for financial life in the 21st century. So that's what's exciting a bit about Bitcoin above all. To me, it's exciting that you can have peer to peer transactions with that third party verification because you no longer have that third party extracting rents from the informational asymmetries. That is a very exciting phenomenon, and it doesn't really have any any obvious precedent in history. Yeah, that's really fascinating. And I'm also reminded from your book the ascent of money you mentioned as well I think some of the work of Peruvian economist Hernando de Soto and you were talking about how bureaucracy and the difficulty of establishing property title in places like South America. Uh, that can actually be why some of the poorer countries are poor because they just don't have that same infrastructure. And so perhaps it's like in a similar line of thinking, it's

a Bitcoin is providing a new line of infrastructure that people can sort of store their value, and in doing so, they can start to accumulate capital. And that helps start that process of society a ceased, uh, speed, that process of the society advancing and becoming more prosperous. Her Nando de Soto is a remarkable man who's inspired me for many years. His mystery of capital made the point, which I guess I've seen with my own eyes that a significant proportion of the world's wealth is outside the financial system and therefore can't be used as collateral. And he wrote that before we had even heard of Bitcoin more recently Hernandez Bean exploring ways in which Blockchain can be the basis for easily titling the property of the poor, something that he's been working on in his native Peru but has also looked at in North Africa. Everybody listening to this should should

make a point of reading her Nando's work. He's a tremendously creative and unorthodox economic thinker. He's one of the few people who came up with a really good explanation for the Arab revolutions, the so called Arab spring again looking at ways in which insecurity of property rights rendered the small business class of countries like Tunisia, Egypt, revolutionary eso I do think Hernandez really one of the most interesting thinkers in this whole area, on that Ultimately what we're seeing in the 21st century is a revolution in financial inclusion, which is taking all kinds of different forms. The key points in a place like Peru. And it's also true in Argentina. It's true, actually, in much of South America is that really large proportions of the population or outside the financial system. All together, they don't have bank accounts. Similar things are true in Africa and even even more so. The combination off the advent of smartphones, uh, and

the technology that you can you can put on a smartphone is really changing that. And I think Bitcoins part of that wider story where financial innovation happens. Online laws The barriers to entry makes it possible for a working class kid in Buenos Aires slum toe, have an account with an online payment, uh, sites on, but he can therefore enter the financial system, which is his mom and dad really couldn't do so. I do think that that's part of that's what Bitcoin is part off now t get to the point where you're actually able Thio own ah Bitcoin isa stretch. For most people in the slums of Buenos are is, uh But I think what's happening in those countries, and especially in the most screwed up of countries like Venezuela, is that people who do have some wealth see Bitcoin as a

really invaluable store of value, that it's very hard for a renegade state. Thio get its hands on Andi. That's why I think that's why Latin America is an important part of this story because there have been so many bad monetary experiments on so many arbitrary acts of confiscation that people instinctively know. Oh, this is a solution to a problem that we've had repeatedly to say nothing of all the inflations that there have bean. I mean, part of the interesting thing about the world today to take a step back is that it's not a very inflationary world on I remember when I first moved Thio California. I was struck by how many people pitching me crypto ideas or talking about Bitcoin would say, Well, this is gonna be a terrific protection against inflation, Andi. I would say to them Why you worried about inflation? Everybody in the Fed is worried about deflation on. We haven't really had an inflationary problem in the developed world since the 19 seventies, and

so you kind of solving a problem that seems kind of like last generations. And I think that's That's been one of the little headwinds that Bitcoin has encountered in the Northern Hemisphere. That the argument you need to protect yourself from inflation doesn't actually resonate. Certainly with anybody much younger than me. I remember double digit inflation in the UK in the 19 seventies, but I'm quite old on the first. My first ever contribution to literature was a letter to the Glasgow Herald complaining about the price of school shoots because I couldn't believe how much more they cost. Each year on, my mother had to go buy them because my feet kept growing. It was actually my introduction to the problem of inflation at the age of 10. But for most people your age, that just hasn't bean an encounter with double digit inflation unless they have lived, uh, somewhere like Argentina or Brazil or in an African country the most. The few hyperinflation episodes we've seen in Zimbabwe

in Venezuela are really conspicuous by there are low number. So I think part of what we've for gotten about is what really monetary instability looks like, because in the developed world, it's it's largely faded from memory on the problem of the last 20 years has actually been avoiding deflation rather than worrying about inflation back to the show in a moment. Knox is a Bitcoin custodian dedicated to ensuring their insurance protection covers the full value off their customers assets. For example, suppose the fiduciary wants to hold $250 million of Bitcoin with Knox. Knox will seek to obtain $250 million of insurance dedicated exclusively to that account and adjustable to volatility. No fractional coverage or narrow scope insurance for what it's worth, it all to transfer risk. If you are a Bitcoin company, investment fund trust or family office, check out knocks for your insured custody. That website is knocks custody dot com and finally lend at Huddle, Huddle is a global Bitcoin

backed lending platform that allows you to lend and borrow anonymously on your own terms. Huddle Huddle offers a peer to peer lending solution ensuring a secure and transparent collateral storage system by providing a unique multi signature escrow for each deal. This is a way to greater savings and earn attractive returns on your investment. So if you have any stable coins lying around to create your office and earn interest by lending on lend at Hoddle, Hoddle or if you are a Bitcoin and you need some liquidity, you could borrow stable coins and keep on huddling with Hoddle Hoddle's lend platform. You set your own terms and put up offers depending on how long you want to borrow or lend and interest rates. Go and check it out at lend huddle huddle dot com. I say so it may be it may well be that certain nations, as you mentioned so certain South American nations, they see the anti inflation case much more clearly than we do in the Western world, Right? Me, me here in Australia, people in the US, the UK they may not feel it as often unless they more acutely

aware of thes kinds of things. And I think this is another point that I've seen you mentioned as well, which is that just the general level of financial literacy is not that great. And so I think it's just that most people you know wouldn't like if you talk to the random guy on the street lady on the street, they may not really understand. Um, you know, the concept of they might not be thinking deeply about all What's my real rate of return? What's my return after inflation? Andi, if you would ask sort of basic financial questions, they might not necessarily get those right. And perhaps that's just part of the journey. I'm also interested Thio get your thoughts around just in a broader macro sense, where a lot of governments around the water going into more debt and what does that mean from Ah yeah, Are there historical insight there around the typical things that happen when governments reach a certain level off debt? And what does that mean for the currencies? An example might be that people

are less inclined to borrow from rather to lend to that currency because they have less confidence that they won't inflate their way out of it. Well, this is a very live question because we've seen an enormous increase in public debt this year, even larger, actually, than the increase that followed the financial crisis of 2000 and 2009. The trajectory of the US federal debt is looking mawr arm or like that of World War Two on its breaking through the 100% of GDP ceiling and ongoing rapidly upwards towards 150%. Now most economists, certainly the mainstream economists at the Harvard M I t kind of institution, would say to you, It's not a problem. So Larry Summers and Jason Furman just published a paper this week saying there is a new

paradigm in town because of secular stagnation. Interest rates are going to be very low for a long time on. Therefore, the government has considerable latitude to run up a large stock of debt. No downside risk here. Olivier Blanchard has has essentially said the same. This is the new consensus amongst the mainstream Keynesian influenced economists, and I think it will influence the Biden administration as it thinks about its options starting next year. Now you've got to be a little careful taking on Larry Summers. Uh, it would be significantly easier to take on a charging rhinoceros because there is no more competitive on powerful intellect in economics than Larry. Uh, and I think, one of the lessons of the post financial crisis period Waas. It's a smart move to be on Larry's site

because Larry's argument from 2014 was were in secular stagnation. You do not need to be worried about inflation. Interest rates are not about to normalize on bond. It was a mistake to dial back the fiscal stimulus in the Obama administration on it's a mistake for the Fed to try to normalize rates on Larry one. Those arguments and those who took the other side and I occasionally did and said, 00 dear continent of easing is going to generate some inflationary pressure. We were wrong, so that makes me very cautious, because I think I don't want to get back into those bitter battles over austerity, which I think ultimately were were won by the secular stagnation School. However, on this is a big, however, the aftermath of a pandemic is quite different from the aftermath off the financial crisis. The reason that the financial crisis had this long hangover was that it was about

some some very fundamental things, like bank capitalization. The inadequate capitalization of American banks was a major reason why it was a slow, a slow process to get the economy back to full employment. And it turned out that Justus, the Keynesians, had argued you needed to do additional fiscal stimulus, of course, when Trump did it, or when Mitch McConnell did it when the Republicans did it with their tax cuts, the Keynesians didn't cheer because it was the wrong kind of stimulus politically. But oddly enough, Trump was the Canes Ian candidate in 2016, and the Republicans did fiscal stimulus. It was just that they did it through tax cuts rather than increased expenditure on a whole range of public works. So here we are, in 2020 and we've just been through this high speed depression where the events of 10 years were compressed into 10 months. Um, the economy at recovered, but as I remember predicting earlier in the year, back in April

, it was like a giant tortoise oise or a reverse square root where it kind of went down very steeply on. Then it came back up. The torch toys his neck. But then it got to the tortoise's head, which was some way below where the tortoise's shell waas. And that's because as long as we've got Cover 19, there is about 5% or maybe more of GDP that we just can't bring back online because there's a whole bunch of service sectors that can't function on, whether it's adaptation by people or rules issued by state governments. Theo Economy is down there on the tor towards his head. It can't get back up to where it waas on the back of the shell at the beginning of this year. But vaccines are coming with high efficacy and they're going to be distributed pretty rapidly. I think many economists underestimate how rapidly we will therefore bounce back more rapidly than we did after 2000 and 2009. American households have probably about

a trillion dollars of forced saving, ready to spend on their itching to spend the idea that the savings rates going to remain very elevated through next year after we've got vaccinated and we can get back to restaurants and bars and cruise liners and crowded planes and parties. All those things that people are missing, I think, is wrong. So imagine the following scenario. We bounce back faster than expected next year. By the summer things air really frothy because everybody's enjoying the return to normality. There are some supply constraints left over from the disruptions of the lockdowns. I don't wouldn't be holy surprised if inflation surprised the Fed a little bit to the upside above the 2% target. Now the Fed has said it's relaxed about over shooting. It wants to overshoot. Sure on. I could get the rationale for that. But remember, there are these Spectators called

the bond market, looking on and asking themselves, Are they really sure they know what they're doing? There are people like me who read Allan Meltzer's history of the Federal Reserve many years ago, the late lamented Allan Meltzer, and we remember what the mistakes of the late sixties and seventies were where essentially the central bank, the Fed and other central banks around the world were too passive in the face of changing inflation expectations. Andi fiscal imbalances. So I put it to you that there is a non trivial probability that things do surprise, uh, in terms of inflation, inflation expectations and that the bond market reacts to that. You do not need a significant move in rates to make the debt burdens off the developed and developing world. Suddenly, quite scary. It's all about the debt service. I pointed this out 20 years ago in a book called The Cash Nexus. The debt GDP ratio is not really a meaningful number. I

mean, essentially, you're looking at a stock relative to a flow. What really matters is this Are your debt service payments? Are they actually sustainable relative to your growth rate? And if not, then you're in what's known as nasty fiscal arithmetic very quickly, so that, I think, is the key issue. What if secular stagnation turns out have bean true after the financial crisis, but not after the pandemic? Then I think the central banks of the world are going to be in a very nerve wracking game of chicken with bond investors on. Although the Fed has been buying every new bond that the Treasury has issued this year, pretty much if you imagine the situation a year from now. I think the credibly credibility of the Fed could be on the line if there is a significant exit by foreign investors from dollar denominated bonds, because people look at the

numbers and they look a inflation and they think, Oh, dear, it's the 19 seventies and Joe Biden is Jimmy Carter. I mean, that's again, no, a kind of high probability scenario, but it's not a zero percent probability scenario, either. That's a big, however, but, ah, big one I wanted to get into with You were mentioning around bonds and interest rates. So I think it will be interesting to get your views on where we are in terms of interest rates. You know, today in 2020 they're obviously very low. How does that compare historically and what other times in history can't Would interest rates have gone this low? It doesn't not seem like a bit of an aberration that we've got almost 0% rates. And if you consider from a real perspective, people are earning negative because of inflation, right? So the nominal rates are very unusual. The rial rates not so much. Let me take a step back. My student Paul Schelzig

did amazing doctoral dissertation at Harvard. It's Bean, partly published by the Bank of England in a couple of working papers. There'll be a book soon. Now what he shows is by going ALS the way back to the 12 hundreds on looking at interest rates from AH, whole variety of different debt instruments. There has bean super secular stagnation in that nominal rates have trended down century after century. Uh, since even before the black death and therefore are present nominal rates a very remarkable in history. It's hard to find periods when nominal rates were this low. In fact, it's pretty much impossible on de so that that is one of those rare occasions when the economic historian can say unprecedented. But the real rate story is not so straightforward because, in fact, there have bean lots of periods in history. When real rates were negative that that, for

example, happened in the 19 seventies on, it was one of the reasons investors in bonds had a torrid time in that decade. So I think the nominal rates story is remarkable. The rial rates story not so much eso, in other words, a relatively small amount of inflation at the moment can get you negative rates because the nominal rates are so are so low and it's the real rates that matter in the end. To an investor who's thinking rationally about returns on that, I guess is another reason to think that there'll be some pretty nervous, trigger happy bond vigilantes. If inflation does start to search a any point on that that, I think, is that the great unknown? We've seen a little bit of life in inflation expectations ever since the vaccine breakthrough news came. But I think what really from my money matters is where will be by the summer of next

year. Given that a ZAY said, a vaccine that works is a form of stimulus more powerful than anything in the Keynesian playbook, because it is a promise to consumers that they can go and do stuff that they've been prohibited from doing for the better part of a year. On the analogy here that I quite like is with the aftermath of war, when peace is declared, they're typically is ah, little boom. That was certainly true after World War Two in the United States, when control started to be removed. You saw a great surgeon consumer spending because people had really bean forced to save. I think this is is one of the ways in which covert 19 is a bit like a war on. When you know Madonna and by on Tech, come along and say We've got a vaccine that's a That's like saying peace. So it's not so much VE Day or V J Day sort of v covert day

victory over covert. And I think people will respond to that in a way which will be exuberant to use a word that has has done its has done the rounds in in modern financial history. As I said, we can't be certain it could be, after all, that there are problems of the vaccines that we haven't foreseen, and that would be enormously dispiriting and depressing to people. It could be that in the course of next year, some new form of disaster arises that we didn't quite think about, because we're always surprised. We're always looking at the last disaster, expecting to repeat itself, and then along comes some new form of disaster. But if everything else is equal and people can spend a trillion dollars in bars and restaurants on vacations, etcetera in a mood off It's over. I think we could see quite a quite a frothy middle of 2021 and that will be the moment that the Fed is tested on. It will most

likely be tested because the dollar will slide on. Foreign investors will want to exit U. S denominated US dollar denominated bonds in preference for, say, euro denominated bonds or, for that matter, even RMB denominated bonds, because there will just be more attractive. Riel returns in those instruments, right? And, uh, also wanted to get your thoughts around the concept of financial repression, right? So if if governments are in this very high debt situation and they essentially do not want to let interest rates rise, do we risk seeing that kind of Japan ification in other countries around the world that simply do not want to let the rates rise so they just keep everyone in that sort of low growth sort of environment? I certainly think that Japan is a little bit of an experimental laboratory for all that we're discussing, because in Japan

, in the wake of its financial crisis, at the end of the 19 eighties, there was a great surgeon in government debt far above the levels in other countries. A same time, Japan had the, uh, the extreme case of the aging population. Andi. It has spent decades trying to solve the problem off very low inflation expectations, very low inflation on bond, very low growth. And I suppose when I look a Europe, I I think to myself. That's kind of the future for Germany, because it will be very difficult with the rising debt of the eurozone, the aging population on what I think will be quite low growth to avoid being a version of Japan. I don't think it's necessarily the future of the United States

, because the United States has fired bazookas in a way that Japan never did. I mean, the bazookas fired back in the spring in terms of the level of government debt issued and the expansion of the the Fed balance sheet. These air really big, big, big bazookas on board. The key issue here is that when life returns to normal, I think that both consumers and banks will be quite eager to expand, and so I don't think it will feel it all like post crisis Japan in the U. S. Next year. If if it feels like that anywhere it'll be, it'll be actually in Germany. Andi. In Japan itself. Yeah, I guess it's sort of coming to the end of our time. I wanted to just kind of take a step back and look a little bit further into the future. And let's imagine this idea that, you know, Bitcoin does become Seymour

like a reserve asset, right? So people aren't necessarily doing day to day stuff with it. What kind of a financial system? What kind of ah, you know, Do you see it being like a credit system or an equity sort of style of system? If you have thio kind of project out maybe 10 or 15 years, if you have to speculate what kind of imagining what it might look like? Do you have any idea of what that could look like? I think that we'll spend a lot less time talking about banks in the financial future. Andi. There'll be, ah kind of platform based system for buying and selling financial services. I think that seems like a plausible future uh, will therefore see a significant compression of the fees that financial services companies can charge on. There'll be a decentralization of the system, uh, in a whole range of different ways

, so that it will look, I think, radically different 10 years and 20 years from now. One of the points I made when I was updating the ascent of money was that not much actually changed between 2000 and 2018. We spent those 10 years putting patches on the system to make sure it didn't fall apart. But my prediction was that the next 10 years would see a financial revolution propelled by technology, and that financial revolution would do for familiar institutions such as banks what the technological revolution in e commerce is currently doing to department stores. It will render AH, whole structure of finance obsolete, or at least obsolescent. I think most of us will be able to conduct our daily financial transactions on our smartphones with a variety of APS. I think the competition to allow payments to be done at low cost will be such that I will no longer be fleeced

every time I need to send Remittances to my wife's family in Kenya and Somalia on, I think the whole Remittances business will cease to be the the nasty racket that it is a frictionless and low cost payments across borders will suddenly be a reality, which will be a great boon for the poorer, uh, poor, a proportion of humanity, I must say, Because if you if you look at the fees that are charged for typically relatively small transactions across borders, they're absolutely extortionate. They are usually in the modern world. I think that it will be a different world in terms of the ways in which, uh, we finance new ventures on this, I think is a thing that people struggle a bit with because they're so pre programmed to think in terms of of equity, finance on death, E aipo is the culmination of your career. When you sell securities through public

markets, I'm sure that that will necessarily be the dominant motive. Financial, uh, capitalism by the time we get to 2030 because there will actually be simpler ways off raising money for for operations. And I sense that the era of private equity the era of the, uh, the asset manager is passing because ultimately it will be possible toe manager portfolio with technology on, not pay, the kind of fees on Brents that have been characteristic of the last of the last 20 or 30 years. Bitcoin's future, which is really what we should focus on in our final minutes, is to me the great unknown because it's in the hands of financial regulators. It's ultimately up, I think, to the U. S Treasury and the U. S. Federal Reserve. Whether the United States is creative about the financial future or conservative

, it's being conservative. For years. Washington's attitude has bean for the last 20 years. We love Swift. We love payments between banks with this cranky, cranky, cranky clanky. Clunky What's the word? I'm looking for clunky technology dating back to the 19 seventies because it allows us to do financial sanctions and financial sanctions. Are the US superpower so much easier than sending theeighties second Airborne? So, please, can we leave things as they are? That's no really a viable strategy. It's an opportunity for China to build in all terms of payments architectures. I don't think it is smart to let that happen. The U. S. If It's smart is going to use Bitcoin, a successful, proven Blockchain based technology for peer to peer payments as part of its plan for a new alternative financial architecture. ER that is decentralized that allows that kind of peer to be a payment toe happen with minimal state surveillance

on, therefore, creates an alternative to China's centralized, artificial intelligence based one party rule. Panopticon essentially the totalitarian dream. No human action outside the surveillance of the party. We've really got to offer people something better than that, and I don't think the answer is, well, Do the surveillance through Facebook. Don't worry. Zuk is a good guy. We need something that is Mawr authentically American. Remember The American system of banking was designed from the outset to be decentralized and to guarantee significant privacy to the individual. The whole point of the United States is the liberty of the individual. On what's exciting about Bitcoin is it kind of fits into that model of American decentralized on relatively state free finance. So the argument that I would make to the incoming Biden administration is, for heaven's sake, don't feel that you have

to replicate the People's Bank of China playbook on Build a digital central bank currency for the United States that that's like turning Chinese. Let's think about what's already working what the United States has been good at, which is building crypto currency as a new kind of money. And let's let's make that part of our system. And if ultimately, Bitcoin becomes a reserve asset, which will take time with its price volatilities obviously diminishing over time, then that's actually quite an exciting prospect because it makes to my mind mawr sense toe have at the root of the system a unit of account that can't be debated. I mean, why not way used gold for the better part of a century in the United States to provide that kind of anchor? We've bean drifting anchor Lis Since 1971. We've

had one bout of inflation and the near bout of deflation. I don't think one could look back and say the Fiat currency is awesome. Let's keep it going. I think there's an opportunity to come up with something better on DWI. Don't need to reinvent it because it's been around now for 11 successful years on. That's what, for me, is so exciting about about Bitcoin and why my then 15 year old now 21 year old son Lachlan, was right on I was wrong and I'm still not so old that I can't can't learn a new trick. That was phenomenal, Neil. Finally, just for listeners who would like to follow you online. Where is the best place for them? Thio. Find you and follow you online? Well, I was once upon a time bullied into using Twitter by my publisher. I kind of hate Twitter. Um, as a friend of mine once observed, It's like, you know, the biggest urinal wall in history. But used

carefully, it's not a bad way to follow writers. So I am on on Twitter on Twitter at and Fergus. I have a website damn, which is just as you might predict, Neil Ferguson dot com, where you can find all my journalism. I write every two weeks for Bloomberg Opinion Rather lengthy column. The most recent one was about Bitcoin, and it just came out a little less than a week ago. I have a book as I mentioned Doom Coming Out, which will be my 16th book published at the end of April. Next year, so there are lots of ways you can. You can follow my stuff. And if you like TV more than any of the previously mentioned media, I did a PBS Siri's called Net World back at the beginning of this year, which, uh, not not wrongly pointed out some of the dangers off. Ah, highly networked world. I think that's still available to watch five PBS. Fantastic. So, listeners, I'll put Neil's

links in the show notes and Neil, I've really enjoyed chatting with you. It's been really, truly interesting conversation. Thank you for joining me. Thank you, Stefan. It's been a pleasure. Show notes are available at Stefan Lovera dot com slash 235 for this episode and make sure you share the show with your friends and family. Thanks, and I'll see you in The Citadel's

SLP235 Niall Ferguson Bitcoin & Monetary Revolution
SLP235 Niall Ferguson Bitcoin & Monetary Revolution
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