Latest / What Bitcoin Did / The Biggest Lie in Economics | Peter St Onge

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The Biggest Lie in Economics | Peter St Onge · What Bitcoin Did

0:00
I mean, the first problem is that they caused the recessions, right?
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So they manipulate interest rates down.
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That causes a tissue fire boom.
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Tissue fire boom leads to inflation because it's being driven by money printing.
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At that point, they jam on the brakes.
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So you get this, you know, go fast, slam on the brakes, go fast, slam on the brakes, which we call the business cycle.
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Now, if we do get one, you know, of course, the sort of prime suspect is going to be AI.
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And I thought we would never, ever see anything like that again.
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Like the internet, the degree that it changed the world,
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the amount of money that went into it,
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the amount of money that was made out of it.
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I didn't think we'd see any of that for a century,
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nevermind my life, my kid's life, my grandkids life.
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So I am shocked at AI.
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It's literally it's 5X what the internet was in every way.
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All right, The Prof, Peter St. Onge, welcome to the show.
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This is the first time you've been on
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since I've taken over and you were always
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one of my favorite guests on the show.
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So welcome back.
0:59
Well, thanks for having me back, Danny, and congratulations on the show.
1:02
Thank you. So I think, like I said, this is the first time you've been on the show since I've
1:07
taken over. And I've got a lot of stuff I want to throw at you today because I do a ton of macro
1:11
shows. And rarely is it from a very pure Austrian viewpoint. And that's obviously your background.
1:18
So I want to get into that. But we should start off by talking about where you've come from,
1:22
because you have a PhD in economics. Tell everyone about that and then how you found
1:27
sort of Austrian school economics.
1:29
Yeah, so I did my undergrad in economics,
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and that was at McGill University in Canada,
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and it was a very mainstream program.
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So, you know, it was Keynesian economics,
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and I actually, during the entire degree,
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so this is an elite school in Canada,
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during the entire degree,
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I never even heard of Austrian economics.
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I don't think any of my professors
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knew anything about Austrian economics,
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and I was after I graduated years later I was roaming a bookstore in Japan and there weren't
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that many books uh so I was digging through old bookstores and there was a book by uh by um
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Rothbard no I'm sorry Skousen who's also not an Austrian economist but he has a book where he
2:18
basically compares different schools of economics so it's called making I think it's the making of
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modern economics. And he had, you know, Marxism, Keynesian, and Austrian. And so I was reading
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through, well, and then he had, like, I think he called it Friedman economics, like free market
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economics. And so I was looking through the Austrian stuff, and I was like, wow, this stuff
2:41
makes a lot of sense. And so, you know, went out, found Rothbard. Rothbard's kind of the gateway drug.
2:47
The case against the Fed. Anybody who's not familiar with Austrian economics, that's a very
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good book to start. Ron Paul's book, End the Fed, is kind of a popularization of Rothbard's book.
3:00
And then Rothbard led to Mises and all these other Austrians. But yeah, it was striking. Like,
3:05
I had to find it on my own. You know, the academic establishment teaches nothing about Austrian,
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which is fascinating in retrospect, because Austrian economics is simply classical economics.
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Like, it's not a fringe thing.
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It is simply the continuation of what economics was
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before government bought its way into the field
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and morphed it into so-called Keynesian economics,
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which is really just pro-government economics.
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So essentially, the 500-plus year history of economics
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is hidden in even an elite university degree.
3:43
Why do you think that is?
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Is it because they're preparing you to go out and get a job?
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And if you go out and work for, I don't know, the Fed, for example, you're not going to need it.
3:53
Yeah, there's a certain amount of network effects, essentially.
3:56
So, you know, the individual professors are not, you know, they don't see themselves as foot soldiers of the socialist revolution, right?
4:04
They just think they're teaching economics.
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And as you say, right, if you go out into the world, everybody else, every other economics person you're communicating with is going to be trained in Keynesian economics.
4:16
And so if you're not trained in that, then you guys are not even going to know what you're talking about. So business economists, Wall Street economists, of course, government economists, academic economists, all of these standardize on Keynesianism. So, you know, it's a little bit like the QWERTY keyboard. Like, it's not logical, but everybody else uses it. And so you have to use it. And so, right, you've got sort of a network effect, I think, from the individual professor's point of view.
4:42
Now, the sort of deeper question is,
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why was economics corrupt in the first place?
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I think the answer there is just that it is far too useful.
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If you look at every Marxist regime,
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the economists are the gods.
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They get the oceanfront dachas.
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They get the import brandy directly from the West black market.
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And they're treated like that
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because economics is how you can control a system.
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If you trying to be a central planner you need economics to do it You still not going to do very well with economics but without economics it be an absolute mess It going to fall apart You can be strung up by your heels Mussolini style So economists are just too useful And so that
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I mean, you know, really, if you think of all the different academic fields, sort of the
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biggest prize for a government to corrupt is going to be economics. And it's very cheap,
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especially if you have a central bank. You know, so the Fed literally prints its own budget,
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It can spend unlimited amounts, you know, so it can build tennis courts, but it can also hire hundreds or thousands of monetary economists.
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It essentially bribes them with academic grants.
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Now, these guys know that, you know, if they write a paper arguing that we don't need a Fed and that it actually destabilizes the economy and causes boom-bust cycles.
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So if they write that, they're not going to get any more grants from the Fed, right?
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Which, you know, that impacts their career.
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It impacts, you know, universities will hire or promote you based on your ability to raise money.
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And in the field of monetary economics, there are not many NGOs that are funding your research.
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Fundamentally, you know, you got to dance how the Fed wants you to dance.
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So it's, you know, very, very easy for a government to corrupt.
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It's surprisingly cheap to corrupt an academic, like $500, $1,000 would do it, especially for junior academics.
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You can get them to write a paper on something, arguing some point.
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very, very cheap to corrupt them compared to the social prestige that academics have in general.
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But specifically when it comes to economics, you know, you can essentially buy the leverage points
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to control trillions of dollars of resources. You can do that spending millions. So I think
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what's more surprising is why it took so long to corrupt economics. Do you think the political side
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of this comes into the equation as well in the sense that like the hot topics of the day
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change all the time. But one of the ones that doesn't is the economy. And do you think that
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the government needs to pretend that they have these levers they can pull that will influence
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the economy, even if they're not exactly real? Yeah, 100%. You know, if you look at top issues
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in elections in really every country on earth, something economic is going to be like top three
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all the time. Currently in the US, I think border is up there. I'm sure it is in the UK as well.
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But, you know, inflation, jobs, economic growth, wages,
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these things are always absolutely top of line.
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And so it's very important for governments to,
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A, look like they control it.
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B, it's very easy to gaslight on these topics, right?
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The average man in the street knows almost nothing about the Federal Reserve.
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And so, you know, in fact, there was a study,
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roughly two-thirds of Americans think that the job of the Federal Reserve
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is to control inflation.
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to fight inflation, which is funny because, of course, the purpose of every central bank,
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including the Federal Reserve, is to create inflation. In the U.S., we had no inflation,
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zero, for 170 years until the Fed was created, at which point they destroyed 93 or 97 percent of
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the dollar, right? So the Fed gave us permanent inflation, yet man in the street thinks that the
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job of the Fed is to fight inflation. Because if you open a newspaper, you know, nine times out of
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any article about the Fed is about the Fed fighting inflation. So regular people who don't
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have degrees in economics, and even if they did, they got the Keynesian economics, which argues
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that, right, says that central banks control inflation. So, you know, it's very, very easy
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to gaslight people, and you're dealing with not only trillions of dollars, but you're dealing with
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one of the top issues in voters' minds, you know, viz, inflation, wages, jobs, unemployment rates.
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So it's absolutely sort of the commanding heights of academia.
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You know, the rest of it, gender studies, all this.
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Those are nice to have.
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They're fun.
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You can, you know, you can shape public opinion.
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You can shift some money over to this industry or that.
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But economics is the battle royale in academia.
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I think the 2% inflation thing is one of the most successful psyops of all time.
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Before I got into Bitcoin, I didn't really pay that much attention to economics.
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And then it wasn't until I got into Bitcoin that I'd even heard of Austrian economics.
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And if you'd have asked me, you know, in 2015, before I found Bitcoin, what I thought of
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inflation, I would have probably said that the standard line of 2% inflation is good.
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It means the economy is growing.
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Like it would have been that answer, that stock answer.
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But I'm interested, like as someone who did the PhD and this was before you found Austrian
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economics, would you have said the same thing?
9:40
That's an interesting question.
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Sort of counterfactual back the, you know, naive version of me.
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I mean, I didn't have strong opinions about inflation back then.
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I just thought that, you know, it was part of the system.
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I hadn't given a lot of thought to it.
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You know, now I understand, of course, like you, that it's a psyop.
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You don't need inflation for anything whatsoever.
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You know, it's essentially a counterfeiting cartel.
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And, you know, the metaphor I like is a gasoline thief.
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So if you're siphoning gasoline from your neighbors,
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the trick to that game is don't take it all at once.
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Right Take a half gallon here a half gallon there If you literally drain the neighbor tank he going to notice that if it happens twice he going to start taking countermeasures right And so you know 2
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is basically siphoning a half gallon here, there, right? And every so often it gets away from them,
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like during COVID or in the 1970s, you get double digit inflation. And then at that point,
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central banks panic because they have drained the neighbor's gas tank to zero, right? Now,
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voters are noticing, voters are discussing, right? They're starting to ask what, you know,
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do we need to reform the central bank? And then they panic. But in normal times, right, it's,
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you know, 2%. And, you know, keep in mind, so the economy grows independent of inflation,
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right? It grows on its own measure. So people come up with innovations, they figure out new
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recipes, like new ways to combine, you know, technology, capital, workers, etc.
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So that's productivity growth.
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That's how the economy grows.
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And, you know, if we take the past 150 years, let's say,
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the economy itself is growing something like a percent and a half a year
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because we're inventing new things.
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The government is not destroying as quickly as the rest of us are creating.
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So prices should be falling by about a percent and a half.
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Then, of course, the population is growing.
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In the case of the U.S. dollars, foreigners use the dollar.
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They're wealthier, so you have more dollar demand, et cetera.
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By the time you're done with it, you've got the 2% inflation when we should have about 2% deflation.
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In other words, stuff should get cheaper because we're coming up with new ways to do it.
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Now, we do have this in some things like TVs or computers because the innovation is so fast that even the Fed cannot print money fast enough to soak it up.
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But in most things, the Fed manages to soak up all of those productivity improvements.
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Right. So the computer, China, which massively lowered manufacturing costs all over the world.
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You've got boring things like containerization.
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Right. In the old days, you had to pick up pallets and move them onto ships.
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Now you can just ship.
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So you've got all these amazing productivity improvements that should have made us on the order of five to ten times richer.
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Right. And instead or put differently, should have made things cost five to ten times less.
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And instead, it all got soaked up.
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So, you know, when we talk about 2%,
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it's not just that they're stealing 2%
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by licensing counterfeiters effectively.
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It's that they're also soaking up the 2%
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that we should have gotten.
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So you put it together, and in the U.S. economy, for example,
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it's on the scale of a trillion dollars a year that's stolen.
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Now, where is it stolen? Where does it go to?
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Some of that goes to Wall Street,
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which can literally print up its own money.
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in the U.S. as in most countries, if you go out to get a mortgage, first thing they'll say is,
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okay, let's open you a bank account. You say, no, no, no, I don't want a bank account. I want to
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borrow money. I want you to give me money and I'm going to take it out. What do I want a bank
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account for? And of course, the reason is because it's imaginary money. They create a bank account
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and they credit you with, you know, $400,000 to go buy a house. This is a money printer. This is
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a counterfeiter. So that's, you know, a big chunk of it. Then the other part of it, of course, is
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they counterfeit it effectively by pushing, by manipulating interest rates down so that borrowers
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can borrow cheap. The vast majority of borrowing on earth is either governments, rich people,
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or corporations. So it becomes this giant siphon where, you know, the sort of upper middle income,
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worked hard his whole life, stashed a bunch of money in the bank. That's paying 0.2%. Why?
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because it's being siphoned off to all these borrowers
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who, broadly speaking, are either connected
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or they're the government.
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So it's a massive, you know,
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siphoning of the neighbor's gasoline
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and it is much bigger than people understand.
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It's not just the 2%,
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it's the 2% plus soaking up every technological advance
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of the past 100 plus years.
14:23
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16:28
What's the reason they need to siphon that off? Is it through a fear that this would cause a
16:33
deflationary bust and the entire system would be at risk? It's not that they need to. It's,
16:39
you know, like, why did Willie Sutton rob the banks? That's where the money is, right? So they
16:43
siphon it because that's where the money is, right? You know, you got a trillion dollars.
16:47
Now, in terms of what's the propaganda they deploy, why they need to siphon this money off,
16:52
That's exactly the claim, is that if we don't inflate the system, then you'll have deflation,
16:58
and then they have this just-so story how people will stop buying because they figure it'll be cheaper in the future.
17:05
Okay, well, first of all, that's testable.
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That does not happen.
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That's what occurs.
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There's lots of industries where prices fall.
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For example, TVs and computers.
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People do not stop buying them at all.
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And, of course, if you know Austrian economics, the reason is because, you know,
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you've got time preferences and you prefer a TV today to one tomorrow. If you're waiting a year
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for a TV, it's not just that you're getting the TV, the exact same TV in a year. You're not getting
17:28
to watch Netflix for an entire year and so on. So that's the testable hypothesis is absolutely false.
17:33
Now, you can also compare it to past episodes. So the probably the most famous episode of
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ongoing deflation in U.S. history, anyway, is the so-called long depression. I believe it was the
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1870s, maybe early 1880s. And that was about a 10 or 15 year period where prices were falling
17:52
every single year. It was also the golden age of really humanity. Everything was invented
18:01
in that long depression. Magnetism, computers, vacuum tubes, every single thing that Elon Musk
18:08
does, robots, all of it, right? All of it, helicopters, airplanes, like you name it,
18:13
it was all invented in this very, very small window that was dominated by the long deflation.
18:20
And so if you look through history, in fact, periods of deflation are economically healthier.
18:27
Prices go down, wages go down, but wages don't go down as much. So people get much, much richer
18:33
when you have deflation. Now, the sort of sleigh of hand, the hocus pocus that the Fed's relying
18:40
on with their propaganda is that there's a very, very specific type of deflation that is harmful.
18:45
What happens there is that when you have a financial bubble that's been inflated by
18:50
central banks, when that bubble pops, you have massive defaults. Defaults effectively evaporate
18:59
that money, right? Because the loans were being treated as money somewhere in the system. So if
19:04
you have massive defaults, then it sort of takes out quasi-money, and so the remaining money is
19:10
more valuable, right? If you think of it, you have stuff, you have money. If half the money suddenly
19:14
evaporates, then now, you know, each dollar buys more stuff, which is known as deflation. So we saw
19:22
that in the 2008 crisis, for example. Once the crisis hit, you started having mass defaults,
19:26
you started getting deflation at the beginning. The Fed said, look, see, we told you, we told you,
19:31
deflation is the end of the world every time. Then they came in and printed, right? But the key there
19:37
is that that is a very, very special case of deflation. And see, the normal deflation is where
19:43
you have productivity improvements, and so stuff is cheaper. That's different from a Fed-induced
19:49
liquidity-driven deflation, which is where the stuff didn't get any better, the money vanished.
19:55
Now, why does money vanish? Because it's fake, because it's fiat, right? It is subsidized,
20:01
manipulated into existence by the banks. Nothing is backing it. So the Fed's core argument that you
20:08
need us to fight deflation is kind of funny because the only type of deflation that's bad
20:14
is the type that central banks create and then sell themselves as the only solution to.
20:22
Is there another side to that sort of deferral of consumption? In a Bitcoin world,
20:29
things get cheaper in Bitcoin terms over time, generally, obviously very volatile.
20:33
And there are things that I definitely don't put off.
20:36
Like if I need a new laptop, I'm just going to go out and buy it.
20:39
Like I'm not going to wait for that purchase.
20:41
But there are other things like larger purchases that I will wait for.
20:43
Like I've been looking at buying a house for a long time and I'm just basically always waiting
20:47
because I know in Bitcoin terms over time, that's going to reduce
20:50
juice. But that's a good thing, right? Like that's not me having to rush out and spend
20:55
because I know my money is going to be worth less over time. It's the opposite. And does that sort
20:59
of stop any kind of malinvestment? Oh, yeah, it absolutely does. So malinvestment is when interest
21:06
rates have been manipulated too low. And so it's artificially cheap for companies to borrow. And so,
21:13
you know, generally speaking, foolish entrepreneurs will be able to get funding, whereas in a healthy,
21:19
normal economy. They would not because the interest rates are too high. So what you're
21:24
describing absolutely helps that problem. And the problem itself, of course, comes from central bank
21:31
manipulation. But now what you're describing, like in a Bitcoin world, so, you know, somebody
21:35
like Pierre Rochard, who, you know, he doesn't want to buy anything, right? He's reluctant to
21:40
buy too many chairs, okay? And, you know, this is kind of a meme in Bitcoin that, you know, once
21:45
once you understand that your money,
21:49
your true money is appreciating,
21:50
you become reluctant to spend it on consumer goods.
21:53
So the Keynesian would say,
21:54
well, this is terrible for the economy
21:55
because if nobody's spending any money,
21:57
then now the guy who's working at the movie theater
22:02
doesn't have a job,
22:04
the DJ at the nightclub doesn't have a job, so on.
22:06
Of course, the thing, so that's false.
22:10
And the way to understand is that if you sort of zoom out,
22:13
Now, society has a certain number of real resources, like things you can drop on your foot, right? And these are people who can do productive things, their physical capital. The money itself is like a bidding token, okay? You know, think of it like chits.
22:32
so you've got workers you've got steel and if people are um you know buying or here you've got
22:40
workers and wood that exists already in the economy on january 1st and so you can do two
22:46
things with that one of them is that i can go out and hire these guys to build me a deck
22:50
so that's a consumption good if i don't do that right if i'm buying bitcoin i'm looking at number
22:57
go up and i say no no i don't need the deck this year well what happens now you've got workers
23:01
and wood that I'm not bidding on. So they're going to go to the next best use. Their price is going
23:08
to fall a little bit, deflation, because I'm not like chasing them down. And they're going to go to
23:13
the next best thing. Now the next best thing, among those next best things, some of them are
23:19
investment, right? So my consumption dropped out, but now it's cheaper for somebody to build a
23:24
factory, right? They can hire the construction workers. They can buy the wood, which is now
23:30
cheaper. So it's good for the economy, right? And the key here is that Keynesians think in terms of
23:38
money being a resource. Money is paper. It is a token. It's a bidding chit. The resource is the
23:46
real things. It's the workers, the steel, the wood, okay? And so if consumption drops, that leaves all
23:54
those things left over to invest. Now, sometimes if I don't build the deck, the worker's now
24:02
available and somebody else is going to build a deck, okay, but sometimes it's going to go into
24:06
investment. So the tendency is that if people move away from consumption, those resources are still
24:11
there, right? They're going to be used for something. The price will just keep falling
24:15
until somebody uses it for something because construction workers are useful. There's always
24:20
somebody who needs something done by a construction worker. So that's, you know, once you look at the
24:26
economy in terms of real assets as opposed to money, then you can kind of understand what's
24:32
going on here. And it also helps you understand why the Fed is a bad thing, right? So you don't
24:37
need 2% inflation to get people to buy things. What's getting people to buy things is that stuff
24:42
is useful. Wood is useful, construction workers are useful. They can stand on their own merits,
24:47
right they don't you don't have to like hand out free money to banks give them a license to
24:53
you know print mortgages you don't have to do these things to get the economy to go hire
24:57
construction workers right they'll do that on their own the thing that i find so fascinating
25:03
about austrian economics is whenever i hear it explained it just makes it makes total sense like
25:08
from a very first principles perspective everything that that you've just explained makes total sense
25:12
and compared to sort of keynesian economics it's actually much easier to understand i think
25:16
And what I don't get is why everyone isn't an Austrian.
25:23
Oh, yeah. I mean, you've got 12 to 16 years of education, right?
25:28
And the way that modern government education systems work
25:34
is you've got this pyramid where you've got a couple of guys at the top
25:37
who write the textbooks, and they decide,
25:41
like when we were talking earlier about that network effect,
25:44
right? When, you know, school teachers, like high school teachers teaching economics and they decide
25:49
what type of economics they're going to teach, well, what's the vernacular? What's the,
25:53
you know, vocabulary? Where do they get that from? They get that from Paul Krugman
25:56
or Paul Samuelson You know there like basically three or five guys at any particular time who are writing the textbooks Those guys are all you know dyed Keynesians they drank the Kool
26:10
So, you know, the challenge at that point, I mean, before the internet, it was essentially impossible.
26:16
Like, my story of turning on to Austrian economics, the internet existed, but there wasn't much on it back then.
26:23
This is the 90s. So I had to find it in a bookstore, literally, right?
26:27
So what percent of people were going to get red-pilled that way?
26:30
Or I guess gold-pilled is the term.
26:33
And, you know, now it's much, much easier, thank God, right?
26:36
You know, so if you look at sort of Ron Paul as a phenomenon, for example,
26:41
he could have never really existed, or anyway,
26:44
he would have been much, much smaller scale without the internet.
26:47
The internet really blew that up.
26:49
So, and, you know, whether it's on Twitter, on Reddit, you know, YouTube,
26:56
You know, you've got all these videos now where people are explaining Austrian economics.
27:01
They're explaining, you know, heterodox theories, how banks create money, like how they, you
27:06
know, counterfeit as opposed to the sort of benign Keynesian story.
27:10
So the story is getting out, but the trick is that you're up against 12 to 16 years of
27:15
education.
27:16
There's also a funny phenomenon where the more educated somebody is, the more closed
27:23
minded they tend to be on political issues.
27:26
And I think this is counterintuitive. Like, people imagine this the other way around. You know, you go to school, you learn critical thinking, and then that's not how it works. They are utterly close-minded. And so, ironically, the people who are sort of most able, you know, who might be interested in picking up, like, you know, a book about economics and just reading it for fun, like, that's kind of the target market that you're talking about.
27:51
but those people also tend to be the most ideological blind.
27:56
So it's sort of trench warfare that, you know,
27:59
you're fighting 16 years of indoctrination and it takes a long time.
28:03
You can only get people one by one.
28:06
The virus is spreading though.
28:08
Okay, so when I do a normal macro show and I'm talking about things like interest rates,
28:13
what the Fed's doing, what the Treasury's doing,
28:16
do you look at all of that and just think it's all nonsense and it doesn't matter?
28:20
Yeah.
28:21
It definitely matters. Yeah, they can destroy a ton. You know, if the Fed prints too much money or it doesn't literally print at all, right, but it minimizes interest rates and so on. It prints a certain amount of it and quantitative easing.
28:37
But anyway, if the Fed prints too much, you know, if regulations get in the way, if the government borrows too much and then that pushes up interest rates and chases out, you know, useful like building factories and things, all of these absolutely matter.
28:50
I think the main point of distinction is, you know, first of all, what are the mechanisms? Like, you know, change thing, change thing X, what then comes out the other end? A lot of that Keynesians and Austrians agree on just because we're looking at the same reality, right? So the empirical predictions of Keynesianism are not that bad.
29:14
So it's kind of like they don't understand what set off the fire.
29:20
But once the fire is burning, they're pretty good at predicting, right?
29:23
So, you know, you've got gasoline all over your house,
29:26
all down the driveway to the neighbor's house.
29:28
Okay, they don't understand what set it off,
29:31
but they do understand how the fire is going to spread.
29:33
So day to day, I mean, you know,
29:37
they'll predict unemployment rates or inflation or GDP growth.
29:42
They're not that far off.
29:43
If they were, then, you know, more people would disbelieve it.
29:47
They're originally decent on that.
29:48
And the reason is that, you know, generally mainstream economics, the way it works is
29:53
it puts statistics first, right?
29:56
So they'll observe like 12 years of interest rates and, you know, they'll then look at
30:02
inflation and they'll correlate them and they'll say, okay, so, you know, inflation does this
30:06
with a 12-month lag.
30:08
And that's accurate.
30:09
They don't understand why, right?
30:10
it's monkeys on a keyboard, but they're reasonably good on the predictions.
30:16
Okay. And so the thing that I'm interested in that I've never fully understood from an Austrian
30:21
lens is, is interest rates. Walsh has obviously come in, everyone thought he was going to cut
30:25
rates and instead he's hiked again. And what I'm interested in is what you think the correct
30:31
cost of capital is. Like what should interest rates be and what shouldn't they be? Because
30:36
like 0% or 0.25%, whatever it got down to, makes no sense. And when you're looking at like a 5-ish
30:42
percent cost of capital, that kind of makes sense to me. Do you think we're in the right zone?
30:48
Yeah. So there's a beautiful piece of work that the Bank of England produced, of all people,
30:54
where they looked at, I think it's 900 years of interest rates. And they looked at Britain,
31:00
Holland, there were a number of countries, Venice.
31:03
And the, you know, certain periods in there,
31:08
you had fiat short fiat but broadly speaking those were gold systems where the government was not able to manipulate the interest rate You got at least 400 years before the Bank of England even
31:21
existed on that data series. And the number there is roughly about two and three quarters percent,
31:26
something like that. It depends a little bit. Like when you've got wars, you know, people's
31:32
their time preference goes up because they're not sure that they'll be alive next year. You know,
31:37
you've, you know, you've got, uh, when you've got the black plague, right, things change.
31:41
Uh, so, you know, you've got little, little bumps in there here and there, but if you sort of squint
31:45
and average it out, it's something like, you know, call it two and a half to 3%
31:49
real interest rate. In other words, so translating that, um, for non-economists,
31:55
people prefer today to tomorrow by about two and a half or 3%. Or put differently,
32:00
um, people would be willing to save if they got about two and a half to 3% back on their money.
32:05
Now, keep in mind, those are real rates of return, right? So that's after inflation. So if, you know, you assume 2% inflation for simplicity's sake, then it basically says that interest rates should be about 5.5% to 6%.
32:21
So that would say that the rates in the U.S. right now are actually perfectly neutral. Like, it's where they should be. It's not where Trump wants them to be, right? Because Trump wants interest rates to go to zero, because being a real estate developer, he understands that zero interest rates makes investment boom and, you know, jobs boom. So he likes that sort of tissue fire side of low interest rates.
32:43
but yeah the current rate I think in the US it's it's essentially neutral most of the world is
32:51
pretty close to that they all got scared straight by the by the COVID the post-COVID inflation which
32:56
was caused by massive central bank money printing they printed up something like nine trillion
33:00
dollars worldwide which is a lot of money and so that set off inflation so pretty much everybody in
33:04
the world is sort of scared straight even Japan is is raising interest rates after what 30 years
33:10
or something. It's such a mess right now because the problem the US government has, obviously,
33:15
is every time they raise rates, it's raising their cost of rolling over the debt as well.
33:19
What do you think will happen over the next, say, 12, 24 months? Do you think
33:24
rates are now at their sort of peak for this cycle? Do you think they're going to start dropping again?
33:29
I think we've got another half point pretty much already in the works.
33:33
and even that's going to depend on how long the Iran war goes.
33:40
Trump had originally said 60 days.
33:42
That was some time ago.
33:45
And it's starting to look like Trump keeps trying to end the war
33:49
and like Iran keeps, you know, trying to keep it going.
33:54
So I'm not sure that he can actually get out of it.
33:56
It seems like Iran's enjoying it.
33:59
So if the war keeps going, you know,
34:01
if we sort of look at the situation before the war started,
34:05
depending on the measure,
34:07
inflation was down to something like 1.2% annualized.
34:12
I mean, it was very, very low before the war started.
34:15
The war kicked up oil prices.
34:17
Now, oil prices impacts inflation the short term.
34:20
In the long term, though, it's like squeezing a balloon.
34:23
So oil goes up, other things go down,
34:26
and you sort of return to the level of water,
34:29
and the level of water being the amount of money being created, right?
34:32
So before the war, you had very low inflation.
34:35
The war kicked that up.
34:36
I think it was 4% or 5% annualized since the war has been going driven by energy.
34:41
But the problem for the Fed right now is they don't exactly know.
34:45
Like, they know that, you know, wartime energy prices are temporary.
34:49
They don't know what the underlying inflation is.
34:51
And I think, you know, people like me and you would be concerned that the underlying inflation is actually quite high. The reason being that you've got these massive deficits. You've still got money creation. It's not at the same pace as it was during COVID.
35:09
but you've got a massive AI investment boom, for example.
35:14
There is a tremendous amount being invested.
35:17
A lot of that money is being conjured out of thin air.
35:19
It's growing the money supply, which is driving inflation.
35:22
So I think that if the war were to end tomorrow,
35:25
we'd probably be looking at another half point,
35:27
meaning that race would be slightly constrictive,
35:33
but not massively so in historical terms.
35:36
If, however, the war keeps going,
35:38
you know, we keep getting all of this investment money pouring in, then it could start creeping up
35:43
terribly into 5%, 6%. That's panic territory for any central bank. And so they will keep hiking,
35:49
if that's the case. I mean, they could keep hiking to 6%, 7%. Which raises, I think, the other
35:54
point that you mentioned a moment ago, which is interest expense for the U.S. government. I mean,
35:59
really, it's a worldwide issue, but U.S. deficits are actually, they're larger as a percent than
36:04
Japan, then Europe. They're completely out of control. Six, seven percent of GDP. So if the Fed
36:13
can't get a handle on inflation, if it keeps getting away from them and they hike rates to six,
36:18
seven percent then you would get to a point where you know the U is paying out something like two trillion dollars of interest just simply interest Absolute insanity Yeah you can get into kind of a doom loop Keep in mind also that historically so we haven had a bona fide recession since 2008
36:38
on a worldwide basis.
36:41
I think countries like Germany have sort of dipped in for just a second, but really, really
36:45
small.
36:46
We haven't had a sort of global slowdown for 17 years, right?
36:51
COVID was kind of fiat.
36:52
It was in, out.
36:53
They, you know, dumped so much money
36:54
that it didn't really leave a mark,
36:56
not in terms of, you know,
36:58
sort of standard recession metrics.
37:01
So we're, you know, you could argue
37:03
we are very, very long overdue for a recession.
37:07
And historically, when you get a recession,
37:10
deficits double, right?
37:13
Tax revenue dries up.
37:14
You get millions of people who, you know,
37:16
they need welfare pay or unemployment benefits and so on.
37:20
media tends to turn very very sympathetic to those people and so it's it's essentially impossible
37:25
for even a conservative to say no uh so if you look you know sort of extrapolating what's happened
37:31
in the past couple of recessions in the u.s and you ask what if we had a recession like next year
37:36
the deficit would just going by history it would go to something like four trillion dollars which
37:42
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Like you mentioned COVID there,
40:16
and obviously, like you said, dipped in and out.
40:18
It was very quick because they just printed a ton of money
40:20
to try and sort of right that ship.
40:23
Is that the problem?
40:24
Is it that the government won't let a recession happen anymore?
40:26
They're just going to print the money to try and stimulate the economy,
40:29
quote unquote, stimulate the economy?
40:32
Yeah, well, I mean, the first problem is that they caused the recessions, right?
40:35
So they manipulate interest rates down.
40:37
That causes a tissue fire boom.
40:39
Tissue fire boom leads to inflation because it's being driven by money printing.
40:43
At that point, they jam on the brakes.
40:44
So you get this, you know, go fast, slam on the brakes, go fast, slam on the brakes, which we call the business cycle.
40:50
The business cycle, of course, is not part of nature.
40:53
Businessmen don't all get stupid at one time and all their businesses fail.
40:58
It's completely a central bank creation.
41:01
Before central banks, governments did it as well.
41:02
The specific way they did it was they would encourage banks to lend by telling them, look, if you run into trouble, you don't have to redeem your tickets for gold.
41:12
So it's called suspension of specie redemption.
41:15
So you've effectively had the central bank cycle.
41:18
You had it going back even further in the U.S. case, essentially, since the beginning of the Constitution.
41:24
But right, so governments caused this boom-bust in the first place.
41:27
So, you know, sort of the first sin
41:31
is not necessarily that they try to stop recessions,
41:34
it's that they cause recessions in the first place.
41:35
So that's the first problem.
41:37
But then the second problem, as you say, is that,
41:39
having caused recessions, they try to stop them.
41:43
When what they should do is, you know,
41:45
what was called traditionally in economics,
41:47
it's called liquidationism.
41:48
The idea being, look, if you built a stupid business
41:52
in the boom because money was cheap,
41:54
fold it up, kiddo.
41:55
Like, it's over.
41:57
You're done.
41:58
And, you know, that used to be the solution
42:00
in the 1800s.
42:03
When the world nights ends.
42:04
We got into a recession, exactly.
42:06
And the last time that we did that,
42:09
in the U.S. anyway, is a book by James Grant called The Forgotten Depression. It's a fantastic
42:17
book, and he talks about the recession, we would now call it, but back then it was called
42:22
Depression, that came out of World War I, right? So all the companies were retooling.
42:27
The U.S. economy was basically this giant export platform feeding into Europe, and, you know,
42:33
Europe was selling the family heirlooms so they could kill each other. And when that war ended,
42:39
you had, you know, not only did Europe stop buying because they could grow their own wheat now,
42:43
but you had to, you know, turn everything from guns into butter. And that, you know, set up,
42:48
that revealed a massive amount of malinvestment. In other words, factories that needed to be shut
42:55
down. So that was always going to be a problem, right? And the government just let it happen.
43:00
And it was brutal for about 12 months.
43:04
You know, you had first very, very extreme deflation.
43:09
I think it was 20% or 30% deflation within less than a year.
43:13
You know, you had a lot of layoffs.
43:15
But because the government stayed out of the way, it very, very quickly bounced right back.
43:21
Unfortunately, the next time that they did that, that they essentially put the economy
43:28
into a tissue fire, you know, printed the prosperity, and then it popped. So the next time
43:33
that happened was 1929, of course. The government very much did not do that. They did not allow
43:39
companies to fire people. Literally, Hoover would sit them down in his office and threaten them,
43:44
saying you have to share the work with the men who are left. Don't fire anybody. Don't lower wages,
43:50
right? Well, if you don't lower wages and you got 40% in 29, if you got 40% deflation,
43:55
then what you're basically telling companies is,
43:58
look, I know you can't sell anything,
43:59
but you got to pay everybody twice as much.
44:01
So, shockingly, they went out of business.
44:04
So, I mean, it was an absolute, you know, disaster.
44:08
And, of course, it was bad enough that, you know,
44:11
you could ultimately sell World War II to the American public
44:14
because, you know, we got to do something.
44:16
We got to get these young men back to work.
44:19
But, right, so this sort of original sin
44:22
is causing the recession in the first place,
44:24
the boom-bust cycle.
44:25
And then the secondary is instead of just letting it liquidate,
44:29
you know, they try to stop it.
44:33
There's a great metaphor by Rothbard, and he talks about...
44:36
So he uses the metaphor of locusts, right?
44:38
So locusts show up every seven years, they eat everything,
44:41
it's terrible. You need the locust man to come control the locusts.
44:45
But he comes out and does his thing,
44:50
and then what happens to locusts?
44:52
Well, they don't come back for another six years, right?
44:54
So this is terrible in the locust industry, right? You have a collapse in employment and you have all these locust trucks that aren't being used. Okay, so what's the solution, right? One solution is to say, well, I mean, that's life, kiddo. Go find something else to do for six years. Go build decks instead. That would be one thing to do.
45:16
And then the other thing to do would be to, like, pay them, you know, come up, you know, I don't know, have them study the, you know, mating pattern of cockroaches, like, figure out some make-work program to keep them employed for the six years to get them all the way through.
45:30
That's functionally what governments do.
45:32
I mean, it's stupid, right?
45:33
Like, you know, you don't want to pay people to work at a company that's destroying value, right?
45:38
It's better to let the company go bust, put the workers back on the market, and then somebody can hire the workers to do something useful.
45:43
in the Great Depression.
45:45
Unfortunately, the government
45:46
all but froze that.
45:49
You know, some of it
45:50
by threatening companies.
45:52
Some of it, they had taxes
45:53
where I think 80% at some point.
45:56
Like, you as an entrepreneur
45:58
are not going to start a business
45:59
if you've got an 80% tax rate, right?
46:01
Because if you lose, you lose alone, right?
46:02
If you gain 80% of that goes to taxes,
46:05
you're not going to do it.
46:06
So they effectively outlawed economic growth.
46:10
And it's similar to sort of
46:11
the wildfire analogy where
46:13
if you don't let the fire sweep through and burn off all the dead wood, eventually the entire world
46:17
burns. And so that would be the question. Do you think when we do eventually, because at some point
46:22
we will go into a recession, it's going to be the mother of all recessions slash depression?
46:27
That's the interesting question. So the question is how much dead wood did COVID clear out?
46:35
And I've been very clear. It's hard to say. The bankruptcy numbers actually declined during
46:42
COVID because governments were giving away so much money.
46:45
And so we sort of don know Like in other words if you just naively interpret the bankruptcy numbers you would say no COVID didn clear out anything In fact if bankruptcy numbers went down it probably built up more dead wood to burn
46:59
But, well, we know that the bankruptcy numbers went, you know, they were artificially pushed
47:04
down because governments were handing out $9 trillion.
47:06
The question is, you know, did that $9 trillion push them down a whole lot, but dead wood
47:12
clearing out pushed them back up, so they're somewhere in between?
47:15
I don't think we know.
47:16
I haven't thought of a very good instrument for trying to measure exactly how much malinvestment got liquidated.
47:23
It feels like a lot did because the world before and after COVID was very different, right?
47:28
A whole lot of things shifted from the physical world to online.
47:32
A lot of venues, you know, like I think pubs like before and after COVID, I mean, it's just catastrophic.
47:39
It was like a neutron bomb for a lot of physical based industries.
47:43
So I feel like a lot of deadwood got wiped out, but I haven't seen a good instrument for it.
47:48
So that, I think, is the question, right?
47:50
If COVID did wipe out a bunch of things, sort of metaphorically, it would be like if you've got a town with a bunch of bars that are kind of struggling,
47:59
and then, you know, the government comes through and it says, hey, listen, I'll give you $10,000 to burn down your bar,
48:04
which is effectively what they did in COVID, right?
48:06
Well, you know, you're going to have fewer bankruptcies next time around, right?
48:11
Because they've already gotten rid of it.
48:13
So I don't know.
48:15
If COVID cleared out a lot of deadwood,
48:17
then the next recession is going to be surprisingly mild.
48:19
Maybe it already happened.
48:21
There was a moment in 2023, I think it was,
48:25
when in the U.S. we had a technical recession.
48:28
I know that they've had a couple of technical recessions,
48:32
again, across Europe.
48:34
When you say technical,
48:35
is that like two quarters of negative GDP growth?
48:38
Yeah, two quarters of negative GDP growth.
48:40
And there was some reason why the Grand Keynesian Kubas decided in 2023 that it wasn't a real recession.
48:48
But at any rate, so that's what's called technical recession.
48:51
And they call it technical because they're differentiating from the kind of catastrophic recession where kind of everybody looks at it and says, yeah, yeah, that was bad.
48:59
Right. So everybody knows 2008 was bad.
49:02
You just had to be there to see it.
49:03
Right. You don't need the statistics.
49:05
So, right, you had a couple of technical recessions along the way.
49:08
I think an interesting question would be, were those so mild because COVID cleared out so much deadwood?
49:16
Or did COVID merely, you know, sort of string us along so that we're due for some massively catastrophic one at some point?
49:26
Now, if we do get one, you know, of course, the sort of prime suspect is going to be AI.
49:34
right i mean the the quantity of money going to ai is you know i i cut my teeth with dot com
49:41
that's kind of how i started in finance and i thought we would never ever see anything like
49:46
that again like the internet the degree that it changed the world the amount of money that went
49:51
into it the amount of money that was made out of it right how many trillion dollar companies
49:54
i never thought we'd see anything i didn't think we'd see any of that for a century never mind my
50:00
life, my kid's life, my grandkids' life. So I am shocked at AI. I mean, it's literally, it's 5X
50:06
what the internet was in every way. And so you think this bubble, if you think it is a bubble,
50:13
is going to be bigger? Because it's probably quite hard to tell before the bubble pops,
50:17
how bad it's actually going to get. Yeah, that's what's tricky. So
50:21
anytime something goes up, right? Like anytime the amount of investment going in the industry goes up,
50:27
anytime a stock price goes up, there's, you know, it's like these, these knee-jerk pundits who are,
50:34
ah, it's a bubble. And, you know, you want to differentiate, okay, there are some things that
50:38
go up because the underlying business is good. Like, for example, Netflix, okay? Netflix went
50:43
up a lot. If you invested in Netflix 20 years ago, you're rich, right? You don't, you don't look at
50:48
restaurant prices anymore. Netflix was real, okay? Like, you know, we can verify. A lot of people
50:53
like Netflix. They spend a lot of money. They have a lot of revenue, right? So not everything that
50:57
goes up is fake, right? Now, having said, the sort of hallmark of that Fed-induced tissue fire
51:04
economy is that everything overshoots, right? And so, you know, if we look at .com, for example,
51:10
so people love to talk about the guy who bought, you know, Apple at the peak, or maybe Amazon or
51:17
pets.com. But no, I think what's more interesting is, so I was around in the beginning, and I was
51:23
one of the first people into the internet. Like when I bought in, uh, I mean, when it was in public
51:29
markets, I wasn't a cool guy who like knew people in Silicon Valley or anything, but I bought in
51:33
early enough that everybody in my entire life told me I was an absolute idiot to buy Yahoo.
51:38
What the hell is Yahoo? What do they do? Um, and you know, I retired young on that, but the key is
51:44
that in whatever it was, 1995 or six, when I bought into Yahoo, anybody could have done that,
51:52
Right? Like, and the vast majority of people didn't, right?
51:55
They were like, no, this is fake.
51:57
Even back then, in like 1996,
51:59
everybody was saying you know no this is a bubble There nothing there So I think you know the bigger risk I think of a real bubble is not buying at the peak
52:11
Almost nobody buys at the peak, realistically, right?
52:14
Like, you know, when Yahoo Stop finally collapsed,
52:18
the average person who had bought Yahoo
52:20
did not buy at the absolute peak, right?
52:22
The vast majority of them had, in fact, bought in 97, 96,
52:26
and they came out making a whole ton of money.
52:28
So I think that's the trick with the bubble,
52:29
is that people in their mind, they see the peak,
52:32
they see the terrible thing that happens next,
52:34
and they think, my God, I don't want to lose 90% of my money.
52:37
Well, okay, but statistically, you're not going to buy it
52:39
on the Tuesday that it collapses, right?
52:42
And so the question is always, okay, yes,
52:45
AI, like .com, like, you know, any exciting technology,
52:50
it's going to overshoot.
52:52
The question is, you know, so if SMH,
52:55
which is the AI picks and shovel ETF,
53:00
if SMH is like 600 today,
53:02
okay, so is it going to go to 900
53:03
and then drop to 300?
53:05
Is it going to go to 1,500 and drop to 1,000?
53:09
Because if it's going to end up at 1,000,
53:11
then you should buy in.
53:13
You should buy in rationally now.
53:14
Is it going to pop at some point?
53:15
Yes.
53:16
Don't necessarily, you know,
53:18
every time it goes up,
53:19
don't like internalize the gain.
53:21
And of course, you know,
53:22
this is very, very similar to Bitcoin, right?
53:24
So, you know, again, Bitcoin fluctuates, but the people who've been in Bitcoin a long time, right, you know, they've got the battle scars to prove it.
53:32
And when a noob comes in, you know, they might sit them down and have a talk and say, okay, listen, you know, first off, don't buy it until you understand it.
53:40
Because if you don't understand it, you're going to panic sell at the wrong time.
53:43
And secondly, you know, yes, yes, it fluctuates.
53:46
Okay, but you got to zoom out.
53:47
You got to look where it's going.
53:48
So I think without a doubt, there is going to be an AI bubble that pops.
53:54
However, I think it's probably going to go up a whole bunch from here.
53:58
Like, we're not at the crazy stage yet.
54:00
You know, we don't have, like, a company that was started, like, last week worth $3 billion yet.
54:05
We're getting close, but we don't have that yet.
54:07
I think there's more crazy to go.
54:09
And then, yes, it's going to come down from the crazy.
54:12
But, you know, somebody who buys in today, I don't know.
54:16
I can't say confidently if, you know, they're going to get wiped out or not.
54:20
They might actually book a profit when the smoke clears.
54:23
But in terms of the economy itself, yes, it'll eventually overshoot.
54:27
The question is, how big does it get from here to there?
54:29
Because if you look at the numbers, I mean, they're like literally,
54:32
I think investment-wise, there's something like 10x what dot-com was.
54:36
The entire dot-com build-out was something like $120 billion inflation adjusted.
54:41
If you look at things like VC dominance,
54:44
there's a tiny bit of VC money going into biotech.
54:49
almost, I mean, it's just absolutely dominant to a degree that the internet never was.
54:55
I think the internet at peak was, from memory, something like 30% of VC money.
55:00
A lot of it was going to software and other things.
55:02
AI is like 70%, 80%.
55:04
I mean, it's just, we probably haven't seen a technology this dominant since the railroad.
55:11
Even though not everyone buys the top, obviously some people do,
55:14
but everyone's looking on their brokerage account and seeing they're a gazillionaire at the top,
55:17
and then they watch those paper gains disappear.
55:19
But if you had to sort of compare this to the dotcom bubble, which you lived through, you were investing in, what year do you think we're in?
55:27
Is this 96 or are we in 99?
55:30
Yeah, I think it's 97, maybe coming to early 98.
55:33
So I mean, of course, you know, it's always tempting because like when you say something like this, if you're completely wrong, you're going to be famous.
55:41
But anyway, yeah, I mean, I would be really shocked if it pops in the next 12 months.
55:47
I'd also be really shocked if it kept going
55:49
another four or five years.
55:50
So I think somewhere in there that we're looking at
55:53
probably late 27, early 28.
55:57
If you've been playing it,
55:58
then you probably want to take money off the table.
56:00
And I think probably a lot of Bitcoiners
56:02
have been playing it because if you look at Bitcoin price,
56:05
it started crab walking as exactly when AI took off.
56:08
So I know what you people are doing.
56:10
So yeah, you know, probably take some money off the table,
56:14
I think gradually over the course of 2027, if you're in the AI play.
56:18
It's definitely where all the fast money went. Do you think these AI companies are going to be
56:23
deemed too big to fail by the US government? Because one of the interesting things that
56:27
I've been watching is when you look at $40 trillion of debt, they're not going to be able
56:32
to rein in their spending and remove that debt. They're not going to default on the debt. Their
56:36
only option is to try and grow their way out. And AI looks like the best shot to actually do that.
56:41
And if this does look like a bubble that's gonna burst,
56:43
do you think that there may be a government backstop?
56:48
Uh, yeah, it's a serious question.
56:50
So, the AI is without a doubt the magic beans.
56:53
Um, you know, in the US,
56:55
we just had the perfect storm to shrink government, okay?
56:58
We had Elon Musk, who's a force of nature,
57:00
uh, and very, very rich.
57:02
Um, rich meaning that politicians listen to him.
57:05
All right, so he was amazing.
57:07
Um, you had Trump is the most...
57:11
He instinctively hostile to the federal government He the best we had since Reagan Once in a lifetime in terms of an anti president And we had unified small government control of Washington So every duck was lined up It was the moment
57:25
This was it. We were gonna slash government.
57:27
And absolutely nothing, right? In fact, it's grown.
57:31
And so, you're right. At that point, they shifted,
57:33
and they were like, okay, you know what? Nah.
57:35
Forget the spending thing. Let's just grow the economy.
57:38
And AI is the magic beans to do that.
57:41
But, you know, if you look historically, it's the impact on growth always turns out to be a lot slower than you imagine because it takes time to be integrated.
57:53
So one of my favorite examples is the first electrification of a factory.
57:58
The first time that it was shown that rather than using steam to run a factory and having a bunch of guys with coal, you could hook it up to electricity.
58:06
The first time they showed that that was a better way to run a factory, it was more efficient, lower cost.
58:11
That was something like 1850s.
58:16
And then it took 80 years for half of the factories to be electrified.
58:24
So when people talk about AI and jobs,
58:27
and they tell you AI is going to do this,
58:28
it's going to be a lot slower than you think.
58:31
I mean, it's not going to be months.
58:33
It's not going to be years.
58:34
It's going to be decades.
58:35
Look at the internet itself.
58:36
When the internet came out,
58:38
people thought it was going to change everything.
58:40
You won't recognize the world when it's done.
58:42
Not that much has changed.
58:44
It's distribution.
58:46
It's changed a lot for people like us
58:47
who, you know, make a living
58:49
distributing information, essentially.
58:52
But like in terms of the broad economy,
58:54
it's changed a lot less
58:55
than I think people expected 30 years in.
58:59
So I do think that, you know,
59:01
if they're counting on AI to deliver like 8%
59:04
Singapore-level growth, it ain't gonna happen.
59:07
To get there, you would need
59:09
massive deregulation.
59:11
I mean, really, you'd have to kind of imitate Singapore, right?
59:14
You'd have to massively shrink the government.
59:15
You'd have to get rid of all the idiots.
59:18
I'm going to avoid the R word because I don't know where you're distributing.
59:21
Being careful.
59:23
I mean, you would have to massively change how the U.S. government works.
59:27
For Europe, of course, it's twice as challenging
59:31
because of the massive bureaucracy that runs the economy.
59:35
But, yeah, I don't think they're going to get there.
59:37
which then leads to your question,
59:41
which is, are they going to be tempted to bail them out?
59:44
So you've got two parts of the AI industry.
59:48
You've got the part that builds the picks and shovels,
59:50
and then you've got the ones who run the models, right?
59:53
Like Anthropic, OpenAI, Grok.
59:57
And, you know, you can compare this to also during the dot-com era,
1:00:01
you had the guys who were building it, like Cisco and Lucent,
1:00:04
and then you had the guys who were running applications on it,
1:00:06
like Yahoo, Google, Netflix.
1:00:09
In the internet, the guys building it,
1:00:12
when the smoke cleared, they didn't make that much money.
1:00:15
I mean, they had a really good couple of years,
1:00:16
but they didn't fundamentally transform their business.
1:00:18
In fact, most of them went bankrupt, ultimately.
1:00:22
In the case of the consumer applications,
1:00:25
that's where all the value ended up being, right?
1:00:29
That's where the product differentiation is
1:00:31
because they're sticky, right?
1:00:32
So once somebody has Gmail,
1:00:34
it's pretty hard to switch over onto another email.
1:00:37
You know, this is true for, I mean, it's true for Netflix,
1:00:40
it's true for, you know, travel sites, for news sites,
1:00:45
just eyeballs are surprisingly sticky,
1:00:48
and so the value ended up accruing to those consumers,
1:00:52
to those consumer-facing applications.
1:00:54
In AI, it almost feels like it's the opposite.
1:00:57
But if we look at it so far,
1:00:58
there's been a tremendous amount of value
1:01:00
that has gone to the guys who are making the chips,
1:01:02
the picks and shovels, so NVIDIA, Broadcom, guys like that.
1:01:08
The actual models, like, I think a lot of people listening
1:01:12
have probably had the experience where, like,
1:01:14
you might ask a question on ChatGPT,
1:01:17
and then you might ask a different question on Grok,
1:01:21
and after the fact, if somebody asks you,
1:01:24
you know, where did you get that information,
1:01:26
you can't remember which model it was.
1:01:27
Because the models are basically the same.
1:01:29
which is kind of shocking, right?
1:01:33
If you step back, everybody assumed that when AI arrived,
1:01:36
it would be this godlike power
1:01:38
where the man who controlled the AI, right?
1:01:41
It would be like Wizard of Oz
1:01:42
and he would control the entire universe.
1:01:45
And it turns out that, no, actually,
1:01:46
it's almost a perfect commodity product, right?
1:01:49
One's the same as the next, the same as the next.
1:01:51
Now, if you're Goldman Sachs
1:01:53
and you're trying to, you know, shave points off a,
1:01:56
you know, whatever, like a margin trade, okay, yes.
1:01:59
then you're going to shell out the big bucks,
1:02:01
you're going to get the latest models, so on.
1:02:03
But for 99% of applications,
1:02:05
even for business applications,
1:02:07
the free ones are good enough.
1:02:08
So I think that's driving a lot of what's going on
1:02:11
with the models now,
1:02:12
where they're trying to encourage governments
1:02:15
to regulate them.
1:02:16
Regulate me harder, daddy.
1:02:17
And I think what's pushing that
1:02:19
is the realization that there's no margin in it.
1:02:23
There's no money in AI.
1:02:24
It's incredibly useful.
1:02:26
Everybody uses it,
1:02:27
but there's no money in it. It's a commodity.
1:02:29
business. Damn, just prime for a bubble pop. Yeah, I was going to say for the models, yes,
1:02:35
but actually none of the models are public yet. Gronk is inside of SpaceX. That's the only one
1:02:40
that's public. The others haven't even gone to IPO. So I think that's part of what's challenging
1:02:44
for them is that they're considering these trillion dollar IPOs when, you know, I mean,
1:02:49
you look at their pricing, I think Anthropic and OpenAI just slashed their prices by 50% again.
1:02:55
there's no pricing power in there yeah and i'm pretty sure anthropic was pricing like eight
1:03:00
thousand dollars worth of compute for two hundred dollars a month um yeah it makes no sense but
1:03:05
that's something i've always thought is the ipo of anthropic and open ai is probably that that
1:03:10
might be where the bubble pops um but we will time will tell yeah i know you've got a hard stop
1:03:16
coming up i just i have to ask you about bitcoin just quickly um are you still as excited about
1:03:22
Bitcoin as you were a few years ago? Because I know you were a gold bug before Bitcoin.
1:03:26
Yeah.
1:03:26
You're a Bitcoiner now, but how do you view the market?
1:03:31
So I'm excited about it as a technology. I think it's very important to have
1:03:37
sort of a backup plan when our current fiat elite, that's Safedine's expression, I love it,
1:03:44
fiat elite, when they screw it up. So in a sense, it's kind of like having a king with no power,
1:03:50
Right? Parliament's eventually going to screw it up.
1:03:52
And then the king takes over, hopefully it'll be William, not Charles.
1:03:55
But at any rate, it's sort of a similar idea, right?
1:03:59
That you want this backup plan.
1:04:01
Gold, I think...
1:04:03
I mean, gold's, you know, fundamental flaw is that it needs to be centralized.
1:04:07
Like, you can't pay the Netflix bill using gold.
1:04:09
You know, you can't literally put the bars in an envelope.
1:04:12
I mean, you can, but it's going to be expensive.
1:04:14
And so gold sort of has this fatal flaw.
1:04:17
this fatal flaw. So I think that in terms of a technology, I am as excited about Bitcoin as ever.
1:04:23
I think it's critically important. A separate question is, do you invest in something? And
1:04:29
my, I may be excoriated for this. The way that I've always treated gold is that if there is some
1:04:39
bubble that I think is inflating then I going to put my capital on that bubble because I greedy And if I get nervous or if it looks like we heading into a recession then i going to pull it out and i going to park it in gold and so for my entire
1:04:55
investing career up until bitcoin has been uh buy the hot thing buy it when everybody says it's hot
1:05:04
and when people say it's a bubble okay because i mean that's just you're like showing me what's
1:05:09
going to happen next um and and you know as it goes up pull out of it a little bit so that it's
1:05:15
eventually house money um and what do you pull out of it into you pull out of it into gold so that's
1:05:20
been my pattern since i was a wee lad and now i treat bitcoin that way right so if it's invested
1:05:27
then the vast majority of it is going to be like right now it's in ai picks and shovels uh i think
1:05:32
there's more dimes in front of that steamroller uh but you know if you're starting to take money
1:05:38
off the table and you don't have anything else to play that you're confident in, then
1:05:44
rather than stashing in the bank, like a normal human would do, stashing Bitcoin, where at
1:05:49
least you know it's not going to get eroded and you've got that upside, you know, if,
1:05:55
you know, either if inflation takes off, if deficits take off.
1:06:00
I mean, both of those are very, very good bets.
1:06:03
You kind of can't go wrong with that one.
1:06:05
So I treat it as a great place to park money.
1:06:08
So, obviously, over the last year or two, AI has massively outperformed Bitcoin.
1:06:13
But Bitcoin looks like the bottom is in now.
1:06:16
It's had a good couple of weeks.
1:06:17
Do you think in the next year, AI will continue to outperform Bitcoin?
1:06:22
I mean, yeah.
1:06:24
So, I don't think AI is going to be going up the way that it has in the past year.
1:06:31
You get these massive price rises, whether it's an AI or Bitcoin.
1:06:37
you get it when a bunch of people either didn't know about the asset
1:06:41
or were skeptical about it, and they changed their mind.
1:06:45
And that moment, I think, already occurred for AI.
1:06:48
Like, there's not a huge percent of people in the investment community
1:06:53
who think that AI is fake.
1:06:54
Two years ago, there were.
1:06:56
There were a lot of guys who were like,
1:06:58
no, no, this is so stupid.
1:06:59
You know it hallucinates it racist you know whatever Exact same things that they said early in the internet People said no this is goofy What if people put cameras showing their coffee makers of dancing babies What the hell is this thing good for
1:07:12
I think that moment is done.
1:07:14
So I don't think AI, like at most,
1:07:16
you might squeeze 2x out of it.
1:07:18
2, 3x, 2.5x.
1:07:20
You're not going to get 10x like we had
1:07:22
over the past couple of years.
1:07:24
So that's one side of it.
1:07:26
And, you know, I think that, like, within Bitcoin,
1:07:29
if you sort of break up the Bitcoin holders,
1:07:33
you've got some people who are there for the technology,
1:07:36
and then you've always got sort of the tourists here,
1:07:39
therefore, number goes up.
1:07:40
So as, you know, AI, I think,
1:07:42
is going to start moving into a relative crab walk.
1:07:46
It could have boosts, like when the war's over,
1:07:49
you know, and then people think that inflation's going to come down,
1:07:52
rates are going to come down, that's then good,
1:07:54
because these are capital-heavy industries.
1:07:55
There could be little movements here and there that make it pop.
1:07:59
But I think that, you know, AI's 10X is probably behind us.
1:08:03
I could be completely wrong, but best guess.
1:08:06
And so that's going to, you know, some of that number go up.
1:08:09
Refugees, some of them are going to come back.
1:08:14
You know, a small number of the really degenerates
1:08:16
are going to like chase AMCs and stonks,
1:08:18
but they do that anyway.
1:08:19
And, you know, like in the grand scheme,
1:08:22
you know, there's sort of a Darwinian process there
1:08:24
where they sort of drop out anyway
1:08:26
in terms of impact on the market.
1:08:29
But yeah, so I think that some of the Bitcoiners who have been playing in AI are going to come back.
1:08:36
And then the other part of it is what's actually happening with Bitcoin itself.
1:08:40
And I think the main driver there is just the inflation and the deficits.
1:08:46
So when you're getting to the point where bonds, for example, are starting to pick up a premium
1:08:52
because investors are getting nervous about governments not being able to pay back,
1:08:57
Well, the traditional way that governments don't pay back is that they run inflation. They let inflation run hot. Because inflation melts away the debt, plus you can use it for goods and prizes, right? Like, you know, the government can effectively, they can borrow the extra money. And so this is a twofer for them.
1:09:15
so I think that
1:09:17
you know that
1:09:18
as AI
1:09:20
as sort of the air runs out of that or as it gets less exciting a certain number of people are going to come back that then going to meet this current of ongoing deflation or I sorry ongoing inflation
1:09:33
through deficits that I think people are going to start getting more excited about Bitcoin. So I
1:09:37
think we're going to see some transfer back, and we'll start to see a little bit pickup in Bitcoin.
1:09:42
I don't think Bitcoin is necessarily going to hit another 5 or 10x also until something happens
1:09:50
that convinces a large number of people.
1:09:51
Now, in the case of AI,
1:09:53
I think the vast majority of money
1:09:55
that could be deployed in the AI
1:09:56
already knows what it is, right?
1:09:59
They're not skeptical.
1:10:01
There's not like a huge audience
1:10:03
waiting to be convinced.
1:10:04
I think in Bitcoin, there still is, right?
1:10:06
So we could see a return to the go-go days,
1:10:09
5, 10Xs,
1:10:10
but we would need something really, really big
1:10:13
that would convince people.
1:10:14
The most likely candidate would be
1:10:16
some sort of default, right?
1:10:18
something to do with the national debt that would refocus people, put banks back in danger,
1:10:25
and then people start looking at Bitcoin again. Or something like massive yield curve control,
1:10:30
big print type event. Bingo. Yep. Yeah. I agree with that. I think you're right. I do think if
1:10:37
you've been in the AI trade trying to squeeze as much Bitcoin out of it as possible, maybe that's
1:10:42
passed. But who knows? That could age like milk. But Peter, this has been awesome. Next time in
1:10:47
florida will have to do one in person but really appreciate you coming on the show yeah of course
1:10:51
and tell everyone where they can go and follow you and see your show and and all that stuff
1:10:56
uh let's see i do weekly videos on uh x the artist formerly known as twitter so prof st
1:11:02
onge p-r-o-f-s-t-o-n-g-e and i also do a monthly investment newsletter uh where i talk about ai
1:11:11
stocks and also the guys who are going down which are all of these loser companies that are being
1:11:15
disrupted. So check those out. That's over on Substack, all linked on the X.
1:11:20
Perfect. Thank you so much. This has been great. And I'm looking forward to
1:11:23
doing it in person with you at some point in the future.
1:11:26
Absolutely. Thanks, Danny.