[00:02:47] Lyn Alden: They do all sorts of different types of lending, and those are ones that are generally a little bit riskier, higher duration, but they pay higher interest rates and so they can absorb some, you know, small percentage of defaults, build positive capital, pay [00:03:00] dividends, you know, fund their operations and maintain positive equity and positive capital.

[00:03:05] Lyn Alden: When you look at a central bank, it’s very similar, but there’s a couple different categories for their assets and liabilities. So their liabilities are, One bank notes, right? So physical cash and circulation is a liability of that country Central bank, and those are obviously 0% yielding assets, right? If you hold a dollar bill or a physical euro, you’re not getting paid interest on this.

[00:03:26] Lyn Alden: So that’s an obvious already good start for them, right? They have 0% liabilities there, but they have other liabilities that, for example, consists of bank reserves. So much like how we deposit money at a bank, and that’s our asset and their liability. Banks have to deposit their cash, their spare cash at the central bank, and that’s an asset for the bank, and it’s a liability for the central bank.

[00:03:47] Lyn Alden: And just like how a bank pays interest, a central bank also in, in many environments does pay interest on those reserves. And the reason they do that is because it’s an important part of how they manage their short-term interest rates. It basically presents a floor, right? If you can put reserves in the central bank, You know, and get, say 5% interest on it, there’s no reason why you would lend to anyone else at below 5% because you’re just taking on more risk and for less return.

[00:04:15] Lyn Alden: Right. And so that’s one of their important policy tools. And then there are other liabilities they can do, like reverse repos and things like that. They get more complex and some of those do pay interest. So that’s the central bank’s liability side. On the asset side, it actually looks [00:04:30] pretty similar to a commercial bank.

[00:04:31] Lyn Alden: They have things like treasuries, you know, the government debt of whatever country they operate in. So those pay interest. They also often have mortgage backed securities, right? So they have mortgage exposure. Obviously, these deals would differ around the world, but for example, a Federal Reserve has a lot of mortgage backed securities.

[00:04:46] Lyn Alden: These also pay interest. And then in some countries they’ll have things like corporate debt, or they’ll have things like equities. Those are generally considered less traditional types of assets for central banks to hold. But you see some like Japan kind of going that route. And sometimes, like the Fed and others will do that temporarily during crisis.

[00:05:02] Lyn Alden: Things like corporate debt. And in most contexts, the federal reserve’s assets are bigger than their liabilities and they pay higher interest rate than their liabilities. And it will then differ from jurisdictions. But usually the central banks operate like utility where it has to pay its excess profits back to the government.

[00:05:21] Lyn Alden: It doesn’t just keep building capital like a commercial bank would. Although in some jurisdictions they actually, you can publicly hold, you know, shares of a central bank and they will, you know, they could pay dividends, they could do things like that. Look at the Federal Reserve, so it’s not publicly held, but it is held by banks.

[00:05:38] Lyn Alden: They basically pay a small dividend to their owners. They pay their operating expenses, and then they have to send the rest of their profits back to the treasury. Right? And so it’s actually a source of income for the treasury, and it kind of makes it so that any sort of treasury is held by the Fed are effectively interest free because they are paying interest on them.

[00:05:55] Lyn Alden: But all these, a lot of these profits are getting sent right back to the treasury. The challenge in [00:06:00] recent months, really ever since September, is that the Federal Reserve increased interest rates so quickly and so significantly, and for the first time they got above the prior cycles high in terms of interest rates or at least, you know, the first time in, in decades we’ve had this kind of declining trend of lower highs in terms of interest rates, but they actually got way above that.

[00:06:18] Lyn Alden: And so they’re actually, their liabilities pay higher interest rates than their assets. And so obviously their bank notes are still paying zero, but their other errors, their bank reserves and their reverse repos in the fed’s case are paying a higher interest rate than their treasuries and their mortgage backed securities that in many cases are a longer duration.

[00:06:36] Lyn Alden: They’re fixed rate, they’re not adjusting upwards. They hold them from years ago, and so they have a mismatch. And so one is there, they’re no longer profitable. They’re not sending any more remittances to the treasury, and two, if they were a normal commercial bank, they would be on the verge of bankruptcy.

[00:06:51] Lyn Alden: So they’re months away from having negative, tangible equity, which is a normal bank would be bankrupt, but because of the central bank, they get to that. That’s where they have a very big difference. They basically get to just put a placeholder there that kind of is like an I O U. And so in the future, if they’re ever profitable again, then before sending more money to the treasury, They get to pay themselves back.

[00:07:13] Lyn Alden: So basically they’re losing money. They’re going in towards negative, tangible equity, but they’re filling that negative equity gap with IUs on their future income, which of course, for any private entity would be red flags over the place. Absolute catastrophe. You wouldn’t touch it with a 10 foot pole, [00:07:30] but it’s different if you’re the central bank.

[00:07:32] Stig Brodersen: So Lyn I really like that you talked about this, and I think a lot of people, they’re not even thinking in the first place about fed being profitable or not. You know, that’s probably not how they see the Fed in the first place. But from January, 2011 until December, 2022, the Fed paid approximately a trillion dollars in cumulative remittances to the US Treasury.

[00:07:52] Stig Brodersen: And these are the payments you referred to before. They’re not flowing anymore. Now, the listener might be concerned, or perhaps the listener is not concerned at all. They might say, why is that a big deal? Can’t the US Treasury not just borrow the difference? Like we hear all about this, all the debt, why not a bit more debt?

[00:08:08] Lyn Alden: Yeah, it’s a good set of questions and there’s a couple avenues to approach that. At one, we can talk about why a central bank should be profitable, and then we can go into the second question. So the main reason you want a central bank to be profitable is that you want them to be independent or at least as independent as they can be.

[00:08:21] Lyn Alden: The worst case scenario is to have a central bank that’s completely beholden to like the central government of that country, because if that’s the case, they can do things like call the central bank head and tell him to cut interest rates six weeks before election, for example. Right? You can get very manipulative very quickly if the government actually controls the central bank controls the price of money for the entire economy, can do all sorts of things like that.

[00:08:45] Lyn Alden: And so for that reason, most central banks are designed to be somewhat independent in the sense that they’re not completely independent, but they, so they’re governed by laws and their leaders are often appointed by the country’s congress parliament leaders in various ways, but with [00:09:00] terms that are pretty long and that are hard to dismiss that, that, so the president can’t just call them up and tell them to do something.

[00:09:06] Lyn Alden: And part of what maintains some degree of credible independence is that the central bank is not like financed by the government, right? Because you can, if you have independent terms and things like that, but the government can just shut off your funding if unless you do something, then you’re not independent.

[00:09:21] Lyn Alden: And independence is a limited concept in the sense that it goes away during war, pretty much. It goes away during absolute crises, but on a normal operating basis, election cycles, things like that, it is supposed to be pretty independent. So maintaining positive equity, maintaining some of your profitability is important for a central bank’s independence.

[00:09:39] Lyn Alden: If they have deeply negative equity, if they’re operating on massive losses, that becomes a problem. And so that’s one word’s relevant when you start to see a central bank with negative, tangible equity and kind of no path towards profitability in a foreseeable future. That’s a challenge. Number two is that in this world of rising deficits, Some of these things that we’re kind desensitized to, right?

[00:10:00] Lyn Alden: So for example the US Treasury just lost a hundred billion revenue source per year from the Fed. And we’re like, well, I mean, you know, we’re talking about trillions now, who cares about a hundred billions? But for context, that’s about four times the size of NASA’s budget, right? If you heard that, you know, the government’s going to four times the size of NASA’s.

[00:10:18] Lyn Alden: There are a lot of people that’d be like, oh no, we can’t, that’s we’re just going to keep spending now. We’re just going to keep, you doing this. Whereas the other side, we just lost a revenue source that’s four times NASA’s budget. So that’s, you a hundred billion more [00:10:30] treasury debt that has to be issued each year, all us being equal.

[00:10:33] Lyn Alden: So that’s number one. And number two is the fact that, so the fast 40 years we’ve had in many developed countries, rising debt to GDPs at the public level, but it’s all offset by declining interest rates. And so the interest servicing cost, especially as a percentage of GDP, has not been rising in many cases, it’s been falling or flat.

[00:10:52] Lyn Alden: And the problem that we now face is that we have, you know, we hit zero or even slightly negative in many countries now, we kind of bounced off zero. Now we’re kind of sideways up. While deficit still being accrued, debt is still being accumulated. And so we’re paying higher interest on higher debt, and that’s where you risk a fiscal spiral.

[00:11:10] Lyn Alden: I think that, I mean, a good analogy is the European sovereign debt crisis when you had, is basically people no longer trusted the, you know, the fiscal solvency of many Southern European countries. Their interest rates exploded. And if unaddressed, that would just spiral into a you know, a fiscal default essentially.

[00:11:27] Lyn Alden: And so that can also happen in other countries, but the difference being that they have more levers they can pull internally to finance their own government deficits.

[00:11:36] Stig Brodersen: I hear a lot of people talking about how central should be elected, like in any good democracy. And I don’t know if it’s because I’m sitting in the echo chamber that I’m hearing that I don’t know if that’s always been the case.

[00:11:49] Stig Brodersen: And I think that we have this idea that. Democracy is good. And if laity democracy, it’s bad. And I don’t want to be caught on that because I also think democracy is good, but there are just some things [00:12:00] that’s probably not good if it’s surely democratic like the Fed. So imagine that, you know, you had, there are two different candidates to be fetch yet, and one saying we should high interest rate and one onset the opposite.

[00:12:12] Stig Brodersen: And it was the population who had to elect, you know, the new chair. Who would the population elect? Like I, I just, that in itself is just an interesting thought. And know, I can’t help but like make the comparison to the question about if you ask people, do you want to be a millionaire? Everyone will say yes.

[00:12:29] Stig Brodersen: But if you ask them like, why do you want to be a millionaire? They’re going to say things like, oh, I’m going to buy a new car, a bigger house, a boat. Which is ironically the very. Of being a millionaire. And, I kind of feel like the idea of having a democratic elected central bank might give you the opposite of what you want.

[00:12:46] Stig Brodersen: As much as we can bash the central bank in this current form, that’s not what I’m trying to say at all. So anyway, I just wanted to bring that point of view into the debate here.

[00:12:55] Lyn Alden: Yeah. One of the interesting, basically if you had elected central bankers, especially on kind of the same term cycle as other political leaders, you generally have a lot of agreement between the central banker and the government.

[00:13:07] Lyn Alden: And so you probably would give the government more control over the price of money and generally financing. In the United States, for example, we have the Supreme Court. They’re not elected, but there, you know, they’re appointed by the people we do elect and they have, well, they have indefinite terms, which is kind of a, you know, a debate in its own sake.

[00:13:23] Lyn Alden: But either way their terms are much longer than other ones. And generally, you don’t want to see outright political comments [00:13:30] from a Supreme Court justice, even though it, the court at the times does become very politicized. And it’s kind of the same thing with Central Bank. Like you expect political comments out of your president, you expect political comments out of your, like, you know, your congress or parliament.

[00:13:44] Lyn Alden: But generally in a lot of countries you kind of, the society and the government is structured around where you don’t really want to hear political comments out of your Supreme Court justices or your central bankers. They’re kind of meant to be a different type of political leader in a way, even though they still are political leaders.

[00:13:58] Lyn Alden: And so it, in some ways it’s like an illusion, but it is somewhat of an important illusion. And it does have some tangible, you know, effects. I mean, right now, for example, Jerome Powell, I mean, last I checked, he’s registered Republican, for example, under a Democratic president. But even when Trump was in charge, Trump was criticizing Powell for raising rates.

[00:14:15] Lyn Alden: And because we do have some degree of independence, I mean, you know, Powell is basically not subservient to any president. He can’t just be fired. He’s not part of the executive. And that is important. And he can’t have his, you know, it’s harder to have his funding source pulled if the Central bank is a profitable institution.

[00:14:32] Lyn Alden: And in order you, the government can override the central bank. They can change the laws that they operate with. But in divided government, that’s hard to do. Right? So the, you know, the president can’t do that unilaterally, takes a pretty big consensus of government to do that. And so Central Bank Independence is kind of a spectator, right?

[00:14:48] Lyn Alden: In a you what you would call quote unquote Banana Republic. It’s generally, you know, when you see like massive deficits, people say, oh, that’s Banana Republic. And it’s like, well, because you’re generally talking about jurisdictions that don’t have these [00:15:00] strong institutions that are some degree of separate and kind of balancing each other out.

[00:15:03] Lyn Alden: Whereas in the United States and in a number of other developed countries, you at least have some degree of central bank independence, but it does start to erode at times a crisis or war, which has also been a big theme of my macro research that I do think in general, this is an era of much closer interaction between the central bank and the treasury because the central banks get overridden in many other ways.

[00:15:25] Lyn Alden: Basically, one of their mandate is financial stability. And sometimes the government can mess stuff up so bad that the central bank has to do things they prefer not to do in order to maintain, basically like avoid sovereign default or, you know, keep markets liquid, things like that. And if they become heavily politicized.

[00:15:42] Lyn Alden: And so this is, you know, that’s why I keep comparing the 2020s to the 1940s, which is not a great analogy and I hope that obviously certain things are very different than 1940s, but in a lot of macroeconomic ways it actually is kind of similar.

[00:15:56] Stig Brodersen: Very much so, and we talked about this, I want to say it was the last episode we had.

[00:16:00] Stig Brodersen: I want to make sure to link to that in the show notes. It’s a very interesting observation that you made. In comparing today with the 1940s, unfortunately, I want to talk to you about your wonderful blog post, how the Fed Went Broke, and in that blog post you state by the end of this decade, I have considerable concerns regarding financial spiral occurring in the United States and other developed countries, meaning that a combination of high deficits, high debt, and high interest rates on those debts will all work [00:16:30] together to create structural inflation and money supply growth.

[00:16:34] Stig Brodersen: Now, lot to unpack with that statement, but first perhaps Lyn, if you could paint some color around what do you mean by structural inflation and money supply growth? And then perhaps we can sort of like unfold based on.

[00:16:47] Lyn Alden: Yeah, so basically money supply growth is heavily correlated with inflation, especially on a persistent basis.

[00:16:53] Lyn Alden: Not like a year over year basis, but I’d say rolling five year periods, money, supply growth and price inflation are pretty heavily correlated. And money supply growth can come from one of two main avenues. One is bank lending, right? So bank, as banks lend more, they increase the money multiplier, they lend more deposits into existence.

[00:17:12] Lyn Alden: That’s one form of money creation. And the other one is very large fiscal deficits, especially when they’re monetized by either the central bank or the commercial banking system. And those are the two avenues for how a lot of money can be created. So for example, the 1910s, 1940s in recently, due to the whole pandemic stimulus, those periods of rapid money creation were mainly fiscally driven money creation.

[00:17:35] Lyn Alden: Whereas the 1970s that everyone thinks of when they hear about inflation, that was in many cases there was fiscal deficits, but they were smaller. And instead you had peak bank lending. And a lot of that was because you had peak demographics, right? So the baby boomer generation was entering their home buying years, their peak consumption years for like a, you know, a 20 year period.

[00:17:55] Lyn Alden: And that was a very big environment for bank lending, especially in [00:18:00] developed countries. And so that’s the two avenues. When thinking about, and during the eighties in order to try to quell that bank lending, Paul Volker raised his rate super high. And then, you know, basically those rates stayed pretty high even after him for quite a while, and he started to get much higher debt to GDP.

[00:18:19] Lyn Alden: So from the 1940s to the 1970s in the United States and many other countries, you had declining debt of GDP. A lot of that was financial oppression. So interest rates were below the prevailing inflation rate about half the time. So you basically you had novelty GDP kind of catch up to the debt in many cases.

[00:18:36] Lyn Alden: But either way, you had declining debt to GDP. But starting in the early eighties in the US and many other countries, you had rising debt to GDP, which became pretty structural. And so by the end of the eighties, you had a lot of concerns around the debt and interest servicing. And so, for example, the famous like US National Debt Clock in New York was installed in the late 1980s.

[00:18:55] Lyn Alden: And you know, we had Ross Perot in the early nineties, Ron as an independent political candidate, one of the most successful political independent political candidates in history. Like he had actually had a meaningful percentage of the vote, which is normally just Republican or Democrat.

[00:19:10] Lyn Alden: And he ran on a platform of basically the debts a problem, right? So that whole period was kind of a crescendo and people getting very concerned about debts and it’s on the debt. But the punchline is that they were way early. So basically right after that kind of crescendo, You had a period of, you know, 1990s, so booming economy, peak [00:19:30] demographics in terms of workforce participation, right?

[00:19:32] Lyn Alden: So the United States had the highest ever labor participation by the late nineties, early two thousands, we actually had a brief budget surplus. You had declining interest rates, so even though debt to GDP was pretty high, you had falling inter servicing costs. And then of course you had the two thousands, and then you had the 2010s basically as big by banking bust, disinflationary period, things like that.

[00:19:53] Lyn Alden: The challenge now is that here in the 2020s, some of those things are, those people that were concerned about in the late eighties and the early nineties, are actually starting to manifest just way later than they thought. Because we had to get through that period of peak demographics, we had to get through that period of declining interest rates.

[00:20:09] Lyn Alden: And now you have a period of very large fiscal deficits, you know, many countries above a hundred percent debt of GDP and interest rates that are no longer declining and don’t really have anywhere to decline too. You know, below zero, for example, much below zero. And so they’re kind of in a period where they’re stuck.

[00:20:25] Lyn Alden: You have, you know, high debts, high deficits and high interest on that. And a lot of that’s tied to demographics and entitlement spending. So it’s not like a war that can just go away suddenly it’s kind projected out into the thirties. It’s going to keep compounding. And so by the end of this decade, I think that’s going to be a meaningful problem.

[00:20:44] Lyn Alden: I, I think the combination of, I think deficits are actually going to be a problem in developed countries really for the first time since the 1940s. And that this is going to be a macroeconomic trend to be aware of for investors. And it’s also going to I think add to, [00:21:00] you know, basically political polarization, turbulence, things like that.

[00:21:03] Lyn Alden: Because in those types of environments, things like interest rates become politicized because your kind of out of control there.

[00:21:09] Stig Brodersen: So could we try and dig a bit more into this, what you said there at the end, Lyn? So if things indeed unfold the way that you describe which implications would have for us as citizens and then.

[00:21:21] Stig Brodersen: Perhaps the second part of that question would be, what should we do as investors to position against what may or may not happen here?

[00:21:28] Lyn Alden: If you have inflation calls by bank lending, the correct answer for central banks is to raise rates. Try to slow down that bank lending, harden the money, get the positive real rates, discourage, kind of excessive bank lending.

[00:21:39] Lyn Alden: If you have inflation caused by rapid fiscal spending, then really it’s pretty hard to get inflation down until you know, you stop that excessive fiscal spending, which is what happens after a war is over, for example. But because this one’s entitlement driven, it’s really not ending any time soon.

[00:21:55] Lyn Alden: But it’s very unlikely to be struck restructured in many countries. So the implications is that you have very large structural fiscal deficits. And if you flip that around conceptually, basically the deficits of our government are a surplus for the private. Which sounds good at first. In fact, many advocates kind of refer to like that positively, but in inflationary terms that’s also true, right?

[00:22:19] Lyn Alden: So for example if they’re running 10% of GDP deficits year after year, that’s actually money creation is kind of pouring into the private sector, especially at times where the central bank is monetizing [00:22:30] those fiscal deficits. And so you end up having above average money supply growth, not necessarily every year, but on a, you know, say, rolling five year basis.

[00:22:39] Lyn Alden: And that is, is likely to transit into higher prices, especially if you have other things like, you know, constraints on commodity supplies, basically, you know, tight supply demand spreads among, you know, commodities and infrastructure and that sort of thing, as well as labor demographic. And so that ends up being a rather inflationary cycle.

[00:22:56] Lyn Alden: And it’s one where ironically, raising interest rates can exacerbate the inflation because it actually increases the deficits that governments are pouring into the private sector, right? So raising rates will squeeze the private sector, but if they’re not the ones primarily causing the deficit and causing the money creation, then those higher rates can actually result in even more inflation.

[00:23:18] Lyn Alden: And so they are stuck in a rock between a hard place because if you raise rates too high over long enough timeframe, you’re exacerbating fiscal driven in inflation and deficits. But the other hand, if they try to do financial pressure they go to low interest rates. Despite that, then it encourages speculative attacks and the currency, basically, everyone should borrow currency and buy harder assets with it, which creates more money and therefore exacerbates inflation.

[00:23:41] Lyn Alden: And so they try to stop that as well, and they often turn to capital controls and things like that. So from an investor perspective, There are going to be times like say, you know, last year, perhaps parts of this year where you want to own safe paper assets, things like, know, T-bills cash, but over the course of a [00:24:00] decade, those are likely to lose purchasing power on a structural basis.

[00:24:04] Lyn Alden: And that instead you probably want to be in generally harder assets on average, things like bodies, infrastructure, certain types of value stocks. Basically that’s an environment where generally value stocks do outperform growth stocks more often than not Gold, Bitcoin potentially emerging markets, you know, countries that don’t have those high debt problems, but that, you know, ha have other tailwinds associated with them, I think can do pretty well.

[00:24:28] Lyn Alden: And so you generally want to be in things that, that didn’t do well in the 2010s decade and that instead generally did better in say, the two thousands decade. That’s kind of the environment you want to be at least maybe not all in on, but that your portfolios kind of shifted towards. I, if you think that thesis is correct, I generally like India and Brazil for a very different reason, and they’re not without risks.

[00:24:51] Lyn Alden: So I do, you know, you have to position sizes carefully. India has very strong demographics, very good structural growth. They still have low household debt relative to GDP compared to many other countries. So they’re still actually underbanked under financialized in many cases. So I’m pretty bullish structural in India and, you know, just large Indian banks on say a, you know, a five year basis, Brazil is a instead.

[00:25:14] Lyn Alden: So, so India’s kind of like a growth story, whereas Brazil’s more like a value story. So during periods of strong dollar and weak commodities, Brazil often enters depression like conditions. So this happened in the eighties. It happened to some extent in the late nineties. And really ever since 2014, [00:25:30] ever since we had the end of period of QE, we had a kind of a stronger dollar.

[00:25:34] Lyn Alden: We had oil come off of its like, you know, a hundred dollars plus barrel pure that it was in back then. Brazil’s been in this kind of depression like condition. But if we do get a very strong. You know, kind of commodities decade. I do think that Brazil can do pretty well. They currently have positive real rates.

[00:25:49] Lyn Alden: They jacked trades up super high to try to get ahead of fed tightening, and so they actually have positive real rates. And so their equities are very cheap. There’s obviously political turbulence, there is tail risk associated with that, but I think as a, as an appropriately sized position, I think that’s another way to kind of play on the fact that the US are going to have these kind of out control fiscal deficits for 5, 10, 15 years into the future.

[00:26:14] Lyn Alden: Brazil’s actually in a little bit better shape in that regard and might actually stand to benefit. And so there’s select emerging markets like that, that I like to combine with those other types of, you know, value stocks and commodities and you know, kind of alternative monies, things like that.

[00:26:29] Stig Brodersen: Yeah, it’s very interesting that you should mention that I have a lot of US based. A lot of them, whenever they talk about diversification, they talk about, let’s say, have these properties in these five different states and now I want to diversify. So now I’m buying the s a p 500 and saying, oh, that’s US stocks.

[00:26:47] Stig Brodersen: But you know, we also have international exposure because by definition a lot of these US stocks like say Apple, they have more revenue abroad than domestically. Do you think it’s still too US-centric? I

[00:26:59] Lyn Alden: think it’s certainly too [00:27:00] US-centric. I think having commodity exposure, even if you stick with US companies or just commodities in general, can bounce some of that out because like during the past kind of forward decade period, bonds were the kind of the main offset to equities or I think going forward in this type environment, commodities could be somewhat of the offset.

[00:27:18] Lyn Alden: Basically if commodities are going. Central banks are able to kind of, you know, get more dovish. That’s generally good for equities. On the other hand if commodities are soaring, central banks are likely to freak out, be more hawkish, and that can really quell equities, you know, not necessarily in any sort of given three month period.

[00:27:35] Lyn Alden: But I think that’s a general trend to be aware of that these higher input costs can really benefit certain sectors and hurt some of these other sectors. I do think that commodities are a way to diversify somewhat without actually going into international markets, but I do think international markets can add another dimension of diversification.

[00:27:53] Lyn Alden: If you look at most metrics right now, there’s so much global capital stuffed into US markets. We’ve really had a perfect storm to encourage that over the past decade. And so we kind of saw this in the late nineties as well, early two thousands, just like tons of global capitals all stuffed into US markets.

[00:28:09] Lyn Alden: And that can be a pretty painful unwind over, say a five, 10 year period if you get to that point. And so I do have concerns about, you know, You could have a period where the s and p 500 goes sideways, especially in inflation adjusted terms. Same thing for many types of US real estate. You could go sideways for five years, 10 years in inflation adjusted terms [00:28:30] while certain sectors or certain foreign markets or certain kind of global assets outperform on like a, you know, that they outperform that kind of sideways price action.

[00:28:41] Stig Brodersen: Lyn, I want to talk about a bit about money creation. We previously talked about money creation here, together with you on the podcast and the role commercial bank system plays in that. We also, from time to time here, this chatter about central bank digital occurrences, not just in the US but in Europe, China, other places too, which, depending on how it’s set off course, but the intention could be to replace a the current process for money creation.

[00:29:05] Stig Brodersen: I actually wanted to go into this topic from a slightly different angle, and I don’t know if I could call it more pragmatic approach. Do you think that the commercial bank lobby will ever allow the money creation process to happen outside of their system? Like how can we think about that to arise?

[00:29:21] Lyn Alden: I guess so. I think in countries with strong banking systems like the United States, you’re likely to see them kind of shift their power towards the central bank and towards the government in terms of money creation. And you generally see that reflected in the political leaders. Like for example, Jerome Powell’s kind of been dismissive of a CBDC, you know, it’s like it’s all, you know, they’re researching it, they’re looking into it, but they’re not rushing into it in a way that some other countries are.

[00:29:46] Lyn Alden: You also had Neil Kaari kind of, you know, from the Fed more directly kind of as like what the point of a CBDC is, kind of talk about how certain contexts you don’t really need it. And so I do think that’s going to be a trend in the United States and certain other countries. I think the UK will be similar in that [00:30:00] regard.

[00:30:00] Lyn Alden: Some countries that have more centralized politics might have a better chance of getting a CBDC pushed through. And then there’s also a spectrum, right? So CBDC doesn’t, on its own mean that it takes away from the banking system. Like, we, there were recent headlines where UK talked about having a limit on how much you could save in the CBDC.

[00:30:20] Lyn Alden: And the reason, so the reason they would consider something like that is if you’re a saver and you want to hold cash. If you hold cash in a bank, you know, you’re subject to loss. Especially if you’re above the, you know, in, in the us the F D I C limit, other countries have different limits. If you’re above the limit, or you’re worried that the limit won’t be honored because they have to, they actually have to print money.

[00:30:40] Lyn Alden: If there’s a big banking crisis, like the F D I C only holds like, say, 1% of the deposit’s worth of insurance, right? So if people, for whatever reason have a non-zero risk assessment of banks, they’d rather hold money directly with the Central Bank, right? Cause they’re like, well, I mean, that’s a lower risk threshold.

[00:30:57] Lyn Alden: So if you’re a saver, why wouldn’t you pick the Central Bank? And so you basically if you don’t want to suck all the deposits out of the bank system into the central bank, you would generally need either lower interest rates or you need limits on how much can be put there per person. And so if a central bank digital currencies primarily just trying to replace cash, right?

[00:31:19] Lyn Alden: Which in many cases they are, then they want to have it treated like cash where you don’t hoard large amounts of it, that you have small amounts of it, but that large amounts are stored in banks or [00:31:30] government debt or you know, other types of assets. And so, To the extent that a CBDC is used to mostly just replace cash, but not bank deposits.

[00:31:38] Lyn Alden: That is, I think something that a lot of countries are interested in, even ones with pretty strong bank lobbies, and they would just make sure that there are limits on that, whereas countries that have more command control style politics are potentially interested in having more expansive C B D C From a used perspective, the big risk with central bankers occurrence is that you lose that on privacy, right?

[00:31:59] Lyn Alden: So physical cash is a private medium of exchange. It’s also something where, I mean, they, it’s like no one can shut off your cash, right? It’s like they can shut off your credit card, but they can’t shut off your cash. And so in a CBDC it basically gives policy makers more surveillance capabilities, more kind of control capabilities for public spending.

[00:32:19] Lyn Alden: Corporate spending gives them better options to kind of, you know, control the types of spending or resource flow that happens. And so from a user perspective, that’s one of the key risks there. Whereas from a banking system perspective, I think their main goals is limited so that it doesn’t, that the CBDC is not more heavily used than physical caius.

[00:32:36] Stig Brodersen: I wanted to talk a bit more about digital currencies. This was related to something Ray Dalio said on CNBC not too long ago. There’s always like this dance between Dalio and Sorkin whenever they speak to each other. I don’t know if you ever watch any of that, but it’s one of those, like, Dalio gets asked a question, he really wants, you know, to explain and like paint his thesis.

[00:32:58] Stig Brodersen: Sorkin can continuously try [00:33:00] to interrupt him and come up with some kind of like headline. Lio bulls on Bitcoin or whatever it is, he can try to like catch him on. And every time like Dalio takes like three steps, steps back and like, oh, but here’s the OL framework and let me dive into these eight steps one by one, which is just like a terrible format for CNBC.

[00:33:18] Stig Brodersen: But anyways, he previously said this on CNBC before he was cut off. I should say if you want a digital currency, you have to do things differently. I don’t think stablecoin are good because you’re just getting another fear currency. What would be best is an inflation linked coin. So that was the end of the quote.

[00:33:38] Stig Brodersen: What are your thoughts on Dalio’s statement and how would an inflation linked coin work in practice?

[00:33:46] Lyn Alden: Inflation is, if you say money creation, right, it’s an increase in the money supply. If you use it in modern context, consumer price increases, right? And it’s due to in part more money entering the system.

[00:33:58] Lyn Alden: And there’s already official inflation hedges. Things like short term treasury, inflation, protected securities, things like that. So there’re already those in the fiat system. The problem with having any sort of digital currency that’s linked to something like that is that you need a price oracle, right?

[00:34:15] Lyn Alden: So basically the network now becomes a reliant on some sort of external source of information, right? So if you had some sort of token that, for example, adjusted price based on CPI Data. The question is, okay, where’s it getting CPI data? Who’s controlling it? [00:34:30] Who can change the algorithm? How that works, things like that.

[00:34:32] Lyn Alden: Something like Bitcoin is designed to be entirely self-referential, right? So basically there’s a network, it’s backed up by proof of work. It’s not looking out to an external price Oracle, it’s just Bitcoin. For better or worse, sometimes worse. Bitcoin is what a Bitcoin is, whereas something like Stablecoin or other.

[00:34:49] Lyn Alden: Backed tokens. Some sort of central issuer holds collateral, like with stable coins. Let’s say they, for example, they hold treasuries. They might hold a commercial paper or bank deposits, other things like that. They’re issuing liabilities. They represent claims for those redeemable claims. For those, you can also have gold back stable coins.

[00:35:07] Lyn Alden: You could have commodity backed stable coins that’s another way of having somewhat of an inflation linked token of some sort if people would want it. So if there are ways to make these like digital assets that are in some way inflation back, but they’re really not that much different than the kind of inflation hedges we already have, and there, at the end of the day, they’re centralized.

[00:35:25] Lyn Alden: There’s a custodian or price oracle or some sort of governance aspect that is, it is managing that system and it doesn’t really solve anything other than the system doesn’t solve. Now, other than perhaps making it more access. One of the use cases of stablecoin, for example, is that if you’re in Argentina and you’re dealing with near hyperinflation quite but almost might as well be a hundred percent inflation.

[00:35:46] Lyn Alden: If you get cash right, you can hold it physically, which is dangerous. You can also deposit your banks. But Argentina has a history of saying, oh, we have a dollar shortage. We have to go take those dollars and give you pace within, in return at the exchange rate that we decided is. So that’s a [00:36:00] risk. So what a lot of Argentinians do, for example, is they will buy stablecoin and they know it’s centralized.

[00:36:06] Lyn Alden: Or at least if they know what they’re buying, they know it’s central, it’s a centralized product. But the central hub is not an Argentina, right? And so anyone with a smartphone and internet connection can go buy a stablecoin. They can get dollar exposure and just bypass Argentinian banks for physical cash.

[00:36:21] Lyn Alden: And that can be true for Lebanon. That can be true for many other Turkey for many countries that are experiencing high inflation, hyperinflation, that kind of thing. You also see it in places like Nigeria. So that is serving a use case to a lot of people. And similarly, I mean, if you’re a middle class Nigerian and you want to buy the S&P500, It’s just hard to do.

[00:36:38] Lyn Alden: So if you could tokenize it or something, right, you can make it accessible to more people in the world so that they can access it on a smartphone rather than go through this kind of more legacy kind of kind of complex financial arrangement. But obviously such approaches have regulatory challenges as well as some technical challenges.

[00:36:55] Lyn Alden: So I think that the more people overthink what an appropriate digital money is, they’re more likely to be disappointed just because anything that you can think of that’s complex is ultimately centralized. You’re linking back to something and while it may have certain kind of improvements in the tech rails and who can access it and things like that, it’s still not, at the end of the day, fundamentally different than what we have.

[00:37:17] Stig Brodersen: I think you’re definitely right, that simplicity is key. I was reading this series of articles in The Economist probably over here the past few months, and there were these talks about how Argentina and Brazil would [00:37:30] form a union together in like monetary union. The first time I read, I was like, this must be some type of.

[00:37:35] Stig Brodersen: Of April’s full type thing and they continued with another article and apparently it wasn’t possible, and they wanted to go back and then in like link it with Artinian commodities and it just seems like a, just seemed like a big mess that seemed so unstable. And I know this, was this sort of like a, if you knew the answer to this, you would probably have called someone already, but like whenever you have a system like you have in Argentina No, that, that’s one of the countries we typically take up because of all the things that have happened over the past few decades.

[00:38:08] Stig Brodersen: Is that really about money? I know it sounds crazy whenever I’m saying that, but is that a money problem? Is it an institution problem? Like IMF often going to say, well it’s about like building institutions and is that even possible? I don’t know if you even buy the premise for this. I have this intellectual exercise of can I come up with a good financial system for Argentina?

[00:38:28] Stig Brodersen: And so far the answer is definitely no. What are your thoughts on how to build a system in Argentina?

[00:38:34] Lyn Alden: So at the end of the day, institutions and money are tied together. So a country’s money is essentially that country’s public ledger and when that ledger is very mismanaged on a structural basis, you’re going to get problems with money.

[00:38:47] Lyn Alden: And so you can’t really fix the money until you fix the institutions. It’s hard to fix the institutions while you have bad money. And so really nothing short of like a wholesale, just realignment in terms of domestic politics, people’s understanding of money, politicians [00:39:00] getting incentives aligned with the longer term could fix it.

[00:39:02] Lyn Alden: It’s very hard to fix it once you have that kind of spiral in place things, I sense you have to get bad enough that people just go with a very different approach. The a challenge with the IMF is that kind of based around just perpetuating the current system. I mean, if you look at a lot of these countries, they’ve had like over a dozen IMF loans and it’s like the, that quote, like Insanity is trying the same thing over and expecting different results.

[00:39:23] Lyn Alden: There’s so many countries in the world that have just, you look at the list of IMF loans and it’s just over and over and over again. And I think part of that, I mean part of that HA is because of those countries policies, but it’s also, I think partially from the imf. Basically it’s like not allowing bankruptcy, it just, you never allow the system to kind of reset.

[00:39:39] Lyn Alden: You just keep restructuring loans, rolling loans over. And then another thing is that the I mf, in order for countries to ex take the loans, the IMF gives them certain economic prescriptions. They say, okay, you have to do this and this. The funny thing is those are very different than what domestic countries do, develop countries do in recessions.

[00:39:56] Lyn Alden: So what does the US do when you have recession? Well, we print a lot of money. We bail everyone out. We often cut taxes. When emerging markets have recessions, the IMF comes in and says, okay, we’ll give you a loan. But you have to do austerity. You have to raise taxes, you have to cut spending, especially on things like healthcare and education.

[00:40:12] Lyn Alden: You have to restrict credit to your, like domestic businesses, but also allow the opening for multinational corporations to come in and buy like your FI assets on fire sale prices, optimize your exports conveniently for developed countries. And so it’s kind of this, there’ve been pretty reasonable criticisms that it’s kind [00:40:30] of this like neo-colonial policy almost, where you kind of come in and just keep telling them how to restructure their economy.

[00:40:35] Lyn Alden: It’s clearly not working. You keep doing the same economic prescriptions over and over from an external source. They’re very unpopular. They often work with dictators. And so I think it’s a, for these countries that have recurring problems, I think it’s both a mismanagement domestically, which is very hard to recover from once you’re in that state.

[00:40:51] Lyn Alden: And then two, it’s just external entities coming out and just keep pushing things that don’t work. Right. So I just think it’s, in some ways, I think it’s a technology problem. I think we have a; I think our money technology’s still lacking for, in one way, but it’s also just a, it’s a political problem and it’s a geopolitical problem.

[00:41:08] Stig Brodersen: Yeah. It’s just so complex. And your, like, to your point before you have this element of Moha, so if we mess up everything, IMF will come in again, then they’ll probably tell us something. Not silly, but at least they’ll bail us out. And like, I don’t really know how to. How to change that. I don’t think, I don’t think anyone, anyone does.

[00:41:26] Stig Brodersen: It’s up there together with being the chair of the boj or something, like one of those impossible tasks that sounds very prestigious, but probably no one wants really to see if they can solve. Lyn, I wanted to talk to you and sort of like shift gears here a bit and talk a bit more, perhaps philosophical about money as it, it hasn’t been philosophical enough with everything we’ve been covering so far, but, know, as I’ve gotten older, perhaps a bit, not a lot, but a bit more money.

[00:41:57] Stig Brodersen: And I also find myself think a lot [00:42:00] about how I spent my time and how that works together with building my portfolio and really a quality of life. And, you know, why I have this thesis really to speak in, like, CNN, BBC type headlines. I would say optimized for independence is one, but also sleeping well at night is another.

[00:42:19] Stig Brodersen: And I wanted to explore this thesis a bit more. Also knowing that it’s inherently filled with pitfalls, right? So, sleeping well at nights, that’s very different from one person to another. One might say, I cannot sleep if I own Bitcoin. And another might say, oh my God, if I did not own Bitcoin, how could I sleep at night?

[00:42:39] Stig Brodersen: So I guess my question for you is, how do you think about independence and sleeping well at night personally, and how would you encourage our listeners to think about optimizing for those two things? And of course, also you can challenge the entire premise of that question in the first place.

[00:42:56] Lyn Alden: Yeah, so I won’t challenge it. I think there’s two things that a person has to optimize for that are somewhat conflicting, and that’s kind of the balance. One is that someone should be diversified and safe enough that they can sleep at night, right? And that means different things to different people, but basically they want, if there’s an asset in your portfolio that’s causing you problems and that you keep thinking about, you maybe should own that asset or learn more about it to check the, if that’s an asset you want, you maybe should get rid of, right?

[00:43:24] Lyn Alden: Or maybe you’re over exposed to that asset, right? Maybe if you have, you know, it’s like one gigantic property is like a [00:43:30] huge percentage of your net worth. And you’re always worrying about the property and maybe you should sell that property and get a smaller property and diversifying other things, for example, right?

[00:43:38] Lyn Alden: It depends on what the context is. So one is that, yeah, you do have to tail, you have to understand yourself, understand your psychological limits, and also the limits of your knowledge, and make sure that you’re appropriately diversified and safe, that you can get through periods without making bad decisions.

[00:43:52] Lyn Alden: You don’t want to sell at the bottom and buy at the top and kind of lose capital that way. Or hold things that are too big, a percentage of your portfolio that crash and never recover. Another end of the spectrum, if a person’s sleep is based on things that aren’t true, that’s going to be a problem, right?

[00:44:06] Lyn Alden: Because that they have to make sure over time that the things that cause them to step at night are reasonable things. And so they, part of it is just education, learning, exploration to make sure that the things, the risks that they’re concerned about are the right risks to be concerned about, or at least a close approximation of the right risks to be concerned about.

[00:44:26] Lyn Alden: And one of the challenges in the current era, I mean finance and economics and managing assets is, I mean, it’s a full-time activity, right? I mean, even professional money managers have a tough time being the s and p 500. Most people, like if you’re a doctor, if you’re a lawyer for an engineer, if you’re a school teacher, if you’re a plumber, if you’re, whatever you do for eight hours a day or more, right?

[00:44:47] Lyn Alden: If you also have to come home and just kind of look, then you’re managing kids. You have a family. You have whatever your life entails, you have hobbies. If you’re also expected to just pour tons of hours [00:45:00] into multiple different asset classes, you have to know how stocks work well, how does money creation work?

[00:45:04] Lyn Alden: What’s going on with commodities? What’s going on with Bitcoin? What’s going on with foreign equities? What about real estate? Right? It’s kind overwhelming for a lot of people, and they’re almost expected to have like a second. It’s one of those things that unfortunately in the macro environment that we are in now, it’s somewhat unavoidable.

[00:45:20] Lyn Alden: I do think that it is important both, even just managing your money, but also just making decisions about where you want to live, who you want to vote for, what, that kind of thing. It’s important to be a very informed person about economics. I think it’s something that I wish was more taught in schools. I wish people were more interested in general in it, while acknowledging that not everyone can just put multiple hours a day into the study.

[00:45:42] Lyn Alden: So I think it’s a combination of one, you want to have your portfolio simple and diversified enough that you’re comfortable with it, but that you also want to lay over time, increase your level of knowledge so that to make sure you’re, things you’re excited about or that you’re concerned about, do align as much as possible with reality.

[00:46:00] Stig Brodersen: I wanted to talk a bit about what you said about you can only sleep well at night if what you believe is true. It’s just opens up for a bunch of other questions because. How do we know what’s true? And let me try to explore that a bit more. So, you know, I have a, I guess what you would call a conventional business education, financial education, have a degree in that.

[00:46:21] Stig Brodersen: And we were taught already and already I think on the undergraduate, but definitely whenever the graduate, we had these stock investing courses where [00:46:30] you learn a lot of things, but not anything about stock investing, ironically. And one of the things you learned, at least we learned, was that Warren Buffet was lucky and Buffet was the luckiest person, which is why he had the best returns.

[00:46:43] Stig Brodersen: And because it could be explained with the efficient model hypothesis. And of course, like my old professor, you know, he always had this joke like, oh, but you know, look at Buffet, but I drive, perhaps I’m not, we did have a section about Warren Buffet being lucky in the textbook. I know it sounds crazy but we.

[00:47:00] Stig Brodersen: So coming into the stock market myself and having another job in the financial industry, you learn that markets are not efficient, and you start to think differently about investing. Then a few years ago I read this book about the modern monetary system. T it was Stephanie Kelton’s book, the Deficit Myth, and I read about it first, and I felt it was ridiculous, but I also kind of felt, well, it was also kind of ridiculous going in.

[00:47:28] Stig Brodersen: Like I learned business school, like Warren Buffet was just pure luck. So why wouldn’t I try to challenge myself? And I started reading the book and I found myself being so, I wouldn’t say angry is the right word, but I kind of felt it was such a waste of my time that had to stop midway, which that you should don’t do with books because I felt it was just crazy.

[00:47:46] Stig Brodersen: But it also goes to the point about what if it’s not, and I’m not so much talking about m o t as I’m saying this, but like this whole notion about what you have believed in so far just isn’t true. So how do you [00:48:00] think about that whenever you learn about finance giving that you also want to sleep well at night?

[00:48:06] Lyn Alden: I think one thing I keep in mind is that the era we live in, like it, it’s like a fish and water, right? Whatever you live in just seems normal. One of the challenges that the era we live in is conceptually just very unique in terms of monetary history. Basically, it’s the only time in the world where the entire world was on a fiat standard, and it’s only in our parents’ lifetimes, right?

[00:48:27] Lyn Alden: It’s like, it’s not as long lasting and durable as we think it is, or at least historically and the future can be. There’s a broad range of outcomes for what the future could look like in terms of how our money works. And so I, I think the first step is just to always have an open mind. Money’s con, constantly transforming, especially in the past 150 years.

[00:48:46] Lyn Alden: And there’s no reason to assume that this current period is like the end state that we’ve, like, we’ve fixed money. I think our prior discussion around why are there dozens of developing countries in the IMF doing the same thing over and breaking constantly may, maybe the system’s not the highest possible peak of how the global financial system’s going to be structured for the foreseeable future.

[00:49:03] Lyn Alden: Right? So I do think it’s important to keep an open mind about how money works. I think that’s number one. And just kind of always challenge your assumptions and always say what are the most foundational axioms that you’re assuming just might not be true? It might work differently than you think. When it comes to mmt, I find it interesting because I obviously, I generally disagree with most of what they say, but there’s a couple observations they make that are not wrong, right?

[00:49:28] Lyn Alden: It’s mostly that they describe how the [00:49:30] system works. That in many cases they’re not necessarily wrong. It’s then what they say you should do about it is what I would very much disagree. Like the idea that the government deficit is a surplus for the private sector is often a term you’ll hear in mmt and it does become relevant in certain contexts, right?

[00:49:46] Lyn Alden: But because I think a lot of MMT people are incorrect about a lot of things, they get disregarded. Whereas like in many schools of thought, even if you almost entirely disagree with that school of thought, there’s usually a couple things in that school that are useful to incorporate into your broader knowledge set.

[00:50:01] Lyn Alden: And so I think even things you disagree with are kind of worth exploring up to a point. I like to phrase it as like you should be able to steel man any kind of argument, right? That’s relevant to things you care about, right? Meaning that you should be able to state the case for that school of thought in a like in the way that makes it the strongest possible description of that school of thought.

[00:50:21] Lyn Alden: And then be able to dismantle it, right? Assuming you disagree with it. And so I think that applies to M T or other things as well. Basically, I think it’s important one, always challenge your own assumptions, and two, make sure you fully understand opposing schools of thought rather than just dismiss them.

[00:50:36] Stig Brodersen: Yeah, and I think that’s a great idea. And for the record, I did ask Stephanie Kelton to call on the show with no luck. And I wanted to continue talking a bit more about money and happiness for the lack of better words. And there’s this wonderful book here, it’s called The Art of the Good Life that’s written by Rolf Dobelli.

[00:50:55] Stig Brodersen: And in the afterward of that book, he talks about how you [00:51:00] can’t say what a good life is, but you can easily say what a good life is not. He just kind of felt that was an interesting observation. It really makes me, me think about how Monger also talks about you have to invert, always invert, sort of like thinking about it from that.

[00:51:16] Stig Brodersen: And I wanted to bridge this to our discussion about creating the right portfolio. So perhaps instead of talking about the optimal portfolio and you know, thinking about how much equity we need, how much long duration bonds we need. But like, I guess I wanted to rephrase that question as you learn.

[00:51:32] Stig Brodersen: Instead of talking about the optimal portfolio, can you tell me about what is the optimal portfolio not?

[00:51:38] Lyn Alden: So, I think the optimal portfolio that’s not, or kind of the description of a bad portfolio would be one that is too concentrated, especially in something that you don’t fully understand, especially something that is extremely volatile or that you’re excited about.

[00:51:53] Lyn Alden: If you’re super excited about your portfolio, if you think about it all the time, probably taking too much risk, really probably not having a sober analysis of the risks. And you’re over enthused and you’re open to more volatility and downside risk than you’re probably aware of. So I see people that, for example, they’ll have say a similar macro-economic outlook as me about, they expect the 2020s on average to have higher inflation, X, Y, Z.

[00:52:18] Lyn Alden: And then they, so, but they, their portfolio is like a huge amount of like junior gold and silver mining stocks and then crypto and then like something else. And it’s like that, it’s basically, it’s an [00:52:30] extremely like volatile portfolio. Very gamified, very ex explosive upside, and then can collapse. It’s also an area where the median entity does not do well over the long term, right?

[00:52:45] Lyn Alden: So the median gold miner is like a terrible long-term investment over history. And the median crypto just doesn’t do anything, right. I mean, there’s 20,000 cryptos. We keep making more that they’re not really solving, most of them not solving unique problems. Most of them don’t have like a second or third cycle.

[00:53:01] Lyn Alden: Of rising growth. Most of them have these like pump and dumps and then they’re dead, right? So if someone’s like entirely in like mining stocks, like junior mining stocks and crypto, that’s probably not conducive to long-term wealth. Like, for example. So I think that’s one of the examples I often see is just being overly focused on a narrow set of things that are also not necessarily sound investments.

[00:53:23] Lyn Alden: That’s a good shift to an awful portfolio. On the other side, and this goes back to actually like, making sure that the things that allow you to sleep at night are not entirely wrong, right? So a lot of people that don’t want any volatility and so like they’re entirely in like cash and government bonds or almost entirely.

[00:53:39] Lyn Alden: And the risk there is that you’re entirely attached to that public ledger, right? You’re entirely attached to the competence of institutions. You’re entirely, you hold non-real assets. That can be, their supply can be changed. They can underperform inflation for years and years. They can have big stepwise devaluations.

[00:53:58] Lyn Alden: And so for example, if people [00:54:00] in the 1940s. Were afraid of war and the therefore they held cash and government bonds, they got sharply devalued. Same thing if you went into Covid and you were afraid of owning any assets and you held cash and government bonds, well you got sharply devalued. Right? And so there is also something we said about being overly cautious, not understanding any assets, not wanting to own any assets, and just owning the underlying currency or currency derivatives because that’s also a, I think a key long-term risk.

[00:54:27] Lyn Alden: You risk failing to meet your retirement goals and you’re basically, you’re kind of like the sucker at the table that keeps getting drained, like a melting ice cube to, to pay for other things. Right? And so you’re a fear of volatility is kind of being used against you. Right. So I think kind of an example of what a good portfolio’s not is one that tends towards extremes.

[00:54:47] Lyn Alden: One that is very casino like, or one that is so risk averse that it is pretty much just designed to fail to recruit purchasing power.

[00:54:56] Stig Brodersen: It’s interesting to think about how we all, the product of the time and what we experienced from my time as a college professor, I was for obvious reason, speaking with a lot of young people.

[00:55:07] Stig Brodersen: And a lot of them were interested in investing. So we talked a lot about investing and they only owned cryptos, but they talked to me about how diversified the work because they had so many different cryptos. And then I came, you know, visit my, my, my parents and you know, they paid off their house and they have the rest of the wealth in cash and they feel like they’re safe.

[00:55:25] Stig Brodersen: And it’s so I can stand there in the middle and be like, oh my God, [00:55:30] why would anyone only own cryptos? Why would anyone, you know, pay out their mortgages and just have the rest in cash and look at my fantastic portfolio. And that sort of like goes back to also what I said before about, you know, m t and feeling it’s wrong, which it may or may not be, who knows?

[00:55:43] Stig Brodersen: But we all have these preconceived notions of what have we experienced? We might not think about what we have experienced, but we all have our own truth based, our own experiences.

[00:55:53] Lyn Alden: Yeah, I think it is the challenge because I think a diversified, a portfolio is the best risk adjusted return you’re going to get.

[00:56:00] Lyn Alden: The downside is that it either requires knowing a lot about different assets, or it requires kind of blindly trusting the process it with ETFs and things like that, right? Because it’s one of the things that’s just universally important that we have to know about how different assets work. Even though we shouldn’t in a better macro environment, we shouldn’t be expected to, we shouldn’t have to know about different investments the way that we do these days.

[00:56:23] Lyn Alden: But especially in this kind of current era, which I think is a challenging transitional period, it is important, I think, to know about financial markets, about economics, and about kind of how to preserve and grow your purchasing power. Cause that’s, I think this is an important life skill that we all have to focus on and avoid extreme, make sure you’re comfortable, but then make sure your threshold for what your knowledge-based comfort level is always going up over time.

[00:56:47] Stig Brodersen: I guess I want to use that as a transition into talking about. How you spend your money to optimize for happiness. Again I’d say before I do, please challenge the premise if you want to, that you do use money as a tool for happiness, or perhaps that’s not the primary use. My premise is that people use money to optimize for happiness.

[00:57:10] Stig Brodersen: It, they might do it in the wrong way. They might do it for the wrong reasons, but that’s the underlying premise of having money. So I’m sort of like a bit more of a philosophical discussion, but I want to throw it back over to you, Lyn.

[00:57:22] Lyn Alden: So I actually think we can take the prior discussion and combine into that because I think the way that I approach how to spend money is to invert, right?

[00:57:30] Lyn Alden: So it’s less about spending money to be happy, it’s about spending money to solve problems or things like fix things that make me unhappy. There are things that are fixed by my, by money, which some things. Right, and so, I mean, there’s actually one thing you can do is look at studies, right? So what are things that like reliably make people miserable, like really long commutes, for example, a really bad mattress.

[00:57:49] Lyn Alden: There’s like certain things that like reliably make people unhappy. So one is using money to solve those like reliably unhappy things. So either being able to get a different job or being able to get a different home, right? You either not have a commute or have a good commute, for example, being able to, there’s certain things that just give you discomfort.

[00:58:08] Lyn Alden: Just solve those. Like for example, I don’t travel well, some people just travel well, and I have trouble sleeping on airplanes. I have trouble just sitting up for like, if I’m going into national, like sitting up in a cramped seat for like 12 hours. So for example, splurging on like a business class sometimes is a way I get there and I don’t feel like I regretted coming here.

[00:58:25] Lyn Alden: Right? It’s like it makes the trip better. On the other hand, I avoid this I don’t spend money [00:58:30] on cars. I don’t spend money on designer clothes. I don’t spend money on just frivolous things that don’t really bring me happiness, but that in some context might bring other people happiness.

[00:58:39] Lyn Alden: And so I mainly use it to solve pain points. And then I guess even zooming up more philosophically, but one of my pain points is the idea of uncertainty, right? So I might have mentioned on your podcast, I’ve certainly mentioned on other podcasts my writing, but when I was a kid, I was homeless for a period of time, and then after that it was like a trailer park.

[00:58:56] Lyn Alden: The childhood was always like, always kind of, financial uncertainty. And so I think that kind of, if anything, it kind of overcorrected my mentality towards saving, investing, having very high margin safety for everything. And so for me, one of the things I do with money is save it, invest it, build large and larger kind of income streams, build large and larger savings reserves up to a point so that I generally reduce the uncertainty around the future, right?

[00:59:22] Lyn Alden: So that’s another pain point that I solve in addition to those more just like direct pain points. So I think if someone realizes that money doesn’t create money, you can just fix a couple of things that can get in the way of happiness, whether it’s a long commute or whether it’s not having enough time with their family or whether it’s just you hate flying, for example, whatever it, whatever the case may be.

[00:59:41] Lyn Alden: There’s certain annoying things. Money can solve those annoying things, but happiness doesn’t come from money. Happiness comes from your outlook on life, your relationships with other people. Being passionate about how you spend your time, what work you do or what hobbies you do. It comes from health or staying in shape, getting sun, getting exercise.

[00:59:58] Lyn Alden: That’s where happiness comes from and money is just kind of a tool to, I think, eliminate or reduce problems.

[01:00:04] Stig Brodersen: I think that’s well said and it reminds me of that story where a rich man died and it was asked how much did he leave? And the answer was all of it. Lyn, it’s always wonderful speaking with you and I already look forward to hopefully being able to invite you on again.

[01:00:21] Stig Brodersen: Before we let you go, I wanted to give you an opportunity to tell the audience where they can learn more about you, your research, and your wonderful block.

[01:00:28] Lyn Alden: Sure. I’m at lynalden.com so people can check it out there. I have public articles. I have a free newsletter people can sign up to. It comes out every six weeks on average.

[01:00:36] Lyn Alden: And then I also have a low-cost research service for people that want more frequent updates every two weeks approximately. So we cover macroeconomics-specific investment ideas and try to just tie a lot of these themes together. I have these kinds of like long-term thesis, like what do I expect a decade to look like directionally, but then just things change over time and we have periods where we have counter-trends to those these, and so it’s kind of like these other types of updates kind of just.

[01:01:01] Lyn Alden: Analyze what’s happening? What is the process? What is going as expected, what is not going as expected? What are the expected timelines from some of these things? And so I just basically think this is a challenging decade and I’m going back to what makes us happy. I get a lot of enjoyment out of like being a detective, essentially financial detective, just kind of seeing, trying to put complex things together in a way that is accessible to even just myself, just kind of figuring out things myself and hopefully share some things along the way.

[01:01:29] Stig Brodersen: I’ll just highly encourage everyone to go into to lynalden.com. The blog is absolutely amazing. Thank you again, Lyn, so much for coming here on the show. As always, it’s a privilege to have the chance to speak with you.

[01:01:40] Lyn Alden: Thanks for having me. Always happy to.

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