How macro helps crypto investors beat inflation

Transcript

One of the most common questions we're getting is just what is macro? What is macroeconomics? Like how do I frame it? So tell us about how you frame macro and macroeconomics so our audience can get up to speed on the way you view it. >> Sure. Absolutely. Great question. And I think the way I would answer this is just the definitions of the terms, right? So economics is a social science that regards the study of the allocation of scarce resources in a given society. Macro just means large or overall. So when we say macro, we're using that as a shorthand for macroeconomics, which is a study of how an overall society allocates its scarce resources because there's not total infinite abundance and we have to make decisions about these

things. So studying how that's being done is what the the discipline or the academic field of macroeconomics is all about. the framework that myself and the other team members at Milk Road Macro have developed um in order to help investors kind of apprehend this and get their minds around it because it is a very large multivariate multiffactor discipline and academic field. Um the framework we we've laid out involves three areas. The first one is the monetary analysis or the monetary system. The next one is economic analysis or studies of the economy itself. Uh and then market analysis. So how is this playing out in the markets?

What do we see happening? What trends are we seeing? um and just trying to make sure that our audience is aware of those and kind of keyed into what's going on in the markets. But as a as a general framework, that's how you think about it. It's how the societyy's allocating its resources and then we look at it from a a lens of monetary perspective, an economic perspective, and then the actual market and and just positioning as as far as that goes. >> Okay. So, let's walk through each of the three areas of the framework. Let's start with money. Uh tell us about how you think about money and the monetary system.

>> Sure. So I think the place I would start with for this is going back to Thomas Jefferson actually because I think >> okay let's go way back >> I I want to go back to the beginning because I think a lot of people will look at where we are currently in the monetary system and think this is the way it's always been right however this is a many centuries long debate of of monetary policy and and money itself is a policy right so Thomas Jefferson said banking establish establishments are more dangerous than standing armies and he said that the principle of spending money to be paid by posterity under the name of funding is swindling on a large scale. And so this is something that's very reminiscent of a lot of the arguments we hear today that the government is doing all this deficit

spending and growing the debt, stealing from future generations. But my point here is that this has been a debate for centuries in this country and in all countries. So I think the thing I would start out with is just this this image I think kind of helps illustrate this for people in a way that they'll understand. So, this looks somewhat similar to a dollar or $20 bill that we would recognize from today, except at the bottom it says something very different. It says $20 in gold coin payable to the bearer on demand. So, prior to 1971, if you had what they called greenbacks at the time, you could take this down to a bank, what was part of the American central banking apparatus in some capacity, and exchange this for actual gold. If you go and look at the dollar

bill, this is again from before 1971 at the bottom. And this says $1 in silver payable to the bearer on demand. Again, you could go down to a bank and exchange this for actual gold and silver, right? So, it was a bearer asset that was tied to a real world monetary assets. Now, post 1971, this is from, you know, the Obama administration, uh, Secretary Yellen, um, this says Federal Reserve note $1. So now the the paper money is it looks the same. The pictures are almost the same but it is a huge radical difference in terms of what this actually is. Okay. So before 1971 um there was this exchange of of these dollars for gold and silver and now afterwards it's just the dollar. So what

this is this Federal Reserve note this denotes this is a representation of $1 worth of debt owed by the United States Treasury. So the United States of America to the central bank the the Federal Reserve. Um, and so what happened in 1971, which I've alluded to, Richard Nixon, and this was kind of funny, he said in the speech where he did this, he temporarily, he said, temporarily suspending the fungeability of dollars in gold. So up until that point for the period of about 30 or something years, $20 or no, sorry, uh, $20. Yeah. So it was an ounce of gold was priced at $30. In 1971, he suspended that funggeability. The stated reason, he said, was to protect the value of the dollar from speculators. However, the real reason was that the United States

had already figured out that they could spend a lot more of these paper dollars certificates without actually having the gold to back them. The French called our bluff and actually sent battleships to New York City to go and exchange their dollars for gold. And they realized, hey, we're going to run out of gold if we do this. So, they suspended it. But since that time, we've been operating on a system of debt. So, there's no quote unquote money anymore. Now, we have a central banking fiat system. Fiat comes from a Latin word that means faith. And it is faith that the United States government will at some point in the future pay back its debts to the Federal Reserve. Um, so that's sort of like some basic history of the monetary system, how we got from a system of using gold and silver that backed all of these

things to this system of central banking, fiat, and just infinite debt. And I can go on from there, but I'll pause there for for a minute. So, so, so what you're saying is pre-1971 the there somebody was holding custody of gold to represent the US dollar the dollars that you had and at any point you could go into the bank and you could say hey I want my gold or my silver in exchange for the dollar right like that that's the way it was and then the big shift that happened was at some point 1971 there was a shift to Okay, we're no longer going to to hold gold or hold silver. We're just going to we're going

to accumulate debt and the debt will represent the dollars that we give to you. >> Correct? So, we switched from using a system of gold and silver as money to using debt itself as money. So, debt is not money, but we are using it as though it were money. And I think this is an important distinction for people to understand. >> And why is that such an important distinction to understand? And how does that where are we now in terms of debt? Because everyone understands that we are in a large debt problem get us to get us to where we are now.

>> Sure. So I think if you want to put up this other slide, this will help me kind of illustrate this. Um so the the situation is that now that we do not have money like in a technical sense money, we have debt that we're using as money. The only way to repay debt is with more debt, right? So the only way for the Treasury Department to pay the debts that it owes to the Federal Reserve is to get more debt. The only way for it to get more debt is to get borrow more debt from the Federal Reserve. So it only really goes in one direction. Sometimes it goes faster or slower. But as you can see, since this this chart is I wouldn't say stable, but it it's relatively stable for the decades leading up to the 70s. Once you get to 1971, there's kind of this

inflection and we start going towards this asmtote. Now part of this is just how the chart is representing this, but the idea I think is important, right? is that the dollar is only ever going to continue losing value and the more debt that we have in the system, the more debt we have to borrow to pay back the debt that we have because again there is no money. The Federal Reserve kind of owns everything in an official like technical sense and all we have is debt. So the impact of this is enormous and everyone I think is aware of the fact that they can feel this happening right that inflation is just the dollar losing its value and so that's all that's happening through history is the dollar keeps losing its value and this is I think something really important to understand because it's a fundamental

endemic uh part of the overall system that we live in is the the bedrock monetary policy and the reality of the economic system we're living in is this continual debasement of value of the dollar and expansion of the debt supply >> and what you're saying is pre-1971 this we weren't in this inflationary cycle we weren't in this debt cycle so it really is that is a key turning point when ever since then and you can see it on this chart and for those listening in you know if I look at 1971 like we're less than a trillion dollars US is less than a trillion dollars in national debt I can't see the exact number but it looks like less than a trillion and and then you fast forward to today and it's 36 trillion 36 and a2 half trillion uh

in debt that we're at as of March. It's probably even higher than this uh today if you were to >> It's over 37 trillion now. >> Yeah, >> there you go. There you go. Okay. So, we have we have neverending debt which causes inflation which causes devaluation of your dollars. And if you don't understand that simple concept, you're you're you're losing every day basically, right? which is which is why it's so important to to understand this and to be able to to invest wisely so that you don't, you know, get your your money deflated away essentially, right?

So that I'll we'll talk about that when we get to the economic piece because that is ultimately the goal of economics is to try to continue to protect yourself and defend yourself from this continual debasement, this financial repression that everyone's living under. Um, but I think a couple of other things I want to say about this system is that this is not just in the United States. It's it's I think it's almost every sovereign nation in the world has some version of this where they have fiscal policy which is taxation and spending by the government and then monetary policy which is is is controlled by the central bank or controlled by the central bank of of some neighboring economy. Um, but so those two pieces of policy are how the government control the growth of the debt and the expansion of the economy.

And it's kind of like a a gas pedal and a brake pedal. So with monetary policy that's governed by the central bank, the Federal Reserve, they do that by adjusting interest rates and by adjusting the the money supply. So they can do this through open market operations where they just go buy bonds off the open market and directly inject cash as they did a lot during the the great financial crisis. Um or they can adjust the interest rate um to make the cost of getting more debt either greater or lower. So if they raise the interest rates, it makes the cost of borrowing more debt higher and that kind of like percolates throughout the whole system.

And so it's a single dial, single control they have to kind of like dial things up and down. Um fiscal policy on the other side with the government is just about taxation and spending. So um those things are again ways for them to either increase the speed of the growth of the debt of the economy or to bring it in. And they they do this at various times for various reasons. Um but that's really the the the system that they're controlling and those are the levers that they do it with. And that's pretty consistent across most major economies in the world. >> Okay. So, important to understand monetary policy and fiscal policy, not necessarily the inner workings of it. If you're listening to this show and you're thinking, hey, like I I don't understand the exact inner workings of monetary policy versus fiscal policy. That's

okay. You just need to understand that those are as you said gas pedal and brakes that can be used by the central bank or by the government in order to control debt and control inflation. Am I getting that right? >> Correct. And I think that's an important thing to understand is like reducing it to these things is maybe reductionist, but the reality of what's happening behind the scenes, all those machinations is like a a tangled Rube Goldberg machine that I think very few people, if any, people actually fully understand. So you can kind of go crazy trying to like figure out all these machinations of this, but just understanding at a high level what's going on and what these directional changes in policy mean, why they're undertaken, and why people disagree about them, that's what I think is

important to understand here. >> Okay. Okay. anything else to say on monetary uh analysis before we move on to economic analysis? >> Well, I could talk about this a lot. Um, but I think that's kind of the high level that I want to give people the framing and then I'll just end with something that we said um which is that this is one of the few sure things in finance and economics is that the dollar is going to continue to lose value, right? Like the arrow of time is not going to run backwards. water's not going to flow uphill and the dollar is going to continue to debase as the debt continues to expand. So that's the kind of main takeaway. And then as we we touched on briefly going into the economic ramifications of this, everybody corporations individuals

nations has to try to find some way to kind of keep up with this financial repression, this debasement of value. And so how people do that is I think what we'll talk about next in the economic section. Thanks for watching. Make sure you subscribe to the Milgrow Daily YouTube channel. And if you enjoyed this clip, you can watch the full episode here. [Music]