The Sovereign Individual - with Su Zhu and Hasu

Transcript

[Music] welcome to uncommon core where we explore the big ideas in crypto from first principles this show is hosted by suzu the ceo and chief investment officer of three arrows capital and me hasu crypto researcher and writer uh hey sue it's so good to see you again yeah you too i checked our anchor and it's crazy it's been december that we last recorded an episode it was i think it was the eve versus one right that one was memorable i think we did another one which was like market in general right and we talked about markets but yeah yeah maybe that was right about the

same time right yeah yeah yeah we've always been wanting to do one on macro as well that's right yeah that one didn't happen maybe it would happen still in like the next few months i think that would be really interesting yeah not just on the podcast we we haven't really talked um for some time what's what's new in your life what has been what has happened since december i think same old for us um crypto has just been really interesting because you've seen a lot of different um things start to happen i think we're kind of out of the the speculative wave of crypto and we're now really going to the kind of what i said is the sharpest or the steepest part of the s curve so we're seeing a lot of nations start to form their

policies and and see people use it in larger scale and um yeah it's a very fascinating time that we live in now yeah hasn't that been like a request for a discussion or a proposal even for cbdc in the u.s yes that's right and i think every nation is really scrambling to figure out what they think about crypto if they want to do their own cbdc if they want to have travel rules or not how do they tax it how do they do regulation the whole gamut so i saw that the other day you you played a match against one of the protest sisters right was it for derebit i think yeah that was a derivative sponsorship and um yeah so it was a lot of fun i mean i do think there are a lot of overlaps between you know skill games uh online games and and

crypto in general and um you know a lot of the top trading firms used to recruit uh top chess players top poker players and and so it's just cool to kind of go at it from the other side you know me being a chess amateur and then she being a professional um and just talk about things obviously she's also really interested in crypto uh from a from a holding perspective um and so yeah it was a great discussion and we also touched on uh where we saw similarities and um kind of where we both saw value in crypto as an idea as an ecosystem as a group of people did you play andrea or alexandra alexandra oh yeah okay and um how did it how did it go i i think she's like a fair bit higher than you ranked red yeah

she's ranked much higher she went easy on me um and that was uh that was nice because we could talk through the moves and she gave me some advice as well and uh yeah it's um it was a pretty friendly game i hope people learn something from it i definitely learned a lot just playing her in general like i don't know much about chess but so if you're a rank 1600 right and she's 2200 then the can you win ever is it or is it basically are you completely drawing that unlike something like poker yeah it's not quite like poker because in poker on any given hand the the uh likelihood of winning even as the amateur is quite high just because of so much that depends on what the cards are uh whereas in chess there's no luck element in that sense i mean there's still luck

at high levels in the sense of just like mindfulness and how people are thinking at that time but at our levels yeah it's um i mean what people do is they'll they'll prepare strange openings to surprise each other um if it's a fast game then they can try to you know do unsound moves that uh still require the other side to know the precise response those are called gambits or kind of sharp openings uh so yeah it's it's um it's interesting because the internet has made it quite a different game than over the board uh because you have all these really fast games now that people play um it's actually alexandra's mentioning too but there's a whole generation actually that has only grew up playing fast games and so they've never like actually sat on a table and and played

like a long game of chess before uh just because they don't maybe they just there's they don't even own a chessboard for instance if they're in a certain country by fast game do you mean that the thinking time is very low or is it the playing style that's faster yeah so the thinking time is sufficiently low then the strategies just become very different right like you want to like sometimes get your opponent low on time or you sometimes want to do um you know different types of things that you wouldn't do in a in like you know a classical game would be like hours and hours over a board right so you have to do very good moves on every move because you're not going to get away with any tricks whereas same is not true in a fast game so if you had to

play her not in a show match but in like a life or death game what would be your approach to the game uh i mean i would get crushed there's actually no chance uh if it was life or death and her life was on the line there's actually zero percent chance i think oh okay and if you had like a month for preparation and she had to do it immediately would that be different i think a month is interesting a month is possible you'd have to just try to study some of the like lines as far as possible and try to get it i mean i think it's possible to get to a draw if you study really hard some of the very drawish openings um because a lot of the top games end in draws right so that's probably what i would do i'd

probably just study something that's very dry try to get it to that kind of an end game and then try to draw it and then you know maybe there's some chance she messes up and then you can win or just bribe her to accept the draw or just bribe that's right find the right off-chain strategy yeah exactly yeah really cool i mean well as has been has been going on i i used to thinking about crypto a lot or are you do you have any other outside interests at the moment uh i think still mainly crypto i mean i haven't picked up too many new hobbies let's see i mean there's a lot of interesting stuff we're doing on the business development side for three hours um probably be able to announce more soon but uh i think it's a really exciting time around the world

uh a lot of opportunities yeah i mean this probably connects in some way to well let me let me ask a different way i mean is three hours at this point getting too big to like for crypto is that why you're sort of thinking about macro and you know some of these like nation state level things and central bank things and so on no i think um i think you know the last few months we've had more of like a lull in crypto markets where people kind of uh you know we kind of had a lot of growth tech guys get washed out as sort of zero revenue zero cash flow the tech stocks did very poorly and then people who held those some some of them also held crypto and so they kind of got taken down together in a beating

and so there was less opportunity for sort of crypto specific stuff to stand out just because it was kind of a washout but i do think now yeah we're very back we're very much back in the idiosyncratic crypto world again in terms of things happening there's a lot of just different questions during the last three months though from investors on you know are we entering an age of uh stagflation are we entering an age of you know spiraling inflation uh or or are we in fact just getting the final road bump be for more secular deflation in a sort of kathy woods sense and and so the jury is still out on a lot of these issues these kind of big questions and you know we can talk about those today or or some other

time but i think that now it's it is becoming clear i mean just with the way that equities have bounced off the lows that even if you raise rates you still don't have the ability of cash to outperform inflation it's just not possible and a lot of that has to do with the way our economy is structured as well and just the opportunity sets that are available so that being the case you've also seen bonds sell off quite a bit right you you've seen longer duration rates go up and this was thought in the past to be very bearish for tech stocks but we haven't really seen that play out and it was always hypothesized in that way because you know tech being long duration it's stories about the future right and it's ideas of what the future is worth so if

you discount it back then obviously the future is worth less if cash flows are worth more in the near term but that hasn't really been what actually happens because the reality is that there's sort of no alternative right because bonds are locking in just huge losses and and fiat is locking in losses as well people are sort of sticking to their guns and saying i have to own growth i i have to own the future i don't have a choice to go and own you know first of all like i can't own commodities because if we get demand destruction which we're getting then once that comes in then the commodities will fall also and so i can't sit in commodities for three years or five years and i can't sit in fiat for very long at all and i definitely can't sit

in bonds so there's kind of uh we're getting to the there is no alternative kind of thesis coming out for sort of tech equities uh and also for crypto as well um and that's what i think we've been seeing the past few weeks which is just that realization that when people go into cash it really is a cash bubble right because when people go into fiat they're trying to uh time the market and then they need a greater full almost right to be able to sell their assets for fiat so that they can get back in cheaper and so that's kind of the collectively people started to realize that they were just playing this kind of game of uh the greater fool and once the final greater fool didn't want to sell their growth anymore then you had a huge bounce in

and so i think the i think my personal view is regardless of whether we go into recession regardless of whether we go into stagflation or secular deflation i don't think the world can turn away from the disruption that is occurring in many industries technology wise and i don't think it's an environment where people have the luxury of saying i don't want to own tech i will own something else that looks safer because we have seen a breakdown of what is safe bonds were supposed to be safe in this environment but because we went so far into the low negative rate environment bonds were not able to go up anymore as stocks fell right so you had bonds even following more than stocks i think bonds are now down 30-year bonds are down more in dollars and if you own stocks if you own nasdaq and so

also you haven't really seen much else be great at storing value in terms of the things that are supposed to be safe they're also very volatile right like you can own oil stocks but you're making very specific bets now about supply chains you're making very specific bets about how things will develop and and the volatility there is even higher than in crypto so it's also not quite something that you can hold for many years and feel good about it i think longer term what we're gonna see is people just allocate a fixed percentage to uh crypto and this percentage will get higher and higher as they start to understand it more and these kind of investors have been waiting for this move to get in and that's exactly why we're seeing you know the market be so firm now i i want to zoom into the role of bonds here so

bonds used to be i think there have been very few times historically speaking where stocks and bonds have gone down at the same time right happen to owe it briefly as well but um yeah it's usually not the case and the whole 6040 portfolio which a lot of bitcoiners talk about being very strange it's really starting to play out now because the only natural buyer of bonds is really the pensions and the pensions are buying them because they need to deploy somewhere and this has like a fixed annuity like properties that pension holders benefit from right because they have a fixed amount of capital and then they get a income per month that pays for their expenses so that's kind of the natural buyer of annuities but aside from them you don't have any other national buyers aside

from them in the central bank right so the central bank has ended up being the biggest buyer of bonds in many different nations now in europe in japan and in the u.s and that is actually extremely scary long term because what it means is that the government is basically lending to itself right it's printing money to then lend to itself and this really only works if we are in secular deflation long term and what secular deflation means is that despite printing money we will not have inflation and the reasons why we won't have inflation are that technology is advancing quickly enough and demographics are slowing quickly enough that you will never have that kind of demand for more goods pushing up the price of goods and most importantly you won't

have wage inflation because without wage inflation it's very hard to get true price inflation right people have to be making more money there has to be kind of a pushing up of the base wages and technology of course is incredibly wage disinflationary these days right we've gone from call centers in kansas to india to manila and now just ai chat bots right so so if you if you go to things that used to be maybe a human on the side now they just give you a chat bot and they say go for it well this is all you deserve right and maybe one in 100 problems can't be solved by the chat bot but most actually can yeah and that's why people always say in the markets right that if you get an inflationary spike that's actually very disinflationary because it also makes

people think about prices and it makes people scared to spend and that cuts back demand and growth but it also gives businesses social uh the overton window to do more things that would have been socially unacceptable yes right so some of these things some of these things may be like for instance just having fewer waiters and using tablets so i'm seeing this here everywhere like people just order by tablets now and now we wonder why do we ever have a waiter to order food it just seems weird now and if you go to japan for instance if you go to a ramen shop there's just one guy cooking the ramen and he also gives you the menu and he also takes your money and then it's done yeah there's like one dude in the whole shop for let's say 24 people and he's making all the food for everybody and

then he goes home and then he will usually have a ship with like another guy so there's two dudes that run the whole restaurant 24 7. yeah that's it so so like people if pushed can can add a lot of efficiencies to their business very quickly yes and this actually in my opinion will only accelerate as older people start retiring from the workforce like one of the interesting questions that you know economists have asked is like as the boomers retire is it wage inflationary because uh wages will go up for those same jobs as those people don't exist so the skills you know the people who are remaining will be able to demand higher wages yeah and i actually i've gone back and forth about this in my own life for quite some time but now i'm quite firmly in the camp that absolutely not wages will go up uh in

fact it will be the opposite because it opens up the overton window for technology finally because up to now it's incredibly socially unpopular to bring out technologies that smack the 55 year old out of his job or the 60 year old out of his job so but once they retire are you going to train new people to do those jobs for another 30 years you may not right so real estate broker is an interesting one because most real estate brokers now are quite old in certain countries there are obviously younger ones but it's quite top-heavy on older ones um and so as they retire can the younger realtors demand higher fees on selling houses probably not right probably the whole industry will just make do with fewer realtors or make do with fewer um or or use better technology and i think we see this in

every field so the other interesting point on sort of deflation is that in the west a lot of demand is psychological as well and sort of the leftists have been talking about this for a long time but you know the idea of behavioral change in the west and and you know what do people actually spend money on and what do they do but i do think they have some points which is that if you think about the average person waking up in the u.s right if he if he doesn't want to spend any money he can just sit in his house and watch tv and play video games it's incredibly deflationary he can get food delivered to him he doesn't have to use any gas himself he can walk around the street he can meet his friends you know he can take a bike ride and meet his friends so

if people wanted to they could live incredibly deflationary lives and that's what we see in japan right we see in the urban environment people can live incredibly cheaply they can even eat relatively healthy food in japan unlike in the u.s incredibly cheaply in the u.s if you you do have a problem where you end up eating fast food if you're poor and things like that but in in many countries in asia you you can actually be completely fine spending an insanely low amount of money per year so demographics pushing in that direction as well and behavioral uh changes pushing that direction are also very deflationary uh you know like most of the spending is for say flexing or for showing off that can all go down quite a bit if you enter a

negative growth environment or if you enter a different kind of economic environment so i generally think inflation tops this year probably q2 and then we actually will start seeing a lot of signs of growth slowing down and and deflation also so i think that's also what the central banks in the west need right because if this is not true if we cannot create this deflation then there's actually no way for them to really get out of the situation that they're in you may end up in a situation where they start redefining the cpi basket to try to get people to you know buy different things or to do so on and so forth but at the end of the day there's really no way they can get out of this issue of very large balance sheet debt on central banks and the only buyer of this debt which is negative

yielding being printing of their own money what do you think the decision makers want is it deflation or inflation the decision makers want deflation now but they want to do it by creating fear for consumers so that they don't spend as much they want to sort of crush demand essentially what they don't want is for people to stretch themselves out and start buying used cars at 80 higher than last year or start buying new houses they can't afford and then mortgage rates go up so they want to scare everybody they want to say okay you better be spending within your limits you better be uh sort of safe but they don't i don't believe for a second that they think that we will have inflation in like three years

i don't think they believe that so i think they know that it's transitory in a lot of ways but they don't know how long it is and they kind of oversold the transitory inflation stuff for too long right because of energy they didn't have energy security they don't have food security at all because they oversold that and now they need to uh dampen that in that's kind of why they're going for the shock and awe effect on job owning inflation to the point that they start that we start seeing these inflation prints come off there was a yeah a lot on secular deflation do you have any views on what speaks for stagflation as a possible outcome so first of all maybe how would you define it and then where do you see the odds of that yeah so stagflation is kind of the idea that the

economy slows down you go into recession uh growth is low but at the same time you get inflation meaning you get wages higher and prices higher and so the main people who believe this are kind of pointing to the 1970s and saying look we had a similar type of environment in the sense of um you know oil spike which causes inflation and commodity spike and then you probably enter a recession but i think there are some key differences i think demographics are the biggest key difference you don't have more people entering the workforce yeah right now in fact you have people coming out of the workforce so in the 70s you had huge amounts of people entering the workforce right you had women entering the workforce you had just a very different demographic set and so now i don't i don't know if we will be able to call

top on commodities in general but i do know that for quite a few of these commodities they can be substituted by people just deciding they can't afford them so the analogy i give is like if you make 30 000 a year and you normally spend let's say 25 000 a year on a certain basket of goods if that now costs you 50k a year you don't spend 50k because you don't have 50k a year yes right you may not you may not even spend 25k a year where you currently spend on you may somehow even spend less because you're just so shocked by the prices higher yeah and and so like people always say like when everyone's talking about oil prices being so high that's usually very close to a top in oil prices because everyone's just seeing it and being like you know what

instead of driving to the movie theater i'm going to stay in and watch netflix yeah these are kind of things that you're already seeing now in the logistics markets in the shipping markets right where shipping has come off uh logistics have come off and you know it's not in the mainstream narrative of sort of you know spiraling inflation because people the other thing about inflation is that the media likes to talk about inflation a lot because it gets clicks and it's kind of uh now very obvious that we have inflation and it gets people riled up but secular deflation is much harder for people to understand and also it's nonetheless been the reality of japan for many many years now for about 30 years so if we get into japanification as you know there are a lot of signs that the west will then this is actually still the main

game and in fact will be even more so by this kind of shock but i do think stagflation you know if it were to happen it would be very dangerous because there's a lot of people with mortgages there's a lot of people with uh you know if you get job to destruction plus you get rates going up quite a bit you're gonna have just a proper bankruptcy cycle and you get a lot of pain basically so i think kind of the fed blinks both ways it blinks on the high cpi prints but then it's also confident enough that they can manage it that they won't let it sort of they won't basically margin call the man in the street to make him sell his house yeah so in summary stagflation you think any kind of inflationary scenario is very unlikely

because we have huge secular trends towards deflation for one technology the other demographic change yeah you think more secular deflation is more likely but at the same time very dangerous because if nominal debts stay the same but your income goes down that's very bad for borrowers yeah does this necessarily end in a recession or can this you know stretch out for a decade so what do you where do we generally put the odds of recession i mean it's very difficult to say i generally don't think it'll enter a recession unless the fed forces it into a recession and i don't think that that's their goal either but with that said i think zooming out right uh you're actually getting massive easing in china

and japan at the same time that the us is trying to say that they will crack down very hard on inflation and i think there is because china more so than anyone knows that they have a massive secular deflation problem coming because the birth rate the public birth rate is like 1.1 but it's likely under one you have this kind of problem where you have all this housing that they have the highest housing price to income ratio in the world in many cities and so you have six people basically saving up for one house right you have four parents plus the two the man and the woman yeah saving to buy a place uh and these asset prices are not able to be supported because there's just not enough new people being born and not enough immigration to to buy these homes and they also have all been told that

these always go up so they need to print a lot of money to support asset markets and they need to print a lot of money to basically prop things up and they're they're also quite sure they can print this money and not even have much inflation in the long run because of secular deflation and and so i think the only question there is um can they handle the food price increases in the meantime because there's been a lot of food inflation as well and that's from the fact that so much of our current food systems come from fertilizer right and russia a few other places control basically all the fertilizer supply in the world the ammonium nitrate and so you have prices of almost everything in agriculture at all-time highs

again that can turn very quickly if you get a resolution to the war right if you get some kind of a ceasefire so borrowing world war three those kind of things are also transitory we kind of have what's very common in markets which is that you have in the near term sort of the extreme fear of the war and the extreme the extreme conditions uncertainty on the other hand longer term you see a whole different set of problems that are in a way opposite to those problems that's where sort of the real push and pull are where does primarily your interest in this come from is it sort of that crypto has just been at the as you said for like the last three to six months or is it that you're starting to look at you know the bigger

game sort of the macro game or do you think that this macro development is relevant for all crypto investors and it's like earlier you basically compared crypto to tech stocks as well right so yeah do you think that crypto is just basically the outcome we have in crypto is fully dependent on what happens in macro well yeah i think we're entering a phase now for crypto where it's in the big leagues so it's um people are wondering you know when i own this what what sorts of things do i believe about the world what what kind of world am i investing into and what what kinds of things uh will hurt my portfolio what kind of things will help right yeah and i personally think actually you know regardless of my previous comments by cycling deflation i actually think it doesn't even matter

that much for crypto itself because it's still very early that those forces are not strong enough to matter for the total market cap of crypto assets so it's almost like the macro stuff is to understand the way that other traditional finance people view it and it's sort of our original background in three hours as well which was mainly emerging market foreign exchange just basically to get in the mindset of a tourist in this market how they think about whether or not they should own bitcoin or they own ether and what are they hedging right but aside from that i think the real interesting stuff aside from macro the past few weeks has been the political implications of ukraine russia and there i think what we've seen

right is where before people could criticize crypto as either frivolous and speculative or subversive and dangerous now absolutely no one says it's frivolous and speculative they can only argue over how subversive it is or is it creating net good or net bad in the world yeah and to that i have two different arguments sort of two very different philosophies i would say one we can say it's doing net good in the world because you know you ukrainians are using it to be able to uh get money in and out they're able to receive donations and have that translate into supplies and also russians are able to leave with some of their wealth intact so net it's good in that sense right but but of course some people might debate

you on that and they might say well russians are also you know maybe they're avoiding sanctions or this and that right and we'll come back to that uh the second argument i would add to that though is that we are in a time now where in an unprecedented way the way a normal person views things occurring in the world is in terms of whether it should happen or not and this kind of is odd problem you can really see in all discourse right so there are things happening which are clearly not necessarily in the realm of us thinking should he have done it or should he not have done it yet people will spend a long time debating this all right so we talk about should putin have invaded should he have not invaded should he have just stated dumbo should

he have just gone to kiev or not but these are all questions that are almost irrelevant right the the more interesting questions is like what happens next or or what will be the uh reaction and i think from that point of view crypto the cats out of the bag and you're seeing sort of both ukraine and russia do a lot more on crypto now right you're seeing russia do a lot more with talking about mining talking about using bitcoin for oil and gas talking about issuing digital assets on the ukraine side you have them minting nfts you have them doing a whole host of things and on top of that you're seeing really interesting developments in the middle east around crypto because they're also saying we want to support a alternative parallel system of finance and

it turns out that the west also supports the system but that's even better because it's just a credible neutral system and we love the idea of a credible neutral system because we believe in the multi-polar world order right and we don't think that uh you know the us for instance should be able to sanction an individual uh but moreover we want to contribute to a world where it's more likely that they cannot sanction a world order so we're kind of seeing geopolitical moves happening that are well outside the world of saying what should happen and instead saying what must we do next as a response to these things that are occurring yeah totally i mean this is something that you learn in trading and in poker and then any form of professional gaming to be in the present right and yes and

don't waste your time thinking about the past unless it can give you an indication for what's gonna happen in the future i like what you said about the multipolar world order and and also about um the conflict in russia and ukraine and it's my impression i mean one thing has given me a bit of pause which is i talk to a lot of people and and sort of everybody is on the same page that really it's a good thing that the west has been able to freeze you know so many russian assets and um you know the assets of the russian central bank and um and of russian oligarchs and so on and is able to enforce so many sanctions and i feel like this this could be used increasingly as an argument against

crypto and i'm not sure how i would respond to that yeah what do you think this is actually one of my sort of more controversial points and it's something that i think i'm able to say because of where i am and the sort of seat that i'm in i mean it's very difficult for let's say a protocol founder or a you know a silicon valley based fund to make similar arguments that i would make you know for me sitting in singapore as a singaporean but i do think that there's two different questions here right one is first of all what are sanctions do they work who needs to follow them who doesn't need to follow them right and these are quite basic questions about sanctions and just to give a thought experiment

the reason why we sanction the people is because we can't actually arrest them right because they haven't committed any crimes so when we talk about sanctioning russian oligarchs in london the reason why they're not in jail is because there exists no laws to put them in jail so we actually have to that's because they are not in london they are outside the reach of the they're sort of their jurisdiction well they're sort of two because they are breaking international law right yes well there's sort of two ways to think about it right like one is that they are breaking some laws but in many cases the imposition of sanctions against individuals that haven't contacted putin for let's say 15 years or 10 years that is not as clear right and that's why you've seen only a few of the oligarchs actually end up getting

their assets frozen right and in the u.s in fact very few of the oligarchs actually managed to get their assets frozen because their lawyers successfully argued that in fact these sanctions against their assets make no sense and so even now we still have some rule of law in the west which is to say okay you still have to prove that something requires a sanctioning of financial assets because this is something that is relatively extrajudicial right yes it's a it's a suspension of it's a suspension of rule of law in pursuit of a higher purpose so then the question is what kinds of things can we draw a clear line on and what things can't we draw a clear line on right so for instance we can't kill the children of people that are sort of even if they're war

criminals we cannot kill their children if they're in you know let's say they're on the beach in paris or not paris but on the beach in south of france we cannot kill their children just because of who their father is right that would be seen as like in modern day kind of we would draw a line there yes but you know in the old days maybe you would not draw a line there maybe you would say well that's a great move that's an excellent move so these kind of things are depending on norms and these norms are are dictated by a lot of different things but i think coming back to where i see it tie in with crypto is that crypto absolutely can be used for sanctions just like cash can just like you know uh to pervading sanctions just like the internet can

just like anything can and i always say that if something is useful for people then it must necessarily be useful for criminals because criminals are people there's no instance yet of a technology which is only useful for people who are not criminals it doesn't exist right criminals you use the same phones use the same you know technologies use the same internet that that we all use and so crypto being in the nascent phase now where the regulatory rules haven't been written yet in many countries it's a precarious subject to broach because they're in fact writing what those rules will be now and they want to decide how draconians we want them do we want them to be extremely draconian because we value the ability to sanction people as

much as possible on the other hand do we say you know versus cash is used much more by criminals and therefore we should treat crypto as we treat other things on the internet or cash in general and just allow that space these are kind of very difficult questions and i think that um each society will answer those questions very differently also based on their priorities right so for instance there's where some talks about how you know india didn't follow the sanctions and is in fact planning to do a lot of these oil deals with russia right but interestingly like some of the indian families that i speak with they're incredibly skeptical of the u.s sanctions and they're incredibly against them as well they would say for instance that sanctions have never worked

basically it didn't work in iran didn't work in venezuela it didn't work in north korea basically they would say there's not an instance of it having worked and for them if they were to follow the sanctions their people would die because they need russian fertilizer for their people to eat yeah and so india would say to the u.s well the west is still buying russian oil after all this talk about secondary sanctions they themselves have not actually followed their current sanctions and so this multipolar world is something that is very scared of the west because they don't know what comes after this is it world war iii is it sort of breakdown of international world order but i do think that there are real questions that people outside of the us they do ask about sanctions which is to say how far does it go uh how do we decide on these

sanctions and how do we weigh the impact of sanctions not just on individuals in the countries even but on the idea of shutting off a country is trade which may kill people which may cause a revolution somewhere else right like with wheat prices this high syria link has gone into default gone into bankruptcy many countries like egypt can end up in very unstable situation as a result of this kind of stuff so you know what are the obligations of third world countries and poorer countries to follow the sanctions of the that job biden talks about and this is something that um interestingly when you see with the uae and with some others in the middle east they would say i don't want to be part of these sanctions and i also know interestingly that you will not dare secondary sanction me because i see you

going to iran for oil i see you going to venezuela for oil say i already know your hand is not very strong basically yes right i already kind of know that uh if you if you're going with the guy you just put in the axis of evil a few years ago then me i'm i'm at least your ally you can't play that card with me this is kind of the big widening of the overton window that we're seeing now which is that people are just ignoring what they say and i do think kind of what's likely to happen is that you kind of see a like a short-term victory for the west where probably ukraine will get the better end of a deal with russia but then longer term you will see countries really aggressively move away from overdependence on the existing financial systems and so

part of that is embracing technologies that are credibly neutral part of that is working on creating alternate systems uh to the ones that exist but this whole process will take years and years and i think that the role that crypto plays in this is uh many fold on the one hand you will have the continued adoption of crypto by the west as an expression of liberal values and as an expression of uh freedom of speech and also freedom of um freedom of money on the other hand you will see adoption of it by governments and by you know sophisticated players outside of the west as to say this is a credible neutral money this is a credible neutral platform that i can use

to do trade so i think crypto becomes all the things essentially i've been reading this book i've been rereading it rather i've read it in the past called sovereign individual and what it calls the mega political force is a really good lens to view crypto in crypto and more broadly peer-to-peer encryption is a mega political force meaning that we cannot we cannot reason about it in terms of uh should we ban it or not because it is not bannable in the sense that the printing press is not bannable uh also in the sense that the iron horseshoe is not bannable so in the book they make the point that we roughly have followed 500 year epox and

in each transition from epox has been marked by technology changes uh so he gives example of you know coming out of the dark ages into feudalism we had cold spell which was then followed by the invention of iron horseshoes and that enabled some farmers to put these iron horse trees on their horses and be able to lord over other people because they were able to also then make uh metal weapons and metal armor so they were able to have dominion over their neighbors and then eventually centralized farming yeah and eventually do that by the catholic church as well and then he points out that you know in the year about 1 500 you you had the printing press and you also had the boats and age of exploration and this in turn changed the locus of power drastically from the feudal system

to a merchant system and an immersion system and that's why you know he pointed out that the aristocracy of that time they would have not believed that this was possible that this transition but it happened because of the mega political force of the technology yeah which was changing the very nature of capital as well because at that time land was very valuable but land started to fall a lot relative to financial capital as people realized through pamphlets which could be printed by printing press that actually there was so much happening in the rest of the world that suddenly the land you have right around you maybe isn't worth so much relative to what is possible outside the world and then you have people investing in the dutch east india company had people investing in some of these tremendous exploratory missions that ended up you know creating

vast amounts of wealth right but interestingly you know at that time the catholic church was fighting against it arm and fists right because they were saying usury is uh is against god but really why they added those things because they didn't want people to invest they wanted people to give all their money to the church yeah right and they also banned the printing press initially everywhere except a few parts where they were not able to penetrate those areas and in those areas you had people you know slowly proliferating this idea that you don't need to give your money to the church you can still practice religion and so they attacked at the power of the church by having the bible printed in common language meaning the language that the locals could read instead of in

latin and they also explained the bible itself instead of did it via the catholic way which is through the cathedrals and through the and through the paintings and these kind of things which are very abstract and so through that process you you had really a mega political revolution in people's minds about where the locust of power was where a capital should be allocated and i think what we're seeing now is this but with peer-to-peer encryption on the internet right yeah because in the 90s you had essentially the invention of peer-to-peer encryption by cryptographers and the military in the u.s said this is military-grade encryption technology this is weapons-grade technology we should ban it right you know the professor said well sir

this is just code these are just words yeah so and in the end of course information went out and it's just words uh and just numbers it's funny to think about the printing press as a disintermediating technology incredibly so right incredibly so who do you think is the present day equivalent of the church that gets disintermediated is there any equivalent i think the nation-state apparatus today a lot of people don't think about all the things we currently rely on it for but this was not the case even a couple generations or three generations ago there's kind of been a breakdown of the family and then an idea that instead you rely on your state for this and this i think will get dialed back

in a major way especially in the countries which have a very large social welfare state especially an unfunded social welfare state because ultimately it will be financially unsustainable one of the predictions that sovereign individual makes is that as we enter the information society the work that people do will be predominantly on the internet yeah and digital and as this happens the place that they live the territorial claim to revenue will get weaker and weaker yeah their monopoly on violence will get weaker and weaker and not in the sense that they don't have the monopoly in violence but that what they can extract from that monopoly and violence goes becomes less and less and interestingly what you're seeing now is that the same rails that companies used to use

uh during globalization to do regulatory arbitrage and lower their own tax rates individuals are now using in mass right in europe great example where people are all going to lisbon to get zero percent tax and europe can't even say anything about it because they have free movement of people that they you know added in for their own sake at that time and and so that's exactly what sovereign individual predicted which is that the place that you are born in or the place that you grew up in is going to have very little claim over your productivity as we enter digital world and that of course breaks down the the kind of ability of the nation state to command a lot of things from you and this will be very disruptive to places that are used to a very large government doing many different things

and will be good for ones that have a different government model that don't rely on this as much it would be so interesting to see an unbundling of the nation state right i think the nation state is maybe the greatest one of the greatest innovations in human history i think it has unlocked so much welfare and so much productivity gain and security and physical safety for people and just so many benefits but at this point i would also say i think it would be great to have more competition and more experimentation right i think so i can for example you know after creating ethereum vitalik went very deep into the governance rabbit hole and started to become really interested in you know funding of public goods and how humans organize and and you know the

these ideas of novel forms of organizing human society and and so on and charter cities and you know i can definitely understand why i think with a few years delay i can definitely see how this is going to be such an interesting field in the next coming years yeah for sure we are not that far from a world where people will start moving to places with with people that they've already met online to set up communities and this i think is not as futuristic as it even sounds because if you think about the pilgrims going to the east coast going to plymouth rock that really was the same thing right these are people that kind of organized through their religious views and then left religious

persecution to a land that they've never seen before together in a boat yeah the mayflower right so so that kind of move and we've seen tons of this stuff throughout history whether it's refugees whether it's you know islanders the the sort of desire to form a clan or form a group and then go somewhere else yeah and take the risk of the unknown versus the possibility of something bigger this is native to our species really so i think uh now what's interesting is that we're seeing these uh creations of groups be done entirely digitally yes exactly and and the generational gap here has never been bigger because for the older generation who didn't grow up on the internet this they're shocked by the

idea that you can form bonds this strong on the internet they're just completely shocked by it i was just at an inner with some very old people who were to say you know what the internet i think net was a bad thing that that's what the guy said and and i and i just yeah i had a similar reaction to you and i was like i'm just not privileged enough to say something like this because like it's the height of arrogance to even think the internet cares if you think is good or bad right but that's kind of the gap because they for them they can just turn off the internet they can just say you know what you know and he showed me that he has a nokia phone or like a phone from all these years ago and things like that and he doesn't use a smartphone but at the

end of the day what are young people actually doing they're actually forming all a lot of their most important moments online uh whether it's socializing with people you know in their neighborhoods but also making friends overseas and making friends through common interests this i think this kind of pluralism is something that will take real shape over the next few years and the ways that it does so is going to be really hard to predict and it's going to blow people's minds in my opinion because i think in many ways those bonds are stronger than the bonds that can be made physically because they're done so through choice yeah right they're done so through going into these places doing actions together taking these journeys together yeah i don't know i'm

sure you have heard of the idea of the cloud city right which is kind of the the same thing like where people used to venture out into the unknown with the idea to you know settle down somewhere form a new country or form a new city and it's it would would be built on the ideals of you know search for prosperity and freedom from from oppression and and so on right and exploration yes but today sort of the problem is that there is nothing to settle down on right you know every every point on on the earth is kind of taken already right so instead people form these what was basically a cloud city right um yeah and i think what's missing really to bring this into the real world would be just one country you

know going ahead and saying we divide our land into like we have all of this free land like let's just divide this into like a thousand passes and anyone can make a charter city here and you know this is the ten percent of laws that you have to submit to but you know the other ninety percent is kind of in your hand just you know go and experiment away i think this would be just so insanely cool if if that was possible yeah and i think we absolutely will see it actually for the same demographic reasons that i mentioned before just because you know in japan the average age of a farmer is 67 years old now and a lot of these houses uh you can buy for free if you're willing to go there and live there because they just need human beings to live in these dwellings yeah

and the same thing is happening all across europe now right in italy and some of these places where there's just no people because of the brain drain that we discussed the young people who are productive they go somewhere zero attacks where all their friends are going like a lisbon and then what's left is like 25 youth unemployment a bunch of old people and that's it right and that that kind of environment is very uh they need that vitality whatever it is whoever it is at some point so it'll happen through that in a big way i also think there will be cities and places that sort of don't rely on the old models as much and therefore can kind of be almost like proto-modern in ways that the things that they used to do might have seemed

regressive but now they seem modern a good example of this is like like if you look at catholicism or if you look at islam right like a lot of secular kind of secular western or confucian thinkers think of this as like regressive views right but interestingly you know people live a different style of life they don't believe in the possibility of work in many cases in the sense that that the point of life or what conscious the good life is working really hard and then having that work transfer into a kind of material success whereas they much more would say the goal of life is to have a family and raise your kids and that's kind of the way that they're brought up in a way this can become a very futuristic viewpoint right in a post-work society if we really get cyclic deflation and there's robots then

the idea of training your kid you know really hard in memorizing a bunch of stuff is actually kind of stale right it's actually kind of an old-school mentality that's not going to get you anywhere right whereas maybe the approach of just like having good interpersonal skills having good uh you know a love of life being able to just enjoy life without uh needing to like let's say strive for something that is some part of a rat race that actually something that you know china wishes they could teach its people to do right like they're seeing a lot of signs that kind of gets this fully so they're trying to start you know stopping a lot of educational like testing uh trying to support as much sort of relaxation as possible because they also get that you don't want to set up hundreds of

millions of people to compete for something where there's no reward at the end of it you know we've had globalization first attack at a lot of blue collar jobs the next wave will be attacking at white collar jobs right so accounting we kind of already know is like dead but then you know banking lawyer even doctor a lot of this stuff can be telemedicine a lot of the stuff can be outsourced and so the kinds of jobs that exist in 30 years will be very different from the kind of jobs that exist today and so i also think that you know the societies that are very much not prepared for this are going to find it really hard because they will have set up a huge generation for failure essentially on that point as well with crypto i think there are places that understand this

and so they don't for instance um a place like dubai is quite interesting right because their model of how they capture value from their expats or the people that go there and move there is they sell them land it's like a metaverse model almost it's like i don't tax you anything by not taxing anything i don't have to track anything either i don't have to figure out if you're buying this or buying that i don't have to figure out if you're doing this or doing that i simply let you live here uh you do whatever you want zero percent tax on everything but i want you to buy something here so i want you to buy land it's a token gated community it's a token gated community exactly and that and that model works well for them because they have a lot of land that's

not lived on yeah and if there's more demand they'll just build on more land and so this is a flywheel that is actually it's quite compelling because they're able to offer let's say what i would call like the freedoms of a liberal monarchy right because in a liberal monarchy which sounds like an oxymoron because we're think well you think you have a monarchy as like a liberal but in a liberal monarchy the monarch doesn't have to care as much about what you're doing on all these different things because it already knows it has absolute dominion and also because it has created a business model which needs to attract talent and capital right for instance you can leave a liberal monarchy if you don't like it there anymore so if you know monaco became a very bad liberal monarchy people would leave monaco right yeah or

they would leave wherever it is and so i do think we may end up seeing more and more interest in these kinds of models because of course the promise of liberal democracy is that everyone gets a voice but what often ends up happening is that uh you get sort of the tyranny of the majority over the minority so you get the tyranny of the poor over the rich you get the tyranny of the major ethnic group over the minor ethnic group and get all these kinds of things yeah that's why i mean checks and balances and minority protection are the two other pillars of any liberal democracy yes yes but the question is can these systems ultimately sustain themselves if people are really are able to leave because people can leave liberal monarchies and they can also leave liberal democracies so will liberal

democracies give people enough reason to stay and what will those be we have seen sort of the nordic models where that has generally worked but it was also with a generation where a lot of people did leave but with those who stayed you know they were interestingly is quite ethnically homogeneous right and they have a strong sense of culture and so they're willing to kind of fight through it together in that kind of a sense right but but not every country is like that right not every country has that kind of ability to command that it's like the the same thing we are sort of speed running right now in crypto with uh taos versus you know more streamlined forms of governance for projects where i think the main reason why

liberal democracy has been so effective is because the exit cost on the system is so high and so the cost of failure is so large as well so if you get someone bad in charge then people cannot leave and it's basically a horrible outcome for everyone so you need a system that is very you know failure proof but i think when the incentives are set up different and the mobility of people between different systems and firms and capital and everything is much higher then you do have more competition and you get more checks and balances that way right so you can have more smaller systems that each keep each other in check because if they don't perform well then people will just leave yes i think so too and and so i think just as we've seen a lot of dow deaths

we will also start to see a lot of liberal democracy deaths uh so in the book the kind of the first one that he gave us a kind of like a precursor example was in peru right where uh fujimori he at some point declared the end of the parliament and i was incredibly popular as over 70 people wanted it into the parliament why because they thought the parliament was incredibly corrupt and they thought that it was not serving the issues the needs of the people and so there was a case of you know a society transitioning from democracy back to monarchy or back to authoritarian and so i i do think that um i don't know if francis fukuyama's end of history where the end of history is liberal democracy is actually

historically likely i have my personal news on what systems are the best but i don't think they're relevant my personal views on which are the best i do think that uh ethno states will be on the rise because ethnostates are one of the only ways that people are willing to sacrifice for the rest of their nation you can't get someone to sacrifice for the idea of a continent it's difficult because it's a made-up concept right it's a concept that's not old enough for people to die for and moreover many cases they're not even willing to die for the country that they're in they may be only willing to die for their tribe right you know and a really great example that i was bringing up is a catalonia right so catalina in 1997

in the referendum 92 voted for autonomy and they were promised autonomy as well by ferdinand franco when in 1973 yet catalonia has no autonomy today right and you know there were some points where the european union wanted to say well spain is a flawed democracy because they didn't give but then of course they they didn't do so because it would have been very politically inconvenient to call spain a flawed democracy right and so you have these you have these interesting questions of like you know where do people's loyalties ultimately lie where do people's you know what kinds of things do people believe about the world and given you know globalization has now created the rails for free movement of people and free movement of labor free movement

of capital uh how will the modern generations use this freedom to shape their own lives and that question is a very open one because it's now not just information workers not just software developers who are doing this it's anyone working on the internet right so it's marketers it's content creators it's literally mass adoption of this idea the book talks about how in the 1990s even 50 of people polled in europe said i will not make my career in the place i was born and that was in the 90s right and of course now if that same poll were to be made there's you know in some countries that kind of idea is even higher yeah and so this kind of thing is very good for crypto

because it already abstracts away the idea that you must save in your own country's fiat right yes it abstracts us away and you're saving with whom instead you're you're saving with groups of global like-minded people who share a common purpose so in the case of bitcoin that's you know the common ideas of the 21 million supply of a currency whose creator is pseudonymous the idea of something that is uh as changing as little as possible right and then with ethereum you you have the ideas there of global settlement layer that's powering very important economies digital economy so suddenly once you abstract away the dependence on

the state for the things you need because you're not getting them anyways you also abstract away the need to save in the fiat of your country especially if it's inflating your way against real purchasable basket of goods anyways so this kind of twin this kind of twin occurrence is why we've seen incredible adoption by digital nomads by millennials in the tech space because they say well i would rather save with these people these people are my nation right and they like the fact that you know old people still not really buying crypto yet they like the fact that despite you know here institutional adoption there you know most institutions are generally quite scared to buy coins you know they get scared and get scared out that's actually very in a way like that's the most bullish part for me like i would

actually not like it as much if you had something where you know huge institutions were buying it and then like staking it you know it would it would seem weird almost right yeah it would seem like an anachronism so it's actually you know in a way i think that the shakeout's been incredibly healthy for the markets because it's shaking out institutions yeah uh and it's also but it hasn't shaken out individuals right uh if you look across exchanges you know some of the proprietary data that we see yeah individuals have been buying the entire dip that there's been very little individual selling uh it's actually been mainly sort of the web 2 funds that i've been selling and you know these kinds of players that kind of just like had to cut risk and and so on and so forth so longer term i don't think institutional adoption

even matters for crypto for me the interesting end game is all about what are people doing on this earth to secure their wealth what are people doing to transact with each other and what are governments doing in reaction to the fact that people are already doing this not their opinion on whether people should do this but their reaction to people matter of factly doing it back to first principles yes that's a very good ending and very fitting for our comeback episode cool thanks for the great discussion sue and see you hopefully sooner than in three months this time yeah sounds good take care take care [Music] you