The Blockchain Debate Podcast

Motion: Corporate bailouts and capital market rescues make sense (Qiao Wang vs. Jimmy Song)

May 05, 2020 Richard Yan, Qiao Wang, Jimmy Song Episode 10
The Blockchain Debate Podcast
Motion: Corporate bailouts and capital market rescues make sense (Qiao Wang vs. Jimmy Song)
Show Notes Transcript

Guests:

Qiao Wang (@qwqiao)
Jimmy Song (@jimmysong)

Host:

Richard Yan (@gentso09)

We all know the dominant crypto-native perspective on corporate/Wall Street bailouts — as generally anti-intervention, both fiscally and monetarily. But it’s important to hear the other side, if only to kick the tires of your own beliefs. After all, many smart people embrace a statist, big government view, in how to run an economy.

In this debate, we covered many topics, including the following:

  • A way to think about corporate bailouts as claims on a social insurance policy, with an analogy in social security and Medicare
  • How the monetary policies are worsening the wealth gap by giving a disproportionate advantage to the rich not enjoyed by the poor 
  • Whether FDR’s intervention policies were instrumental in lifting the nation out of the Great Depression, or this was just revisionist economic history, with these policies accomplishing the opposite or having tepid effects at best

Our two knowledgeable guests are both in the crypto circle, but come from very different backgrounds. One used to be a Wall Street trader and is a finance buff. The other is a bitcoin maximalist and an unapologetic libertarian. 

Be sure to also check out our previous episodes too. We’ve featured some of the best known thinkers in the crypto space. And it was great to have a few no-coiners on. I always appreciate their agreeing to do the show, and adding perspectives to what sometimes seem like an echo chamber.

If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.

Please note that nothing in our podcast should be construed as financial advice.



Source of select items discussed in the debate:

Richard:

Welcome to another episode of The Blockchain Debate Podcast, where consensus is optional, but proof of thought is required. I'm your host, Richard Yan. Today's motion is: Corporate bailouts and capital market rescues make sense. We all know the dominant crypto native perspective on this topic-- generally anti intervention both fiscally and monetarily. But it's important to hear the other side, if only to kick the tires of your own beliefs. After all, many smart people embrace a statist, big government view in how to run an economy. In this debate, we covered these topics, and more: a way to think about corporate bailouts as claims on a social insurance policy, with an analogy in Social Security and Medicare; how the monetary policies are worsening the wealth gap by giving a disproportionate advantage to the rich but not to the poor; whether FDR's intervention policies were instrumental in lifting the nation out of the great depression, or this was just revisionist economic history, with these policies accomplishing the opposite or having tepid effects at best; and many more. Our two knowledgeable guests are both in the crypto circle, but come from very different backgrounds. One used to be a Wall Street trader and is a finance buff. The other is a Bitcoin maximalist and an unapologetic libertarian. Be sure to also check out our previous episodes too. We feature some of the best-known thinkers in the crypto space, and it was great to have a few no-coiners on from time to time. I always appreciate their agreeing to do the show, and adding perspectives to what sometimes seems like an echo chamber. It would be great to have more of them on in the future. If you would like to debate or want to nominate someone please DM me@blockdebate on Twitter. Please note that nothing in our podcast should be construed as financial advice. And if you enjoy the show, please don't hesitate to give us five stars on iTunes or wherever you listen to this show. I hope you'll enjoy listening to this debate. I get involved in the conversation a bit more than I normally do. Let's dive right in! Welcome to the debate. Consensus optional, proof of thought required. I'm your host, Richard Yan. Today's motion, corporate bailouts and capital market rescues make sense. To my metaphorical left is Qiao Wang, arguing for the motion. He agrees that corporate bailouts and capital market rescues make sense. Now note that even though Qiao generally sees merit of fiscal and monetary responses to fight economic and financial crisis, he is not an advocate for what the US government is undertaking in the current downturn. To my metaphorical right is Jimmy song, arguing against the motion. He disagrees that corporate bailouts and capital market rescues make sense. In fact, he has been a long-time, vocal critic for such government actions. It's great to have him back on the program. He debated David Gerard on Bitcoin's store of value status in our first episode, so make sure to check that out too. Qiao and Jimmy, I'm excited to have you join the show. Welcome!

Qiao:

Nice to be here too. Thanks Richard.

Jimmy:

Thanks.

Richard:

Great. Here's a bio for the two debaters. Qiao Wang is an advisor at Massari, a startup aiming to create Bloomberg for the crypto markets. Previously Qiao was a quantitative trader. He ran R&D teams and helped build two trading businesses at IMC and Tower Research. Jimmy song is a Bitcoin developer, educator and investor. He is the author of the book Programming Bitcoin. He is currently a Bitcoin fellow at the blockchain capital and a lecturer at the University of Texas. He is also a Bitcoin core developer. As usual, the debate has three parts: An opening statement from both sides starting with Qiao. The second round is the body of the debate with me directing questions to the debaters. Both sides are highly encouraged to follow up with our opponent after hearing answers on the other side, and of course, they're also free to respond to each other's points raised during the opening statement. The last round is audience questions selected from Twitter, and we'll end with concluding remarks from both debaters. Currently our Twitter post shows 59% against bailouts and market rescues and 28% in favor of them. We'll have a post debate poll and whoever tips the ratio more to their side wins the debate. Okay, let's get started with the opening statement. Qiao. Take it away.

Qiao:

So, I guess before talking about this intervention stuff, I want to point out that economics is a very nuanced topic. Macroeconomics is a complex system and in theory, if you have all the data in the world, you can answer all the questions that you have. But in practice, no one really has all the data. And number two, macro is not really a repeatable and controlled science experiment. So you can't go back 10 years and say, let's do something else and then expect different results. There're so many confounding variables that you cannot really isolate, in a non-repeatable science experiment. So as a result of these things, I think in today's debate, I want to be really clear that this is a very nuanced topic and I don't have the right answer. But again, like Richard said, I'm not 100% in favor of what the government does. But I'm here debating Jimmy today, so that we as a crypto community at least know the other side of the argument, see different perspectives so that once we actually go out and argue with people who are bitcoin skeptics, that we know their arguments. So we can argue and debate intelligently. So that's my main point today. But when it comes to the actual government intervention, I think my two main arguments, which I can expand later, are basically: number one, the bailout programs that the Federal Reserve and Congress have laid out, they're not free money, they're loans, right? We're not giving free money to corporations and individuals and small businesses. We're actually lending money to them. So that's the number one argument. And number two is that I think government intervention in itself is not what wrecks the economy. In fact, the last time we didn't intervene immediately was 1929, and we basically went into a depression for many, many years. So both of these points, we can expand a lot more later on during this debate. But this is my main two points that I want to layout today.

Richard:

Okay, thank you. Jimmy, please go ahead.

Jimmy:

I'd like to start with a quote from Andrew Jackson, who was the President responsible for ending the second central bank of the United States. And this was his reasoning. Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the bread stuffs of the country. When you won, you divided the profits among you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and a null this charter, I shall ruin 10,000 families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin 50,000 families and that would be my sin. You are a den of vipers and thieves. I intend to rout you out. And by the eternal God, I will rout you out. I don't think he's really exaggerating there. What the system that we have currently is one of central banking, central bank fiat money. And, essentially what it does is it's a racket that takes money from everybody else that owns a part of that money, and gives it to other people. It's straight up that without any sort of consent from, the populace whatsoever. and just to give some rough numbers around what's going on in the last seven weeks, the M2 money supply, which includes the money from the Federal Reserve and then the pyramiding on top by, by the member banks. it's, as of March 1st or March 2nd, it was 15.6 trillion currently, or the last data point that we have is from April 20th, and that says 17.4 trillion. That's an 11% increase in seven weeks. That's, almost$2 trillion. That was essentially put into the economy, at the behest of the Federal Reserve on behalf of all of the people that quote unquote got these loans. And we'll talk about that more a little bit later. the fact of the matter is this, a racket that is not limited to the United States. This is a racket that encompasses the entire world ever since Bretton Woods in 1944. We've essentially been running the entire world on our Dollar hegemony. And it is not democratic in the least. The Fed is an independent organization and is not supposed to serve any political ends. Therefore, it is essentially an autocratic system. They get to do whatever they want according to the mandates that Congress has given to them, which is very vague and they can justify pretty much anything that they want. So in a sense, all of these bailouts, all of this money printing, all of the things that the federal government is doing is adding to a corrupt and fragile system. And as Andrew Jackson said earlier in the quote that I quoted, it's essentially continuing the racket. It is endangering and fragilizing and creating, more, badness for the entire global financial system, in order to keep up the racket that they have and it's stealing from savers and it's spending on whoever the government wants. Now, that's not to say that it won't benefit some people. Clearly it will, it will benefit say, a lot of these zombie companies that have been in existence for a while, but they have political connections and so on. But the people that it will hurt the most will definitely be the third world country people who do not get to spend the Dollar first. At least we in the United States get to spend the Dollar first. Instead, we're essentially exporting inflation because the Dollar is the unit that everybody wants to be in, because of a credit crunch that is currently happening. Essentially what you're doing is you're stealing from savers, savers maybe even in the third world, and distributing to people that you favor, in some way, shape or form. So, there's a lot of deception at play, because the Fed and the government and everyone else that is part of this quote unquote macro economic industrial complex are pretending that it's actually good for everybody, and that you're getting something for nothing. It is nothing of the sort you are making the entire system way more fragile. You are probably going to put at least several third world countries into hyperinflation. And really the only argument that I would accept for these bailouts being good, is that it would accelerate the whole system to collapse, and that Bitcoin could then take over. It is an unjust, unfair system, where the rich continue to get richer, and the poor get enslaved. That is a morally repugnant system and I oppose it for those reasons.

Richard:

Okay, great. Thanks for bringing the fire Jimmy. Expect no less from you. And Qiao, I think you definitely have your hands full. So I'll give you a choice. I can ask you the first question of the round two first, or you can respond to Jimmy now.

Qiao:

So I'm going to quickly respond. So I think all the arguments that that Jimmy, put out, they have some merit and I generally agree, but, over the next 45 minutes or so, I want to hear the actual evidence of those things from the actual evidence of, wealth being transferred from the rich to the poor, from emerging markets to the US. I want to see the actual data. So that's my main thing. But we can start with the first question.

Richard:

Okay, perfect. Let's move on to round two. So my first question is for Qiao. In crypto land, the top criticism of the recent government action is regarding the monetary response. The argument goes something like this, and maybe this echoes with what Jimmy has said already: Money printing transfers wealth to Wall Street, creates inflation, and worsens the wealth gap, elaborated below. So in terms of the money printing, transferring wealth to Wall Street, QE buys assets, increasingly risky ones from Wall Street at a premium. But banks are under no obligations of sharing that liquidity with the markets, which indeed there are signs of their reluctance in doing so. Point two, which is the inflation creation increase in monetary supply, debases the currency, and reduces purchasing power. And then the third complaint is the wealth gap. Inflation of assets such as housing and stocks makes them increasingly inaccessible to main street. Borrowing is a rich person's game, both asset-based or income-based, which allows them to own more assets and rent them back to the poor in a new paradigm of feudalism. So what are your thoughts regarding this? Sorry, this is a bit long winded and I'm happy to remind you of the individual points.

Qiao:

So this is a really good question. And for each one of these three points, we can literally talk about three hours, But I want to focus on like maybe one of them first and then we can explain later. So, when it comes to QE, buying assets, from Wall Street at a premium, I want to question a couple of assumptions here. One is if we look at the actual breakdown of major holders of US Treasuries, right? Because QE really buys US Treasuries and mostly US Treasuries and a little bit of, mortgage backed securities. But if you look at the ownership breakdown of US Treasuries, half of US Treasuries right now is actually owned by the rest of the world by foreign entities. So we don't have a lot of clarity into what know part of, the foreign entities own what. But if we focus on the other half, I think that data suggests that, only 2% of US Treasuries are owned by banks. The rest are owned by things like mutual funds, cools and phones, pension funds, individuals, households, and so on and so forth. So the first data point I want to point out here is the entities that actually own the QE assets. The vast majority of them are not banks. So you could argue that, mutual funds, pension funds are part of the Wall Street, the system, but in reality, yes. But what they're really doing is they manage money for the households and individuals. So I don't necessarily agree with that. QE, benefits, Wall Street, by and large. So, that's,...

Richard:

Sorry, if I understand you correctly, are you saying, because the US Treasuries, which are primarily assets being bought up by QE, are distributed across a large base of institutions, not just banks, therefore not just Wall Street banks. Therefore the Fed buying up these assets are not disproportionately benefiting these fat cat bankers. Instead, they are benefiting the entire pie, right? Which includes these money-managers and pension fund managers and so forth.

Qiao:

Exactly, exactly. And obviously that the counter argument there is that QE benefits the asset owners, right. That the owners of those Treasuries, even if they're individuals and households, and I generally agree. But I just want to question the assumption that, Wall Street is the one that's being benefited here versus main street. So I don't necessarily agree with that. Number two, evidence suggests that, over the last 10 years, the volatility in the market has been, depressed by the so-called Fed put, right. Both the implied vol and realized volatility in the stock market has decreased, not just stock market but also the bond market, FX, and so on and so forth. And as a result of that, we also have seen a much worse price discovery, in the actual markets. And I think what this does is this actually destroys a pretty big portion of wall Street's business, which is the trading business, proprietary trading business, because trading business basically dies when you don't have volatility. So again, I don't necessarily agree that Wall Street is the one that benefits from this. So that's number two. Number three, buying assets at a premium. I think what QE really does, at least in theory, is that it tries to depress long-term interest rate, right? Because what the Fed buys is long-term Treasuries, 30 year Treasuries. And what they tried to do there, is to depress the 30 year interest rate in order to stimulate long-term borrowing. Now in practice, I don't know how well that works, but in theory at least, what it tries to do is to stimulate this credit creation throughout the economy. So as a result of that, I think it's really main street that benefits from QE. So the distinction I want to make here is not Wall Street versus main street. It's really asset owners versus cash owners. So that's the main thing I want to point out here.

Jimmy:

Can I respond?

Richard:

Are you done, Qiao? If you're done, then maybe Jimmy can jump in.

Qiao:

I'll let Jimmy take it from here.

Jimmy:

Okay. So, first of all, like QE, yeah, they buy a lot of Treasuries there, but they're also buying up a lot of mortgage backed securities. These are called toxic securities for a reason. No one wants them. And the fact that they get, they get dumped to the Fed by bankers. I mean they're, they're the ones that, own the mortgage backed securities that are more or less toxic. That's straight money going to them. But there's not only the quantitative easing, there are all sorts of lending facilities that the Fed makes available. This includes stuff like muni bonds and corporate bonds and things like that. I think it is down to the BBB- rated level. Right? Like one level above like junk bonds basically. Yeah. And what they do is you can borrow Dollars against whatever bonds you might have reducing selling pressure and that way you can just sort of wait it out instead of being forced to liquidate. And that's very beneficial to every Wall Street bank getting cash through loans via the Fed, at very generous valuation of the assets that you're getting a loan against. So that's happening all over the place. And it is Wall Street banks that are benefiting primarily through these? Yeah, it is pension funds and all that. But I mean who manages those? It's like Fidelity and Goldman Sachs and all of these banks. They do a lot of the services for them. So it's definitely helping them out significantly. And this is all part of the Cantillon effect, is that the first spenders of the money, the newly printed money, and every Dollar that the Fed lends out on these is really newly printed money. I think Qiao mentioned earlier that these are loans they have to pay them back, so it's not really, they're getting a lot of benefits or whatever. He fails to mention that these are loans at insanely low rates, right? Like these aren't the, loans that you get from the bank for your car at like 4% or your mortgage at three, three and a half or something like that. This is like 0.5% or 0.7%. This is all money that they get lent to them at insanely low levels and then they re-lend it out to everybody else. And the right that they have is that if they borrow$10 million, they can lend out 100 million. So you're borrowing 10 million at like 0.25% you're lending out 100 million at like 2.5%. You're making insane amounts of money off, a very small amount of that you're liable for. So it ends up benefiting those banks hugely. And all US Dollars, all fiat money is essentially debt anyway. It's all lent money. And so anytime that the Fed is lending more money, it's printing more money. That's how the system entirely works. His second point was about volatility decreased. And that is true. It's decreased. But at the same time it's increased a lot. The stock market has gone on an insane bull run since 2008. and even right now you're seeing that S&P500 has largely recovered from the dip of all this stuff. And you might be like, a lot of people are confused. I thought the economy was doing badly. What the heck is going on? How come? How can the stock market be so high? Well, turns out that the stock market is not the economy. The stock market has a store of value premium because the US Dollar is such a terrible store of value. What that means is that a lot of the people that are rich that have access to these cheap loans, they put it into good stores of value that they have access to. And those two end up being real estate and stocks. And those have, essentially kept up with more or less kept up with the M2 monetary expansion of the over the last 60 years or so, and that's good enough for them and that's a way that they can store value. And that's definitely benefiting the banks because while they can leverage the hell out of whatever positions that they're in, and it's mostly been going up the last 12 years. Guess who's benefiting? I was reading about Mike Bloomberg's presidential run and how in 2008, he had something like$10 billion. and that and that. Now he's worth something like 20 billion. in 12 years, he somehow made$10 billion. It's not like he sold 100 million Bloomberg terminals. That's not what he did. No, he leveraged his way into making all that money. This is how the rich get richer and the poor get enslaved. if you're poor, your interest rates are probably in the credit card range, right? Like 16, 17, 25, 35%. Whereas if you're rich, you're getting, interest rates at like 0.5, 0.75, 1% maybe, and you can leverage the hell out of it to make a lot more money. And, all that is to say that the rich get richer, and it is true that they have more assets, but that these are assets that they get loans against and then leverage the hell out of them to make even more money. Whereas the poor people, they get enslaved to debt and they continue to suffer. And it gets even worse in third world countries because they have a global Cantillon effect that they have to combat. And it's a terrible system. It's an immoral system. It's an unjust system. It's an unfair system.

Richard:

Okay. So I'm happy to go ahead and ask Jimmy another question unless Qiao, you want to respond. Although there will be plenty of opportunities to respond in the next few questions as you cover them.

Qiao:

I'll respond in the later questions.

Richard:

Okay, perfect. So the question next was for Jimmy, and this sort of naturally follows that line of logic. Basically, some people say that there's no problem with the rich getting richer, and the poor not necessarily having the same advantages, as long as everyone has the same opportunity to fail and not get bailed out. So this question is exactly that. So when asked for a solution to financial crisis, crypto natives generally give an Austrian economics answer that goes something like this, badly run companies should be allowed to fail. The bankruptcy and liquidation proceedings should be accelerated and equity holders should just get wiped out. A counter argument here is the negative impact of employment pensions invested in the stocks and time it will take to rebuild a company offering similar essential services. And these would basically be the backbone of the counter argument against just letting companies fail. So what is your reaction in this whole line of logic, Jimmy?

Jimmy:

Well, the line of logic assumes that these companies are going to innovate in some way after getting bailed out. And all evidence is to the contrary. When when you bail out zombie companies, they continue to be zombies. A good example might be some companies like GE, which has been a zombie company for like the last 10 years at least. what ends up happening is that you end up, feeding the beast, feeding a fat, lazy corporation that's not really contributing anything to society, that sucks at the teat of the Fed. and that that's what you're doing. If you let companies fail, then yeah, the people that work for that company will no longer have jobs and things like that. But that's their problem. They chose to work for that company, that wasn't doing very good, or I had rent seeking arrangements with the government, through whatever means that they could. The thing is, once companies like that collapsed, now you have a lot more people that are available to create new businesses. This is what, in Austrian economics you would call creative destruction. When you have, a giant company, say, somebody like GE, release all of their resources. If they go into bankruptcy, all of their equipment and factories and like real estate and everything that they own, now goes to the highest bidder as part of the bankruptcy proceedings. Now they get reallocated to new companies that are going to utilize them a lot better than GE ever was. And that's, an overall add to society. The thing that people tend to protest is the fact that short term, that, those people have to suffer pain. But that's going to be the case regardless, because at some point, systems like that collapse, companies like that will eventually collapse unless, you're committing to keeping them alive forever. And you're going to have to have some sort of short term suffering. it's better to get it done with now instead of getting them more and more dependent. It's exactly like Andrew Jackson's quote. Like you could, you could keep the racket going, or you can let them fail and have something good come out of it instead of delaying the inevitable.

Richard:

Okay. Great. So I have some thoughts against this too. But Qiao, I'll let you have the first response.

Qiao:

So Jimmy mentioned that the Fed is buying junk bonds munies at a lower rate, bailing out all of these large corporations that really should be let fail.

Jimmy:

I said, they're having lending facilities where they will, instead of just straight buying them, they will lend out Dollars in exchange and take those bonds as collateral, at the valuation where they were bought, not at what valuation that they would normally sell in the market because there's no liquidity in those bond markets right now.

Qiao:

So that is partly correct. The Fed is actually buying both at issuance and in the secondary market. One thing I want to point out is yes, they're buying out a very low rate, low yield, but the rate itself is not the whole story. When we look at interest rates or yield, we really should look at is two components is the risk free quote unquote risk-free rate plus the credit part. The fact of the matter is the risk free rate, which has right now the Federal Reserve fund, the Federal Funds is basically at zero, right? Technically it's between zero and 0.25%, and so there is a credit component in the rate at which those junk bonds are being bought. So, but if we look at the risk free rate itself, we know from the experience of Europe, that the moment you lower the rate to zero or even negative, the banks will suffer, right? Deutsche Bank is the prime example. Deutsche Bank has been failing for 10 years. And the point is low interest rate or negative interest rate is actually not beneficial to the banking system, at all. That's one of the reasons why earlier this week the Federal Reserve was reluctant to lower the interest rate into the negative territory. That's number one. Number two, the Fed, yes, they have launched an alphabet soup of lending facilities. And Jimmy mentioned munies, junk bonds, and so on. Munies I think it will ultimately benefit individuals, partly because, there are two problems that the municipal bond issuers, which are, cities and counties and States are experiencing right now. One is a decreasing revenue and the other one is increase i n expense. But both of these problems are a result of the pandemic, right? So they're actually, spending more money to help the medical staff, the medical infrastructure, and t hey receive less tax revenue, because there's less sales, less commerce. So I think the money that is being lent to these municipal bond u sers will actually ultimately flow through, to m ain s treet. And when it comes to junk bonds, I think that we should look at the actual details, like the devil's always in the details. The first round of, corporate bond, purchase was actually targeted on, the so-called, investment grade, bonds, corporate bonds and investment grade are basically some of the lowest credit risk corporations. So I'm totally fine with that. The second round was, targeting the so-called falling angels, right? So the fallen angels are the companies that used to be investment grade that were recently downgraded, downgraded into junk bonds. I think you cannot really say that, bailing out these companies, it's like bailing out zombie companies. They're not zombie companies, they're doing well before the pandemic. And then they were hurt by, I would call it Black Swan event. You know, the saying goes, the pandemic itself is not a Black Swan. It's the handling, the political handling of the pandemic, that's the Black Swan. And I agree with that. So I think what the Fed was doing by purchasing these falling angel, junk bonds is to provide social insurance to a Black Swan event. And I think that can be justified.

Jimmy:

I totally disagree. A lot of these bonds, even the, investment grade ones have zero liquidity. There's nobody there to buy them. And this is why the Fed had to create these lending facilities because a lot of these Wall Street banks wanted to exit to cash. And a lending facility essentially lets you do that. You get a loan from the Fed for it. And because there's no liquidity, no one's actually going to sell. So on a book basis, it keeps its value, quote unquote. But really what they're doing is, exchanging these bonds, essentially selling these bonds at a higher rate than they could get on the market. And basically getting cash out of it, but doing it in this sort of way. Also, you mentioned that Oh, negative rates would be bad for the banks. Here, let me play the world's smallest violin. I don't care about these banks. They've been sucking at the teat of the Federal Reserve and the American people and, worldwide, like the people that actually are using the money for a very long time. Most of these are bloated, completely crazy like, administrative, inefficient, just extremely, crazily bad companies, that have been kept up because of all of these bailouts. For example, Citibank employs something like 50,000 people, and it's known that they've merged like 200 different banks, or something ridiculous, and they still have a room somewhere full of people that take fax orders, and then they enter the orders into a mainframe so that they can keep going. And the fact that they employ such people is like just complete... like it tells you just how bad the system is run or how much of a monopoly or a legalized monopoly that they essentially had as a result of all of these policies. Now, you talked about the muni bonds and how that's actually going to help people or, eventually filter down to benefit that people, because these cities are not going to go bankrupt and whatever. Again, I'm going to play the world's smallest violin. I don't have any sympathy for these cities and states that are overspending their budget. I mean, if your deficit spending by millions or in many cases, billions and billions of Dollars, well that's kind of your fault. You spent more money than you got in revenue, you should suffer the consequences of that instead of being bailed out by the Fed, through the pockets of everybody that has any savings whatsoever. So in a sense, like all of these arguments for"oh, well, it'll eventually eventually benefit you. It's doubling down on a bad investment. Like, all of these, bonds, corporate bonds or whatever." They got these loans at, relatively cheap rates on the market. And the fact is like the banks or pension funds or whoever is left holding the bag, they want to bail out and the government is giving it to them out of our pockets. And that is unjust, unfair. And this is how the rich get richer and the poor get enslaved.

Qiao:

So Jimmy, I have a question. Do you think Social security should exist?

Jimmy:

No. I mean, like if you want social security, you should save your own money. the fact that the government forces you to save your own money to, eventually pay it back to you, is against the principles of Liberty, if you like. There's plenty of, ways in which you can save. It's basically the government saying, we don't trust you to save for your own retirement. So we're going to do it for you by taxing you in this, and this. Of course, like it's a completely insolvent system because they use the money that they collected from the worker. They collect from the workers now to pay the people that are getting the benefits. Now, there is no lock box or anything like that. There's, it's a Ponzi scheme, that's going to come due. But I like if you're like, essentially you should be free to do what you want with your money and the fact that the government forces you to save money, in the particular way that they demand is stupid. And, it's against the principles of Liberty. And it's evil for that reason.

Qiao:

So let's take this one step even further. Do you think healthcare should exist... Healthcare insurance should exist?

Jimmy:

I mean, depends like, I don't think universal healthcare, I don't think you should force everyone to have healthcare. Again, that's government, telling everybody what to do and forcing everybody to buy something on the market. I don't think that's very good for Liberty. It's not good for personal freedom. It's basically the government forcing you to do X, Y, or Z. Now I think it's perfectly fine to have health insurers out in the market that you can buy from, but it's a completely regulated market and it's, I mean, I used to work for a healthcare company by the way. It's a very, regulated market and it's sort of like a weird, artifact of like some capital controls and, price controls that they imposed in the fifties. But like, at least in the US but like universal healthcare and things like that, it's essentially the government, taking money out of the pockets of whoever, of any saver to pay for, stuff that other people like that they deem favorable. I suspect like one of the things that was, that I thought was a really good tweet was somebody saying, okay, all of these people on the left, they're tweeting stuff like, if these protesters get COVID, then nobody should treat them; they should just die, right? Like that was sort of their attitude and it's like, yeah, that's actually kind of the way healthcare works in totalitarian regimes and so on... is that in order to get quote unquote free health services, you essentially have to comply with the state in order to get it. So if you're somebody that the state does not like, you're not going to get any of it. So it's not really free. It depends completely on your compliance and your being in the good graces of the government. And so for that reason, I don't think free universal healthcare, first of all, it's not free and I don't think it should exist in that way. I think the market should determine stuff like that.

Qiao:

The reason why I'm asking is all these social insurance or health care insurance or bailing out, some corporations, these are all examples of socializing losses. So I just want to see, and obviously they exist on different points on the spectrum. I wanted to see where you are on the spectrum.

Jimmy:

Yeah, I'm okay with having insurance companies though I think they take on way more risk and, generally...

Qiao:

I'm not talking about insurance companies. The insurance companies are still in the private market. What I'm talking about is, whether or not this insurance should be owned and maintained by the government.

Jimmy:

No, absolutely not. No.

Qiao:

So, healthcare insurance should not be part of the government, should not be a government program. It should be completely in the private market.

Jimmy:

Yeah, of course. and I mean they should enforce any contracts that people sign with insurance companies and so on. But, the government, does not have any business being in that, in that market. they've been skewing the healthcare market for ages for that reason. And the fact that Medicare pays, for example, a particular rate means that that's what every health insurer has to pay in order to satisfy the doctors and so on. Instead of market pricing. What you end up getting is a sort of arbitrary pricing. This is why like an MRI still costs like$10,000 instead of coming down in price. If you look at something like LASIK, which was like a hundred thousand Dollars like 20 years ago, it's steadily come down in price because the market makes things more efficient. Whereas, like anything that Medicare pays for, it has no chance of becoming efficient whatsoever because the government is in charge. And there are people that will lobby the hell out of government to continue getting paid at the rate that they're getting paid. And there's no incentive for efficiency whatsoever. So generally if you involve government in something, you're going to get really bad effects out of it. And, generally prices get worse and more bailouts have to happen. And you end up with a lot of bureaucrats and rent seekers, that leech off the system. And that's essentially what's happened to healthcare. It's happened to education. That's happened to a lot of industries where the government puts its thumb on.

Qiao:

So this boils down to the crux of my argument is that... by the way, I'm not necessarily married to Keynesian or Australian economics, I am pro market, but the Austrian economics assumes that, or classical economics assumes that the market is efficient. I've been a trader for 10 years, my track record shows that the market is not efficient, the market is not always rational. Most of the time it's efficient. Most of the time it's rational, but there will be occasions. Maybe once in a decade, about once in a decade, the market just completely breaks down. And that usually happens during recessions. And that happens not because of some fundamental flaws with the market mechanism itself, but because of psychology, because of animal spirit, because of herd behavior. When something really bad happens, the market just stops functioning. And I think we've all observed that over the last couple of months, there has been so much stress within the entire, basically within the entire humanity, right, that the moment that the virus hit us in the US, people started panic-selling their stocks, their Treasuries. And the moment the stock market started to crash, people start to feel poor. And when people start to feel poor, they tighten their belt and they spend less. And the result of that is a potential... In practice a deflation in the consumer goods, in the price of consumer goods and services. And the moment you see a deflation and the people who produce these services and goods, their income also get hurt. Not necessarily in real terms but in nominal terms. Right? But the problem is even if the real income has stayed the same, but their nominal income has gone down, they will feel some stress in their life. They will want to tighten their belt as well. They will want to go spend less money and they will feel the panic, the stress, and they will again sell their own stocks. So we see a vicious circle of deflation in the system due to psychology.

Jimmy:

I don't think it's due to psychology at all. I think it's because there was a lot of malinvestment for the last 12 years, the last hundred years almost. And all of that m alinvestment is coming home to roost. The fact is t here, there's been an overproduction of goods and services that really a ren't h aving benefited anybody in the market. And, the companies that get bailed out w hile they keep producing them because that's what they sell. Instead of allowing them to fail and allowing these goods to not be overproduced, what's happened is that they do get o verproduced and now there's a glut in the market of various things and and these companies are suffering as a result. Now, you talked about animal spirits and not enough demand and whatever. That's all Keynesian BS, at least as far as I'm concerned, it's malinvestments that are coming home to roost, whenever you have down cycles like this. And it's not that the market is rational. The market's never really rational because not everyone knows everything. If everyone knew all of the perfect information, then, then yeah, it would be rational. But there's no way for me to know what other people are thinking, for example. And there's, and there are certain facts in the ground that I know that I have privileged to know that other people don't. and that's how the market works. There. There's nothing, quite as arrogant as thinking that like something is quote unquote priced in. It's never that way because nobody, like not a single person in the entire market has perfect information and certainly not the entire market does until that happens, that's not going to happen. But with respect to this whole idea of mass psychology being the being the cause of the downfall, that's not it at all. It's all of this bad investment. It's throwing good money after bad. It's all bailouts. It's all the deficit spending. It's all the, stupid programs that the government has been, throwing money at, and it's all the zombie companies that continue investing in stuff that nobody really wants. That's the cause of this downturn. And that's what happens with a reset every 10 years or so is that it may be quote unquote triggered by a Black Swan event or a white Swan event or whatever you want to call it, but it's really just a part of the Austrian business cycle. Malinvestments happen when there's a lot of credit, and there's been certainly a lot of credit available in the last 12 years. That in turn causes malinvestment, that in turn causes a glut in the market. Now you're, now you're seeing credit contraction, depletion, all of this stuff. It's just paying the piper, man. It's not, it doesn't have anything to do with animal spirits or mass psychology or anything. People are just doing what they think is right for them and that's based on the information that they have. It's not that they're manipulated into doing something or other, it's that they have a good idea of the situation that's happening. And that's the behavior that you should expect. So I reject this entire Keynesian line of argument.

Qiao:

I wish I were as optimistic as you are about human rationality and lack of psychology. I just don't think that that's true. What I do agree with you is the melody investment, but what we're debating today is not the malinvestment over the last 10 years. What we're debating today is that government intervention during this recession. And my point is, as long as you pay back all your liabilities in good times, as long as you run, not in deficit, but in surplus during good times, you can afford to do government intervention during bad times. That's what I argue for today.

Jimmy:

I mean, I don't think that's what they're doing. First of all, they've been deficit spending for a very long time. I think the last time the US had a balanced budget was like 1998 or something, 1997.

Qiao:

During the Clinton era.

Jimmy:

Yeah, it's been, it's been a long time since we've had anything like that. So, I don't think you can, say with a straight face that, okay, well this is from our savings. This is from our rainy day fund. This is from, like funds that we've saved up over a long time. That is not it at all. This is all money that's being printed in order to prop up, the malinvestments that they did previously. It's throwing bad money after good money after bad. And this is additional malinvestment that's happening right now. And what you're going to end up doing, and, I think it's fairly clear, just by how the stock market is doing, all of these companies in the S&P500, many of them probably should be going bankrupt, but instead they're propped up. Mostly because people don't have a good store of value. So the money ends up finding itself into the stock market. They're going to continue producing goods that nobody really wants or needs. Right? Like, I'm hearing, about how the used car market is like, really terrible right now because, well nobody wants to buy cars, but there's also a glut of cars. There's way too many cars out there and, the manufacturers are constantly producing new cars and, the cars that were built 20 years ago are still kind of on the road. So, who do you sell to? There's no more demand. this is what malinvestment looks like is you, you produce a glut of stuff and that ends up affecting, the market that you're, you're trying to, like quote unquote rescue or whatever. So, all of this malinvestment is coming home to roost and I don't think this round the bailouts has anything to do with any sort of surplus that you've saved up over the good years. We've been deficit spending this whole time, so there's no way that that applies. It's about like throwing good money after bad. And I think that's a terrible strategy. It's immoral. It only helps the rich get richer and makes the poor poorer. It's unjust, unfair. And that's why I'm opposing it.

Richard:

Okay, so I think this is a natural segue into the next question. In fact, I'm going to ask Jimmy first because this question naturally relates to what you were saying. So ethics aside, talking about practicality, if we examine historical cases of crises during the great depression, the Hoover's administration took various measures seemingly in line with the crypto ethos of self sovereignty and sound money. The government let thousands of banks fail and try to balance the budget, which some think worsen the downturn. FDR on the other hand, took the opposite approach. He backstopped banks with federal loans and did significant amount of deficit spending while decoupling USD from gold in the process. And this eventually jump-started the economy. So a lot of what the current regulators are doing is following FDRs playbook to prevent a depression. So how do you tie what has happened between Hoover and FDR with what you were saying about letting the banks fail, don't bail out these companies and essentially let every entity be their sovereign self.

Jimmy:

Yeah. it's a lot of Keynesian revisionist history that you just repeated there. almost all of what you said is completely false. First of all, Hoover wasn't a conservative and he didn't try to rein in the budget. And, like stuff like that. He actually overspent. I mean, Hoover had the Hoover dam, right? Like that was a giant public works program as a way to quote unquote stimulate the economy. if you read Rothbard, The Great Depression, and the economics of the great depression, you find out that actually Hoover in some ways was actually much worse than FDR in terms of state intervention into the markets. And, one of the things that he did, for example, was he got all of the CEOs of the major companies and convinced them not to lower the wage rates of their workers. And of course, what that made happen was that it kept wages like artificially high and it increased employment unemployment significantly because, the wage prices weren't allowed to go down to the market level. And, as a result, there was a bunch of people that were unemployed. It was idiotic in many, many ways. and, then he had to like spend money on public works programs and so on. FDR was completely unsuccessful in his bid to revive the economy during most of his tenure until World War II happened, things were getting worse and worse and worse. Like to suggest that he actually kickstarted the economy. Only a Keynesian revisionists could really say that. Ask anybody from the great depression and they'll tell you it was pretty bad, right up until, World War II. US got involved in World War II, then it started getting better. So, in a sense like the playbook that they're playing from is a very deceitful one, because it makes it sound like you're going to win, but actually you're just like fumbling the ball and giving the ball to the other team. So it's, that the thing that did work, say in like 1920, there was also like a stock market drop and so on. that that was, I think it was Calvin Coolidge that was in office at the time. He decided to do nothing. He didn't intervene in the market at all. And as a result, it recovered in like less than six months. Whereas all of the stuff that Hoover did, FDR did it prolonged the depression for like a dozen years almost, until World War II, getting involved in World War II. So, I mean, they've changed things around a little bit. They, back then we were on the gold exchange standard. So you could actually go and, bring like a Dollar to the bank and get some amount of gold. So, it was harder to manipulate the monetary policy because it was so strongly tied to gold at the time. So they didn't have sort of like the levers that we do today, or the, that the Fed has today, with its ability to essentially export inflation and thus not suffer as much as say, like the third world countries and so on. but that that's a playbook that they're playing by now. So I reject this entire premise of this question that Hoover was a conservative and that FDR rescued things by spending lots of money. Neither of those things happened. Hoover spent a lot of money, intervened in the markets a lot. FDR did the same thing and it didn't get better until World War II. And that's, that's the actual history. instead of like thinking FDR was this amazing, economics, person that, revived the economy. He did nothing of the kind.

Richard:

Okay. Why do you think there was this revisionist economics going on in education?

Jimmy:

That's very easy to explain. like basically, the government always wants to spend more money and this is largely to, win another term in office or whatever. But the economists that support that are essentially Keynesians, and this is why every government think tank, every government economist is essentially a Keynesian there. They're the ones that are telling them what they want to hear. This is what you would call biblically, like false prophets or something like that. It's people that will say whatever the ruling party wants them to say. And that's why, this quote unquote, Keynesian revisionist history has legs and, continues to be spouted by in a lot of these history books and, K through 12 schools and so on. Because this is what the government wants you to believe. This is essentially historical propaganda that's been, that we've been inundated with. There's a reason why, Austrian economists can't get any positions in academia is because most of these educational institutions are, partners with the government and at least in this latest round of bailouts like, recipients of significant amounts of bailout money. The reason why they, do that is because they know that this is what it takes to get in favor with the government. And this is what, how you get jobs as economists in government and so on. So yeah, it's pretty easy to explain, just given the incentives that are out there.

Richard:

Okay, interesting. So this actually reminds me of Thomas Jefferson versus Alexander Hamilton debate. So after the revolutionary war, the various States in the US owed a significant amount of debt to foreign entities, and then the federal government had a decision to make, whether to assume that that of the States and essentially creating a bank and then sort of essentially quote unquote bailing out these States and paying their debt on their behalf over time... therefore not letting anybody default the debt owed to the foreign entities in the meantime. And then Jefferson and Alexander Hamilton had diametrically opposing views. So Jefferson felt that he was more of a libertarian. He believed that the States should be responsible for their own finances. And if somebody defaults, let them default. Hamilton took the other approach, decided that all this debt should be nationalized. The US should have extremely good credit and subsequently was able to borrow even more from foreign entities and then sort of channeled all that amount of money into building infrastructure within the country and sort of created this modern financial system. So the reason why I mentioned all this is that aside from the FDR slash Hoover comparison that I mentioned, there seemed to be this other debate back in history that echoed the very same sentiment. And the argument against Thomas Jefferson's stance and in favor of Alexander Hamilton's thought is basically that without Alexander Hamilton's policy of nationalizing States that and creating this national bank America would not have been set on this route of advanced industrialization pushing for various infrastructural projects that ultimately have, it was extreme positive externality that boosted everybody's livelihood in the US, right. So basically...

Jimmy:

I completely disagree.

Richard:

Let me finish. Let me finish, right. So I think there's also this... I hate to jump into debates by the way. I enjoy hosting a lot more... But I was just going to m ention though that there's this mass coordination problem when it comes to economic development, right? Because if you truly let everyone be their own sovereign self, there could be these negative externalities that ultimately would have these unforeseen consequences. And unfortunately the economy i s not something we can experiment with. And in the past it just seems that we've gone down this path of effectively letting the government put together this infrastructure a nd letting them quote unquote, make smart decisions t o ultimately benefit everyone, and Alexander Hamilton v ersus Thomas Jefferson being one of the examples.

Jimmy:

So I completely disagree for a lot of reasons. First of all, that Hamilton, Jefferson debate ended up with first central bank of the United States. That's how they paid off the debt was by basically taking the wealth of the people through, issuing more and so on. And this and I came back to, I started this whole, debate with a quote by Andrew Jackson. It took a very long time until that was corrected with Andrew Jackson. They had the first central bank of the United States, which I think had a 20 year charter. And then, they had a second bank of the United States a couple of years after that. And, Andrew Jackson basically ended the second central bank of the United States. And what you said was, well, this coordination and this banking, that allowed all of this, innovation and stuff in the United States... I completely disagree that that was financial shenanigans to, get States out of debt. But, it didn't, it essentially took money from the people. instead, like after Jackson, if you look at the 19th century, like, like the US became a complete juggernaut, like on the world stage, we went from essentially a backwater British colony to a world superpower in that century. And it was largely without the aid of a central bank. You know, after Jackson ended it. and I mean, Lincoln brought back the greenback and stuff like that, but essentially the, this like myth of, banking was necessary in order to coordinate all this stuff. Now people are good at coordinating things on their own. And in fact, like in a lot of these like, the West in the United States, there were like wildcat banks and stuff like that. It wasn't any sort of like central bank coordination, that brought about the conquering of the West, if you will. And that that was a large part of the, development technologically and otherwise of the United States. So I mean, the Jefferson, Hamilton, debate, I think basically set us on a path of central banking for something like 30 years, which I think was a big mistake and wasn't really corrected until Andrew Jackson. but after that, I think we see pretty evidently, until like from Andrew Jackson until 1913, there was no central bank in the United States. And we did fine. In fact, we did better than fine. It was way, way better than almost any other country in the entire planet. And, the US, created more things, there was more invention, there was more economic activity, there was more wealth, throughout, than almost any other period of history on a per capita basis. So, I completely disagree that it was, Hamilton's central bank that, unlocked all of this. It was Jackson ending the second central bank that unlocked a lot of this.

Richard:

Okay. Well, in the interest of time, let's move on to a question for Qiao. So some in crypto circles decry crony capitalism in that the fiscal bailouts generally favored corporations over citizens. What is your reaction to this statement? And feel free to respond to any other points that Jimmy and I raised.

Qiao:

I want to first go back to a couple of quickly address a couple of points that Jamie raised. Number one, Jimmy draws the causality between a lack of central banking and the fact that the United States, had a great century. I don't think in history you can draw that kind of causality. I'm not necessarily saying that the opposite is true. I'm just saying there's so many confounding variables, you cannot, say one causes the other just because, as I said at the beginning, economics is not a repeatable science experiments.

Jimmy:

And to be clear, I was responding to Richard who claimed what you said, which is that, Hamilton's like creation of the first central bank actually kicked off all of this, awesome activity and, the American century, I was just saying that we didn't have a central bank and we did fine. and we did better than fine. It wasn't that this caused this, it's that, when you took it away, it didn't change anything. And in fact it probably did a lot better. So there's some good reason to believe that there's correlation there between a lack of a central bank and more innovation.

Qiao:

Yeah, fair point. I'm saying, correlation does not necessarily mean causality. And I didn't say the opposite. I didn't say that central banking did lead to prosperity. I didn't say that. And my second point is, you said that the US did not recover until World War II. I was wondering where your source is. What source did you use? Because every source I looked at, the US was actually improving from 1933 all the way until World War II.

Jimmy:

Alright, so if you look at unemployment numbers, I think you can definitely take a look at'em. All right, so percent of labor force that was unemployed as of 1931, that you would say that that's probably in the middle of the Great Depression. 15.82%. 1933, 24.75%, 1935, 19.97%, 1937, 14.18%, it's getting better. 1938, 18.9%. So it got worse again. 1939, 17.05%, 1940, 14.45% 1941, it took a full decade, actually almost 12 years to recover to 1930 levels. So 1941 was 9.66%, 1930 was 8.67%.so I mean there's one particular metric. I'm sure I could find more with respect to others. But from a very practical perspective, you don't have a job, you're not really doing very good. I don't see how that's improving since 1933, and in any way, shape or form, it was way worse. like during the middle of it, like 1935-ish. then, like even in like 1931.

Qiao:

I think we're using the same source but drawing different conclusions. from my point of view. The unemployment did really, really well. Improved from 1933 all the way to World War II. And so...

Jimmy:

Why is it... I mean, it's 14%, 18%, 19%. I mean like 1929, it was 3%. like to say that it recovered is idiotic...

Qiao:

I'm looking at... You mentioned that, you started with 1933 all the way until World War II. And unemployment improved. GDP improved. Not nominal GDP, real GDP improved.

Jimmy:

Yeah, by tiny amounts. I mean, but it's not recovered in any ways.

Qiao:

Not tiny amounts.

Jimmy:

If you compare it to something like 1920, it recovered in six months. The fact that it took this long tells you that the government was probably suppressing the recovery in many ways. And if you read Rothbard's The Great Depression, you find out that they did all sorts of stupid things in the market to, with all sorts of, different instruments and levers that they have, to hinder the recovery. And, try to keep wages at a high level so that consumers would have lots to spend. It was like Keynesian idiocy all throughout this thing. And that, quote unquote improved a little bit each year, but it was nowhere near like what it was before. And it got way worse before it got any better and it wasn't until World War II, that it really started to recover.

Qiao:

So Richard, back to your question about moral hazard. Unfortunately I cannot argue for that. Unfortunately this junk bond bull... I just can't say anything about it. It's completely bull...

Richard:

Okay. Okay. Well, I would say one counter argument would be something I mentioned a little earlier. So the economy is sort of a bathtub of water. So there's the hot side and there's the cold side, but the hot side is going to affect the cold side, right? So the temperature is not going to be kept still on both extremes of the tub. So what I'm trying to get there, is that yes, there are the capitalists, but there is also the laborers, is there's definitely smart ways to bail out companies, right? And there's probably ways to do it to lessen the moral hazard impact. But ultimately problem with not helping these companies in times of stress is that you're not just punishing the capitalists. There's the whole downstream effect associated with it. And not to mention the pensioners and other externalities.

Qiao:

So actually I want to point out one, one data point, which supports your view. there was a historical high, a number of corporate CEOs, that actually left, their job right before the pandemic. So the plan there is people who would have benefited from all the buyout, all the share buyback and all that stuff, have already benefited. So whether or not we do this government intervention that's not gonna change anything, like these CEOs already got paid. The new CEO's are the ones who have to handle all this stuff. And the government intervention does not change that situation.

Jimmy:

Well, no, they're going to get paid on their stock options. So I mean, of course there's a moral hazard. If they could pop their own stock, then they're going to do it because most of these guys have a huge moral hazard. And the incentives that they have to, like if they're usually on the helm for somewhere around three to five years. And if they can pump the stock in those three to five years, they will. And that's exactly what they're going to do. And, they'll take any risks in order to pump those share price so that they'll, they can, exit with lots and lots of money. So in a sense of like, I don't think there are good bailouts. I completely disagree with this notion that, Oh, you can do bailouts in a good way or give it to the people that really need it. No, I mean that's still the government picking winners and losers by some quote unquote moral standard that you might, like and it's just as bad as any, any other, bailout or putting a thumb on the scales of the market, in many ways. So I disagree with this notion that bailouts are useful. it's essentially, putting aside the market process and trying to, pick winners and losers. And the losers, unfortunately, are the companies that are yet to be born and they're the ones that are going to suffer the most. Instead of entrepreneurs going out and creating new businesses, you're essentially giving leverage to lots of inefficient and zombie companies to continue whatever they're doing and crush these, smaller startups that might, actually do a much better job and handle money much better. So, yeah, I mean it's that's the situation that we're in and that's why I think bailouts are terrible.

Richard:

Yeah. So I think there's two kinds of arguments there. Number one is that depending on the circumstance, so if a company is failing out of it's own fault, okay, so for malpractice or maybe just excessive stock buyback, then it should suffer the consequences somehow. but in the event that it's an issue with a virus, right? Take it to the extreme, a visual extreme of let's say an alien attack, and for whatever reason that just affected disproportionately, some industry more than others, then that's not really the fault of the company to be operating in that space. That just sort of, where the jazz hit the fan, right?

Jimmy:

So, well, so I mean, but life is unfair. Why, why, why do they get like special treatment? Like to say, okay, well that was an alien envision. So therefore you get money. I mean like who, who made you God? That's just the market. Life is unfair all the time. if you get hit by a bus, then you die. There's no, you don't get to go revive that person because it was unfair that that person got hit by a bus. That's not how things work.

Richard:

So the second point I'm about to make is going to illustrate the first point, right? So regarding airlines, right, so there was a very nice tweet thread that I read the other day about how somebody was advocating for a bailout of the airlines because if the airline was to fail, then all these flight attendants and the pilots would get laid off. And if someone were to create a new airline, right? To sort of generate some kind of innovation and subsequently hire all this excess labor force. There are regulations in place to make sure that all these airline pilots and stewards, flight attendants to receive the proper training. And then there's all these certificates, and so on and so forth that they have to get in order to be re onboarded. And then that would mean that a mission critical industry would now be completely paralyzed and that would have ripple effect throughout the economy. And yes, a libertarian could argue, well just less than the regulations. And why are you putting all these hoops that people have to jump through in order to be re-onboarded as someone working in the aviation industry? Well, the unfortunate fact is that the world's just, doesn't just work like that. Right? You can't let anybody do anything right. Just, just let anybody do anything. The are needs to be laws in place. The are needs to be proper trainings in place. Right. And then this other argument about how, well, why did you work for an airline in the first place? Why did you not foresee these issues that could take place? Why not become, I don't know, become a software program or something or just have some, trained skillset that's completely transferable during economic crisis. It's your own fault. I don't think that argument necessarily applies very well because unfortunately, people are just predisposed to different sorts of abilities, and they have different kinds of circumstances. They can't foresee everything. Right. So I think this goes back to Qiao's point of, there needs to be some kind of social net, where when unfortunate events happen to people not at their own fault, some kind of bailout is necessary. That would be...

Jimmy:

No, no, no, no. I disagree'cause like the bailouts and like sort of like social safety net and stuff like that should come from your community and it should not be forced from people at the end of a gun,. essentially, which is what they're doing with these bailouts. It's forcing everybody to contribute to a common, like, whoever needs a bailout, okay, well these are the people that we find worthy. And government gets to be the arbiter of all of that. In traditional societies, what happened is if you were down on your luck and people saw that, like, you, you just like, you're a hard worker. It's just that you, you had a string of terrible luck. Maybe aliens abducted you or whatever, and you just, they would have compassion on you, and would try to help you out. That's what real social safety nets are supposed to be. Instead, we have this notion that, oh, well, the government can bail them out for free. That's not how it works. It's always money taken out of the pockets of everybody else. And that's forced, social virtue or something like that. And it's, it's not voluntary in the least. The social safety net is supposed to be your own community. Not the government. The government is, like basically we've made the government the arbiter of who deserves money and who doesn't, which is really stupid. and that contains within it lots of moral hazards. Instead, it should be your community. And in the past, whenever you had anybody that said, hey, like you're down on your luck, here, here's some money, or here's a loan, or here's something you can use my truck, you can live at my place that I'm not using, whatever that that's how it's supposed to be. instead, we have this notion that the government can print money and that essentially these people are getting bailed out and that, nobody needs to suffer anything. That it's free money to these people and that, and that it's not really being stolen from you, that that's not the right way to do things. And that's against the principles of Liberty. if you want to bail out, you should ask, you should first of all have to ask for it from the people that you can make a good case to instead of, lobbying government with, officials that, have no skin in the game. It's not their money. If somebody were coming to one of my relatives came to me for help, I would try to evaluate the situation and, maybe even lend them some money if that were, or give them some money if I thought it was a worthy cause. That's how it should be. But, the system of bailouts is completely immoral. It has all sorts of moral hazards. It's unjust, it's unfair. This is why I hate it. And this is why I think it's really stupid.

Richard:

Okay. So I think there's also, this is not fully formed argument. I'm just inserting a statement here. I think that the counter argument against that would be something like scale. So if you were to just go to your for something, then maybe the amount of the systems you would potentially get is minuscule or maybe the sort of the kind of company you're trying to build, the type of thing that you're trying to do. Like for example, with Elon Musk trying to go to Mars, right?

Jimmy:

I mean, I'm certain if Elon Musk went bankrupt, there's nobody that's going to really bail him out. Right? Like, but but that's a giant company. I like companies in many ways are artificially large in this economy because of fiat money because they have access to cheap loans and because they can play all sorts of unfair games by, stacking the regulation, for in their favor and buying up smaller companies and like on their pricing, their competition and all sorts of things like that. So in a more fair economic system, something would more sound money. You would have smaller companies and it wouldn't be, like just giant fragile things that could collapse and then affect, hundreds of thousands of lives or something.

Richard:

Right. So my next question actually is also related to this point. So since Jimmy has mentioned very much a distaste for the current system, it would be really interesting to hear any kind of alternative suggestion. It is often claimed that Bitcoin or decentralized finance offer up a better alternative to the current financial system. Suppose Bitcoin indeed becomes the new money. It is a unit of account, store of value, and medium of exchange. The latter perhaps made possible via lightning network. Describe for us how the banking system is now fundamentally different in a new world. How does this new system reduce or obviate the wolves from the status quo?

Jimmy:

Well, first of all, like banks are currently the distributors of newly printed money. Every bank can fractionally reserve money, lend money, which is essentially creating new money into the economy. This is how, especially, via commercial banks, this is how most of the money is printed. It's not actually the Fed per se. It's Fed lending out to commercial banks who in turn lend out to big corporations, which is where most of the money goes. So first of all that that gets eliminated. If you have banking at all, it's probably gonna be more on the full reserve basis and the few that are fractionally reserving, they go bankrupt because you have bank runs and stuff like that. But the nice thing about Bitcoin is that you can be your own bank and, if you have the technical chops and, assuming that, better technology comes along with securing your own funds and so on, then you don't really need the banking system per se. You still have like, stuff that banks, did in the past. Like, you know, loans to people. Maybe foreign exchange or, you know, maybe bond issuance and stuff like that. But, the banking system as we know, it runs on creating new fiat money through, money creation, and loans. So I think that's the main thing that goes away. And that in turn means that there's no crony capitalism. There's none of these bailout things, governments have to stay within their budget because no one's going to lend to them unless they show some fiscal responsibility. And even if they do get money lent to them, it's going to be like a 7, 8, 9%, at least, rather than the, 0.25% that they're getting now, or even zero, I think six-month Treasuries are at zero, almost. So that's essentially what the interest rates are for them. So that's what I think would be different.

Richard:

Okay, cool. By the way, I think a counter argument against that could be something like this. So Bitcoin is effectively digital gold. It has all the features of gold, but it's more divisible, easily transferable and so on and so forth. So it's even better. Right. But imagine that we are now in a world where we have all this digital gold. It's interesting you mentioned fractional reserve system because I still think that lending and borrowing will still exist, right? And lending and borrowing by some kind of entity where the amount being lent and borrowed are not fully backed by whatever is in reserve in that entity. That's basically fractional reserve system. And therefore,

Jimmy:

Yeah, if that happens, those will go bankrupt because you're going to have a bank run very quickly. As soon as anybody finds out, they're going to be like, okay, give me my money, and then they go bankrupt because they don't have money to cover the fractional reserve. I mean, this is how banking worked in the 19th century. you'd have bank runs and then these banks would go bankrupt. That's how it would work. Right. But what I'm saying though is that the introduction of Bitcoin going mainstream and being adopted wouldn't change the fact that people can still run banks and these banks would not necessarily go bankrupt as long as they still get to be bailed out, which is basically what the Fed is trying to do. Right. Well how would they get bailed out? Because the fact can't print new money if it's, if it's based on Bitcoin, what are they going to do? Print Bitcoin? They can't.

Richard:

Oh, I see. So, okay. So we're discussing different things now you're talking about a world where Bitcoin has become like the only mode of, or the predominant mode of value transfer.

Jimmy:

Well, you said unit of account, store of value, and medium of exchange. Of course that's what it means.

Richard:

Right, I meant in the sense that it becomes A unit of account. So I guess it could be different units of account within an economy.

Jimmy:

Well, yeah, I mean you could, you could take out loans in. Okay. Okay. So this is where we're talking about like sort of hyper-bitcoinization. Say they're lending out in US Dollars. What am I going to do? Well, I'm going to borrow as many US Dollars and buy Bitcoin and then like, why and then, and then pay back in Dollars as I need to based on that loan. and if it's already a unit of account, a store of value, and a medium of exchange that I'm going to, Bitcoin's going to do way better than, a currency that inflated 11% in the last seven weeks. So, I mean that means that I'm going to make money and that's essentially what, how hyper-bitcoinization arrives. And then, I mean, banks are not gonna make that much money off of, lending out Dollars or the interest rates that they're going to demand. They're going to be high enough to where people aren't going to want to borrow from them. So, I mean, I think it's inevitable that you get to the point where if Bitcoin is a hard sound money that we've been talking about, that banks no longer loan out in anything else because, like you either have to charge way too much interest or you're going to lose money in some way. So I don't see how the Fed can bail them out. I mean, they can print way more money, but then that's just hyperinflation and you destroy the currency that you're printing.

Richard:

Okay, great. Qiao, any follow-ups there?

Qiao:

So, Richard, you actually raised an interesting point that, I tend to agree with that even if Bitcoin becomes, this, global store of value, unit of account, a medium of exchange, nothing prevents, banks from emerging in a free market, and nothing prevents, fractional reserve. Nothing prevents, credit creation. And in fact that the free market will probably, cause a credit system to arise, where people would borrow, not at a hundred percent collateral. So I think that's an interesting point.

Jimmy:

I mean it might happen, but I think like long-term, those don't survive. I mean, like they're very fragile to any sort of disruptive event and any type of bank-run. So I mean, they might exist for a short term, but like, it works until it doesn't. And then like in the current system, things are so fragile that they have to continuously bail out every 10 years or so. but in a system like that, every 10 years, all those banks just kind of go away. And then people just learn not to trust them. So even in the long run, all of those, like fractional reserve, loans and things like that. I mean, that might happen for the short-term, but long- term, I don't think they can survive. That just won't happen.

Richard:

Yeah. By the way, I think another angle to think about the excessive money printing is the utilization of talent in the economy, right? So if you think about resources, it's physical resources and then, and the labor, right? And I'm talking about intellectual labor. So all the smart people in this country are going to finance or Silicon Valley. And that has a lot to do with the fact there's cheap money. So the finance companies are at the spigot and then for tech firms there are indeed firms that have made things are more productive, increase people's general happiness and wellbeing. But then, there're also arguably some companies that are very popular and profitable but do not represent a lot of progress. Right? So digital drugs. Social media could have extremely detrimental effects. So I think one other problem with easy money is just the incorrect direction in which the talents actually get deployed towards. And I also suspect that there is a sense of internal Delt in various talents in that particular world where they are engaging in these businesses and they seem to enjoy all the success. But ultimately, ultimately they would not necessarily admit that they're doing something super productive. So, I mean, I myself for one have been in Wall Street for a while and I have many, many colleagues that feel very empty for deriving the sort of profits that we do for the kind of work that we have done.

Jimmy:

Yeah, and you're absolutely right. I have a whole talk around this. Bitcoin is the ultimate social justice. And I talk about exactly that, which is that, like a lot of these people went into investment banking and Wall Street trading and things. mostly because you have access to the early printed money. It's not because they happen to be very interested in finance per se. It's because that's where the money is available. And, in any sort of like money scheme, there's a, there's a group of people that will go towards whatever is the easiest. And right now finance is the easiest way to make lots and lots of money. like if you try to like mine gold for example, it's going to be very difficult unless you happen to be very good at geology and know all the chemical processes around gold. Not to mention like all of the management around, procuring, possible mining sites and, equipment, heavy equipment and things like that. the fact of the matter is like, there, there's a lot of people that go into the money production business, which is essentially what investment banking and Wall Street is. instead of doing something more meaningful in a hard money system, what ends up happening is that a lot of those people, go into stuff that they are really good at instead of where they happen to have a small advantage because they're in the right place and time. Stuff like, you might go and build spaceships or cars or, new machines or whatever. and even like Google and Facebook, to a large degree, you're absolutely right, they are kind of meaningless. I think the quote that I've heard that's I think very poignant is, I'm getting paid lots and lots of money just so I can get a few more clicks and that's essentially what Google and Facebook are all those engineers that are working there. Their lives are all about getting just few more clicks. And that's horribly depressing and I don't think it's a coincidence that we have epidemic levels of depression and that drug use is high, and that, people are addicted to all sorts of things like alcohol and sugar and video games, and all sorts of things because they need to escape the fact that deep down inside they know that they don't really, they're not really contributing anything and that they're essentially rent seekers in an economy, that they're not really adding value to civilization in any way, shape or form. So, yeah, I agree. I think, once you get to a hard money, a lot of bad changes, people find a lot more meaning in what they do. And they don't have to spend so much time, trying to store value by researching stocks and real estate and things like that. So that they, put their effort into their passion and what they think is important for civilization. I look forward to that world and I think that will make, not just, like our lives better, but the lives of everyone around the world, including third world countries, much, much better.

Richard:

Okay, perfect. So, Qiao, last question for you. You had mentioned prior to our debate that you generally feel that government officials that understand economics might be able to do these fiscal and monetary rescues a little bit smarter and that could work out. So outside of the US what are some other countries with smart policymakers that seem to have made the right decisions in times of stress? Or what historical eras have there been in the US history where governments have done the right thing?

Qiao:

Ah, that's a good question. well, number one, I don't think it's a problem with competence. It's more a problem of politics and interests. I think. I think the central bankers actually know what is good and what is bad for the economy, but they're not doing what is best for the long run of the economy. What they're doing is to score wins for their elections. I think that's what I do and that's the main problem behind, central banking. But in theory, I think what they do, intervention during recessions and payback, paying back all the liabilities could work. I don't know too much about central banking outside of the US. I know a little bit about Japan and in Europe, but I think mostly they've done a very bad job over the last two or three decades. But a good example might be China, but not in 2020. It might be China in 2008 when they had a lot of bullets, a lot of ammunition, to pull the economy back. In fact, to drive the entire world's economy back on track. But right now they're sort of following a similar of path, of going down a lot of debt during good times. So, frankly nowadays in 2020, I'm pretty pessimistic about, about central banking around the world.

Richard:

Okay.

Jimmy:

As well you should be.

Richard:

Right. Right, right. Okay. So, alright, let's move on to round three, audience questions and then we'll have concluding remarks. So we have one question from a Twitter user named Young Bitness. And his question is, what do you think happens to the equity market and BTC market next? So this is not exactly related to our topic today, but maybe you guys just highlight an answer.

Jimmy:

Alright, I'll give it a shot. So, equity markets, we're talking mostly about stocks, S&P500 and so on. The pattern has been, for the last, 30, 40 years. actually you could, you could go all the way back to like 1959. So here's some statistics that are really interesting. 1959 M2 money supply was around$285 billion. Currently it is around 17.4 trillion. That's as of last week. It's probably closer to 18 trillion right now, at least. but that, if you annualize that ends up being somewhere around 6.8, 6.9% per year. if you look at the Dow Jones industrial index, from 1959, to now, guess what the percentage increase has been? It's been right around 6.8, 6.9%. So that suggests to me that a lot of that newly printed money ends up finding its way to the stock market. And that's because the stock market has a store of value premium. Prior to the Federal Reserve in 1913, usually a lot, most of these companies, first of all paid out dividends and, price to earnings ratios or price to dividend ratios were like in the single digits, right? Like you had to own a stock over nine years in order to make back the money and so on. I think that's the natural price of stocks. but because of the store of value premium, because there's no good place to park your money, it ends up coming into the stock market. This is why whenever the Federal Reserve chairman even hints at, lowering the, Fed funds rate, that that ends up driving stocks higher. It's not necessarily because it's quote unquote good for the economy. It's because all of those traders are front running the fact that there's going to be newly printed money coming into their, into stocks and they're just running it. So I suspect that all of this money printing that's happening, especially, with the Federal Reserve and all of these lending facilities, essentially giving, liquidity to illiquid bonds and, you like weird derivatives and so on. That's going to find its way into the stock market in some way. And we're kind of seeing that. So I suspect equities will get higher, even higher than the previous high in the next 24 to 36 months. With respect to BTC, that's a different animal. And we do know exactly the supply and the supply is going to have in a little over 9, 10 days. So, based on that, I suspect Bitcoin price will go up. Just because there's going to be a supply shock and, there's going to be increased demand as more people realize, well, more people have access to more money first of all. And, because of the Fed money printing, but also because of all of the, different shenanigans going on with the Fed. So, based on that, I'm bullish on both markets, at least, over the medium term. I'm definitely bullish on Bitcoin over the long term. I think the US Dollar maybe has like two or three more bailouts to go before it collapses. But I don't know, that's just my feeling.

Richard:

Cool. Qiao- Anything to add?

Qiao:

I'll comment on the long run. I think the us stock market is going to face a lost decade, similar to, basically what depended in the late eighties and Europe in the late nineties, and then emerging market in the two thousands. So...

Jimmy:

Also the US in the seventies.

Qiao:

Yeah. I mean all these markets, they reached an all time high during their respective decades, and they never recovered. And I think there's a fundamental reason behind... my suspicion that the US stock market will not recover is that, I think, I'm really pessimistic on the economy just because of the debt that we accumulated in this recession we're nowhere near complete yet. I think the balance sheet, the Federal Reserve balance sheet, we'll probably get to 10 trillion, 20 trillion, and that's gonna f* up the entire economy, unfortunately. And, number two, the baby boomers will retire. They're going to be the largest sellers of the US stocks over the next, two to five years. So no more bids and a lot of selling, that's going to happen with the next decade. So we're going to see a lost decade in US stock markets. Bitcoin, obviously I'm extremely bullish long- term. I want to point out a couple of data points recently, which I found interesting. Number one, two days ago, or yesterday, actually, Bitcoin led, so Bitcoin went from like 7,500 to like 95, within like 48 hours. But what was interesting about this rally, which I haven't seen for a while, is that big one led the entire market. So big one actually outperformed alts. I haven't seen this thing in a while. And usually what that suggests to me is, there's new inflow into the market. So people were actually buying the spot market like on Coinbase. And by the way, Coinbase crashed yesterday. So that's a really good sign, short term bullish sign. and I say that because, when someone first learns about crypto, they're not going to buy some random like top 20 alt, they're going to buy a big one because big one has the best brand. so that's why I think it was new inflow into, into Bitcoin. So I generally feel pretty bullish short term. Obviously I don't, I'm not going to trade, in the short term and just hold, for the very long term.

Richard:

Okay, great. Glad to find a point of agreement between you guys. Well, that is our debate. Can you provide your concluding remarks, starting with Jimmy?

Jimmy:

I think I've made my case pretty clear, which is that central banking is an anathema. I really am a libertarian. I think we should end the Fed. We should audit the Fed. We should do lots of things that, make this moral hazard go away and allow the market to operate in a more sane way instead of the crony capitalism that we're subject to. I think, bailouts are immoral. they're unfair. The rich continue to get richer as a result. The poor continue to get poorer as a result. I think, taking, stopping this money printing and, I mean, perhaps there's an argument to be made that, accelerating the money printing so that the Dollar will collapse faster is a good thing. I don't take that view. I personally think it would be better if we had a smoother transition over to Bitcoin rather than a complete collapse of the Dollar system. As a result of, way too much money printing. But I think I've made the case that, bailouts are bad and central banks are bad. There's a lot of moral hazards that and that, Bitcoin would bring a lot more fiscal sanity, and that's what I'm hoping for in the future.

Richard:

Okay, great. Go ahead, Qiao, with your concluding remark.

Qiao:

So there's this interesting concept in economics called the production function. What it says is that the productivity level is a function of, generally three things, labor, capital and technology. And empirically, if you study a bunch of economies over the last century. And currently what happens is the moment you overuse one of the three factors, the general level of productivity actually decreases. And what we've done over the last, at least last decade in the US and probably two or three decades in Japan and Europe, is that we have overused capital and not enough labor and technology. And I think this is very, very bad for the long run productivity increase. However, I think government intervention during recessions can work. the key is to payback all of these liabilities that we accumulate during the recessions and not overuse capital during the good times. That's the only condition for which a government intervention can work in the long run.

Richard:

Okay, great. Thank you for your insights, Qiao and Jimmy. Especially Qiao for braving the show, and arguing in what seems like an unpopular, contrarian, and not to mention, angry, opinion on main street and in crypto circles. I'll tell you, many were eager to debate in an anti-government position, while it was much harder to land someone knowledgeable and willing to argue the opposite side. And thank you for reinforcing the crypto ethos, Jimmy. How can our listeners find you?

Jimmy:

you can find me on Twitter media good hub and sub stack at Jimmy song. on substack. That's my newsletter. You can subscribe to it. I have a technical newsletter that I give out every Monday morning. I'm also available on YouTube, Offchain with Jimmy Song is the name of my channel. I have a couple of books on Amazon, Programming Bitcoin, which is more for programmers, and the Little Bitcoin book, which is more for non-programmers, any of your no-coiner or pre-coiner friends would be able to understand what's in it and get a much better idea of Bitcoin afterwards. Yeah, those are it, I think. Yeah, there's probably more but it's alright.

Richard:

Cool. How about you Qiao?

Qiao:

You can definitely find me on Twitter,@qwqiao. Spend a lot of time on Twitter, although generally there's not a lot of nuance on Twitter. But, I write long form, for Messari. so you can go on messari.io and subscribe to our newsletter. And I generally write once per week.

Richard:

Okay, great. Well, thank you. So listeners, we would love to hear from you and to have you join the debate via Twitter. Definitely vote in the post debate poll. Also, feel free to leave your comments and say hi. We look forward to seeing you in future episodes of the blockchain debate podcast. Consensus optional, proof of thought required. Thank you guys. Goodbye.

Qiao:

Thanks Richard. Thanks Jimmy.

Jimmy:

Goodbye.

Richard:

Thanks again to Qiao and Jimmy for coming on the show. Here are my thoughts as I reflect upon the debate: Bailouts may be necessary evil to combat inevitable downturns in cycles of economic development, especially those caused by an Act of God such as the coronavirus pandemic. However, frequent acts of socializing losses via colossal money printing are unsustainable. At some point, the status of US Dollars will be appended as holders head for the exit, perhaps into a digital store of value. The pro-establishment views from defenders of governmental interventions are generally held by those in the system or having been in the system. These folks have historically benefited from the way things work in the system, and have formed their body of knowledge by studying the inner-workings of such a system. I fall into this category by nature of my previous career on Wall Street. I think acknowledgement of such entrenched biases helps one see things more clearly when critiquing the system. There was another depression in early 1920s that was alluded to in the debate, where unemployment hit double digits that supposedly saw little governmental rescue and ended quickly, presumably as a result of the lack of intervention. I can't vouch for the causality, for not having fully studied this history, but this could be something interesting for the audience to look into. An exercise for the reader, if you will. Anyway, what was your takeaway from the debate? Don't forget to vote in our post-debate Twitter poll. This will be live for a few days after the release of the episode. And feel free to say hi or post feedback for our show on Twitter. If you like the show, don't hesitate to give us five stars on iTunes, or wherever you listen to this. And be sure to check out our other episodes with a variety of debate topics. Bitcoin's store of value status, the legitimacy of smart contracts, DeFi, POW vs POS, and so on. Thanks for joining us on the debate today. I'm your host, Richard Yan, and my Twitter is@gentso09. Our show's Twitter is@blockdebate. See you at our next debate!