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Nathan Lewis – The Possibility of Hyperinflation

May 14, 2021 | Podcast | 0 comments

nathan lewis magic formula

In this episode we welcome back Nathan Lewis to share some powerful insights from his new publication The Polaris Letter. We discuss the risk of hyperinflation in the current global environment of debt, expanding money supply and stimulus. Make sure you check out Nathan’s new Polaris Letter here 

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Hosts & Guests

Jonathan Doyle

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Nathan Lewis Hyperinflation

Jonathan: [00:00:00] Hey everybody, Jonathan Doyle with you. Once again, welcome back friends to the supply side podcast. Really appreciate. The privilege of your time. And I hope we can really bring you some great value today. I love talking to this guy. This is his second time on the show. And he’s been very generous with his time and I’m really excited because Mr. Nathan Lewis has recently launched. 

[00:00:30] His new letter, it’s called a Polaris letter and you can find it on sub stacks. So get across to sub stack. If you’re not familiar with that platform, it is a great platform for so many people to begin to be rewarded for their excellent insights and work. So if you go across the sub stack and do a search for the Polaris letter, Nathan Lewis, you’re going to find that there. 

[00:00:52] He is such a gifted writer. He, I said to him and you’ll hear me say this in the discussion that he had me laughing out loud. And some of the things that he said. And you, you get that, but you just get such great analysis in such clear thinking. So I really want to encourage you all to check out. 

[00:01:07] Nathan’s Polaris letter on sub stack. You can also find Nathan over@newworldeconomics.com. So in this discussion, we’re looking at Nathan’s latest Polaris letter. We’re gonna be talking about hyper inflation. We’re going to be talking about this great big central banking, macro deficit spending. 

[00:01:29] Bond vigilante world conflagration of debt. It’s all there. And we cover some interesting stuff at the end, too. We get a bit more philosophical, but if you have an interest in where this is all heading in How to prepare for the changing macro weather that we’re going to be engineering, then you really going to enjoy this discussion. Look, that’s it for me now. Please review listening to this. Make sure you’ve subscribed. 

[00:01:52]We’ll be on YouTube too. You can come and see the video on YouTube supply side partners. You can find us there. But for now that’s it sit back relax enjoy this great discussion with mr nathan Lewis.

[00:02:04] Jonathan Doyle: [00:02:04] All right. Mr. Nathan Lewis, welcome back to the supply side podcast. Thanks again for making time for us. 

[00:02:12] Nathan Lewis: [00:02:12] to be here. 

[00:02:13]Jonathan Doyle: [00:02:13] I’m stoked to have you back because you’ve now made a great decision to get your new letter, the Polaris letter onto sub stack. And I’m a big fan of sub stack. If listeners aren’t familiar with it, it’s a great way for writers, for, anybody with with a great idea story, to tell, to to get some, to get a good audience and to get paid for it.

[00:02:33] So we’re gonna make sure we send people to the new letter, but as I said to you a moment ago, there was a couple of things that you wrote in the last one. Literally laughing out loud and I’ll do that as quickly. My personal favorite was when you talked about the the Japanese finance minister in 1936, suggesting to the army that they needed to cut spending and he got executed.

[00:02:52] I I just be interesting to 

[00:02:53] Nathan Lewis: [00:02:53] didn’t think it was that funny, 

[00:02:54] Jonathan Doyle: [00:02:54] No he didn’t. 

[00:02:55] Nathan Lewis: [00:02:55] But, it’s true. 

[00:02:56] Jonathan Doyle: [00:02:56] I read it thinking about the if somebody tried to suggest to a, to government that maybe stopping spending would be a good idea at this stage of history, it doesn’t seem that would go down too well. And my other favorite was near the end of the letter.

[00:03:09] You you gave a great definition of MMT where you said MMT is an open-ended excuse for the government to print money for whatever it might like to spend money on, which will doubtless be very popular until it’s not. I like that. I like that turn of phrase because yeah when the party’s on, it’s very popular and until it’s not.

[00:03:30] So I liked those. And what I want to do is give you a little introductory quote of yours here just to lead us off. The letter begins, where you have this great comment about, assets being overpriced, bond yields are down, but you had this quote here where you say we are in the early stages of a monetary event worldwide that will probably result in 80% real losses in stocks, bonds, and cash over a period of five to eight years.

[00:03:59] And the essence of this event is that a decline in currencies worldwide. And there’s no refuge in any particular currency. And the last thing I’ll say on the intro is that you said we haven’t really seen anything like this since about the 1780s around the the continental Congress. As you would agree, an 80% real loss is a big statement.

[00:04:18] Tell us what you’re thinking.

[00:04:20]Nathan Lewis: [00:04:20] It’s real simple. If buying bonds can’t really go up in value, right? They’re already well expensive. They could actually, you could have negative interest rates, but it might be a temporary thing. Stocks typically, that the valuations are very high. And if you had enough debasement of the currency, the stocks could go up a lot.

[00:04:42]But typically after their valuations have already gone down a lot, is that, does that make any sense? They become cheap and then they start to rise due to inflation or your presence. So you’re not going to get any nominal neck. It’s like almost, it’s almost impossible to get substantial nominal increases in at least in the U S accident work.

[00:05:03] It’s somewhat, you can argue, make an argument about, Taiwan or something, know some foreign market, but then if your currency loses value and 80% decline. So it’s only with one fifth, as much as it is today. Then you real then your real losses are, is it 80% loss?

[00:05:21]And. And that’s very easy to achieve. We’ve already done it twice. Just in, in relatively recent us history. During the 1970s, the value of the dollar went from it took $35 to buy an ounce of gold and this in 1970, this gold standard system, it was set up. So the dollar would stabilize, it was always 35, right?

[00:05:41] It didn’t fall in value. Then you had these events and we began the floating Fiat currency system in 1919 seven, 1971, 1973 at that period. And by the time all the smoke cleared the dollar, it took about $350 to buy an ounce of gold. So it’s basically a 10 to one decline. The dollar of the 1980s is worth 10 cents and the 1960s.

[00:06:04] So when I say five to one 80% decline, It’s it’s actually of modest compared to what we’ve already done. And then in the 2001 to 2011 period, we went from about three 50, that average during the eighties and nineties to about we stabilized around 1250 for a while, but we w we touched 1800, 1900.

[00:06:25]Five times three 50 is 1750. So is that right? Yes. So again, that’s about a five to one decline. This is stuff that we’ve done and to say that it could happen again, is it, shouldn’t be very surprising. And also to say that it could happen when we are, I would say, some of the most extreme fiscal and monetary situation and just this loss of discipline in all aspects of the political system.

[00:06:54]It’s, it seems like pretty easy call to me.

[00:06:57] Jonathan Doyle: [00:06:57] It’s a really interesting point. When you talk about the loss of discipline, I reached out to Krista Muth, who’s at the Hudson Institute and he wrote a piece, two pieces in the wall street journal last few days. And his piece on deficit spending was I think, quite brilliant. And I’ll put some links to that in the show notes, but he, this is credible data.

[00:07:14] He said that for 181 years, the U S government ran basic, balanced budgets for 181 years with some small variants. And then the data that he shows, like I just looked at it and this kind of, this immersion in deficit spending and in your letter, I just want to find this. You just talked about, you had some great quotes from the from the French experiencing in the 1790s from Andrew Dickson White’s book.

[00:07:43] And you said here the national assembly had from the first shown an amazing liberality to all sorts of enterprises, why is all foolish, which were urged for, and here’s the key thing for the good of the people. So I’m looking at the stimulus in the U S at the moment, is it just the same thing?

[00:08:03] Is it just, Krista Muth says that there is a fundamental shift in our political economy now, right? It’s where promising huge amounts of transfer payments to individuals, drawing future prosperity. When does it stop? Is it, is this really different simply in terms of scale.

[00:08:24] Nathan Lewis: [00:08:24] Yeah. It’s clearly, everyone has realized that something’s going on. They’re just not quite sure what the consequences are. Cause we haven’t seen it before. And so far, it seems like it’s been nothing. It’s been part of the time. We did it last year, had it, all these checks ran these 15 or 15% of GDP deficits.

[00:08:42] We’re doing it again this year it’s not easy to say anything particularly bad has happened. We’ve had by many measures, the sharpest recession since the great depression, 20, 20, 20 at the same. But due to these government handouts. Personal income actually went up. yeah.

[00:09:04] That’s never happened a recession before because of the checks in the mail. And then with the most recent round of handouts early this year personal income sword again to, like he made and he made an even bigger spike higher and which we’ve never really seen before.

[00:09:19]Just blasting money out like that. You could argue that it was a unintended consequence of world war II because at that time they were spending money to buy bombers and stuff but it was the last time we saw anything like that happen. And here we are just sitting around at home watching TV, or we’re not really fighting world war II here.

[00:09:40]It’s just weird. And I think that I think it, when you read that account of France, And you there’s so many similarities, it took me all of eight minutes to find five or six similarities. Like they listed there, there are so many I could hardly stop cutting and pasting.

[00:10:00]These accounts of the political process and the psychological process. What, by what thinking process did we end up with a 15% of GDP deficit? Not just once, but twice, two years in a row. And already there’s like a, a 10% of GDP deficit baked into the cake for the third year, but it’s just because they pass the spending, these pests, these spending bills, but the actual money doesn’t go out the door until the next fiscal year.

[00:10:23]There’s a lot of baked in even for 2022. I think it’s about either eight or 10%. And it’s, it’s crazy. 

[00:10:32] Jonathan Doyle: [00:10:32] Gotcha. Going back to your early books. It seems that if there’s any sort of tax policy from the current administration, it’s a kind of soak the rich tax policy and having read your books, like your unequivocal, that, w what we’re looking for is low taxes and stable money.

[00:10:49] But what we’re going to get is as, as these taxes go through the ceiling, you actually get less revenue, right?

[00:10:58]Nathan Lewis: [00:10:58] Yeah. That’s another thing that’s happening now. And then some of these texts, some of these tax decreases are pretty big. There’s an increase in corporate tech kind of undoing, half undoing, the tour Crump stuff that in itself is maybe not such a big deal. But now they’re having, they’re talking about applying and if you know the complexities of the us tax code, but payroll 

[00:11:19] Jonathan Doyle: [00:11:19] Does any, does anyone know the complexities? And he likes.

[00:11:24] Nathan Lewis: [00:11:24] No, they don’t some of these weird one complicated thing piled up on another, they’re talking about applying payroll taxes now to higher incomes, which is essentially, stacking on top of the income tax, but it’s actually worse because the payroll taxes, there’s no deductions against it, right?

[00:11:41]In income taxes, there’s often ways to not have income tax. and then even placing that, and I’m not talking about capital gains rates that are in excess of 50% in some States and then tax is going up at the state level and Lottie, daddy, da, and these are some pretty big boots. They are probably not going to generate any revenue and they’re going to have some meaningful.

[00:12:09]Economic slowdown effect, I think. So then you get the triple whammy, which I think there’s three, three, three ways to get whammy, which I talked about in the magic formula. So you don’t get, you don’t really get any extra revenue. In the last 70 years, U S history, no tax increase, legislative tax increase has created any revenue, a sustainable increase in the revenue, GDP ratio.

[00:12:33]No tax reduction has created a a sustained decline. They spent the money thinking they’re going to counterbalance it with revenue, but there is no revenue. So they just have a bigger deficit, basically what happens, what do they do when they have the bigger deficit? Then we’re going to print the money, but they’re also might raise taxes tomorrow.

[00:12:49]The next thing that happens is, GDP slows down. So your revenue GDP ratio is maybe it’s unchanged. But GDP is smaller because there’s fewer people working and they’re getting paid less. That’s basically a GPS, so your tax revenue is down right. Instead of going up. And another thing that happens is often you might be more in a, more of a recessionary situation And it actually in the recession, I’m more of like a cyclical recession.

[00:13:17]The revenue GDP ratio tends to decline because people are out of work kind of changing jobs and stuff. So just one way after the other right revenue actually tends to do decline relative to what it is. Not necessarily declined to nominal terms because there’s an upward trend to everything, but be lower than it would be if there had been no change in policy at all.

[00:13:38] But at the same time they’re matching this with more spending. And then, 

[00:13:42] Jonathan Doyle: [00:13:42] issue as well. There’s a demographic issue as well.

[00:13:46]Nathan Lewis: [00:13:46] Yeah, somewhat it’s a, that’s a broader picture where we have had all around the world. We’ve had all these government institutions, that have assume this expansion of population or a certain, population curve, a certain amount of young people compared to old people and they’re are becoming incompatible with reality.

[00:14:10] I personally don’t think that there’s any inherent, there isn’t very much inherent problem in shrinking working age population or or preponderance of older people possibly needing support and a society. I think those create issues that are not break, can be dealt with relatively easily.

[00:14:30] But they are incompatible with the systems that we have in place already. And of course, the first thing I’m going to do is credit, try to make the existing system work and just get themselves farther into the hole. But there’s a couple of other problems with rising taxes, historically rising taxes have tended to cause currency decline. For a number of reasons, one is, there’s the economy slows down, so there’s an excess of money compared to the economy. The other thing is that the first thing that everyone does, when they, when the economy slows down, the first thing they do is pressure the central bank to have an easier policy, all these gears start turning and to just make a long story short higher taxes tend to lead to declining currency value, which is exactly what happened in the seventies as well.

[00:15:14] Jonathan Doyle: [00:15:14] So the other thing I wanted to just, I really enjoyed this quite to bat. And this is back in, talking about the French experience, which was just seems reading it, reading the quote in your latest letter was just so pertinent. One of the parts I really liked about what’s happening, what happened in France and in 79 is it’s happening now.

[00:15:32] Here’s the quote from the book that you’re signing inflation in France, where it says it creates a class of debauchery speculators, the most injurious class that a nation can Harbor more injurious indeed than professional criminals, who the law recognizes and can throttle. I liked that line because it made me think of GameStop.

[00:15:54] It made me think of crypto. It’s fascinating to watch the speed at which, what, what Andrew Dixon, what we refer to here as a class of the borscht speculators. I wanna walk two, three days ago. And I bought some doge coin about a month or two ago, and I just, I didn’t spend much.

[00:16:13] And then I sold it relatively quickly before it jumps. Cause I plays no one take crypto investment advice from me in a hurry, but I worked out that if I had simply put I had about a hundred K sitting in an equities account, I was, if I’d put that on those coin, instead of what I did put on it, it’s 900, $900,000 windfall in the space of four weeks.

[00:16:37] So it was a very sad and lonely walk as I walked home, I I keep having these conversations with my wife about all the great things like we could have done if I’d follow the strategy. But can you just step us through a little bit about how the current fiscal and monetary environment is driving this divorced class of speculation and what the implications are.

[00:16:59]Nathan Lewis: [00:16:59] Yeah. W it’s almost something that we’ve been living in for so long that we’ve gotten used to it. When you read these accounts from France or actually, it’s the very first book ever written about money, tar tarry topics in the West, which was called the demon Netta in front of the 14th century, France, they say the same thing.

[00:17:16] You start, you started messing with the coinage in this case, reducing the silver and the coinage. You get this debox class of speculators, the very first book that was ever written on the topic of money. It says the same thing. We’ve always been, we’ve almost been steeped in it for so long since 1970 that we all, we don’t even have that experience of stable money to compare to where.

[00:17:39] The currency is, And the, all the effects of this on the economy and just, it just it’s just not there. And the way you make, it’s the old American dream, right? You start a business that makes goods and services that people like and you, by providing this benefit to all these happy customers, you can become wealthy.

[00:17:54]And that’s when, the fortune 500 was fortune 500 fortune, 100 that wealthiest people in America was dominated by industrialists and people who invented a, pull hoops and stuff instead of hedge funds, some hedge fund guys. And so we’ve been so steeped in it for so long.

[00:18:11] We just we’ve just, forget about, doge coin, but the whole idea of a housing bubble. It’s just it just the air we breathe now. We’re just gonna, we’re just gonna take this thing. Why am I jam it and flip it right back in the old days, the house was something that you would build with your own hands and give it to your grandchildren anyway.

[00:18:33] Jonathan Doyle: [00:18:33] And do you think that the 2000, do you think the 2008 experience basically told people that the federal backstop it, is that kind of in the air? We breathe now that the speculative impulse, at least in the banking system, is that it doesn’t matter how much we inflate the bubble.

[00:18:50]There’s no way the fed is going to let it burn to the ground.

[00:18:54]Nathan Lewis: [00:18:54] Yeah.

[00:18:55] there, there is a feeling of that and interesting talk with a friend in Europe and the Europeans are not as this, the stock market is more of a kiss, it’s more like a casino. It’s more like we look at cryptocurrencies, right? It’s not really inherent part of day-to-day life.

[00:19:15]Because, for example, almost all the pensions are government pensions. And so it’s like our social security system it’s pay as you go system, but it’s amped up to cover the entire pension. I’d like it like an old fashioned corporate defined benefit plan, but it’s the state pay as you go system.

[00:19:34] And they’re not looking at their 401ks, they don’t have 401ks. What they’re concerned is can the government make the payments for their pension? The whole thing, it’s not just a little social security, it’s a whole, like you imagine the whole, their whole thing. So what do they care about?

[00:19:46] They care about the government bond market, right? 

[00:19:50] Jonathan Doyle: [00:19:50] Yeah 

[00:19:51] Nathan Lewis: [00:19:51] and if you see what’s happened in Europe, right? It’s all about the bond market. But here in the United States, we have all this stuff that is it dependent on the stock market all these pension systems and retirements and personal accounts and all this stuff.

[00:20:04] So while they’re, got everything, all their eyes fixed on the bond market, we have our eyes fixed on the stock market because not just because, I don’t know, it’s sucks to have own stocks and see them go down. But there’s so many so many institutions that we have that are pended on that.

[00:20:20]The state pensions and stuff they’re underwater already. And if stocks simply went to their average valuation that the last 50 years, they would have to wave the wave, the white flag, 

[00:20:33] Jonathan Doyle: [00:20:33] sure. 

[00:20:34] Nathan Lewis: [00:20:34] which, 

[00:20:34] Jonathan Doyle: [00:20:34] So does the party stop in the bond market when this, when it all comes to an end, is that where it starts? Because there’s just a vengeful riff based on the size of us deficits that there’s just a refusal by the bond market to basically take on any more of that collateral.

[00:20:55] Nathan Lewis: [00:20:55] people are sensing that right now. Now it’s coming to that. If Jessica, cause we have these giant deficits, right? Who’s on the who’s on the buying side of this 15% of GDP, who took down 15% of GDP and bought and government bonds at today’s prices. Obviously the central bank did, but who else would?

[00:21:13]And Yeah.

[00:21:14]That’s, people are sensing now that’s going to be about a ground. It isn’t quite a battleground yet, but they get it’s like the armies are teaming up on both sides, because, and you can see the logic of it, a guy in the, a private market government bond investor says I want to make, I want to make some money, 3% or whatever, an average bond yield plus.

[00:21:38] Yeah, you guys looked into you can’t get these double digit depths, it’s under control. You’re looking like a bad credit. So let’s add the credit risk on there. Plus central bank sure. Is printing a lot of money these days. So there’s an inflation risk. So what does it add up? Does it add up to, yeah, you could say 5%, 5%, 6% historically in U S history.

[00:21:56] That’s what bondholders were paid when there were these concerns. It was average rate in 1990s. And that was a happy time. That the trauma that would take place if we were to pay a bond holders at 6% yield would be so great that the, there’s obviously many incentives not to go there.

[00:22:17]Not only for the simple reasons but. But because the government now has so much debts that they be paying out 6% of GDP just to make the interest payments. And that’s about a third of it’s about a third of total tax revenue. So now you guys, through a total tracks and maybe three times what they are today.

[00:22:36]So that, now we have this debt, which is what is the debt, right? 4%, 5%, 6%, 8% of GDP. And then we’re going to stack on 4% more on top of that to make the interest payments. And then someone has to, then you’re going to have to find bond holders on either side of the table every year to take down this 10, 12% of GDP and new paper flushing out of the treasury.

[00:22:59] Yeah. It’s going to be a battleground and it, and we already know how it’s gonna work out yet. The central bank is going to buy the stuff it’s already, it has been buying this stuff. So we know what was going to work out at least. I think, I know that’s why I’m writing this letter. 

[00:23:13]Jonathan Doyle: [00:23:13] Let’s and let’s get into the meat of the letter because I wanted to talk about the focus of this particular. Addition of the Polaris letters on hyperinflation. And I’ve got a few notes here that I wanted to go through. The first thing that I liked looking at as a there’s something lovely.

[00:23:30] You wrote here early in the letter where you said, I want to reach out to that much larger group of people who sense that maybe something is going on and maybe they should do something, but they’re not sure what I liked that because I’ve got plenty of friends and family who, increasingly they don’t want to sit next to me at family barbecues.

[00:23:48] Cause I’m like, have you bought God? Have you booked out? My mother she’s got cash sitting around, I’m gone, mom plays. I said to my brothers and, but I like what I like how you say that, because I think there’s there’s just so many people. Who were just rolling along at the moment with no intimation of the slow train coming down the track.

[00:24:07] So let’s talk hyperinflation, the first thing was where was the part that you said it’s as simple as that. So first how common it is. So 70 countries have had hyperinflation since 1986, had it in 2020, including Argentina. And I think the definition that you go from one peak government institution, and there’s obviously multiple ways that you could describe hyperinflation, but a hundred percent CPI rise over three years at which point accounting systems break down because it’s almost impossible to conduct a business if currencies moving all over the place.

[00:24:46] And then following that we get societal breakdown. The last couple of things he used to say, first, the, a currency falls in value, then prices rise in response. It’s no more complicated than that. Take us through for new listeners, sophisticated listeners. Take us through your thinking around hyperinflation.

[00:25:11] Nathan Lewis: [00:25:11] They just hear it. They tend to hear just these kind of a few individual situations like Germany in the 1920s likes and Bob way, they probably guess that it’s, it’s happened six or seven times in the 20th century or something like that because that’s you hear about six or seven stories.

[00:25:27]But it’s actually very common. That kind of, the billion dollar bank note kind of hyperinflation where it’s, it’s, 

[00:25:34] Jonathan Doyle: [00:25:34] Wheelbarrows of money.

[00:25:36] Nathan Lewis: [00:25:36] where the price has gone up a thousand times in the space of 12 months. That is not so common to have sushi because most places, managed to bring it to a help before then, but there’s a wide range.

[00:25:46] I wanted to bring up this idea, there, we say inflation and we use the term hyper inflation. And in there they’re actually accounting standards for hyperinflation. And you could argue that we should have some intermediate steps in here. But that’s what we have. We have this, we say inflation, then we say hyperinflation, and there’s a whole accounting series of accounting practices that kick in when you raise a flag and say, we’re in hyperinflation.

[00:26:10] And this came about because we have these multinationals like a Coca-Cola or Pfizer Ford who are in. Peru or TLA or, 

[00:26:20] Poland or something like that selling cars and selling Coke. And they say, we can’t figure out profit and loss because the CPI is a 50, 50%, we’ve got this on the books and the old price.

[00:26:30]Anyway so they wanted some accounting guidelines. And so it’s just interesting out of coming out real experience, at what point they put that line, that point said the old accounting rules is broken. We need some kind of new thing and it, and they decided they put their heads together and decided it was a hundred percent rise in CPI over three years, which is not really that much.

[00:26:51] It’s about 28% a year or 27% a year, which works out to about 2% a month. So now it’s not prices triple in a month, 2%. We’ve probably had to present in the last month. So that’s one way to think about it. And if you look at that measure of hyperinflation, if you take that definition you find out that there are dozens and dozens of countries all over the world that have had that almost every country in Latin America, almost every country in Eastern Europe.

[00:27:17]And there’s also mild or forms of inflation where it’s just kinda like 15% every year. It’s not, it’s not a hundred percent in three years, but there are other there’s even a class of countries below that, where they just have this kind of chronic inflation. So the point is that it’s very common which, and which means rationally that many governments get themselves into these situations, including the United States or the American colonies, many 

[00:27:44]Jonathan Doyle: [00:27:44] And just on that, as you say that, and I want you to keep going that, you just said, governments, get themselves in the situation. This is a quote from you ever thought this was brilliant. You said for a long time, people thought, Oh, I’ll go from here. You say the core element that causes hyperinflation is that the government is printing money to pay its bills.

[00:28:02] And then you say this for a long time. People thought that this was so obviously a bad thing to do that only the serious governments would even consider it. that struck me because this is like international contagion. Isn’t it like the most, here in Australia, we’ve got a a traditionally, very conservative government.

[00:28:26] That’s just, we had a budget last week and it’s just throwing money everywhere. But I liked that line where you say that this was historically, everybody thought this was such a stupid thing to be doing that I need the most, banana Republic governments would do it.

[00:28:39] Nathan Lewis: [00:28:39] Yeah. Yeah. And there, there was even that line from the book about France too. They said the same thing in 1790. This is so stupid. We did, the 70 years ago was a disaster. Everybody knows you do not do this. And they said, yeah, but We want to, anyway, 

[00:28:56]Jonathan Doyle: [00:28:56] We need free stuff.

[00:28:59] Nathan Lewis: [00:28:59] Yeah. Yeah. And it’s just obviously the wrong thing to do So yeah. So I should get, mentioned. So what, does hyperinflation look like? I like to think of it from the outside, right? Not for this one perspective and the person who’s experiencing it. And another perspective from the person who is outside, like we’re outside of the hyperinflation Venezuela, right?

[00:29:20]We tend to say Venezuela, I know they speak Spanish, so it doesn’t really count so common in Latin America that can’t happen here. I would say let’s take Britain. Let’s just take Britain. Germany used to be one of the most reliable trenches in the world for hundreds of years and then had hyperinflation and the twenties let’s take Britain. what, would Britain look like if it had a hyperinflation? Basically it’s well simple. The value, the first thing that happens, the driver is the value of the currency of the clients. Now there might be a good reason why the value of their currency to clients because. The printing more and more of it, for example, but that’s basically what you see the exchange value of the currency declining. So let’s just imagine British pound is now worth about a dollar 30. It goes to one 10th that is present value. It goes to 13 cents. Obviously prices are going to have to go up in Britain, right? British worker goes from whatever it is, 20 to $30 an hour in us dollars to $3 an hour.

[00:30:11]Same guy. He’s just going to sit here. They don’t take that. Obviously the price of gasoline is, going to go up 10 times in Britain and things, and then things start to flow in from there because now let’s do it again. Let’s go from 13 cents. It goes to 1 cent British pounds now worth a dollar.

[00:30:25] 30 is 10 years from now. Let’s say worth a penny, right? It just makes it just, it’s just so obvious from the outside that. A car, an apartment it’s got to go up in price, right? Five times, 10 times, 20 times, a hundred times. It probably won’t fully reflect the declining value on what price won’t go up 130, price of gasoline a couple of hundred 30 times because that’s a worldwide commodity, but price of the property woke up 130 times because who wants to live there.

[00:30:59]But it’s going to have to go up. So that’s what hyper inflation looks like from the outside. The value of the currency goes from a dollar 30, let’s say to a penny. And this happens in a Japanese yen, used to be worth the same as a dollar. Now it takes 120 of them or 110 of

[00:31:15]Jonathan Doyle: [00:31:15] What is the fundamental driver of that hypothetical currency declines, simply money printing.

[00:31:22] Nathan Lewis: [00:31:22] But basically, yes there’s two aspects to it. One is what you might call it, decline, demand a revulsion panicking out of the currency which can cause it to decline a lot vastly out of proportion to the actual increase in my supply. So let’s say the kind of get to the bank, right?

[00:31:41] People going, what the heck’s going on, And then they’d take them. They just go too far. The money’s supply increases, everyone’s wringing their hands and stuff. Money supply increases 30%. And he said, okay, that’s. it, I’m outta here. Whatever they do, they buy gold. They move their assets to another country.

[00:32:00] They pick up And leave. I don’t know, whatever they do. They and the result of this is the currency falls, to, if the currency falls by 70% to 30% of its original value. So it not that, is that a portion.

[00:32:13] Jonathan Doyle: [00:32:13] And is that being driven by Forex markets? That’s basically the global Forex markets are picking up that panic. They’re picking up the money printing and then the Forex markets are going to drive a currency decline.

[00:32:25] Nathan Lewis: [00:32:25] Essentially. Yes. So the point is that so you know the exchange rates or the volume of the currency might go up 30%, which they got away with in the past, they didn’t, they did it last year, nothing bad happened. And you do it again this year. And it was just more than a Strava that they took a step too far.

[00:32:42]And if you look at internally that the price of foreign currencies goes up 200%. So they said, Alison, is that, it’s, this is speculators. It’s the markets it’s, it’s completely out of proportion to the actual increase in the money supply. But if that’s all it was, if they stopped you, so if they stopped printing money, they said, okay, that’s it.

[00:33:04] Obviously, we went too far. We’re going to stop right then. And eventually, in, and the amount of money did not increase anymore is fixed. Let’s just hypothesize. And then the currency is not going to fall. L it just can’t go to zero while the supply is flat. It’ll go up and down, but it’s not going to just implode.

[00:33:29]But what happens is now the currency is worth a lot less, right? It’s only worth one third of what it used to be. So they now to finance their deficits and so forth, there are a lot more of it. And so it’s this, they get into this cycle of increasing supply, and that is what, where you get these. 50 to 100 to 1000 to one music, you mean the currency is worth 1000th of what it was before that was in the one declines Mexico, just to give you an idea, then the value of the Mexican peso declined from, I think it was 28 to the dollar in 1982, 2,400, or actually just the other way around 20 to 24 to the dollar to 2,800 in 1990.

[00:34:06] So that’s about 101 decline. Most Americans weren’t even aware of it. Does that, that get an idea of, I just, to get the wheels and people’s heads turning, what if the British pound went to 10 cents and then it went to one set in the space of, let’s say 10 years just exactly happened to Mexico.

[00:34:26]What would that look like? So I, so obviously if you are. If you were investing in British accent in assets, the bonds and the cash, the bank deposits that went up worth a penny, right? And the stock market typically declined about 90% in these situations which means, so if you get a hundred to one decline in the currency and you get a 10 to one 8% decline, 10 to one decline.

[00:34:54] in the stock market, that means the stock more of the nominal value of the stock market goes up 10 times. So you have to get into this, this funniest mental state where you lose 90% on stocks while stocks go up 10 times. 

[00:35:07] Jonathan Doyle: [00:35:07] Yeah. Gotcha. 

[00:35:08]Nathan Lewis: [00:35:08] Very strange thing. 

[00:35:10] Jonathan Doyle: [00:35:10] I wanted to ask you just on a something team Ricard’s is big on which I’d like your input on is that he argues that. The increase in the base money supply doesn’t drive inflation. He believes that it’s all to do with velocity of money. Can you give us your thoughts on that? Because he argues if money is just printed, but sits on balance sheets, it doesn’t actually drive inflation.

[00:35:35] It’s all to do with velocity. You got any thoughts on that?

[00:35:38]Nathan Lewis: [00:35:38] Yeah, velocity is simply the ratio of some measure of the money supply. Let’s say base money, supply and GDP. If the base money supply goes up, but GDP doesn’t go up a lot then, just by definition, that philosophy goes down. So it doesn’t really mean a whole lot.

[00:35:57] I don’t like, I don’t like the focus on velocity. But we, you can certainly have large increases. Let’s just take a health, Maybe That’s not a good example, but you can have large increases in the amount of money without having the currency declining in value. So it, forget about philosophy, forget about, the CPI.

[00:36:19] Just think about the exchange, the foreign exchange rate, for example of the currency. It’s when the CR the foreign exchange value of the currency goes down a lot. That’s when you’re in trouble. And obviously, obviously at some point, if you keep increasing the supply, you’re going to get that.

[00:36:35]So the question is, some of the steps in between we’ve had I didn’t go into this a lot in the letter, but I did mention it. We’ve had a very unusual situation worldwide because we basically, there was this long, funny cycle of bank regulation. So a lot of the money in the economy is held in banks.

[00:36:56] Jonathan Doyle: [00:36:56] That’s the basil three stuff you mentioned, right?

[00:36:59] Nathan Lewis: [00:36:59] it’s on three stuff. So in the fifties, banks held about 10 cents for every dollar of deposits. You, there’s a dollar in your bank account and they would loan out 90 cents and they’d keep 10 cents just in case, because you might come to the window and say, Hey, I want some money back and they’d have to use that 10 cents and to give it to you, and basically through a lot of, the problem is they didn’t make it any money on that 10 cents. The bankers will say if I could loan out this 10 cents it makes them more money. And so over a period of 30 years, four years, I figured out how to get that down and down and down and down and down.

[00:37:35] So it was the God, I don’t actually remember what the figure it was, but it was well under 1 cent for every dollar of deposits, because they could go to the money market and borrow. So they say if this guy shows up and wants his money back, we don’t have any money. But I can borrow it immediate, 

[00:37:50]Immediately, if ultimately if necessary from the fed itself, we could borrow it.

[00:37:54] So that allowed him to maximize the profitability. That blew up in everyone’s face in 2008. So and and what banks had to do, because they all wouldn’t loan to each other because they all thought they were going to go bust. 

[00:38:06] Jonathan Doyle: [00:38:06] Yeah,

[00:38:06] Nathan Lewis: [00:38:06] So that system went up in flames. So they had to borrow from the fed. And that’s what that was.

[00:38:12] Even if you remember that process, but there’s huge, like trillions of dollars of discount lending, which is direct lending to banks from the fed. yeah,

[00:38:21] And then they said, They said they stick around the table. All the big bankers say, I’m not gonna trust you guys for a long time.

[00:38:27] So obviously we’re going to be in the situation for awhile. Let’s just write it into regulation, which they did in 2010, that was basal three. And they phased it in 2019. So they basically created this regulatory framework where they said, we’re going to go back to the fifties. We’re going to carry 10 cents.

[00:38:42] And every, for every dollar deposits basically is what it was. And that’s what they did well, that 10 cents didn’t exist. So the central banks had to create it, which is exactly what they did with the initial panicky discount window lending, where they just formalized the process and the phase it all in.

[00:38:59]So the base money supply increased enormously. The basically went back to a 1950s level because they instituted this 1950 style regulation. And in the fifties it was actually regulated to that required to keep 10 cents. And that kind of fooled everybody because they saw all this money being printed, metaphorically printed.

[00:39:21]It actually, it’s a digital account, but it’s almost the same thing. And they say, Oh, all of our economic theory is wrong and all of this stuff. And in fact that, the value of a dollar did decline. It was about $850 per article than it declined to about 1500 today. So it wasn’t entirely harmless, but there was no kind of, a lot of economic theory was this monetary theory, which is, which has always been wrong.

[00:39:46] But it just, the wrongness of it is displayed itself because the percentage increase in the amount of money was so completely out of whack with the percentage increase in CPI or nominal GDP or some other thing. What happened was. Even at the end of 2019, there, there was a substantial, the 2019 the agreement they wrote, they signed into law in 2010 was fully implemented and the banks were required to have this 10 cents and they’re still short of money.

[00:40:21] They were still only 8 cents in the system. And they had to scramble around at the end of 2019 to make the regulatory hurdles. So there is even a shortage then. And then there was this in 2020, there was, again, this huge expansion in my supply and to make a long story short, it appears that by the end of 2020 two things that happened, one is they filled in that prep that prior to the 2019 deficit, that the lack of money.

[00:40:51] And then the other thing happened was banks made a lot more loans. Remember all those loans are making call those, so because they were making more loans, they had to have more cash, just because of the rules. For every, every 90 cents a loan and you need 10 cents cash. So they had to raise the cash for that too.

[00:41:06] So to summarize this complex topic by the end of 2020, it looks like, that whole thing was done, right? Banks had plenty of cash, but it was not obviously way too much. And the dollar had fallen somewhat in value. We, we had the big move from 2018 to 20, 28, 12, $1,300 per ounce of gold to $1,800. But it wasn’t, it wasn’t a hyperinflationary blow out. And in, in all the chaos, it was not a big deal. And so that’s kinda why I raised the hyperinflation flag today instead of some years ago is because we don’t have that. The bank sucking up the money anymore. Arguably we’ll we’re going to have to see what happens, but they seem to be completely topped up at the moment, which government seems as a lot, all this plan and say, look, we proved our 10 years.

[00:42:05] You can just print money, like crazy. And we’ll who Yahoo. Right now they’re going to doubt they’re going to be dumping more money than ever before on the economy, through the central bank printing press. And there’s really no good reason for it. 

[00:42:19]Jonathan Doyle: [00:42:19] And is it also true that the primary dealers is getting paid interest on those reserves too? So now that they’re all capitalized, 


[00:42:27] Like they’re getting paid. Is it safe to say they’re just being paid, they’re paying interest on excess reserves. So they’re being paid interest on funny money that they, that wasn’t productively created by anybody.

[00:42:38] Right.

[00:42:40]Nathan Lewis: [00:42:40] They are, yeah, they are paying interest, being paid interest on those reserves. Which is another kind of new thing. And it, it might play a big role going forward. It’s, it completely changes the banking dynamic because if you increase the money paid on the reserves become more attractive.

[00:43:00] You can make 3%, no risk with these bank. Cash payments held at the federal at the central bank, which didn’t exist before 2009 and all of us history. 

[00:43:11] Jonathan Doyle: [00:43:11] Then the fed has to print to pay those interests.

[00:43:15]Nathan Lewis: [00:43:15] Not exactly. It’s making interest income from it’s government bonds but it’s, but the interesting point is if they’re making the interest income on the government bonds, but they’re paying it out on the reserves, then they’re then those bonds become. How would I explain this?

[00:43:32] Okay. I explain this in words basically the treasury has to make those payments before when they weren’t paying interest on reserves, the federal reserve would theoretically, that’s what they say. I don’t really believe them, but the story is they take the interest income from the, from their government bonds and they give it back to the treasury.

[00:43:50] So it’s as if they didn’t pay anything interest at all. A bond where you don’t pay any interest is a lot like a bond that doesn’t exist. 

[00:43:57] Jonathan Doyle: [00:43:57] yeah.

[00:43:58]Nathan Lewis: [00:43:58] Hey, we throw it down a hole and disappeared because we were paying them interest and then they give us interest back and they never matures. Cause they keep rolling them over. So that’s the money paying process. But now if they’re taking that interest income, they’re paying out the banks, then it’s not coming back to the treasury. So those bonds exist again. 

[00:44:18] Jonathan Doyle: [00:44:18] I just have this image in my mind of walking down main street USA and saying to the average American citizen, something like in of those banks that almost blew up the world in 2008. Now they’ve got vast amounts of funny money, which they’re being paid interest on for. I just think that would be an interesting, because it just seems that it’s all much, no one knows about this, right?

[00:44:43]You just don’t hear it talked about a great deal.

[00:44:46]Nathan Lewis: [00:44:46] One of the reasons, one of the things is that no one knows what to say about it, because even the wall street guys who are actually, show up to work each day to think about this, not sure what, how to, what to make of it. I have my opinion, which I described in the space of three story and all this stuff, and you’ve my way of making sense of it all, it’s a pretty weird situation.

[00:45:05] And it’s hard to come to a conclusion. You talk to some other guy who is also supposed to be some big monetary expert. They come up with some completely different kind of thing. 

[00:45:14] Jonathan Doyle: [00:45:14] If I’ve learned one thing. 

[00:45:15] Nathan Lewis: [00:45:15] And I think they’re wrong, but I can understand why people are 

[00:45:18] Jonathan Doyle: [00:45:18] if I’ve learned one thing in my journey in macro and as many listeners would know, I started from scratch about a year, 18 months ago. 

[00:45:27]Nathan Lewis: [00:45:27] That’s the best way to start. 

[00:45:28] Jonathan Doyle: [00:45:28] Yeah. I just if there’s one thing that I’ve learned, it’s that. Just for every strong case for something, somebody else has strong case in the opposite direction.

[00:45:41] It’s extraordinary. And I just I’d love to get us as close to the truth as possible, cause there’s just, someone has to be right. Eventually.

[00:45:49] Nathan Lewis: [00:45:49] So I can, I can having been involved in this space for 25 years or so, I can tell you where some of the pitfalls are but one didn’t did not start that discussion cause it would take a week. One thing I’ve learned is that, academic economists, most of the people get paid to do economy economics.

[00:46:06] Our academics. And as we all kind of ways we know from all the academic studies, but it’s particularly true in economics. A lot of us dogma, it’s like the dogma of the church, which has some basis in reality. But it’s also, it’s, a lot of nonsense which exists because of, institutional need for it, or, an institutional need for homogeneity or whatever you want to call it. And then there’s the most horrendous idiot nonsense that just persists for year after year from the academic economists, because it’s dogma. 

[00:46:46] Jonathan Doyle: [00:46:46] Yeah. It’s like your quote about the MMT stuff. It’s just I think you captured it beautifully. It’s a wonderful excuse to, to print money. And it’s a great idea until it’s, it’s very popular until it’s not, I’m 

[00:46:57] Nathan Lewis: [00:46:57] yeah, you’re gonna, yeah. 

[00:46:59] Jonathan Doyle: [00:46:59] I’ve got you might appreciate this. This is, this has been my my go-to recently Thomas souls.

[00:47:05] Basically. I like him. 

[00:47:07] Nathan Lewis: [00:47:07] he’s good. 

[00:47:08] Jonathan Doyle: [00:47:08] I just, he’s just such a straight shooter and he’s just outside the tent cause he was a Marxist and then obviously he’s African-American and and he just writes so simply and beautifully. And listen, a couple of key things I wanted to ask you. As we wrap up reading down all of his letter today, something resonated what you’re talking about.

[00:47:25] He said that it’s not necessarily money printing or the scale of base money. That’s necessarily bad if what’s backing it up. If the collateral is of high quality and he starts off talking about, as you would, as you talk about it was originally backed by gold, but he said that where we’re heading is that the collateral backing up the currency is just getting worse and worse.

[00:47:48]Is that accurate?

[00:47:51]Nathan Lewis: [00:47:51] I probably wouldn’t put it in those terms. I think it’s a little bit metaphorical, but ultimately the collateral, so to speak backing that currency is the institution, one of the people in charge going to do, what are their ideas? What are their thinking process? What are their political pressures?

[00:48:14]For a long time United States had a gold standard policy and a pretty good record of maintaining it. That’s, that was your guarantee. Then they had, since 1973, we’ve had a flooding Fiat currency, but one that has been better than almost all the others. Although the dollar today, I think is worth about one 50th of what it was worth in 1960. It’d be nevertheless losing 90% at 98% of your value beats, almost all the competitors. But now we, the the backing, So to speak behind our currency is the actions of the people involved. And it’s pretty goofy.

[00:48:55]I think people just, it’s going to, it’s going to, I think it’s going to come to a, tell you how these things develop. I’ve seen a lot of crunchy breakdown moments. What typically happens is there’s a breakdown, right? Currency dropped 20%, something like that. And then everyone watches to see what the government and central bank does. And that’s the moment, right? These would get their act together. They do some dumb stuff, something effective to fix the problem, or they flail around like idiots or they make the problem worse or throw gasoline on the fire or whatever they do. That’s the moment. And that’s the point at which you lose 20% and you recover 10%.

[00:49:39] And so you’ve only lost 10%. It’s not a big deal or you lose 20% and you look at him, you say, you know what? These guys are idiots. Let’s get the heck out of here. And in fact, while we just, it in huge size, and then the drops 80%

[00:49:52] Jonathan Doyle: [00:49:52] So look, 

[00:49:54] Nathan Lewis: [00:49:54] and the money supply hasn’t really changed, 

[00:49:56] Jonathan Doyle: [00:49:56] yeah, but when 

[00:49:56] Nathan Lewis: [00:49:56] by and money supplies the same, but that’s the moment. 

[00:50:01] Jonathan Doyle: [00:50:01] this is, a really important point. I think you, you capture it beautifully and how you express it. There, there will come a moment when the house of cards begins to topple and you say everybody’s watching to look at what they can do. Let’s come back to our Japanese finance minister in 1936.

[00:50:15] Like it seems to me that the obvious thing is to put your hand up and say, we have vast, future funded things that we can’t pay for. We’ve developed a system of vast transfer payments. It’s utterly unsustainable. And we have to cut spending by 40% next Tuesday. I mean that, that fixes it, but you get complete social breakdown.

[00:50:39] So when you say everyone’s looking at what they can do apart from massively cutting spending, what can they do?

[00:50:48]Nathan Lewis: [00:50:48] Yeah.


[00:50:49] I think people are A lot more resilient than governments give him credit for. I th I think. If you can make big changes. And if it’s pretty clear that the outcome is, as positive one, then they’ll people will tolerate it. I think I would like to, I would like to look more into the details.

[00:51:09] This is Broadway cause I was actually involved or while, and I should know more about it than I do, but I think one of the problems there is they got into this pattern where 30% of the entire working population works with government. Obviously not all of them did something useful and of course the operators surprisingly they ended up with fine fiscal problems.

[00:51:28] And so they ended up bringing money. And obviously the solution was the fire about 75% of those people. And I think, moves like that. If they can see if they could see the problem and see the solution, but we’re just going to have to get rid of 75% of the people. Because there’s no real reason for them to be there.

[00:51:47]Then they’ll, people will accept that and until that’s not a such a big deal but we’re not. And I think we will get to that point in the United States when we have to. But we’re not at that point yet. And that’s how I, that of course that’s how governments get into these hyperinflationary situations.

[00:52:02] Just as I said, in France in 1790, that’s in problems that could have been fixed, but today it seems like it’s so much easier just to print the money, 

[00:52:15] Jonathan Doyle: [00:52:15] percent. Oh, it’s funny. I was, I was in Zimbabwe in 95 and spent a lot of time there in 95 and before it got really bad. And yeah, it’s interesting you say that. Cause I remember seeing so many government employed kind of security guards, they just on every corner and like you say, there was just so much, so many people drinking from the government trough and I live in a government town here in the capital city here in Australia and it’s just, yeah, there’s the expansion in the public sector has been quite extraordinary and I’m just hoping none of my friends listen to this episode and hear me talking like that because, interesting.

[00:52:52] I caught up with an executive yesterday and she was telling me a story about a friend who. Had been in private enterprise and went into the public sector into a what’s called the Australian digital transformation office. So this government body was responsible for, creating a wonderful new digital future.

[00:53:12] And this guy said to to the person I was talking to, they said he was there for two years. Two years in the digital transformation office. And he was losing his mind because he said there were two years in and nothing had happened. Like nothing. Like he just said, I can’t do this. I can’t keep going in there every day.

[00:53:30] Now I know there’s many great people, maybe listening who work in the public sector and do a great job, but I often think of what would happen if we had a much smaller public sector and this vast number of people were forced into the private economy and all that energy and capacity and insight, would would just be would be unleashed in a productive economy.

[00:53:52] And the end of sermon for me. Look, I want to ask you a couple last things just just about finished Jordan Peterson’s new book which is quite good. And I was on a, another walk and I listened to his interview with a guy professor toony. I think it’s spelled T U N Y. Who’s from he’s attached to the Cato Institute, but he’s also with an interesting website called human progress or global progress.com and they do an extensive data set.

[00:54:20] I think they’ve got 2000 data sets on their website, showing how the world is getting better and better. And it’s a really interesting interview and I’ll put in the show notes because it’s worth watching and yeah. It’s fascinating things like absolute poverty has gone through the floor.

[00:54:35] I think when Reagan took office, it was hovering still globally, around 50% or 40%. Now it’s down to something like 10%. It’s just, there’s all these indicators that are really positive. And as I was listening to it, I thought the world in some ways just seems to be getting a lot better. There’s less war there’s better health child.

[00:54:55] Mortality’s infant mortality is better. The environment’s actually being looked after in many polls and all these sorts of things. If that thought is true and how do we reconcile this conversation we’re having with that? And if the world’s getting better, is it simply that we’re on a sort of fourth turning precipice and we are heading for some debt fueled global configuration.

[00:55:16] Do you think the world is getting better or are we really heading for something profound?

[00:55:23]Nathan Lewis: [00:55:23] The world for the most part has gotten better, the world is those five, developed worlds about a billion people. There’s 8 billion people in the world, but there’s the, there, there’s the first tier of developing economies which has expanded enormously China.

[00:55:40] And to some degree in India and also, the other places in Asia and much of Latin America, much of Latin America was quite prosperous in the fifties and sixties, but then they had this just absolute disaster in the eighties, hyperinflation throughout the continent. And, hyperinflations end when people start it’s real bad.

[00:56:00]So that kind of, raised all those things. Yeah, the Africa, for example, Africa is under British rule and it was prosperous in a colonial way. And then they handed all of these countries to their local people and they were independent and they didn’t have any history of modern government.

[00:56:21] So a lot of them went communists. Cause that was just that if you just, 

[00:56:25] Jonathan Doyle: [00:56:25] That was the vibe.

[00:56:27]Nathan Lewis: [00:56:27] Yeah. Because because actually a lot of, tribal societies are semi communists, semi socialists because anyway, and but it doesn’t scale up as we know, every nuclear family is communist and, but then you can’t scale that up.

[00:56:41]So there was all this, disasters in Africa, cause it was the common problem, all these issues common sort of issues. And there’s been a lot of success in Africa recently in the last, I don’t know, 20 years, I hear period up Botswana in Tanzania. And so posted figured out this capitalism thing and they’re generating some some positive stuff.

[00:56:59]But in, 

[00:57:00] Jonathan Doyle: [00:57:00] too.

[00:57:01] Nathan Lewis: [00:57:01] yeah in the fifties You had this billion people or less 500 million people in the developed world. And then it was dark everywhere else. There was nothing going on, Asia, places like Malaysia and Thailand were just, subsistence, rice, agriculture, and they didn’t have electricity.

[00:57:19] They didn’t have automobiles, it was water, Buffalo and stoop labor. And Yeah. I think it’s gotten a lot better that way but that’s the world. It’s the bottom half. That’s gotten a lot better. And, but us in the first world, I think it’s a mixed bag. It’s the fourth turning for us.

[00:57:33]What the result will be in in Kenya or Nigeria, which, Nigeria is now how a population of something like 80 million people are now. I’m not sure. It’s it’s a whole different cycle. 

[00:57:45] Jonathan Doyle: [00:57:45] Yeah, it’s I think I might’ve mentioned this to you in our last discussion, Ross Douthat’s new book, the decadence society is very good on this. He is, he’s known as the only conservative person on the entire staff of the New York times, but he his latest books, very good on this and his concept of decadence.

[00:58:00] Isn’t so much around profit pleasure, but running out of energy in the sense of he argues that, that the first world thrived on exploration and you look at the U S and the space program. And he said that part of the problem is we’ve run out of frontiers. We’ve run out of a spark to drive us forward.

[00:58:20]You see a comfortable almost innovated first world culture that doesn’t have much to strive towards.

[00:58:28] Nathan Lewis: [00:58:28] Yeah, Aqua, we get, I don’t know how much time we have left, but as that’s another interesting topic of mine, which I call the end of heroic materialism. And there was a wonderful 1969. BBC documentary is like a 10, 13 part series called civilization hosted by Kenneth Clark is

[00:58:46] Jonathan Doyle: [00:58:46] Yeah, it is famous. 

[00:58:48] Nathan Lewis: [00:58:48] even now people it’s even now you’d go back and watch it on Netflix. It’s really worthwhile. And he’s and Kenneth Clark entitled the last episode, heroic materialism. And it’s basically he included is basically from the industrial revolution for let’s, 1780s, 1820s the first deal, the whole up to the present day. And this is the time when we didn’t build cathedrals. We build suspension bridges, 

[00:59:15] Jonathan Doyle: [00:59:15] Yeah.

[00:59:15] Nathan Lewis: [00:59:15] right? There were an enormous advances during that time, but it’s done. 

[00:59:22] Jonathan Doyle: [00:59:22] Yeah,

[00:59:22] Nathan Lewis: [00:59:22] We don’t need, we don’t need any more systems, just bridges. We don’t need better systems. New prisons. We did it. So then now we’re running out of ideas, at first we build a suspension bridge and then you go, then you build another suspension bridge and then you build a better suspension bridge and then you need some new ideas and that’s where we are essentially we’d done that. And so I but at the other hand, there’s so many aspects of society, which is, are just catastrophic, really bad.

[00:59:46] Like the visual arts go to any contemporary art museum. It’s basically, it’s either metaphorical vomit or it’s literal Vaughn. 

[00:59:56] Jonathan Doyle: [00:59:56] yeah.

[00:59:57]Nathan Lewis: [00:59:57] All these humans in relation to the past had no problem painting, pretty pictures, 

[01:00:01] Jonathan Doyle: [01:00:01] Yeah.

[01:00:02] Nathan Lewis: [01:00:02] with that. That’s the reason we can’t do it. One example one of my big focuses has been what I call urban design city design.

[01:00:10] You go to all these incredibly, these, pre 1900 and even pre 1800 cities. Whether it be Kyoto or it’s Leon France, or it’s Sandrini Greece or Athens or something like that, they’re all beautiful. And they’re all beautiful kind of in the same way, even though they’re vastly different cultures.

[01:00:29]And, but for some reason, even though we have, they used to have the stack bricks by hand and you know how hard it is to make concrete. If you don’t have a concrete factory and you have to be like taco fire, I looked into the Roman recipe for concrete. It’s pretty tough. It was so difficult to build that build things, but they built such beautiful things and they lasted for thousands years. And, we have every advantage, but we just build the most horrible, horrendous crap. And we tear it down in 20 years because we can’t stand the sight of it anymore. And we want to build some more horrendous crap. And we all know this. We’ve been complaining about it for a long time, but I think that’s, we got to stop building suspension, bridges.

[01:01:06] Make a nice neighborhood. And when people change their focus, they’re going to realize, first of all, just making one nice babyhood, just a nice place to live. Just a nice place to live is as difficult for us as it is making a suspension bridge was in 1850, super 

[01:01:25] Jonathan Doyle: [01:01:25] Yeah.

[01:01:26] Nathan Lewis: [01:01:26] And then once someone finally does it, it’ll be like, this is amazing.

[01:01:31] Mind-bending breakthrough. Even the French can’t do it. Even the Greeks can’t do it right. They can, they have their old towns, but they can’t build new ones. It’s going to be this mind-bending breakthrough and they’re going to build, do it again. And they’re going to make a better one. And we’re spending 200 years getting back to where we were in 1800.

[01:01:45] So the funny thing is all of those, all those 

[01:01:48] cities, 

[01:01:49] Jonathan: [01:01:49] Well, Hey everybody, Jonathan with you again, I really hope you did enjoy. That great discussion with nathan lewis always enjoyed having him on the show i learn so much 

[01:01:59] Nathan Lewis: [01:01:59] cities, Athens or Paris in at the beginning of the Kirkuk material stage in 1800. Yeah.

[01:02:08] beautiful buildings, but everything else was horrible. That horrible sewage, they had horrible water quality, that horrible air quality. There are animals dying in the streets.

[01:02:15]People threw trash out of their windows. There was disease everywhere, all these problems we solved. And now if we just combine the two we can get their aesthetic sense with our civic our plumbing, and, sanitation we’ll have something new that had never been created before.

[01:02:33] That’d be great. 

[01:02:35] Jonathan Doyle: [01:02:35] I I used to have a Latin statement on my email signature , which is from Dostoevsky, which was the world will be saved by beauty. And it’s I think that was a cultural crying out for it, even if it’s it’s that transcend transcendental need for truth, beauty and goodness.

[01:02:53]But Yeah, you could apply it to anything. I look at the shadow banking system and it’s not pretty it’s ugly. It’s deception is by its nature. Ugly. Stealing is by its nature ugly. So now maybe beauty is the new frontier in a whole lot of areas. Let me let’s finish up. Last thing was you write in the letter some great stuff just on strategy, and this is basically some gold bullion, some silver, if you can, and you write some great stuff on some of the mining, some of the mining companies.

[01:03:23] So can you give us a quick summary for people listening on if we’re going to get a hyperinflationary event, what a smart people going to do?

[01:03:31] Nathan Lewis: [01:03:31] Yeah. This is not for the silver stackers that have been doing this for 10 years. Cause you know, you know the story, but there are so many people out there and not just people, but tying institutions and pension funds and everybody, that’s why I start the letter with everybody owns all the assets.

[01:03:44] So if you want to know what everyone else is, just look at all the assets everybody’s got these. So these 60, 40 stock portfolios stock and bond portfolios. And let me, I just took the example, just think about Britain, British pound goes from a buck 30 to 10, how has this, how has it British stock market going to do in us dollars, probably going to get pulverized how’s bridge, bond market going to do in us dollars?

[01:04:09]It’s going to vaporize. It’s going to disappear completely. It’s hard to predict the future but you have to have something in your portfolio. That’s going to withstand an event like that. And historically the go-to asset has always been gold bullion. When Roman families there, even today, they dig up these hoards of coins in Italy.

[01:04:30] That was less than by some Roman family that the family’s gone. They never dug it up themselves. Who knows what happened to those guys? Coins are still there, but why did they do that? Why do you take money and very in the ground? It’s because all their other assets, their cows and their real estate there, their banks in Rome and their banks, all that stuff got blown away.

[01:04:48]That’s what the goal is, what lasted. So for thousands of years, humans had known this, that, that gold and silver is much more volatile now, but it wasn’t so volatile in the past or the things that will definitely make it to the other side. And then from there you can get more sophisticated but you have to have something and some, some just think about it allocation, how much of your portfolio you want to put in stuff that will survive a and B potentially benefit from a major currency event.

[01:05:20]You just pick an allocation 5%, 10%, 20%, 30%, maybe 50%. 

[01:05:26]Jonathan Doyle: [01:05:26] Let me ask you, my thesis is simply this. And having studied crypto economics at Oxford, I’m like, I th I think there’s no way in hell that sovereign governments and central banks are going to let individual cryptos win. It, because if they do the world has been now it’s over. Seniority has gone all of that.

[01:05:45] Stuff’s gone. I just, whether they regulate it to death or they outlawed it. So in a world of highly likely central bank, digital currencies, can you see a hyperinflationary collapse leading to the reestablishment of a gold standard? Because a critique would be gold has done gold is over.

[01:06:05] We’re going to have CBDC is they’re going to build some new, clever blockchain based system. Do you still, in your heart of hearts, see an emerging gold standard at some point in the future?

[01:06:18]Nathan Lewis: [01:06:18] Yeah. There’s a lot of scenarios and theories people say we’re just going to go to the new world order and they’ll just be one global currency of tyranny, whatever. Yeah. Historically what has happened is we just mad at you. If you historically, what has happened is you things blow up and then they go back.

[01:06:37] Then they go to gold, even, even Moussa dong and China communist guy the nationalist government in the, during the civil war, the forties, hyper-inflated the currency. Even that guy went to gold because what are you going to do? Everything’s up in flames. All the politicians lie all day, which I had the example of 

[01:07:01] Jonathan Doyle: [01:07:01] Huh.

[01:07:02] Nathan Lewis: [01:07:02] in Germany.

[01:07:03]They tell all these lies what are you gonna do? Oh, we’re just going to have other government people. Run the currency. 

[01:07:10] Jonathan Doyle: [01:07:10] That’s right. You can trust these guys. Here’s some new ones we’ve 

[01:07:15] Nathan Lewis: [01:07:15] guys. We pick them, we hand 

[01:07:16] Jonathan Doyle: [01:07:16] Yeah. The other guys are terrible, but these guys

[01:07:19] Nathan Lewis: [01:07:19] gonna trust this dude, but not all. And I don’t trust you guys at all. Metal’s always worked. So that, they tend to want to say, we’re going to get the human element out of the currency.

[01:07:29] And that, ended in gold. Gold is the alternative. Remember it in the when the U S constitution is written in late 1780s, there had been a hyperinflation, the previous government, the continental Congress printed money to pay its bills and blew the currency way into confetti. And that was actually after a hundred years of all the state governments, basically that the colonial governments, the colonies basically doing the same thing repeatedly over and over again, they pay their soldiers in paper currency, and they would lose money and blah, blah, blah.

[01:08:03] And so they actually wrote into the constitution. It’s in there in article one, section 10, only so golden silver coins shall be legal, tender in all transactions. Now they done that and it never actually happened. There were paper currencies in the ICS from the beginning. But they were minor.

[01:08:19] They were private, but they were so serious about it. They said, no, we just want metal coins. That’s these people, the same people who had hyperinflated the currency who had a hundred years of paper currencies, we said, Nope, we’re going to kick the habit. And that’s what tends to happen.

[01:08:38] That’s historically, that’s what happens. 

[01:08:39]Jonathan Doyle: [01:08:39] And just on that, I think it was George Washington who made the point that it was utterly reprehensible for any government to create, debt that couldn’t be paid off in its own lifetime. Is that the idea was that to, to ship that to future generations, Washington thought was the most, the worst thing government could do.

[01:09:00] And that’s look now, that is just the Kool-Aid right.

[01:09:05]Nathan Lewis: [01:09:05] One of the things we might, we have to figure out some solutions, this, cause you can’t just ban you can’t just have a, constantly amendments as you, balanced budget amendment, because what happens when you have a war. But be nice. If we can work out some way to, to put a lid on this,

[01:09:20] Jonathan Doyle: [01:09:20] But it’s fundamentally a moral question, right? Like it fundamentally, I guess it’s hard now because the spending commitments are so extreme that the essence of political economy is that any politician knows that he goes to an election with an austerity platform. He, but that goes to the morality of the people, right?

[01:09:39] Like a moral populous will vote. This is back to Jude winning skis take on political economy that really politicians, the best politicians are the ones that. Present to the electorate, what the electorate actually wants, which was counterintuitive for me, because I always thought that basically politicians were essentially salespeople who just came up with ideas and had to sell them.

[01:10:03] But when skis take is different, is that, that really the, yeah, like I said, the best politicians figure out what the populace is trying to tell them. So I guess at the root of it, if you don’t have a moral populace, people that kind of think, you know what, I didn’t work for this payment. I don’t deserve this payment.

[01:10:20] I need to go and work harder to get what I want. How do you change it without that kind of dynamic? Ultimately?

[01:10:32] Nathan Lewis: [01:10:32] At some point, you have to eat all the founders, say, one reason we can get away with this utopian system, right? The constitution was by the standards of his time. This crazy dream is because they have the morality, the high morality of the American people. And they said, all right, you can’t just do this anywhere.

[01:10:54]And we’ve seen, it just hasn’t worked in Latin America, for example, they just screwed up once a generation. But getting to your question, getting to your questions. I spent, I’m not, I’m from a kind of when I put my policy hat on, rather than my investing and hat dealing with current events, investing but go a little ways down the way at this time. The house is already on fire. You’re not going to change anyone’s mind. Everything’s going into historical endeavor, not quite inevitable, but the consequences, historical consequences. But I think about, I tend to focus and that’s what almost everyone’s focused on, 95% of the people analyzing this current event.

[01:11:39] But I like to think about the next step. Okay.

[01:11:42] Then what if everything goes to hell then what? And I think it’s good to have a plan for that time. So you don’t end up with, communism. And I, my plan pretty simple, it’s basically the magic form. It’s actually the, the reason I wrote that book was not, was to give a plan for the peer that comes afterwards is to say in the United States, for example let’s go back to the original federal. Model the actual, what it actually is written in the constitution, which is federal government has a certain it’s certain roles and that’s it’s limited government. It’s limited to these certain roles and that’s it. And the roles are basically the military and foreign affairs trade immigration policy.

[01:12:31] And it’s a pretty small, it’s a pretty, by that time, a lot of these liabilities are gone, right? Social security, the debt has all been inflated into oblivion. And so everything. So all you do is you write into writing. You just have a omnibus bill that you pass in Congress, which will be whatever I don’t know, who knows what the political parties will be, but it’ll be a conservative party.

[01:12:52]You just say, we’re going to all that stuff, all that great society, stuff, all that welfare stuff, social security, Medicare, blah, blah, blah, gone. As of tomorrow, we cancel all the programs. Which then puts the responsibility on the state. So they don’t necessarily disappear entirely, but then the States do it, which is the original design of the constitution.

[01:13:13]And then once you’ve done that, you’ve just last spending by 80%. So what happens? You don’t have to print money anymore because you don’t need the money. And then you can have a major reform of taxes because your demands are much smaller. So you implement whatever it is. 8% federal VAT, no more income taxes, no more payroll taxes, just, I prefer VAT, but it could be a net re national sales tax or something like that.

[01:13:38] Jonathan Doyle: [01:13:38] And that massively stimulates productive activity. 

[01:13:41] Nathan Lewis: [01:13:41] Okay. Yes. Yes. And I kind of wonder what’s the political process to get there. We’ve already seen this happen. So there was hyperinflation, both Germany and Japan in the late 1940s, both under us occupation, the military had already taken over. So they were running the show and They were printing money to fund the governments and they, so the first thing they did is they came in and they made the, passed the law, no more deficit spending in law, black letter law. You have to get the money in, in the bank account before you spend it

[01:14:12] Jonathan Doyle: [01:14:12] no complex.

[01:14:14] Nathan Lewis: [01:14:14] not complex.

[01:14:14] both Germany, Japan did that. And so once you did that, the pressure on the central bank to print the money was gone because they didn’t spend the money until they got the money. In fact, I’m pulling into the same thing when he came to Branson 1799.

[01:14:27]So once the central bank was freed from that print political pressure, the next step is they went to the gold standard or in, in indirect gold standard, they pegged the currencies to the dollar. So that is, and then the next thing they, both Germany, Japan did is they had huge tax reforms where texts rates came down dramatically by the standards of the time, I think we should just.

[01:14:50]Have a have a big form where you just get rid of everything and just have something like a federal bat. And this is not just a daydream, it’s how it’s actually happens in Germany and Japan and France, arguably Napoleon to some degree in China. So it’s not silly. So if you could just have that, I think when the time comes, you’re going to have a plan.

[01:15:10] I like to say, we spent everyone’s frustrated because they’ve been talking and talking for decades about all these wonderful sort of conservative, small government themed ideas that have no political reality. But when the time comes, you’re going to have a solution. You’re not going to have decades to talk about anymore. 

[01:15:27] Jonathan Doyle: [01:15:27] Sure. 

[01:15:28] Nathan Lewis: [01:15:28] You’re just going to have to do it. 

[01:15:30] Jonathan Doyle: [01:15:30] I have a strong feeling that that it probably is not going to be a very long time before we find out. And I want to thank you as always for your time. I love these conversations and I get to listen to them again. I listened to him several times, but I want to encourage everybody to check out the Polaris letter on sub stack and just go to sub stack get behind what Nathan’s doing.

[01:15:51] It’s a, it’s just such a, I love writing and I laugh. I learn. I really do. You’ve got a great way of writing it. It’s rare to be able to synthesize complex ideas and make them interesting and amusing at the same time. Otherwise new world economics, like people can still find you their new order, economics.com, but Mr.

[01:16:08], Nathan Lewis. Thank you so much for joining us again on the supply side podcast.

[01:16:13] Nathan Lewis: [01:16:13] Thank you, Jonathan. It’s a pleasure. And hopefully We’ll talk again soon.

[01:16:17] Jonathan Doyle: [01:16:17] We’ll do it again soon. 

[01:16:18] Jonathan: [01:16:20] Hey everybody, Jonathan, back with you. Once again, I really hope you did enjoy that great discussion with Nathan Lewis. Always a real pleasure to have him on the show. I learned so much every single time. It’s a great privilege just to spend time with so many great guests that have such a depth of knowledge and insight, and so many years. 

[01:16:39] Learning studying, experiencing this whole great world of global macro finance. So listen, please make sure you’ve subscribed to the show. I’m going to get back to it. Hopefully producing an episode a week with some really great guests already booked in. So hit subscribe, wherever you’re listening. Everything else is on the website, a supply side partners.com. 

[01:17:00] And We’re putting stuff on YouTube now, too. So you’ll see the video for this one with Nathan, if you just come across. To YouTube and do a search for supply side or the supply side podcast. With Jonathan Doyle, are you going to find us in there? So I like using YouTube for this sort of stuff. 

[01:17:17] It really gives me a chance to concentrate and see the faces behind the audio, see who we’re actually talking to. So listen, I really hope you’ve enjoyed it. Thanks for supporting the show. I’d love. If you could share this with other like-minded interested people, but for now, that’s it until next week. My name’s Jonathan Doyle. This has been the supply side podcast. And we look forward to welcoming you back very soon

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