Transcript: Lyn Alden on the Dollar's Triffin Trap and What Replaces It

Lyn Alden [0:01] Got the, got the headphone hair. I'm all out of Whack-Lyn. It's been a long week here in Austin. Yeah. Yeah, I can imagine. It's been a long time since we've talked on the show. been two years I was checking, which is astonishing to me. But no better time than now. I think quite literally, based off of all the conversations we've had over the years, I mean, you're famous saying nothing stops this train. think we're coming to a juncture where that's becoming abundantly clear. And you wrote a newsletter earlier this week, I believe you said it out Sunday. Yeah, too long. Too long. that basically highlighted the crux of the problem, which is the dollar reserve status and the almost impossible task that Trump would like to accomplish, but likely isn't the case, which is sort of solving Triffin's dilemma of reshoring manufacturing while keeping U.S. dollar dominance. So I think diving into this from first principles would be great.

Lyn Alden [1:05] Sure, yeah, and that's the, I can imagine the administration's challenge of trying to communicate this because the intricacies of how trade deficits and the reserve currency kind of pair together is very wonkish. It kind of has this like academic quality to it that doesn't go over well in kind of political oriented speeches. Like I would be terrible at a political rally, for example, when I try to explain any of this. And so we kind of have this situation where, And this was outlined back during the Bretton Woods system by Triffin, as you mentioned, which is that having the reserve currency does come with a bunch of benefits.

Lyn Alden ⋮ You know, historically called a exorbitant privilege, but then it has certain costs to maintain it. And those costs can vary a bit depending on how the system structures. So for example, back in the Bretton Woods era, the cost was that we kept draining our gold reserves. We basically had to kind of keep paying out our gold reserves to maintain that part of the system. And in the current formation, instead, we kind of pay for it with our industrial base. We keep kind of sending out little parts of our industrial base over time to maintain the global reserve currency status. And there's a few reasons for that.

Lyn Alden ⋮ One is that because unlike every other fiat currency, the dollar has all these extra demands for it by countries all around the world. All these different purposes, there's this extra demand for dollars. which sounds good on the surface. as for Americans, for example, we have tons of import power. S. These things seem good on the surface, but it also means that it's pretty expensive to manufacture lower margin things here at home. And so we have this kind of situation where our imports are very strong. our exports, especially lower margin stuff is less competitive, whereas we can still be competitive on really high margin stuff, know, technology, finance, healthcare, that kind of thing.

Lyn Alden ⋮ And then the other aspect is that even if you could somehow solve that, there's the more fundamental problem, which is that the whole world needs dollars for the, you know, global reserve currency status to use it for international contract pricing, cross border financing, one side of every trade pair that they do, all these different purposes as a reserve asset.

Lyn Alden [3:21] And when you step back and say, well, how do they get all those dollars? If they're all using dollars, how did all those dollars get out there? And the answer is trade deficits. Basically, that overvalued aspect forces open the US trade deficit. And every year we send out hundreds of billions or sometimes a trillion dollars in net outflows. And over years and decades, these have accumulated out there. And so, kind of the way it works is that if you want to fix the trade deficit, which I've writing about since 2019, I think that's a valid mandate to do. Unfortunately, it does come with trade-offs. Some of the benefits that we enjoy at the cost of the trade deficit, if you do want to kind of fix that imbalance, it comes up with basically giving away at least some of those benefits and prioritizing that industrial base a bit more.

Lyn Alden [4:15] And one of the dynamics that you highlighted in your newsletter, which makes sense, but wasn't very clear to me before, that via these deficits, we flood international markets with dollars because we're sending parts of our industrial base over there. But then it's like cyclical. They take those dollars and then reinvest them in U.S. assets. So it has this sort of flow where it goes out, but then it comes back in. into the financialized economy via equities and real estate and other such assets. And that is good for asset owners here in the United States. again, I think that's part of the magna mandate is that sort of cycle has led to this large wealth gap in the United States that they're trying to fix.

Lyn Alden [5:01] Yeah, exactly. And so basically the opposite side of a current account deficit, which is basically the trade deficit plus things like interest and dividends. So we run a structural current account deficit and the opposite side of that is a capital account surplus, which is that funds flow in the rest of the world and buy our financial assets. so the trade deficit is often described as us sending out pieces of paper and getting goods and services, which sounds like a really good deal. But then the extra step of that that you mentioned is that they take those slips of paper or really those electronic digits that they have and then they buy our stocks, they buy our real estate, they buy our private equity, they buy our corporate bonds and government bonds.

Lyn Alden ⋮ And so they end up owning a larger and larger share of corporate America as part of their kind of accumulated trade surpluses and reserve assets and international private assets. the kind of the consequence of this, if you kind of like view the foreign sector as an intermediary, we're basically constantly kind of taking economic vibrancy out of, you know, Michigan and Ohio and, you know, rural Pennsylvania where the steel mills were, we're kind of taking out of our rust belt, causing it to become the rust belt. And then we're stuffing it back into financial assets in New York and Silicon Valley and certain other places, mainly along the coasts.

Lyn Alden ⋮ And, you know, this went on for approximately four four plus decades really ever since you can say kind of the early 80s this really kind of started. And these are cumulative. So one year of that is not a giant deal, but when you have four plus decades of it, that causes major imbalance. And a lot of academics will say, well, there's still room to go. This is not kind of an emergency. But on top of that, there is this political overlay that basically that voters get angrier and angrier when they're on the wrong side of that imbalance. And although many of them you know, they don't work in finance, they might not be able to articulate the exact mechanisms that are causing it, but they have this feeling that something's rigged against them, that something is just not right, that they're constantly going uphill, that they're on a treadmill.

Lyn Alden ⋮ And so we start to see this in manifest in rising voter populism, it manifests in different priorities of when people vote. And so I do think that there's a pretty strong mandate to try to go after the trade deficit.

Lyn Alden [7:19] But I think the way I look at it is that because it's decades in the making, the best that any kind of one term can do is try to start changing the direction of it. But it's inherently kind of a multi-year, potentially multi-decade project to kind of fully reverse these really long-term trends. And doing it on extremely fragile ground, because as you point out, amount of debt that exists, both domestically and offshore for the U.S., it's a leverage ratio of 20 to one. So I think we have 5.8 trillion in base money and over, let's say 120 trillion in debt held domestically and offshore entities holding U.S. debt.

Lyn Alden [8:10] Yeah, that doesn't even include derivatives. That's just loans and bonds, basically. That doesn't include derivatives because derivatives are more opaque, more ephemeral. the BIS has kind of like Bank for International Settlements has kind of tried to map out the estimated size of that, but it varies. So even the conservative measure is 20 to one. Realistically, it's higher. And part of that, so all of that debt creates demand for dollars. All that is like inflexible demand. You if you've got a mortgage on your house, denominated in dollars, you have a demand for dollars, whether or you like the dollar or not. And that applies to the whole world and multiple domestic entities.

Lyn Alden ⋮ And that's why like a lot of, you know, kind of views that the dollar is like doomed in the near term are always off because there's literally way more inflexible demand for dollars than there are dollars in the system. And that's why this system kind of perpetuates itself for such a long period of time and why the network effects of a reserve currency are so strong. It's not as simple as a bunch of getting together and deciding to repudiate the currency and switch to another currency. Kind like how social media networks have network effects, kind like how communication protocols have network effects in financial markets, anything with liquidity has network effects.

Lyn Alden ⋮ And the same thing applies to money and debt structures. And so there's this big intertangled Gordian knot, both domestically and globally, that kind of has to gradually be undone as these rebalances reform themselves. And any sort of shift in direction tends to be jarring. There are people that are on the wrong side of it that become on the right side of it. But that transition process itself could even be harmful and uncomfortable for those that have been on the wrong side of it because they could go through periods of inflation, they can go through periods of recession potentially as some of those big forces turn around.

Lyn Alden ⋮ Because whenever you have a disruption like that, it tends to harm productivity. When you have less certainty in planning purposes, when you have higher taxes in this case, there are these kind of frictions that happen during this turning event where

Lyn Alden [10:25] everybody can feel like they're losing, then the question is, is it going to be well executed? Is that trend going to start going in the other direction and kind of shifting some of those imbalances? Or is it going to be a lot harder than it seems? That it looks like it's going to be a lot harder than it seems to me, because he's thinking about Trump coming and what he's been trying to do over the last three months. We'd to get your opinions on this tariff policy, but I think just generally taking everything we've already discussed in the consideration. The fact that sending dollars out into the world, doing that by sending an industry to other parts of the world, they're flowing it back.

Lyn Alden ⋮ Into financial assets, which is where a lot of the wealth of the, of America, of the American population sits is in these assets. And you look at what Trump's been doing since he got back in the office and he's saber rattling, basically saying, Hey, we're done with this deal. We're trying to fix it, but then you have to factor in like, make all of our stuff. And then on top of that, they have a bunch of us assets that they could dump. and cause havoc over here. so how do you navigate all of that as you're trying to force the warship to move in a different direction?

Lyn Alden [11:46] So I think I would separate into three things. One is kind of the mandate, two would be the plan and three would be the execution. And I think the issues that they start off good and then they kind of deteriorate as you go through those three steps. I think the mandate is there. So there are some people in politics that would disagree that the mandate's even there. They say we shouldn't be going after the trade deficits or they're not a big deal. I disagree with that. I do think that, and I've been writing about this for years, that the imbalances have become big enough that they're actually starting to really matter financially, politically.

Lyn Alden ⋮ They're actually a big deal now. And if you don't ever focus on addressing them, given the network effects involved, eventually it forces itself closed anyway, but that's from a position of weakness. So it's better to kind get ahead of it before it's kind of fully metastasized and there's really no options left. You generally want to try to correct it from a position of strength. So I do think that there is a genuine rising mandate to reverse some of these multi-decade flows that are basically all going in one direction. So I think that that part is sound. The second part would be the plan. And if you look at probably the smartest version of the plan, it would be Stephen Myron.

Lyn Alden ⋮ That's Trump's chair of the Council of Economic Advisers. He's an economist. And he laid out this paper back in November 2024. So right after Trump was elected. And he outlined It was like, I forget the exact title, but it's like basically how to to realign global trade. And it's this paper that kind of articulates the problem. So he talks about Triffin's dilemma. He talks about the overvaluation of the dollar due to it uses as a global reserve currency, how the cost of that is basically undermining our industrial base, making us less competitive in manufacturing. And how some of those imbalances were the downside that system have surpassed the benefits of the system for America broadly.

Lyn Alden ⋮ And so he kind of analyzes different ways that this might be addressed. And then also goes over some of the risks of addressing them. Like it's not treated as like a surefire solution, but like if you were to go about this, what are the ways we could do it? What are our options? And they include things like, you know, starting with some mild tariffs, which kind of is like the, you if you treat it like a carrot, a stick, that's the stick. And then when

Lyn Alden [14:06] you know, this kind of multiple mile tariffs on that are somewhat disruptive, that they could do some sort of currency accord, a series of trade deals that are in the United States favor that could then bring down some of those tariffs and start to maybe balance out trade somewhat. Then he faces the issue of, okay, well, what's next? What's after that? Because there's still the issue that if you want the dollar to be the global reserve currency, you have to supply the world with dollars. And so he focuses on, well, one, you could give up some of the reserve currency status. So it's not a Boolean thing.

Lyn Alden ⋮ It's not like either have global reserve currency status or don't. It's really a percentage thing. And so one thing I've been pointing out for years is that you can have a multipolar world where, you know, Chinese currency is kind of the main currency over in East Asia. The United States' dollar is, you know, the currency in our hemisphere and other parts of the world. And Europe's is kind of, you know, they're part of the world and their biggest trade partners in periphery. So you can have kind of three currency blocks of different sizes. You can have an elevation of neutral reserve assets. So he specifically calls out that this plan would be good for gold and cryptocurrencies, which realistically we mean Bitcoin.

Lyn Alden ⋮ He uses the phrase cryptocurrencies. And so over time, funding currencies that are cross border can shift a little bit. S. assets. and instead buy things like gold or Bitcoin or potentially some other assets from other countries and kind of diversify this to some extent. And then there's also various mitigants because if you weaken the dollar, you risk higher inflation, you risk higher bond yields at a time when fiscal deficits and US interest expense are very high. So it talks about as part of trade negotiations, terming out the debt, convincing countries like China or Japan to increase the duration of their treasuries and basically agree to get like their reserve assets inflated away.

Lyn Alden ⋮ And so I think the plan overall, it's articulately described. I'm somewhat critical of it because I think it overestimates the US's negotiating position and overestimates the willingness of other large countries to kind of play along with that. But it is, I would say, a semi-realistic picture of kind of, if you were to describe how it would work optimistically,

Lyn Alden [16:30] That's kind of how it would go. So that's the plan. And then we look at the execution, that's where I think it got messier because, you know, they ramped up tariffs super high, super quickly that in many cases were so high that they hurt us as much as some of our trade adversaries. And even, you know, it takes years to reshore and build a manufacturing base. So if you throw on really high tariffs right away, we pay the consequences right away, but we don't really get the benefits anytime soon. And so other countries like China can just say, well, we'll just wait then because, you know, your terrorists are hurting yourself as much as you're hurting us.

Lyn Alden ⋮ And so, so far the US has kind of rolled back some of those terrorists. made exemptions for like Apple and phone makers. They made exemptions for automakers. And the problem there is that you're basically exempting big businesses while little businesses that make all the widgets we don't think about. they have all the uncertainty and all the problems. And so now there's like, you know, groups of small businesses asking for tariff exemptions. And so I think that the overall outcome is that they're not going into the next phase in the negotiating power that, that, you know, Stephen Myron would have, you know, hoped for, I think as articulated in that paper.

Lyn Alden ⋮ So I think when you go from plan, like when you go from mandate to plan to execution, each step was kind of a little weaker than, than the prior one.

Lyn Alden [17:53] Yeah, they sort of went Leroy Jenkins with the tariffs there. I think optically, just as an external observer, it seems like there was a faction within his administration that was in his ear saying, let's get aggressive with these tariffs, let's get aggressive. They did. pretty bad reaction from the markets and trade partners and businesses here in the United States across the board. And it seems that within the last month, month and a half that maybe Scott Bissette has sort of taken the reins and said, hey, let me be the forward facing voice of the administration and really try to be the quote unquote adult in the room and try to navigate this.

Lyn Alden ⋮ Cause I mean, he has said publicly, was saying publicly leading up to the election that he did believe there was going to be a global economic monetary reordering that he wanted to help the president navigate. And it seems like there were probably some power brokering going on within the administration about who was actually in his ear giving me the recommendations. And it seems like they Leroy Jenkins. Notice they messed up a bit and Scott Pecett has stepped in. and it's been much more public facing since then.

Lyn Alden [19:12] Yeah, one of their goals is to get the 10-year treasury down and during the peak market turmoil, of the issues is that, so as stocks were going down, which is normal given all sorts of basic, you know, tax increases and uncertainty, normally you'd see the dollar strengthen and the bond market go up, meaning yields go down. Capital basically get out of stocks, get into safer treasuries, it would get out of other currencies and get into the dollar temporarily. And even in Stephen Myron's paper, he talked about initially this would probably be dollar strengthening. And unfortunately, it kind of backfired. So instead, were net outflows, similar to what you see in emerging market, which is we saw stocks go down, bonds go down, meaning yields up, and the dollar go down altogether.

Lyn Alden ⋮ And so instead, capital was going toward gold. Bitcoin was holding up better than you normally see in an equity sell off of that size. Other currencies and markets were holding up better. And it's really not the playbook, I think, that they expected. And then, of course, percent, as the Treasury Secretary's pretty dialed into what's happening in the treasury market, which wasn't looking very good. The move index, which is the volatility index for treasuries, spiked to near record highs, basically the type of thing you'd normally see in a crisis. And so yeah, I think they had it reversed in a number of their policies, dialed down the rhetoric back up a little bit.

Lyn Alden ⋮ And then there was an interesting shift in strategy. So instead of going after everyone at once, they paused for 90 days for most tariffs on most of the world. They're still the baseline tariffs, but they... They kind of pause the bigger things and they try to redirect everything toward China. And they kind of focused on, let's build a coalition against China. You if you can get Canada and Mexico in your court and get Europe in your court, then you could put a lot of pressure on China because China is such a kind of big central part of this. In recent days, that seems under friction too, because for example, Asian, that group of like Southeast Asian nations, ASEAN, One of his acronyms that has like a double meaning.

Lyn Alden ⋮ They announced along with China, South Korea and Japan who are not members, but that are obviously near the region. They kind of announced together that they're going to increasingly tie their trade together and they're increasingly going to focus on all these internal mechanisms between themselves. And so that's not China being isolated. That's actually China kind of strengthening their connections with

Lyn Alden [21:40] trade partners that there are sometimes frictions with, but that they're otherwise all in the same region. So even that attempt to kind of isolate China seems to not be going well, which is what we'd expect given the fact that China is the biggest trading partner with the majority of countries in the world. S. was the biggest trading partner with most countries in the world. outside of certain pockets of Asia, maybe 80 % of the global map was blue. And then over 20, 25 years, that map turned red and made out of China, which is that China gradually became the biggest trading partner in most countries in the world.

Lyn Alden ⋮ And so few countries are in a position where they can say, yeah, we're gonna help go against Chinese trade because for many of them, China is the biggest trading partner that they have, or at least bigger than the US. And so these are just ongoing challenges. And then of course, gives market participants a lot of uncertainty, that gives businesses a lot of uncertainty. And as of this recording, we're still kind of in limbo to see what the next weeks are gonna look like.

Lyn Alden [22:54] Yeah, like I mentioned before we have record up in at a conference last two days. So did not catch that a S E A N announcement. The fact that Japan and China together sort of saying, yeah, we're to do that's a bitch. That's surprising considering how much we've been leaning on Japan for many decades since the, since the eighties, after we, after we sable rattled at them. And I think China's obviously whether Trump wants to, it does seem like he is implicitly admitting it, but that seems like the big elephant in the room. Like when you, when you shared some charts in your newsletter, when you look at their energy production, steel production, manufacturing base, and the fact that while politicians and pundits may like to position that China needs the U S because we're the largest trading partner, it seems like that.

Lyn Alden ⋮ They're even diversifying away from us in real time too. So they're linked to the United States and the United States being crucial to their long-term success may not be as true as it was maybe two decades ago.

Lyn Alden [24:07] Yeah, the whole world's interconnected, but it's not as though the US is just the pure center of the whole system. There are lot of connections that go around us. And so, 20 years ago, China was kind of known for sneakers and plastic trinkets and things like that, but now they've kind of raised up the capital stack toward more complex goods. And so one of the things I point out is that literally in a four-year period, China became the largest auto exporter in the world. So for years, they had kind of pretty minimal auto exports. And then from 2020 to 2024, a lot of their pieces fell into place.

Lyn Alden ⋮ And then just so like they had a hockey stick of just rampant exports. And so they passed South Korea, they passed Germany, and then they even passed Japan as the biggest auto exporter in the world and still climbing, still taking market share. And we don't see it in the US because one, there's kind of extra tariffs on Chinese cars. And two, their kind of key market is kind of, if you think of like Hyundai, you know, two decades ago, they were kind of known as cheaper cars, like starter cars, for example. China is really kind of in that market right now. And that's kind of the pattern that automakers go through.

Lyn Alden ⋮ you know, back in the day, like Honda was in this position, they were kind of cheaper cars, they moved up the quality spectrum, then Hyundai was in this position and other other Korean makers. And now China kind of entered the market and saying, well, you know, in emerging markets around the world, cars are a massive expense. I mean, that's true even in the developed world, but especially in the developing world, cars are a huge expense. That's why a lot of people will ride, you know, Mopeds, motorcycles, or just not have a vehicle. So China would come in and say, well, here's like a $15,000 vehicle or $20,000, you know, SUV or $25,000 SUV, for example, with decent quality.

Lyn Alden ⋮ And they kind of hit that inflection point where the quality and price were very attractive. So every year when I go to Egypt, there's more Chinese cars on the road than there were the prior year, just like growing their pie in that country and many other BRICS countries around the world, emerging markets in general. And that's just a part of the capital stack that they're going through. They also have a near monopoly on like solar production.

Lyn Alden [26:31] They have a bigger lock on the solar market than Saudi Arabia and all of OPEC has on the oil market, ironically. Then they have near dominance in rare earths. And then they have financial measures they can do by holding a lot of US assets. They're able to sell some of those assets if they want to and disrupt US treasury market functioning temporarily. And so there are kind of big moving parts here, both in terms of trade, in terms of financial interconnections. that are harder to unravel quickly. And it does give them a pretty substantial negotiating position. Now they have weaknesses too. mean, they don't want to lose like 10 % of their exports or to face margin pressure, especially given some of the other challenges that they've had. mean, they went through a really big real estate deleveraging, their demographics aren't great. They face a lot of challenges on their own. And so there are There is ammunition that both sides have, but it is kind of a protracted, complicated relationship.

Lyn Alden [27:38] As an American, I look at the, the Chinese energy generation charts and I'm a bit jealous. I think we need to bring that, that type of growth back to the energy sector here in the United States. And it seems like with Chris Wright at the head of the department of energy and, sort of the posturing of Trump leading up to and after the election inauguration is that that is going to be a focus moving forward. And I guess it's like, What are your thoughts on how that actually gets implemented and what it will take to catch up on that type of energy generation growth that I think is desperately necessary?

Lyn Alden [28:18] Yeah, that's a key aspect. As part of our stagnant industrial base, we've had stagnant electricity production in the US for decades, whereas China has ramped up to unfathomable degrees. They produce more than twice the electricity we do. Now, part of that's because they have a bigger population, but it's also a big chunk of it goes toward their manufacturing base. And then there's other ones that don't go directly to electricity. If you're in heavy steelmaking and things like that, you need these big thermal, you know, high powered energy production. I mean, China makes like 10 times more steel than the United States does. Something like that order of magnitude, which is relevant in ship making.

Lyn Alden ⋮ It's relevant in all sorts of stuff. And, you for China, a big chunk of that is coal because in general, Asia doesn't have, or at least East Asia doesn't have a ton of oil deposits compared to other parts of the world, but they do have really big coal deposits. So, And also like when you build coal plants, they're quick to build. It's one of the fastest ways to kind of ramp up energy. So they've been focused on coal, they're kind of across the board investing in everything. Nuclear, solar, pretty much everything that they can throw money at their building. I think in the US it's probably less about coal and more about nuclear.

Lyn Alden ⋮ But that's been tied up in red tape for a while. It's not been a priority of any administration really. And I think that that's one of the ways that we could ramp up our electricity production and overall energy production. And I think that one of the positive catalysts, and this happened really starting a year or two ago, but I think is accelerating now, is that the data center needs, as AI kind of took off and became something that people and businesses use on a regular basis rather than just something we talk about. That's a very energy intensive thing, unlike the prior... round of tech growth, which is mostly communication, social media, not very energy intensive.

Lyn Alden ⋮ AI is quite hardware and energy intensive, as you know. And so that's been like a catalyst for these big trillion dollar companies are basically, they have the ear of the president saying we need energy. I mean, if we extrapolate this out three, five, 10 years, the energy needs are enormous. And some of these things take years to build. Hardware is notoriously more difficult than software.

Lyn Alden [30:39] And so it just moves at a slower pace. And then ironically, some of the parts for like electricity transmission or distribution transformers, a lot of that is made in China. And so even to kind of start rebuilding our own power base, it's not like we can snap our fingers and make it here. We have to kind of build it again from the ground up. And so I think, yeah, getting energy right. is one of the key things. And we saw that when Europe fumbled their energy over the prior years and then they got kind of called out on it due to the war, that's economically impaired them. And we wouldn't want the US to be in a similar position.

Lyn Alden [31:17] It would not I think the pressure from Big Tech and AI it's funny because Bitcoin miners been fighting for this for years and beginning a lot of pushback, but as soon as Silicon Valley gets involved and say hey we need this for AI. It's like, okay, let's go drill baby drill. It seems like Nuclears definitely becoming more in favor. I think we had Oklo Get some of the red tape cut for their SMR projects. They're be doing some government some government applications, military bases, I believe, which is a good sign, but it is. perplexing, not perplexing, but just like, it does feel like there is a needle to be thread here. And I think the next, I'd love to get your thoughts on this. Like what is the window of time where we need to execute the threading of this needle? Is it six months? Is it a year? Do we have this whole four year administration or does something need to happen rather quickly in the near term?

Lyn Alden [32:19] think there's no cutoff, the earlier you go, the better. There's no benefit from waiting, only cost from waiting. And so anything that cuts red tape and can accelerate energy production here at home earlier is better. And even things we don't think about, for example, going back to my prior point, why does China dominate the solar market? It's ironically because of their other energy sources, which is to say, the process of turning silicon basically into solar panels is actually really energy intensive. And that's part of why we've, you know, the whole world's kind of pushed a lot of their dirtier businesses into China. So, you know, kind of put on their balance sheet.

Lyn Alden ⋮ And, you know, that has optical benefits temporarily, but then it gives us costs. And so, you know, same thing for rare earths. I mean, basically, despite the name, rare earths are in general not that rare. It's that they have pretty big environmental impacts when trying to get them out of the ground and process them and everything. And so the whole world was kind of like, yeah, China can handle that part, which is great until it becomes the national security bottleneck or you're kind of antagonistic with them. Then it's like, oh, wait, maybe we need some of that here at home too. And then even things like refineries.

Lyn Alden ⋮ Like the US hasn't built a brand new refinery in decades. for hydrocarbons. There's been some expansions, but really no new ones. And so even though we've kind of ramped up our oil production, we still have to import a lot of oil because different refineries have different types of oil inputs that they need. It's not like all oil is the same. It's not all fungible. So different refineries are built for different purposes. So we ironically can export some of our energy, but also have to import some of our energy because we're not really building the types of refineries that we need. And so there's trade-offs with a lot of this.

Lyn Alden ⋮ S. probably faces a more hardware decade, which is that we need more power production. We need more infrastructure here at home, which then allows us to manufacture. S. kind of automating a lot of its new manufacturing, which is likely true, that still needs energy.

Lyn Alden [34:40] It still needs kind of reliable low-cost energy in order to be competitive. Yeah, I mean, China's getting to the point, but I forget if it was BYD, the car maker, but they had that sort of drone view of the San Francisco sized factory. Like we're getting to the point, particularly with AI, if these humanoid robot form factors accelerate and the software and the firmware gets to a point where they can actually complete tasks like China. You could squint and see within the next decade they could have. a system where humans aren't needed to build anything, even the factories themselves. And you look at the state of the industrial base here in the United States, we're nowhere near that.

Lyn Alden ⋮ And that's the other thing. I'm sure you've been diving into this as well, but just playing with the AI tools myself and over the last two years and seeing how much they've accelerated and advanced just month on month. the advancements that are being made are mind boggling. And we really need to make sure we ride that wave as it's happening, not only in the tech sector, but I think it's gonna be just as important in the physical industrial world as well.

Lyn Alden [36:02] Yeah, I agree. I, you know, for like, I've used it for AI generated art for a couple of years now. And so it's really interesting kind of every month seeing the improvements that happen there. And then of course, for research as well, that's a big area that I use it for and just seeing it become a smarter and smarter assistant over time is very powerful. And there is a, there is a big gap between say data center AI and portable AI or, you know, robots and drones, which is everything gets harder when you have to make it portable. And so, I think humanoid robots at scale are probably farther out than the average person thinks, even though they'll be increasingly relevant.

Lyn Alden ⋮ So, decades ago, industrial automation became a thing, giant robot arms building cars more so than people, for example. A lot of that low hanging fruit's been used, but yeah, I think we're gonna have more mobile robots in factories. And then over the long arc of time, even more mobile robots outside of factories, which is also harder because you have less control over the environment that they operate in. But basically across the board, we should expect to see more and more automation. Prior decades, there's a lot of automation of blue collar work. This is kind of probably the era of automation of white collar work as well, or at a really big chunk of it.

Lyn Alden ⋮ And so rather than just robots moving things for us and doing things for us, they increasingly can think partly for us. which depending on how you use it, I mean, the, kind of the meme is that, you know, humans don't think and just robots think for us, but when used correctly, it extends your thinking. You know, you can learn more when you have like a robot assistant helping you learn and organize information for you. and it's, it's, it's more efficient for information acquisition than Googling stuff. Often, it kind of can do the work of like 10 Google searches in one organized question or prompt. And so I think the output is going to keep growing.

Lyn Alden ⋮ I think the energy usage for that whole field is going to keep growing. The economic relevance of being on the right side of that trend is going to become increasingly important. And what all shows in common is you need energy, need infrastructure. And so, and that's really different than the whole 2010s decade of just social media and communication technology kind of running everything.

Lyn Alden [38:20] It's insane. been, I've been, I find myself using it more and more every month. I've gotten to the point where if you're not using these tools to extend your knowledge, you're, you're going to get left behind, not left behind, but you're at a disadvantage to those who are using it because it is extremely powerful. But shifting this back toward this current administration and Absolutely. going to the Treasury Secretary. How do you think if at all they will incorporate Bitcoin like you said Steve Myron talking about the the demand for for gold and cryptocurrencies these neutral reserve assets should increase as we go through this transitionary period Obviously here in the United States This administration has come in and said we love crypto.

Lyn Alden ⋮ We want you guys to have fun We're gonna support your your industry and it seems like the priorities out of the gate have been the stable coin bill market structure And in a distant third is this Bitcoin strategic reserve bill. Yesterday, Genius Act, the stable coin act failed to to get through the Senate. Democrats blocked it. It looks like you're going to and re get that back on the floor to revote for that. But what are your thoughts on the priorities as it pertains to legislation for our industry, the Bitcoin industry and whether or not Bitcoin is something that the treasury should be implementing into what they're doing or should it simply be a private market thing that people build their balance sheets around.

Lyn Alden [40:04] Well, yeah, think the first step is just not to be in the way. So it's basically to say that, you know, if people want to send money to exchanges or brokers to buy Bitcoin or their assets, you know, their banks shouldn't be told to like block them from doing so or de-banking them just because they work in that industry or are sending money to buy those assets. That's been a big trend for years now. So, yeah, I think just getting out of the way is step number one. I mean, I think a bigger benefit would be exempting Bitcoin from capital gains, at least on a small level to basically say when everyone gets like a write off every year of an equivalent of a several thousand dollars.

Lyn Alden ⋮ So it's easier to spend with Bitcoin to experiment with Bitcoin to not have to worry about that every little thing, every little micro activity is like technically like a taxable event, for example, that would that would relieve a lot of administrative burden and economic disincentives from it. I view that as more important than a strategic Bitcoin reserve overall, even though obviously strategic Bitcoin reserve is fun for price potential. If you go back to Stephen Myron's paper that I mentioned, when they talk about kind of a currency accord to weaken the dollar, they mentioned ideally they wanted to use multi-lateral approaches, but there are some unilateral approaches that they can do, which includes printing dollars to buy reserve assets.

Lyn Alden ⋮ So a lot of countries in the world, especially lot of these Asian mercantilist countries that have these really big surpluses, when they get these big inflows of capital from all the exports that they're doing, their currencies would naturally strengthen somewhat. And so instead they deliberately print more currency and accumulate reserve assets to prevent their currencies from rising. That's kind of the manipulation that they do. And the US doesn't really do it. We actually have the least reserves pretty much. of countries around the world as a percentage of our GDP, including our gold reserves. So many developed countries have 5, 10 % of their GDP in reserve assets.

Lyn Alden ⋮ Many developing countries have 15 plus percent. Many countries with long run current account surpluses have 25 % or more. I some of them have over 100 % of GDP in reserves. And the US has something like 2%.

Lyn Alden [42:24] because we're the axiom of the system. We're the ones that didn't need reserves because other currencies are kind of managing themselves around the dollar rather than the dollar ever really managing itself around others. But if we do enter a more balanced world, then the US can have higher reserves too, 5-10 % of GDP in line with other developed nations. And that can include buying other countries' bonds, which is not very attractive. mean, do we want to own Euro denominated sovereign bonds and yen denominated sovereign bonds. I that was discussed in the paper and obviously that comes with inflation risks, outright default or repudiation risks. Gold is an obvious market because it's so big.

Lyn Alden ⋮ I mean, it's over $20 trillion now in terms of estimated market size, very liquid. There's already a big sovereign precedent for it. When you look around the world, there has been an uptick in gold demand recently, especially ever since the Russian invasion of Ukraine and the associated sanctioning. of Russian reserves. But really that trend goes back to 2009, the global financial crisis. If you look at the prior trend for decades, global tonnage of official gold reserves was decreasing. And it bottomed in 2009 and it started to inch back up for 15 plus years now. And I think that trend probably has likes to it. And now, of course, that Bitcoin is roughly a $2 trillion asset.

Lyn Alden ⋮ That's in the discussion now. It's still somewhat small for a reserve asset, but we can easily imagine that once it becomes a 5 trillion plus asset and maybe a little bit lower volatility and more liquidity, that's in the discussion. In addition, when we see all these different countries in the world, they're trying to build these alternate payment mechanisms that go around the dollar. So whether it's built on Chinese settlement, the BIS was emphasizing Enbridge with a couple of different central banks or several different central banks to kind of just like... kind of like cross border CBDCs to kind of go around some of this. And all of these are like closed solutions competing with each other and then staring them in the face is this big open source settlement network that's capable of settling unlimited value.

Lyn Alden ⋮ And you know, it does come with risks, volatility and things like that upfront, but as it grows and becomes more mature, then in addition to being a reserve asset for many countries, it's a settlement network, a non-dollar permissionless settlement network.

Lyn Alden [44:52] many countries. For the US, mean, if they want to, they can use it as a dollar devaluation tool. They can accumulate more Bitcoin. They've already kind of emphasized that they don't necessarily want to do that. If they're going to accumulate it, they want to do it on a revenue neutral basis, which is the more conservative approach. But yeah, I do think it makes sense for the US to hold Bitcoin, but I purposely focus less on covering it. There's more than enough voices in the space. covering every single move of strategic Bitcoin reserve and cheering them on. I like to focus on kind of more bottom up.

Lyn Alden ⋮ You know, I'd rather have people buy it, small businesses buy it, large businesses buy it, then nation states buy it. You know, that's kind of the ideal approach. Or even small nations first and then big nations. We can't always pick the path that happens. But for me, I like to focus on generally Bitcoin helping smaller entities. than the biggest of all entities. But basically I would phrase it that anytime you're running capital, whether it's a household, a corporate balance sheet, an institutional fund, or the finances of a sovereign nation, if someone gets Bitcoin and they want their thing to succeed, they should own Bitcoin. It's kind of simple as that.

Lyn Alden ⋮ So it depends on what your incentives are and what you're responsible for running.

Lyn Alden [46:14] Yeah, I completely agree. think the Strategic Bitcoin Reserve is a nice to have, but I think... And what's going on now with all the corporations and launching their pure Bitcoin treasury plays? Interesting. Good development. Micro strategy has definitely proven the way. It's repeatable. We will see. But going a layer down, just entrepreneurs, individuals holding Bitcoin on their balance sheet and incorporating Bitcoin into their financial lives in any way that they can. I think it's... like you mentioned, that grassroots way is going to create a much stronger foundation in the long run. that's, I'm sure you've been following it, but I think that this development of Bitcoin and structured credit to help sort of recapitalize credit products in the commercial real estate and other markets is very interesting to me as a theme.

Lyn Alden ⋮ because I think that's an incredible bridge product to an inevitable Bitcoin standard where you sort of co-mix the different collateral assets a bit slowly but surely over time Bitcoin becomes the dominant collateral asset. And I think that has benefits twofold. One, you find a way to solve this massive credit problem that exists particularly in markets like commercial real estate, in corporate debt throughout the country. and the world more broadly. But then two, since these are structured credit products with durations, you sort of have a forward looking duration curve of Bitcoin that's gonna be held off the market for a certain amount of time. So to your point about decreasing volatility, giving governments more confidence in using Bitcoin as reserve asset, I think something like that is necessary to develop that confidence.

Lyn Alden [48:11] Yeah, and think, mean, one of the biggest trends overall is that there is mandated capital or walled garden capital, which is to there are really big pools of capital that have a specific purpose. It could be that they're a stock fund and they buy stocks and you're a manager that buys stocks. There's bond funds, there's credit funds, there's real estate funds. There's all these different types of entities that have kind of a specific mission. And if you happen to work in that industry and be a Bitcoiner. Like you're bullish on Bitcoin long term, structurally bullish, but you work in buying stocks, buying bonds, buying credit, buying real estate, then one of the cheat codes you can do is incorporate Bitcoin into what you're doing.

Lyn Alden ⋮ So if you're bullish on stocks and you say, well, this stock is buying Bitcoin with kind of smart leverage. So if I want to outperform other stock managers and I happen to get Bitcoin and say most of them don't, I can buy the companies that are buying Bitcoin. Similarly, I can buy their bonds that have a Bitcoin component to them. If I'm in credit, I can see how Bitcoin can fix credit or give a price kicker to credit. If I'm in real estate, I can look at real estate tied to Bitcoin. And so basically, it's this kind of way to slip into all these different kind of walled garden types of capital.

Lyn Alden ⋮ And I don't view that as competing with the cyberpunk aspect of Bitcoin. Part of what makes Bitcoin successful is just being large and liquid. So the more entities that want to use it, the better, as long as those ways don't get in the way of individuals using Bitcoin in self-custodial, permissionless ways. So I think there's a bunch of different problems that Bitcoin can solve from small to the big, and they're all kind of happening together. individuals have their own backgrounds. They find certain things more interesting than others. But basically, whatever skill set or experience someone has, they can bring it to the Bitcoin network or bring the Bitcoin network into what they're already doing.

Lyn Alden [50:10] And this week was an incredible validation of that thought you just put forth, is we had here in Texas, we had in Austin, specifically we had the Texas Energy Mining Summit Tuesday, Wednesday, we had Bitcoin plus plus Wednesday yesterday. And I believe it's still going on today. At the same time, we had a group of Bitcoiners going to the Capitol to talk about the Texas Bitcoin Strategic Reserve. And they were pretty confident about that. And at the same time in Orlando, you have strategies. Bitcoin for corporations conference going on and I think that's just like emblematic of Everything you just said we have all these different events going on literally at the same week covering these different areas of the economy that Bitcoin Can can help alleviate some of the pains that exists in the those particular sections of the economy and I spent my time at Texas energy mining summit and Bitcoin plus plus here in the city and energy mining in a very good spot.

Lyn Alden ⋮ Looks like the future is bright for the intersection of those two industries and then Bitcoin plus plus to the side. do think the cypherpunk, the highlighting the cypherpunk technology that's being built out has sort of flown under the radar and strategic reserve and corporate balance sheets have been the memes of the last 18 months, but become abundantly clear to me that on the tech side, protocol stack, we're reaching a level maturation, particularly on second layers where you have the lightning network acting as this connective tissue between different second layer protocols. And the maturation of the interoperability of all those is getting to a point where we can build some really, really cool stuff that can enable incredible payments and savings tech and even fixing things like mining pool incentives.

Lyn Alden ⋮ I think we're firing on all cylinders across the Biqua landscape right now.

Lyn Alden [52:15] I agree and it's funny because I analyzed macro but I also am involved in Bitcoin venture via eGoedith Capital. And so I kind of have these windows into both sides of this, like kind of cool stuff that's being built, but also how it interacts with macro. it just seems like, especially outside of people that focus on this so much, most people just fall into one camp or the other. They're either technical or they're just talking about the financial decisions, whereas across the board it's just so interesting. And I don't really view them as in opposition at all. mean, there people that are like, you know, Bitcoin's been captured or Bitcoin is lost.

Lyn Alden ⋮ It's it's it's it's cypher punk route. But Bitcoin is what you make it. It's an open, permissionless network that works. And we shouldn't take for granted that it works, but it works and it's getting better. And, you know, there are people that that buy it and make Bitcoin IOUs and Bitcoin financial products. And, you know, it works for them. But then Bitcoin is still a technical stack with plenty of design space, you know, in the current configuration to still build on and use. And then especially as demand increases, you know, we have to make more efficient use of block space, more efficient use of resources.

Lyn Alden ⋮ You know, sometimes during periods of abundance, you know, if fees are low and if demand is low, there's not a ton of incentive to build vertically. But whenever there is excess demand, one reason or another, It's kind of like necessity is the mother invention, as they say. And so these things can develop and I'm so optimistic on that whole, all the technical aspects of Bitcoin.

Lyn Alden [53:50] Yeah, that was the most I ran the live news desk at BTC++ Wednesday and yesterday and Matt Corallo, one of the most pessimistic people I've met in Bitcoin. was a core developer for a long time. He's been working on LDK for those who are unaware. was co-founder of Blockstream back in the day. He was optimistic yesterday and he actually, to your point about the bear versus bull market building, Like he, he was, he's pleasantly surprised at the amount of progress that the developers are making on second layer solutions, despite the price going up above a hundred thousand dollars. Usually the price goes up and people are like, we don't have to work to get too distracted.

Lyn Alden ⋮ They can't build stuff, but the pace of development is pleasantly surprising. Matt Corallo, who historically, if you've listened to the show throughout the years, I believe he was our second guest has been, he's one of the He's very bullish on Biquin. He works on it. He's dedicated his life to it, but he's a sober analyst of Biquin's long-term potential success. And he's very optimistic now, which I was pleasantly surprised to find out yesterday.

Lyn Alden [55:05] That's good to hear. At the conference, would you the biggest takeaways are for L2s? I think lightning as this interconnective This connective tissue for these second layers is becoming clear and So for example like the development of cashew over the last year Specifically that that chalmium mint protocol and for those who are unaware Listening to this chalmium mints allow you to lock Bitcoin up you get a commensurate amount of ecash tokens back and when you spend those tokens whether it's in the mint or outside of the mint it's very private it uses a blinded signature scheme where the mint operator doesn't know what people are transacting but it comes privacy benefits fee benefits instant settlement benefits in terms of the speed but you can have these individual mints and what we're finding is that these mints can have lightning gateways the lightning network they can communicate not only with other mints but people simply using the Lightning Network, people using other second layer solutions like Liquid or Arc.

Lyn Alden ⋮ And I think the key takeaway is it pertains to second layer solutions that I've got after having many conversations over the last two days was the sort of synergies that are beginning to emerge due to that interoperability are accelerating development of really cool applications. One of which we talked about was hash pools. is this idea that you can create a new mining pool sort of structure where for anybody who's listening, Lin, you typically pull in a lot of macro people who aren't focused on Bitcoin. So trying to explain this then, mining pool layer of Bitcoin right now is particularly centralized and it's due to the trade-offs that are necessary to get consistent payouts for miners.

Lyn Alden ⋮ So miners are pointing their hash rate at Freepool is predominantly Foundry, Ampool, F2pool. They have a big portion of the network and they're able to attain this because they can pay out pretty consistently. So Hashpool is trying to combine eCashmints with Lightning to make it so you point your hash at a Hashpool and you exchange immediately your Bitcoin mining hashing shares for eHash tokens that you can then immediately sell for Bitcoin over the Lightning network.

Lyn Alden [57:34] To people that are willing to stomach the variance risk of Bitcoin mining so you can create a liquid Market for your hash an immediate liquid market for your hash combining You cash and the lightning network, which is pretty cool so you can spread out the volatility of the payments. So it's not all just focused on the miner. Yeah, that's smart. I like that. Yes. Yes, and you can sell, you can basically pull forward revenue by selling to people who want to speculate on the luck of that individual pool. Yeah, it's happening, Lin, it's happening. Are you finding yourself having to pinch yourself? Because it seems like, it almost seems like, Star Fox 64, level two. It's quiet, too quiet, and then you get ambushed. It's like, it's too good, it's too good, we're about to get ambushed.

Lyn Alden [58:02] powerful. Bullish. great reference. I love that game. I played that a ton when I was a kid. I think it's a good position. think it's actually, I like seeing Bitcoiners pessimistic and arguing with each other because that's healthy. But I think when you zoom out, the network's in a great space. think the network has years of potential political cover. So at least less chance of attacks, including attacks against privacy, attacks against ownership, that kind of thing, least in the US. Europe's a kind of a different beast, but there are pockets around the world where it's politically pretty in decent place. And then the whole tech stack, that allows the tech stack to flourish pretty well.

Lyn Alden ⋮ I think the fact that Bitcoin's kind of forming this like price base above and below 100K and 100K is kind of boring now, I think is bullish. So whether you look at potential price action, integration into existing financial structures, the tech stack, the political risks and opportunities around it, I am bullish. It's not something you want to take for granted, but I think that everything I see now, the future is pretty bright for it. And that still takes a long time. We talked about the network effects of the dollar and the network effects of all these existing things. So I never expect too much to happen in one year or two years.

Lyn Alden ⋮ But looking out in the longer term, It's almost all bullish. It's a great place to work in, to be following. And I think it's only going to get better.

Lyn Alden [59:56] I think that's a Bitcoin turned 16, people that have been in it for a while, they're sort of uncomfortable with how nice people are playing with Bitcoin and talking about it. They're like, wait a second, I you were supposed to hate this thing. And now everybody's like, well, actually it solves the problem we have. And I think a lot of people are trying to come to grips with the fact that like, I don't know, people are waking up to Bitcoin, it's actually happening. We've been talking about this for quite some time. I mean, it's funny, the people that push back against it, the game theory has been, not the game theory, the People have described the adoption, the order of operations of adoption over the course of the last 15 years.

Lyn Alden ⋮ It's always been, I'll start with individuals, then maybe companies will get involved. And eventually, if Bitcoin is as good of a monetary asset and network that we believe it is, then governments and other large entities will want to use it as well. And it's happening. I think David Bailey said it best. It's like your favorite band went mainstream. You gotta come to grips with that.

Lyn Alden [1:01:03] Pretty much. mean, that's part of Bitcoin becoming a multi-trillion asset. That's what happens if it's successful. And then the cool thing about it is that it doesn't have to lose any of its traits that existed when it was smaller. It's still permissionless. The tech is more useful than years ago. There's more ways and easier ways to interact with Bitcoin than ever before. I harder wallets and NFC cards and things like that are better. Lighting network is easier to use, more liquid. ECash is great. There's all these different things that work together. on the individual level, it's great. And then as these bigger entities buy into it, over time, they can dampen the volatility somewhat.

Lyn Alden ⋮ Because instead of having tons of coins in Mt. Gox or FTX or these other places and one thing can blow up the market, the more distributed, the more entities that hold it, the more it can kind of remove at least some of those price shocks and then allow people to use it as money first and foremost. And so, you know, it can just keep seeping into everything. you know, the existing global financial system, mean, global broad money is over 100 trillion. Then you have bond markets that add hundreds of trillions more. And Bitcoin is this, you know, relatively unlevered two trillion dollar market that just kind of growing into that over time, getting its tentacles into everything.

Lyn Alden ⋮ And the way I often describe it is that it's not Bitcoin changing to get into those things. Those things are changing to incorporate Bitcoin. So it's not like Bitcoin did anything to get included in ETFs. The SEC and asset managers changed in order to incorporate Bitcoin. So, you know, they're locked in here with Bitcoin. Bitcoin's not locked in there with them. And that's how I see it for the next several years.

Lyn Alden [1:02:54] Yeah. Bitcoin is catching on, you may want to get some. That's the part we're at. let's not take two years to catch up on the show next time. That's on me. But this was incredible. Thank you for the work that you're doing. Thank you for joining. hopefully we can do it again soon. Yeah. I agree. Always happy to catch up and I appreciate the work you do in this space. Peace and love freaks.