



Andy Edstrom, CFA CFP and author of “Why Buy Bitcoin” joins me to talk about:

Learning about austrian economics after getting into Bitcoin

Investor mindset

Fiat Money Debt Problem and Bad Options for how we get out of it

Why Buy Bitcoin book

Andy Links:

Sponsor links:

Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Andy, welcome to the show.

Andy Edstrom:

Thank you, Stephan. Glad to be here.

Stephan Livera:

Andy had the chance to meet you at Bitcoin 2019 at the conference and also had a chance now to have a look through your book. Why buy Bitcoin? I think it’s great. And I think you’ve got an interesting background because it’s not the typical background. So tell us a bit about yourself.

Andy Edstrom:

Yeah, thanks. Well, If you don’t mind, I want to cover one or two things first. The first is the usual disclaimer, which is none of this is investment advice and all opinions are my own and not those of the my employer WesCap Group. So that’s one. And the second thing is you know, I’d like to start by observing that I’ve noticed that a lot of Aussies do quite well in Bitcoin. And so I was wondering if you know, I was wondering if the accent would would help with book styles. You know, I was thinking about Stephan Livera and Friar Hass and Alex Svetski and the wizard of Oz. And you know, this guy Bruce walking, he’s this baby boomer and he walks around miles a day. He tweets about these podcasts he’s listening to in Bitcoin. Therefore, I’ve been working on it, working on the accent. So I’ve been working on some things like give Bitcoin and I buy Bitcoin and save Bitcoin and Stack Sats and orange coin, good number andgo up.

Stephan Livera:

I’ll tell you what your accent is. It sounding very close to the Kiwi New Zealander accent.

Andy Edstrom:

Ah, yeah, busted, busted. The funny thing is I had been Australia but it was over 20 years ago, but I did go to New Zealand and that trip was more recent. So I think I failed anyway. Yeah, so quick, a quick background on me. Grew up in LA, went to school in Massachusetts, started my career on Wall Street, worked for Goldman Sachs doing investment banking. And I did private equity next and then I worked for a hedge fund in LA doing a wide range of stuff, distressed debt and equities and private debt and private equity. And I was on Wall Street before the financial crisis and then I was doing doing the investing after the financial crisis. And then I I joined my family firm, which is, which does wealth management and that was seven years ago. And and I got you know, I got excited basically about growing that business and and helping out clients rather than investing for faceless institutions. And yeah, so that takes me to today and obviously that doesn’t talk about the Bitcoin part of it, but I’m sure we’ll get to that.

Stephan Livera:

Excellent. And I find that interesting because in Bitcoin it’s arguably, you could say, at least in the first few years it’s been very just individual level, huddling driven. And you know, over the last few years there’s been a bit more talk of the so-called institutional money and so on. But in some ways I actually prefer talking to individuals and, you know, treating it like a bottom up revolution. Tell us a bit about your your work as you’re a CFA and a CFP and working at West Cap. Tell us a little bit about that and how you’ve been teaching your clients about Bitcoin.

Andy Edstrom:

Yeah, sure. So I get it, man. I think the grassroots, sound money perspective is actually the most important one. However this for Bitcoin to reach its potential, it has to get adopted. Well, I shouldn’t say it has to get adopted as an investment, but I think it would help an awful lot. So there’s that piece. I come at it from both angles, right? I’m a big believer in sound money that is uncensorable and hard to confiscate. And but yeah, I’m also an investor. So explaining it to clients, the story of the book was, I knew I was going to have to explain it to clients after I’d figured it out as a fiduciary. Right? I’ll figure it out. Oh, okay. This is a investment that has huge potential upside. And when I probability weight that upside and compare it to the price, I say, wow, I gotta own this and anyone should own this at least a little bit.

Andy Edstrom:

And so then I got to explain it to clients. And the first conversations I had were let’s say challenging. Most of my clients had, you know, knew what was in the mainstream media, which is the usual FUD and the bad coverage and literally, you know, factual errors that the most of the mainstream media serve up to us. And so, yeah, it was a, it was a challenge. And and the book was in large part an effort to create something that I could push to my clients and say, look, I’ve thought really hard about this. Please read it. Cause it’s very readable and after you’ve read it let’s talk about it.

Stephan Livera:

Yeah. And also in terms of coming from the Wall Street world, were you already into Austrian economics and more like a free market libertarian yourself or was that kind of a journey that you went on while learning?

Andy Edstrom:

I wish Stephan, where were you a few years ago when I needed you? The answer is actually you were, you were doing your thing and educating people before almost anybody at least you know, in this format. No, I had no Austrian economics. I wish that I had exposure to that stuff. I was born and raised a Keynesian. I was an Econ major in college. And yeah, good God, I wish I’d had that education. And so yes, Bitcoin was the forcing function for understanding what is money and therefore delving the Austrians.

Stephan Livera:

Yeah. And that comes through in your book as well because you talk about Carl Manger and you know, some of the, the Austrians like Mises and Rothbard and so on. People who I mentioned on this podcast almost every episode. Right. But I found that interesting as well because some people come into it and then, you know, they learn about Bitcoin and then that’s their reason for learning about some of these other things that they would not have seen otherwise. So can you tell us a little bit about that and do you find that a challenge when you’re speaking to your clients because they may not have learned about these ways of thinking either?

Andy Edstrom:

Yeah, it’s definitely a challenge. My experience is that very, very few have had any exposure at all to the Austrian school. And that’s unfortunate. So yeah, it’s an uphill battle in that regard. I certainly can’t tell my clients to, you know, stop everything and go read Human Action that’s not going to fly. So, yeah. You know I do my best to summarize, I think the good news is, you know, in some of these stats are in the book and the graphs, right? When you present, when you approach it from just the ratio of debt to GDP, right? Just debt levels in general and you argue that, okay, maybe this can’t literally go on forever. That’s at least a reasonable, starting point. That would’ve been a really hard argument, I dunno, a decade, well, a decade or two ago, but now it’s now I think it makes more sense to people, but yeah, man, it’s an uphill battle. People do not, people have not been exposed to Austrian economics and I applaud the work that you do and that others do in that regard.

Stephan Livera:

Well, thank you for that. And I think of this when I was thinking, okay, I’ve got to get Andy on the show and talk about his book. And I think some of this material, in some ways it’s like a continuation from one of my earlier episodes with Preston Pysh episode 109, where again, he’s coming from an investor perspective and the typical investor is thinking, okay, but what’s the yield on this thing? Where is my dividend or what is my interest income from Bitcoin and Bitcoin doesn’t have any of that, so why would I buy it? And so what’s the typical way you would explain that to someone coming from a, what we might say is a traditional investor mindset?

Andy Edstrom:

Yeah, so I’ll talk about my personal journey. And so I was raised I guess a value investor. And so this notion of something that doesn’t generate cash flows having value is like, or was anathema basically. Right. And it was anathema actually. Hats off to my former coworker, colleague Matt Fare. He, some years ago, tried to pummel me with some good arguments about, about sound money and particularly gold and it didn’t really sink in, but I think he probably sowed some seeds there in my mind it was 2016 when I started paying attention to some of the more capable, major macro traders like George Soros, like Stan Druckenmiller, and they were going long gold at the time. And I thought to myself, okay, that’s interesting. Like these guys are way smarter than I am. They have better investment track records than really anyone in the investment business, you know, including Warren Buffet maybe ought to pay attention to these guys.

Andy Edstrom:

So that was the point when I did some homework and started to understand the value of sound money and the, and the possibility that something that didn’t generate cash flow could, could accrue some value. And that’s actually when we first got our clients involved. So interestingly, my firm is now over 30 years old. I haven’t been there 30 years. Right. My father and his co-founder founded it that many years ago, but never in the history of the firm had we invent invested in gold until I brought it in in 2016 and it was a small position. But over time, actually, as I paid more attention to the Austrians, including through my learning process with Bitcoin, I then started sizing up the gold position, you know, as well as taking the Bitcoin position. So, I don’t know if that answered your question, but that’s kinda how I came at it. Oh, actually, so to your question about, you know, how do you explain it to people? It’s hard. I mean, I actually do use the Menger, the simple Menger framework of three kinds of goods consumption, good capital, good monetary good, and the monetary good doesn’t generate cash flows and it doesn’t generate utility except for the utility of transacting. And you know, I don’t, I haven’t come up with a better way of of explaining it than that you, you probably have, I’d like to hear what how you pitch it?

Stephan Livera:

Well, I mean, that is the canonical, Austrian way of thinking as well, because you’ve got consumer goods, which are things that you consume right now and you have capital goods, which I use to make those goods. And then you’ve got money, which is Sui Generis. And I remember discussing that in episode 15 with Stephan Kinsella as well. We were talking about this idea that Mises spoke about money as being sui generis. It’s one of a kind. It’s unique. It’s not meant to be like the other things. And so I think that’s basically the typical way I would answer that question, which again, it might be difficult to articulate to somebody who’s coming from a traditional investor mindset. And so let’s move into the characteristics of a good money because this is one of those things where you can find lots of different articles or essays or books that have different, I mean it’s kind of like people just have their own way of coming to the same conclusion, but give us your ideas on how you spell out what makes a good money.

Andy Edstrom:

Yeah. So I have, unfortunately I have 14 of them. One of my personal sort of frustrations with learning about Bitcoin and learning about money in general was people were talking about, I don’t know, four or 5 or 6 or 7 characteristics of money and I couldn’t I couldn’t get my head around there being less than 10. And I thought really hard about it and I, came up with this list. And so the list is identifiable, transferable, durable, divisible, dense scarce, short term, stable value, longterm stable value, fungible, unseizable, censorship resistant private required for some important purpose, and then backed by a powerful agent. And I could talk about any of those, but I think it’s important to note that each of those is important. They’re not necessarily equally important and no form of money scores well on all those characteristics. By the way, none of those is binary, right? They’re each sort of a continuum, a sliding scale on their own Right. And then of course, different people value different characteristics, you know, more than others. So, so there’s a lot of shades of gray in there, but those are the 14 that I came up with. And you know, I’m interested in your, perspective on whether any of these are illegitimate or whether I missed any.

Stephan Livera:

So I think mostly that all sounds, it all makes a lot of sense to me. I think it’s almost just like you’re coming at it from a different way of explaining and perhaps you’re putting it into the context for a person living in 2019 or 2020 of this is how you can think about money. The only one I’m not quite clear on is the, and you might know this as well, the backed by a powerful agent part. I’m not clear on why that is kind of needs to be an important characteristic of money. But what’s your view there?

Andy Edstrom:

Yeah, my view, I may be, that my view may be skewed by the fact that so many people today talk about the primacy of the dollar and then they talk about being backed by the U.S. Military. Right? And I think that’s real. I mean, I do think that the history of geopolitics and conflicts you know, Wars recently fought by this country, you know, over the last several decades indicate that countries, you think about the petrodollar, right? Countries are more willing to, let’s say, use the dollar denominated oil contracts or other economic arrangements in the dollar. In part because if they don’t, the jackboot of the U.S. Is going to come down on their throat. So I would say that’s my perspective on why the backing of a powerful agent and in the modern era that’s the U.S. Military is important.

Stephan Livera:

Right. I see what you’re saying. And I think that to me, I’m thinking more from a, again, so coming from like an Austrian perspective, I’m thinking of say Dr. Joseph Salerno and his explanation on sound money and part of his explanation is actually, you know being free from government interference. Right? And so it’s kind of, and again, it’s not like bringing an ideological blinder to it. It’s just saying, looking at it from a value free sense, what would people choose? And I think even if you look back at Menger and so on, he would spell out, okay, what were some of the political or social impositions upon what we use for our exchange and our consumption? Because if there was some kind of big societal taboo about using a certain thing, then maybe that wouldn’t be the money that we choose. And so I think to some extent maybe this kind of backed by a powerful agent, I think maybe that part is, it sort of bends and shifts a bit. And with Bitcoin, again, as I’m sure you are aware, it’s like this asymmetric defensive technology and the question is, over time, will that be proven out to be enough of a defensive technology that you don’t need a backing by a powerful agent?

Andy Edstrom:

Yes. I liked that framing a lot. I mean there’s no question that if you returned to first principles about, you know, what is the best money in a vacuum, right. Then I agree with you 100% and I agree with you about those. You know, those guys and their perspectives, like, starting with a blank slate, what would be the best money? And so the backed by a powerful agent yeah. It’s only relevant because of, I suppose, because of the network effect factor and this ability of some power to, impose this this system after having left the gold standard. You know, there’s, if the U.S. Military didn’t exist in its form of the last few decades, there’s little doubt in my mind that the dollar’s primacy, would’ve been, significantly impacted and you know, perhaps we would have moved on to something else. I don’t know, perhaps we would’ve moved back to gold. Perhaps we would move to Bitcoin more quickly. So yeah, it’s this sort of it’s this sticky human and government created thing that causes us to, or let’s say, delays us from moving toward the absolute best money. And we arguably would have had a faster transition if not for the existence of this factor.

Stephan Livera:

Yeah. And I think it’s a fair point that we’re saying here, like in that stipulation, you’re saying if there weren’t a U.S.government military, but then let’s also remember that if it wasn’t the U S government it might be some other government. And so it’s kind of like it comes down to what, technology do humans have that enables them to defensively protect their value against outsider inflationist or an outsider controller, let’s say. Yeah. And so yeah, go on.

Andy Edstrom:

No, no, I was going to say, cause you made a point about, you know, how this newly hard to control and unconfiscatable asset, you know, is better money. And there’s no doubt in my mind that it’s better money. I mean one of the things I do in the book, cause I, you know, I score the dollar and I score gold and I score Bitcoin as they exist today. You know, as I see them and then I score them, I score Bitcoin basically in the future. In other words, how it’s developing over time and the direction it’s likely to go. And Bitcoin clearly, you know, has characteristics that are head and shoulders above both gold and the dollar. And you know, we could delve into those, but it’s also catching up on some of the other characteristics as, as time goes on.

Stephan Livera:

Yup. And I also think it’s fair to point out that the situation has changed over time. So when Carl Menger was writing in the 1800’s and Mises was riding in the early and mid 1900’s, they would not have foreseen things that the U.S. Government would later come to do. Or that gold became somewhat muted by the government because the way it’s stored is very centralized. And so I think that’s also an important factor as well, that people have to be cognizant of the historical situation that the world was living in. And what were the typical ways that money got controlled?

Andy Edstrom:

Yeah. Agreed. Which is, and you know, if you advert that you it makes it all the more amazing and impressive that the framework that they applied or that they created, you know, so many years ago still basically, governs, I would say. Right. I mean, I haven’t found much. I mean, like I say, I can quibble that sort of what are the characteristics that they identify as the ones identify as you say in a world where new characteristics are possible or characteristics that didn’t exist then, could exist today. But yeah, the basic framework they laid out so many decades and centuries ago is still governs. It’s guys were brilliant. No wonder, no wonder you’ve been studying them for 70 years. I wish I’d found them earlier.

Stephan Livera:

Don’t we all, don’t we all. And I think the other big one that comes to mind, and so this is a very common question. Oh, but isn’t Bitcoin volatile? And so in your characteristics, you’ve got to, there you’ve got short term stable value and longterm stable value. So what are you getting at with there?

Andy Edstrom:

Yeah, I think this is an important distinction because people as you say, get, they really get hung up on this all the time. And yeah, so here we go to the what is money? And I go to the medium of exchange across space and time and the medium of exchange across spaces, you know, the actual transacting in real time. And then the medium of exchange across time is the store of value concept and where the bifurcation exists. You say, okay, the store of value, the medium of exchange of across time is the characteristic of not getting inflated away over time. And that’s where things like gold and Bitcoin are strong and the dollar and fiat currencies are weak versus the medium of exchange across space. Sort of in short term time is the short term price stability characteristic.

Andy Edstrom:

Whereby yeah things don’t get repriced all that frequently in dollars. You know, the price of the sandwich today is more or less the price of the sandwich tomorrow, even if it goes up over you know, period of a year or a few years. And that is an important distinction that people get hung up on. I would say most people get hung up when they discount or they, or they downplay the moneyness of Bitcoin or the ability of Bitcoin to realize the potential of becoming the world’s money. They focus on that short term price stability. And yeah, that’s actually one of Bitcoin’s weakest characteristics today in my opinion. It is that short term price stability. And I believe that we will, if Bitcoin realizes its potential if and when, which is probably, two orders of magnitude away on price, right. Then we’ll have more stability. I do think that because of the limited supply, they’ll never be as stable as quote unquote stable, short term stable as the dollar. And you know, it’s got the, likewise the same thing with the gold potentially. It actually could become more short term stable than gold because it becomes so much larger than gold. But yeah, that’s kind of the framework that I apply.

Stephan Livera:

Yeah. And I actually think in some ways because the supply is more predictable, it might actually become even more stable and more predictable in that way. But I think in some sense it might just be that it’s like central banks try to hide a little bit of the danger and the volatility and at the risk of creating like the more big Black Swan kind of volatility. And I think if we were to, let’s say we did live under a Bitcoin standard, maybe it’s more just like we would more accurately perceive the little supply shocks and you know natural emergencies or disasters that occur and so on that changed maybe people’s propensity to hold money and so on. But that would be almost more like a true perception of what consumers demand to hold money is.

Andy Edstrom:

You’re right, it would be, it could be more true and more real. And I guess the question, are you suggesting that it would therefore be less volatile or you’re just saying that it would be a more accurate reflection of, you know, human action basically people’s preferences.

Stephan Livera:

Yes. A more accurate reflection of human preferences and I think to some extent it’s like these central banks and these governments who intervene into money, they’re kind of selling us this false promise that, Oh, let me control the money and I’ll keep it stable for you guys when it’s more like actually there is no such thing as monetary stability.

Andy Edstrom:

I tend to agree. I mean you go back to the question of you know, price gouging and you know, volatility in times of scarcity in shortage and why not apply the same to the monetary good or I guess consumption goods as the inverse or the other side of the, of the exchange rate with money. Yeah. Why shouldn’t I? Shouldn’t prices be more volatile. If more people want to buy the, particular consumption, good or capital good, this price should go up. And if the next day, not as many people want to buy its price should go down. I’ll buy it.

Stephan Livera:

Yeah. and so you’re also involved with, you know, professional money management and other important aspect of that is returns the only, you know, let’s talk about returns that you can eat, meaning after taxes and fees and so on. So I think taxes is an important one because you’re in, you’re in America that has a capital gains tax. I’m in Australia, there’s a capital gains tax that will, at least in the short to medium term impact the ability for people to use Bitcoin as money. But what’s your view on the tax situation and potentially how that changes maybe over the long term?

Andy Edstrom:

Yeah. Yeah. Tax, I agree with you entirely is one of the, one of the bugbears that we’re dealing with right now with the monetization of Bitcoin. I guess I could look at it a couple of ways. The way I present it in the book is, you know, I asked the question, is Bitcoin money? And yes, Bitcoin is money, but on the other hand as an investment, it is an investment in an asset that is becoming money. In other words, it hasn’t fully monetized by the time it does fully monetize, well then you know, the value will be much higher. So, you know am I that focused right now on making sure that people can transact and you know, buy a cup of coffee? I’m not that focused on it. I do think it has to happen ultimately, but I think it would actually sort of be okay. You know, if it’s years from now it would be great if it happened sooner. Of course. And there’s no doubt that tax and tracking tax is an impediment to, you know, current, you know, medium of exchange use today. It would be interest. It’s interesting and unknowable, right? We don’t know the counterfactual. Well maybe we do. I guess there are, there isn’t Germany, I’m trying to remember. I think there are some countries where it’s basically not taxable as a capital asset?

Stephan Livera:

Right Singapore, Portugal, Switzerland, Germany, if you held for want more than one year, there are a few off the top of my head that I know of.

Andy Edstrom:

Yeah, there you go. So I guess you could sort of, it would be an interesting study to compare a consumer behavior in those countries versus here, like are people actually using it to transact today? I suspect that the transaction volume isn’t that much higher in those countries yet because of what you know and what I know, which is that the potential value of this thing is so much higher that, I’d be crazy basically to part with it. I’d rather just a HODL strong. I’d rather just hoard it. So, yeah, I think it’s a problem that has to be solved in the long run and I hope it gets solved soon, but if it doesn’t get solved soon, I don’t know that it matters all that much.

Stephan Livera:

Right, right, exactly. And I think if you project out into decades in the future, if it really does become commonly used, money well then I think governments of the world will have to change the tax rules around it to not treat it like a capital asset every time you spend some of it right. Because then it just becomes completely unwieldy for anyone. So yeah, and also I think when we’re thinking of traditional investment, right? So I like to read a lot of personal finance books. So maybe not so much nowadays, but I used to read a lot of those and some of them, some of those books would talk about, you know, if you read, say Bogleheads or some of these books about, you know, buying into ETFs and stay the course, right. Just buy and buy. And I wonder how much of that is being driven by central banks pushing asset prices continually up such that a lot of the traditional investment world, are just thinking, Oh, well, just keep buying. And over the long run it’ll just keep going up anyway. But how has coming into this whole Austrian rabbit hole changed your view there?

Andy Edstrom:

Yes. In 2016, I put out a memo to clients saying, based on where valuations are today, you should expect significantly lower returns in the future than you have in the last several decades. So, and I still believe that. So that tells you that, yeah, I agree with you 100%. There’s no question in my mind that money printing by all the central banks, especially the Fed has flowed into both capital assets and consumption goods. And then the problem, well I shouldn’t say the problem, but the countervailing force there is no countervailing force in capital goods and you know, in capital assets, right? So stocks go up, real estate goes up, you know, all risk assets are driven by the money printing. And then on the, on the consumption good side, it’s more complicated because yes, you have money printing, which some of which is no doubt flowing into those.

Andy Edstrom:

But you’ve got the countervailing forces of automation and free trade at least until recently. So there’s been something, there’s been several factors that have been holding those prices down. But yeah, I agree with you 100% that when you look at people who are saving and investing today and thinking well and looking at recent history and saying, Oh, wow, you know, just indexing, you know, basically buying the index has made tons of money. That is the dangerous trap of extrapolating the past into the future. And yeah, people really ought to be careful about that and they ought to have significantly lowered expectations about future returns in both equities and real estate especially. Yeah, compared to the past for sure.

Stephan Livera:

Yeah. And I think it just is a difficult thing to try and explain because people who’ve tried to call tops have over the last, let’s say 7, 8 years, let’s say, have consistently been wrong because up until now, it’s just, it’s just been continually rising higher and higher and they, and then so then the opposing view might just say, Oh look, you guys are just say you guys are just permabears, you guys don’t understand. See the central bank is riding to the rescue. How do you think about timing and is it just essentially sizing of your position? So is that the way that you try to manage that?

Andy Edstrom:

Yeah, it is sizing of the position. So we’re global asset allocators, anything that’s publicly traded for the most part, you know, we own for our clients. And then the question is, yeah, what’s the allocation? You know, do you overweight or do you underweight? Do you ever go to zero on any asset? And we’re reluctant to go to zero on just about any asset except for when it’s, extraordinarily, obviously overvalued. And so, yes, at the margin we adjust and so we adjust over time toward assets that are cheaper in our estimation. And we just away from, or we rebalance away from assets that are more expensive. But as you pointed out you can have very long periods of time where a particular asset class significantly outperforms others and it’s durable. It’s like, you know, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 years.

Andy Edstrom:

It’s been interesting. U.S. Stocks, especially large U.S. stocks, especially, the internet giants have crushed all the competition in terms of performance for literally a decade now. It’s been, it’s been dramatic. And so, you know, we wish that we could foresee the output, those assets that are going to significantly outperform over literally, you know, half the decade or a decade of time. That’s extraordinarily difficult to do. So yeah, we remain diversified and we size according to expectations, but you can, you know, it’s been a tough period to be a globally diversified investor, right? If you’re an American you would’ve been better off just buying and owning the S & P for the last decade.

Stephan Livera:

Right? And then that’s also a funny feedback loop there because if you are a professional wealth manager and you quote unquote did the right thing, but you’ve made less money than say, some other wealth manager who quote unquote did the wrong thing, then customers will switch over to that money manager. And so that is a, that’s kind of a difficult conversation as well that I presume you must be having as well. When you know that’s a general problem.

Andy Edstrom:

People chase performance. They look at recent history. People have really, they have difficulty looking at longer time series, right? They have difficulty thinking about, I mean this is probably the single biggest reason why there hasn’t been a crack up boom, let’s say, to use the Austrian term yet at least in modern history or recent history, is because people do extrapolate. And so a reasonable analyst and there are some who’ve been noticing that debt levels are too high and that they already were too high, you know, last year and five years ago and 10 years ago had been saying, yeah, the crash is going to come. Well, if the rest of the population just extrapolates, like lemmings, they look at the past and then they, and then they keep rolling and there’s enough dollars or there’s enough you know, asset value that, that continues on that march. Well then we can suspend disbelief longer than we think. Right. And yeah, I think that’s arguably where we are. I think that’s where we are.

Stephan Livera:

Yeah. And so it’s a funny thing because a common example I mention sometimes is, communism is a terrible system, but communism USSR still took like six decades, right? So, Hey, it’s kind of, you can’t call a top because you just never know exactly what, there’s so many variables and so many moving pieces here that you can’t just say, okay, 2020 is the final one. This is it guys. It’s coming now. You don’t know.

Andy Edstrom:

One of the frameworks I like by the ways is by Ben Hunt from Epsilon theory. He’s been, you know, on top of, he’s been, I’m talking to the Corona virus stuff lately and also on top of, you know, let’s say troubling trends in the last few years that people haven’t been paying attention to and the framework who uses, what he calls common knowledge, which is it’s not what everybody knows. It’s what everybody knows that everybody knows. And when you talk about communism, you talk about, okay, people, arguably a significant portion of population, you know, knew it was a bad system and knew it was BS and knew that it wasn’t the right system to maintain, but until you had a critical mass of people realizing that the emperor had no clothes it just perpetuated. And so, and this explains number one, why these bad systems can persist for so long.

Andy Edstrom:

And number two, why the tipping points are you know, can’t be anticipated in advance because there’s this phase shift of people looking at each other and realizing, Oh not only do I now realize that the emperor has no clothes, but you realize it too. And enough people realize it. So, you know, now it’s revolution or now it’s, you know, a regime change. And that’s human nature. We’re social animals. And that ability to tell stories that aren’t true and perpetuate untruths is useful when it allows us to galvanize in a particular movement and you know, move the team forward and conquer where we otherwise wouldn’t be able to. But yeah, it can be troublesome and pernicious and it can well it can allow basically negative frameworks and regimes to persist longer than they should.

Stephan Livera:

Right yeah, it’s a great way of spelling it out. And I think it’s very much like that idea that people talk about, you know, Gradually then suddenly. Right. And so I think I was, I was joking about it a little earlier, but how people were all because of Corona virus and all these people would panic buying toilet paper. And I was joking that, some day a day will come when people panic buy Bitcoin way harder than they’re panic buying the toilet paper. Right. Because they’ll just reach, it’ll just hit a point. But we just, we can’t say when.

Andy Edstrom:

Yeah, I think that’s right. I I have mixed feelings about that point. Yeah. That’s the, hyperbitcoinization flashpoint and it may happen and I, part of me hopes that it does and soon and part of me hopes that it’s more gradual, cause that may be, better for the average person. But yeah, it’s, it’s very possible that you get that, you know, sort of speculative attack as Pierre Rochard suggests. And we’ll just have to see.

Stephan Livera:

Yeah. Right. And so look, we, I think you and me and most of my listeners would agree we’re in an unsustainable situation. So we’ve got this massive debt problem, governments all around the world. You know, the U S government has a massive debt. What are some of the potential scenarios, and you spell out some here, in terms of the, the Fiat end game. So what are some of the scenarios that we might surmise?

Andy Edstrom:

That’s right. So I’ve got a menu, the menu of bad options for resolving the debt problem. And I have six items on the menu, so I didn’t, one is austerity. Well first I’ll just list them so I didn’t want austerity. Two is mass defaults, three is is Jubilee or debt cancellation, four is redistribution, five is financial repression. And then six is inflation consumer price inflation. So I’ll just go through them. So austerity, also known as belt tightening basically means, you know, cutting consumption. And not living beyond your means. And you know, this means that you can actually save and you reduce the debt burden over time. Unfortunately this is painful. Nobody likes doing it. You know, it’s like dieting. It usually fails and we’ve seen governments attempt it and it basically, it almost never works, mostly because of politics and the fact that politicians are elected on two and four and six year cycles.

Andy Edstrom:

And if as a politician you don’t deliver the goodies somebody else will get elected that will. So, you know, the sort of, the modern case, it’s interesting to watch, I think now is Greece. Greece has been in a recession slash depression, you know, since 2011. Basically. I mean, yes, it’s been better the last few years, but they’ve actually sort of stuck with austerity and we’ll see if they continue to, I kind of doubt that they will. I would argue that the only reason you know that they haven’t printed money and devalued is that they’re in the Euro. But for the most part, yeah, austerity doesn’t work. People can’t stick to it. So option two is mass defaults and you know, arguably this is as painful as austerity. Anyone who holds debt as an asset loses value. It’s great if you’re a borrower, but if you’re a lender, a default is terrible. And we saw this play out more or less in the great depression. And that’s why it won’t happen again because politicians and economists, know how that turned out and it was terrible. And it’s unlikely that will tolerate mass defaults.

Stephan Livera:

Yeah. Let’s explore that one just for a little bit. So when you’ve got this mass default situation, and I guess think through for the listener to think through like the typical retail bank, right? They’ve got a lot of home loans on their assets side, and then what happens when there’s mass defaults? It means that banks assets are massively just credit collapsing. What’s the scenario then?

Andy Edstrom:

Yeah. So this fiat money system that we’ve got most of the money, quote unquote money is actually a bank, you know, bank debt, right? It’s yes. You had, you know, $10 of cash deposits of M zero into the bank account, but then the bank lends 10 times as much against that cash deposit or that cash reserve. And so, yeah, so there’s huge leverage in the system and as you say, if there’s if mortgage borrowers, can’t pay their mortgages then the bank isn’t getting paid, the bank can’t lend money to new borrowers. Also, the bank can’t lend money to companies, you know, companies face maturities on the debts that they got to pay. They can’t refinance. So they fire people and people can’t pay their mortgage and you get this multifaceted feedback, feedback loop or the spiral downward, which is a Deleveraging in which basically everybody gets hurt both on the asset side and the borrower side. Yeah. It’s that ugly. It’s not, yeah, it’s not fun. You get bank runs, you get mass unemployment. Yeah. That was, the depression. That was that was the 1930’s. Yeah, go ahead.

Stephan Livera:

Yeah, I was just saying, and then like, I guess from an Austrian perspective, you would say, well that’s going to rehab. You know, that’s the readjustment. And so while that may be, you know, temporarily painful for many people, it’s kind of like we have to go to rehab, right. But unfortunately it’s sort of like we’ve got a drug addict and they don’t want to go to rehab. They just want to keep getting more drugs. Right. And so

Andy Edstrom:

That’s right. And I would agree with you. I mean, it may actually be the right way to to atone and cleanse and you know, basically get on the right path. But because it’s so painful and because it is, it may be in the power of politicians to avoid that outcome. They will avoid it. Yeah.

Stephan Livera:

Yeah. I think so as well. So it’s one of those things where it’s politically unlikely to happen that way. So what’s next? You’ve got debt Jubilee next.

Andy Edstrom:

That’s right. Debt cancellation or Jubilee. The Jubilee term comes from biblical times and it comes from this idea of when there’s a new ruler or there’s a new King who ascends the throne and in celebration announces the cancellation of of deaths across the kingdom. And this is great. It curries favor with the average subject because the average subject is a debtor, not a creditor. And this kind of looks similar to mass defaults because, you know, if one man’s debt is another man’s asset, then anybody who is a lender and now gets through this debt extinguished you know, feels a lot of economic pain. Most of those lenders tend to be wealthy folks who are also capitalists. They’re industrialists, they’re the people who run companies that employ people and have, you know, equity value that that depends on, on that credit system.

Andy Edstrom:

So same, you know, similar situation. Basically. It’s, it’s significantly disruptive to the economy and it’s especially problematic because if the sovereign can just declare a debt null and void, well that puts a real dent into the confidence of ideas of rule of law, contract law and property rights. Because if the ruler can just sort of capriciously say, Oh, this debt contract is now null and void well then as an entrepreneur you’re saying yourself. You know, what are my real property rights and am I actually going to be able to capture the fruits of my labor and the risks that I take? If you know, this guy who’s in charge of the kingdom can basically just change the rules on me. So yeah,

Stephan Livera:

I’ll tell you one, a reflection as well on that. And just adding to that point is something I’ve seen Nick Szabo speak about, which is deep safety versus shallow safety. And so one of the points that I’ve seen some people on Twitter saying is, Oh, didn’t you Bitcoin people say it’s a safe haven, blah, blah, blah. But I think the best answer on this is to think of Bitcoin as deep safety and what’s deep safety. It means, think about the underlying institutions that you are living under. And if in your example, the King can just unilaterally declare, Oh, it’s a debt Jubilee, but Bitcoin is not like that. And Bitcoin gives you some kind of protection against that, doesn’t it?

Andy Edstrom:

Yeah, I like that framework a lot. I like the deep safety. Absolutely. It if most assets in the economy depend on rule of law and depend on contract and depend on the, let’s say, fair behavior of those in power, then yes, Bitcoin is this uniquely, the system that is uniquely resistant to malfunctions in in that other established regular system. Totally agree.

Stephan Livera:

Yeah. so yeah, so, and then the next one you’ve got here is redistribution.

Andy Edstrom:

Yeah, that’s right. So we just finished items one, two, and three. That’s the top of the menu. Now we’re getting to the bottom of the menu, which I think is where we’re more likely to order from, so to speak. Yeah, redistribution is just, is just tax and spend, right? It’s taxing the rich more in various forms. You know, that can be higher. Regular income tax, it can be higher capital gains tax. It can be a wealth tax. It can be any number of things. The wealth taxes is a conversation I had to, that I have with clients with some frequent frequency. They’re like “a wealth tax that will never happen in the U.S”. And I say, “I hope you’re right.” But we’ll see. So yeah, I think that when you look at the, at the political conversation today, you know, it’s, we’re in an election year. I don’t know what the outcome will be. However, if either, you get a democratic victory and, or a democratic sweep in this election, for sure, we’ll see higher taxes. If that doesn’t happen, maybe it’s not this cycle, but I have some confidence that in the next cycle or the one after, we’re likely to see we’re likely to see more tax tax burden on the wealthy and redistribution to to the less wealthy taxing the have and giving to the have nots.

Stephan Livera:

It’s very soak the rich style and by saying a lot of popularity for politician to come out with that kind of idea. So definitely one to watch over the next five to 10 years, let’s say.

Andy Edstrom:

Yeah, no kidding. Absolutely. so yeah, so then, so the next you know, fifth category is financial repression. This is a term that was coined by two Stanford economists. Edward Shaun, Ronald McKinnon, I think in the 1970s. And it describes, a set of government policies that primarily includes, lowering interest rates and thereby penalties and penalizing savers. Right? And so, however, you know, capital being mobile, it often needs to be coupled with capital controls, right? That’s somewhat what we’d see in China. You know, interest rates on bank accounts in China still are and have been extraordinarily low. One of the results of that is you get capital shifted to other parts of the economy. Like you get a property bubble, a real estate bubble, but in the case of China, the capital controls have been, let’s say, somewhat effective.

Andy Edstrom:

Now of course, you don’t need capital controls. If all central banks financially repress and lower interest rates at the same time, right? I mean, you look at the situation we’re in with Japanese interest rates being zero or negative, but German and several other European countries, being zero or negative. And then now most recently with us, rates approaching zero, we’re not there yet, but we’re pretty close. There’s sort nowhere to hide. But but yeah, that’s the, that’s the financial repression situation. And, and lowering rates that way does for a while allow governments to borrow more and run deficits and and basically play out this house of cards for a much longer period of time than they would be able to if they didn’t have those tools available to them.

Stephan Livera:

Yeah. And it just kind of reminds me that we should expect that governments will try to keep doing what they can to keep the party going. And so I think that’s, probably the intuition there. And I think coming to our next one, which is consumer price inflation, I think that’s also another very much in line with probably a very likely scenario. So tell us what does that scenario look like?

Andy Edstrom:

Yeah, this is the consumer price inflation scenario is the one that I think is most likely, and by the way, I’ll say that these six scenarios or outcomes are not sort of mutually exclusive. You know, my best guess is that we have a combination of the last three, right? Right. We have tax and redistribution, we have financial repression. I mean, clearly the financial repression is ongoing with the low interest rates and falling interest rates. And then the eventual outcome is likely consumer price inflation. And so when we think about, okay, what’s, how can we reduce the real burden of debts? Well other than, you know, cutting them and slashing them outright in those methods we discussed earlier, the sly, I hate to say sly and roundabout way, but I’ll invoke that term, the slightly more sly and roundabout way of reducing the debt burden is just by printing money and reducing the real burden of those debts by inflating everything else over time.

Andy Edstrom:

So that seems most likely to me we haven’t seen significant consumer price inflation generally across the world, at least in developed countries and rich countries for decades now. And I think that’s in large part because of those couple of factors I mentioned earlier, like automation, like free trade which brought, very cheap labor and therefore lowered costs on consumer goods. And then there’s also the issue of well, what is the real, level of inflation. And that’s a whole other, can of worms which I discuss in the book. Primarily those those couple areas of consumer goods that are also quasi capital goods. Like education and especially like housing where yes, inflation as measured and declared by the government is low in housing. But although rents have been kept low because interest rates are low and therefore you know, real estate can be acquired.

Andy Edstrom:

Well, it can be acquired and you can support that level of capital with a low with a low rent. It also jacks up the value of the asset and prices a whole generation out of the ability to buy that asset. And so, yeah, it’s great news if you’re a renter, it’s terrible news if you ever want to not be a renter and actually own your home. Right. And this is what millennials are figuring out and living right now is their inability basically to to climb onto the property ladder because the average home in a city is, multiples of income. You know, it used to be three or four times annual income and now it’s 10 times annual income and it’s out of reach. So yeah, so that’s what I’d say about a consumer price inflation is, and by the way for my clients one of the major adjustments we’ve made in our portfolio allocation is to account for this. Right. And that’s the, for the first time investing in gold a few years ago and continuing to add to that position in the last few years as well as adding a small amount of Bitcoin and you know, in my estimation, we’re more likely to add to that position over time rather than rather than subtract from it.

Stephan Livera:

Yeah. The thing, again, this is one of those things where again, the doomsayers and like the Permabears and so on can come out and say, Oh, look, we’re going to have high inflation and stuff. And maybe they were a bit early on that call, right? Not just a bit early, but yeah. And in reality, what we’re seeing is asset price inflation. And as you said, you know, housing prices just get out of reach for people who are in the millennial or younger generation. And then it just is more like, that’s an eventual outcome, right? You just keep on this track. Well, that’s eventually what will happen, but no one really knows exactly when that tipping point happens again.

Andy Edstrom:

That’s right. And this gets to the, well, as investors, you know, it gets to the portfolio management question, you know? Yeah. If I could if I could anticipate when that inflection point in inflation is going to occur, man, I could make a lot of money. It’s unknowable. It really is unknowable. I will say that my confidence has grown. Especially recently. I wrote about this in the book. So, you know, the fed has this 2% inflation target, and by the way, it’s 2% as they measure it. And as we know, as we just discussed, there are several reasons why their measurement is flawed. Nevertheless, the Fed has, according to their own math, been undershooting their inflation target of 2% for years now. And they actually went on record last year, it was May of last year.

Andy Edstrom:

And they specifically published a note talking about how the inflation target is. Target is quote unquote symmetric, right? What do they mean by this? They mean that for every year that they undershot the target, it would be okay if they overshot the target, right? So they’ve already told us, it’s in writing, right? That they’re okay with higher than 2% inflation. Now we don’t know when that’ll happen. You know, we don’t know how much higher than 2% they’re comfortable with. But when I look at the debt burden and I think about, what’s the likely path out of this thing? And I read this in the book, you know, I think we see 5 to 8% consumer price inflation before we see any really serious follow through attempt to raise interest rates. Because if you quote unquote normalize interest rates, right? If you get to 7, 8%, you know, on a 30 year mortgage, you know, when you get to, I don’t know, 5% on the treasury on the 10 year treasury, you know, it’s going to be a very severe recession. So central banks when put to that, trade off, they say a deep recession or a little higher inflation when we’ve already been undershooting, you know, our inflation target we’ll take the higher inflation,

Stephan Livera:

Right? And just a more politically palatable option. It’s, it’s the one that makes them more popular. We should anticipate that that is the option. That is the pathway that they would preferentially choose.

Andy Edstrom:

That’s right. And nothing is a hundred percent, right? We only, we only think in probabilities, but when I look at that menu of bad options out of too much debt, I think that clearly the inflation option is the most attractive yeah. For the powers that be in government.

Stephan Livera:

So let’s say the listener now they’re convinced about this idea. They’re thinking, okay, well, okay, maybe I’ll take a small position in some Bitcoin. What are some typical ways you would say when you’re thinking about position size for Bitcoin?

Andy Edstrom:

Yeah, so I still stick with the rule, which actually applies to every asset in which you invest, which is don’t invest any more than you can afford to lose in a single asset. Any Assets can go to zero. You know, there are those who will argue against that, but the reality is any asset can go to zero or near zero. So that rule is no different for Bitcoin than anything else. So that’s one piece. And then the second piece is, well, how much do you need basically to have a hedge? We’ve started small with clients. I mean we started under 1%. There’s also then the layering on of the psychological element, which is people do struggle with the volatility, the short term volatility. They really have difficulty getting their head around the possibility that this asset may have legs in the long term, despite the fact that it sometimes loses 80% of its value, right, or 80% of the price.

Andy Edstrom:

So so these are the factors that you know, that we consider. And then of course, you know, you look at the data is in the book too. You know, about the last, 10 years of performance. And historically you’ve been able to add, you know, two to 3% annual return with a very, to a portfolio diversified portfolio with a very small allocation to Bitcoins. So, those are some factors. I mean, it’s clear that zero is the wrong number. And you know, for many people it’s, I dunno, 1% or a little less. And then for those who are comfortable with it and understand it and can get past the, you know, just the negative perceptions and all the FUD and you know, the Mt Gox and the money laundering allegations, you know, which are false. But for folks that can get past that, then, you know, several percentage points can make can make more sense.

Andy Edstrom:

I’m talking about, you know, for clients now and then for those who have really done the research, you know, I mean, I see people on Twitter who are, who are all in and levered. I definitely don’t recommend that. Leverage is problematic with an asset that can on occasional is 80% of its value. You really don’t want to get liquidated and you really want to have enough cash and income, you know, to support your ongoing expenses without having to sell that precious sweet Bitcoin. But that’s what I’d say.

Stephan Livera:

Sure. Yeah. No, I think that makes a lot of sense for considering the type of clients that you would have. I think the other thing that’s important to hit as a topic is recognition of what Bitcoin is, right? It’s not the same thing of like just put it in like the ETF and just hold it. Like part of it is really appreciating it as a bearer asset as well. So what are your thoughts there on teaching that aspect to people?

Andy Edstrom:

So I think that’s important. So there’s two answers to that. What am I doing today for clients and what might I do in the future. So today, you know, we hold Bitcoin in vehicles that do not entail the client holding the keys or us holding the keys, right? So it is a third party custody and that is, you know, just a decision that Hey, we want to own an inflation proof or inflation resistant asset that we think has tremendous upside and is uncorrelated to the rest of the portfolio. And that’s an investment decision. Full stop. So then there’s your question of, well, what about yeah, learning to hold the keys. I have made the offer to my clients that, Hey, I’m here to educate you and help you, you know, when you’re ready, basically to yeah, to, literally take the keys. Right. And so I, am interested in people learning to do that for themselves.

Andy Edstrom:

I think people should be sovereign. It should be sovereign individuals. They should at least know how to, even if they don’t wanna do it, with all of their Bitcoin holdings, they still ought to know how to do it. And they ought to do it with at least some of their holdings. And hopefully over time they do it with more rather than less. Having more and more skin in the game. Putting taking more and more control over time, I think makes a lot of sense. And I’m also, you know, excited that the teaching and the educational tools in that respect are, getting better. I think in fact, that I think you’ve been instrumental in fact in that regard. Putting together, educational tools for people to to learn, gain confidence, not screw it up, you know, practice and yeah, learn to learn to securely hold their keys.

Andy Edstrom:

And I think that’s an important life skill. By the way. I will extend this further. I had this debate actually with my dad the other day and you know, we were kind of sparring on, this issue of can you really keep a private key safe? Can you really keep you know, a cryptographic key safe. And my response to that is this is a civilizational skill. It’s basically a life skill for the next several decades, right? We will, we all will have to either figure out how to do it ourselves or delegate it to someone we trust. It’s just going to be something you have to learn how to do. And so yeah, the more that we get comfortable, sorry, the more that we get people comfortable, the more we educate them, the more we encourage them to play around with it, practice it, you know, do some with a little bit of skin in the game and a little value at risk and then step it up over time the better. Cause this is just, this is one of those things you’re just going to have to learn how to do. It’s like a learning how to do basic math or learning how to write or you know, learning how to code. It’s just going to be a critical life skill.

Stephan Livera:

Yeah, I think so. I think it’s one of those things where, you know, yes. We’re not at the stage where, grandma can use Bitcoin and so on. But you know, right now grandma can pick up an iPad and write an email. Right. And you know, grandma needs to know a little bit about how to do an email, right. In the same way, we’ve got to eventually get Bitcoin custody to that point where, yeah, look, there’s a little bit you have to learn, but most people can achieve it. And I think that’s ideally where we want to get it too. But I think in these early days it’s very important as well to stress, that idea, because a Bitcoin is special and it’s important that we use it in the way that, it was intended and able and that’s the way that it is much more stronger as well.

Andy Edstrom:

Yeah, I agree. I agree with you 100%. I mean there’s the question of like, you know, what should the average person do? And then there is the question of literally, you know, how many people do we need independently running nodes, you know, on the network to keep the thing secure. And that’s also very important. So I support, I support any and all efforts, you know, by you and others to educate people on how to do as much as possible and be as self-sovereign and supportive of the security. And the secure use of the network as possible.

Stephan Livera:

Yeah, of course. And I mean for me, I’m not expecting people to go zero to hear us right away. Right. It’s a progression journey and you start small and you, like you said, step it up over time. But yeah, look, I think that’s pretty much it for today. But have you got any closing thoughts on you know, why buy Bitcoin and any other, any other things that you think you’d like to mention?

Andy Edstrom:

Yeah, no, I mean, look, I’ll shill the book. You know, I wrote the book cause there was a gap. I saw a gap in the market between the Bible, which is The Bitcoin Standard. Right. Which I love, but you know, but I wanted to write something shorter. You know, and then some of the much shorter, more simple books. And so I designed it to tell all the pieces of the story and explain all the pieces of Bitcoin that I thought were necessary to get off the ground. And so that’s, you know, so that’s the goal of the book. And I also obviously, like I say, I wrote it to explain it to my clients and also to be able to hand to someone and be like, look, read this and once you’ve read it, you know, I’m happy to talk to you and and answer questions. So yeah, I guess you know, follow me on Twitter. I’m Edstrom Andrew, that’s the last name, first name. The book is Why Buy Bitcoin, it’s available on Amazon and Apple. And it’s been a fun, fun discussion and fun chat and you know, I welcome people’s feedback and, criticism, you know, tweet at me, tell me what I got wrong. I’m probably going to regret saying that.

Stephan Livera:

Yeah, We’ll see. We’ll see. But I know, I will say though, I think it’s a great book to give to a person who’s coming from a traditional investor mindset. Having read it, I think it would make sense to give that sort of person, this book. So definitely a listeners docConsider having a look at the book and gifting it to your friends who are more on the investment side of thinking. So, once again, thank you for joining me.

Andy Edstrom:

Thank you, Stephan it’s been great.