path: root/transcripts/2023-03-18-balajis-bitsignal.mdwn

2023-03-18

Balaji Srinivasan's bitsignal

(210,000 people in this twitter spaces)

<https://twitter.com/kanzure/status/1637518895509585921>

robert breedlove, balaji srinivasan, alex gladstein

AG: ... The main point I want to make is to credit the work of Parker Lewis in "Gradually, then Suddenly". We all knew that at some point the federal government would .. bitcoin is the only digital asset with no counterparty risk. It's just that many of us thought this would happen 5 or 10 years from now. If that's what's happening right now, then there could be a very violent move. I think it's as simple as that. Do you see what I'm getting at, Robert?

RB: Yes. Gradually, then suddenly captures it well.

AG: Nobody will be prepared. Nobody will see it coming. It will be shocking to even believe. That's the only way it can really happen. ...

RB: You're a little bit choppy. Could you get to a better location? I hear you just fine right now.

AG: Great. That's obviously the bet in some ways... that he's essentially betting that the markets understand that bitcoin has no counterparty risk. It has market risk like everything else, but this doesn't have counterparty risk. Everything else has counterparty risk. This doesn't. That's something that I think some people are starting to realize right now. I think that's the bet. I think it's a reasonable bet. It's obviously a big ass bold bet. It's very bold. It could happen now, next year, or 5 years from now. I wouldn't want to be taking the other side of the bet, we'll put it that way. Does that make sense? I would be very uneasy about that sort of thing.

RB: I think that in general this is the thesis that bitcoiners have long been expressing that- what is the old, who is attributed to the quote? There are decades when nothing happens, and weeks where decades happen. That kind of thing. When Balaji gets on here, I'm sure he will explain his case a bit more. He sees something that most of us don't- that the system is about to rupture from fragility. There's nothing there from a thesis standpoint that is different from what bitcoiners have been saying for years and years. The big surprising thing for me is the timing. I'm excited as everyone else to hear what he has to say about it.

AG: The other thing to keep in mind is that most of us are afraid of such a transition. Obviously, such a transition could include a lot of social unrest. Obviously, there's the Trump stuff going on. War going on. Collapse going on in a lot of nations right now. The Federal Reserve is breaking the banking system right now but they also just finished breaking dozens of emerging market countries in the last year thanks to the Fed's policies. So there's a lot of fear. I think we could entertain the possibility that it might not go down that way... there's a possibility that this transition happens in a way where the financial markets just re-price things and there's a composition change. But it doesn't necessarily cause massive social unrest? I'd at least like to hope for that. If not, then it's a dark view. Balaji is on.

Balaji: Hey guys can you hear me? Alright. I actually published a rationale for why I am thinking what I'm thinking. I'll retweet that and read it out and explain a prepared statement. There's a totally different frame on events. If you add it all up, it's actually fairly concerning. My mental model- you have been feeling independently of me- the heat going up with the discount window $150 billion going to banks with $200 billion bank bankruptcies over night, with Trump saying he will get arrested and calling for people in the street. There's a lot of different sources of heat that would seem to have absolutely nothing to do with anything bitcoin related. Bitcoin is just the exit at this point.

Balaji: Let me just explain my thesis on where we are, which is totally different from the narrative that you might have seen in the mainstream press. It is actually kind of a stunning way of thinking about it but if you look at.... I retweeted this so you can see it. It's a mini essay with about 14 references. You should click each reference and look at the graphs. I'll try to give the 1 minute, 10 minute then 100 minute version.

Balaji: The one minute version is that the banks have been insolvent. The central bank and the major banks and the small community regional banks and the Fed and FDIC and the banks themselves- so the central bank, the bank regulators and the banks themselves have known about this for the last year at least because this all happened when the Federal Reserve hiked rates after saying it would keep them low for a while. So we essentially have a bunch of crazy looking graphs that are going down to the right that everyone was aware of in the banking system. But, you know, a good analogy is "Uncle Sam Bankman-Fried". Just like SBF, it's sort of, lied to himself and to you with this crazy accounting that made him seem solvent when he actually wasn't. All the banks are actually like that.

<https://twitter.com/balajis/status/1636822077775941633>

Just as in 2008, the bankers lied.

This time, the central bankers, the banks, and the bank regulators have lied to all dollar holders and depositors.

This isn't your typical fractional reserve situation. The problem is that there isn't enough in the banks on a mark-to-market basis to cover withdrawals. They knew this through all of last year, and communicated it internally in their coded language.

It's obvious from the graphs (see below). The central banks, the banks, and the banking regulators all knew a huge crash was coming — the phrase is "unrealized losses" [1,2,3,4,5]. But they never notified you, the depositor.

Instead the regulators allowed banks to hide their literal insolvency in footnotes[6], until one guy figured it out[7].

It's Uncle Sam Bankman Fried. Just like SBF used your deposits to buy shitcoins, using accounting tricks to fool himself and others into using the money, so too did the banks.

They all used the deposits to buy the ultimate shitcoin: long-dated US Treasuries. And they all got rekt at the same time, in the same way, because they bought the same asset from the same vendor who devalued it at the same time: the Fed.

Specifically, as NYT admitted, banks "binged" on enormous amounts of Treasuries and other long-term bonds in 2021 when the flood of printed money cut off their typical demand for loans, and because they thought the Fed would keep interest rates low forever.[8].

And they had good reason to believe this. Powell said he'd be "patient" on rate hikes as late as Nov 3 2021[9]. Then he got renominated on Nov 22 2021[10], and hiked rates much faster than anyone had expected — which even Yellen[11] and the FDIC[12] admit caused the current banking crisis.

Why did Powell delay? Probably for political reasons. Presidents don't like rate hikes[13], especially running into the election year of 2022. And Powell thought he could wait and just be like Paul Volcker[14], who was "firm" and then defeated inflation.

But the world isn't an 80s rerun. Hiking from ten years of near zero interest rates in the 2010s was a surprise attack on every dollar holder. Economics isn't politics - the kind of insane flipflops you see in politics don't work when there are actual contracts involved.

So anyone who bet on long-term Treasuries got killed in 2021. And now, anyone who bets on short-term Treasuries is going to get killed in 2023. The absolute worse place you can be is to have large amounts of assets locked up in three month treasury bills. The ~5% interest rate offered by big banks (G-SIBs) is a trap. Most fiat bank accounts are now a trap, for those countries whose central bankers followed the Fed.

Check my references, I've provided quite a few. If you trust US bankers and US media, ignore me. Otherwise buy Bitcoin and get your coins off exchanges.



It's not just innocent Americans but also huge foreign holders of treasuries and other what's called dollar-correlated things. This isn't your typical fractional reserve situation which is kind of a built-in instability anyway. Remember, the Fed rejected both The Narrow Bank and Custodia Bank. They wouldn't allow a bank with a pure one-to-one dollar reserve. Lyn Aldyn tweeted about this.

This isn't your typical fractional reserve situation. The technical way of saying it is that there isn't enough in the banks on a mark-to-market basis to cover withdrawals. This means that they are treating something as being worth $1,000 because they are using this hold-to-maturity accounting but it's not worth $1,000. Actually if they went and sold it right now it would be a lot worth less than $1,000. That means that if you come there and you ask for your dollars, then they don't have it. Just like SBF was doing some crazy accounting on the backend and convinced himself and others that he had 100 cents on the dollar but when the actual demand came- he didn't have the deposits.

They knew this through all of last year and communicated it in their coded language. The key phrase is "unrealized losses". If you look at my tweet, there's a few references. The Kansas City Fed in September 2022 said: ""unrealized losses lowering tangible equity capital". All this stuff by the way within the banking sector so much of it is written in an intentionally opaque way. You'll see people tweeting things like "lol tell me you don't know what tangible equity is". But the thing is that, in 2008, they would have said "tell me you don't know what a CDO is without telling me you don't know what a CDO is". But the whole point was that nobody really knew what a CDO was including the guy selling it. They just used fancy words and complex math on top of a thing that was basically a piece of shit. Basically houses that didn't have any value. That's exactly what they have done here. There's complicated words on top of something where fundamentally the money is gone. The banks do not have assets sufficient to cover their liabilities. It's not just Silicon Valley Bank and it's not just Credit Suisse and not just First Republic, it's hundreds and hundreds of banks.

You don't have to take my word for it. Go and look at this article, it's called "Highlight: Unrealized losses lower tangible equity capital". It's from the Federal Reserve Bank of Kansas City, written months ago. There's banker-coded language at the end where they say "at year end, only 4 community banks"-- at the end of 2021- "only 4 community banks have tangible equity capital ratios below 5%, and this number increased to 333 at June 3rd 2022 indicating less ability to withstand economic shocks". You think?

They don't actually define what tangible equity capital is. This is like, but basically what they are saying is um we went from maybe 4 banks that could be considered insolvent to 333 banks in a year. Not even a year, 6 months. This is a 75x increase in 6 months. How did this happen? Well they actually admit it at the top, they say the rising interest rate environment has led to an unrealized loss position, meaning the Federal Reserve hiked rates and basically devalued all the bonds that they sold everyone in the other year.

Now another thing just like I talked about the intentional capacity.. the other thing that you will see about the finance sector is that the people in it have 2 simultaneously contradictory beliefs. The first belief is that the Fed is all powerful and that Powell is more powerful than the US President and we hang on his every word and our algorithms trigger on every single thing they do and you shouldn't fight the Fed. The other belief they have at the same time without seeing the contradiction is that they will say something like "oh you know, nobody really listens to the Fed and I have my own secret sauce that I add to my forecast and I don't take it straight- you are responsible for your own trading strategy and if you were smart you would have hedged". Etc. Etc. But this is a weird thing that I had to squint at as an outsider in some ways to this. How could they say that the Fed is both all powerful but also has zero responsibility for anything? Last week, there was essentially people saying that some you know immigrant engineer or some like startup founders are responsible for diligencing footnotes in their banks' statements that shows in a footnote that they are insolvent, but Powell isn't responsible for protecting the market and our deposits? That doesn't make any sense. There's a reason why it doesn't make any sense. The reason is related to why was the insolvency hidden in the footnotes? Why was it only discovered through a bank run? Well, sa you will find out, the bank regulators, the banks, and the central bank were aware of all of the banks being insolvent and just did not notify you the depositors. I know how crazy that sounds. But that's what has happened.

RB: So what you're saying is that what happend to Silicon Valley Bank has effected the entire banking sector?

Balaji: No, in reverse. Well, sort of. Every bank was effected by- what happened is that, the technical way of talking about it is encoded in all this jargon and whathaveyou. The technical way to say it is that there's a New York Times article from August 25th, 2021. Banks are binging on bonds but not because they want to. Okay. So what happened is all the printed money, consumer loans, consumers weren't taking out loans any more, and banks were thinking there was inflation but at the same time through 2021 even up to november 3rd 2021 then Powell was saying be patient on hiking rates. Kashkari said in June 2021 said we'll keep rates low until 2023. Assuming that environment, all the banks said okay our best bet is to just buy a ton of bonds at even low interest rates. There's a quote from the NYT August 2021 article "When the yield rose around to 1.75%, banks hungry for high returns rushed to buy them". The thing is that this quicly gets technicaly, but the short version is that the Fed faked out all the banks. It sold them a huge huge amount of bonds. It told them that it was going to be selling something roughly the same for a while and then after Powell got re-nominated he then de-valued all of them and stuck with them with a "surprise!" a massive devaluation of all the assets that he had just sold them.

Balaji: So the banks were like "oh crap" and went to these bank CPAs". There's this smoking gun article: Rising rates for health and rates maturity classification. This fun article- and again all of this is in my tweet with references. You guys can see the tweet. Read the references. This article- if you go and look at the graph preview of this, what they are literally saying is "Wondering what you should do in reaction to large losses? We've got you covered. Held to maturity classification." In other words, this article is about how anxious bankers with their huge losses can hide it with this accounting trick. Then it's okay, because they have preserved their regulatory presence and all they care about is how they look to the regulators. Nobody cares about the actual depositors because they aren't going to poke around and find out. That's in April 2022. So the Fed surprised the banks and then the banks decided to surprise you.

Balaji: Do you guys know the meme with the 50 iq guy, the 100 iq guy, and the 150 iq guy? The dumb version is "don't trust the banks they are just lying to you and trying to screw with you something in the fine print". The 100 iq guy would say "no, no, banks are a pillar of our society" but what I've discovered on this is that while poking into this- the whole thing is setup to intimidate people from poking into it and finding out if you actually have the money. It's just like the mortgage banking crisis. It's weird. 15 years later, people haven't learned those lessons: don't even trust these guys when their mouths are moving. The level of lies is bananas. They are their own tribes of bankers, central bankers, and bank regulators which are distinct from the tribes of bank depositors which are victims and regular depositors.

What they basically did over the past year is they were just trying to figure out how to hide the fact that we have gigantic unrealized losses. That's a key phrase. Look at the tweet with the references- it's the Fed, FDIC, the bank's CPAs, all thorugh before the SVB crash showing that they were aware that 100s of banks were insolvent. Most of the time people don't discover that insolvency because they don't try to get all of their money back from their deposits at the same time. So what exactly were they thinking about doing? I don't know. Is there some centralized plan? I don't know. The Federal Reserve is centralized but did they actually have a plan?

Gladstein: So you're betting that the asymmetric information framework we have had where some of us know what bitcoin is. Some of us know it's the only asset with no counterparty risk. We know it's very valuable. We know that most people don't understand this yet. So you are basically betting that this deposits vanishing crisis is a trigger moment for the market to snap into understanding bitcoin?

Balaji: Look... I'm not a bitcoin maximalist, but we're all bitcoin maximalists now. Bitcoin is the exit. It is the one asset that is not going to be seized. Just to summarize what I just said. Hundreds of banks are insolvent, right now. The central bank, the banks, and the banking regulators themselves all hid this with various accounting tricks that were approved in their space and they were just trying to let it slide forever and hope that something would change. Then it exploded when one guy- when Hobort looked through the long bank filings and found a footnote in a long SEC filing that it had a negative $80 billion dollar classification in hold to maturity a gigantic insolvency. They literally bury their insolvency in a footnote. He figured it out and that's what lead to this bank run. The thing about it is that all the banks are like that. What's about to happen this week if you google the term "discount window"- they use all these words and terminology to try and confuse you and like 15 different definitions of the "money supply" etc. But the "discount window" is pretty clear. Essentially a bunch of these insolvent banks- which by the way if you google Wall Street Journal WSJ Dozens of Banks May Have Risks Similar to SVB-- so you put it together: there's 186 banks prone to similar risks, all these banks are at the so-called "discount window", with this new printing program that the Fed just setup, they have $150 billion dollars that has come in. Everyone knew that they were going to monetize the debt like we all knew that- right? You knew they were going to monetize the debt.

RB: Yes, that's what the central bank is designed to do.

Balaji: Exactly. Ray Dalio for a long time knew that they were going to monetize the debt. Alex, did you know they were going to monetize the debt?

Gladstein: Well they have been doing it for a long time and they will continue to do it.

Balaji: Exactly. So we all knew this. So strategically they don't have surprise but tactily they had surprise until this because the way that they decided- or maybe it was an ant colony with a bunch of ants doing its own thing and it moves in totality- but the emergent decision at least is to monetize the debt in the messiest way possible with an orgy of money printing and bank runs, basically happening this week.

Trump calling for guys in the street- this week is going to be unfortunately absolute madness. This has absolutely nothing to do with me or with tech or with bitcoin or anything like this. This whole situation is completely caused by the Federal Reserve, not bitcoin. Everyone here is coding or thinking about math or AI or whatever- all that stuff? The central banks bankrupted the banks and they wanted to pin it on someone, and the emergent system decided this is a great opportunity to pin it on crypto. But now they are just printing and it will be absolute chaos because all the banks trying to get that $150 billion or whatever in this "discount window"-- did you see my QT of your thing? That discount barring thing?

RB: I don't see that, maybe show it to me again. To decrypt this for the audience, when you say monetize the debt, you are saying there is an implicit default on the debt through fiat currency supply inflation so they are printing money to paper over what would otherwise be unpayable debts. That's what we mean when we say monetize the debt.

Balaji: Yes.

RB: So my question for you is you mentioned the possibility of a centralized plan. I think the most obvious centralized plan would be the coralling of people into a central bank digital currency (CBDC). As far as I can tell, the banking industry is the only impediment to a full-blown CBDC. Isn't this just the central bank flexing its powers to wipe out the impediment of the commercial banking sector?

Balaji: Well here's the thing. Basically like, my-- my take on all of these guys is that they are kind of like a meta-organism. I don't know if any of them have a master plan. Think about how in a sense like a decentralized currency and a centralized currency can both facilitate a payment but in very different ways. One is conscious and planned and the other is an emergent property of the community. Let me talk about it as if there was a centralized plan but I'll call it an emergent plan. The emergent plan is sort of like this- the v2 plan- is that essentially the combination of hyperinflation, destroy all of the local regional banks. These big banks normally are competitors and in the fog of war would be snapping up-- all the too-big-to-fail banks are bailing out the smaller banks but what are they using to do these bail outs? Well they are basically like the money that was loaned to them by the Fed, right? So it is effectively a stealth nationalization where tons of money is printed and the big banks are snapping up some of the failing banks and the others are just being set on fire and let them burn. The end state of this is what you are saying. People are saying oh my god my small bank won't work and then they flee and send their funds to a big bank. Your regional bank is set on fire, right?

Gladstein: So what we're talking about here is the nationalization of bank deposits. And I mean that both in the financial sense and also the political sense, meaning that the government is going to get to determine which bank deposits are valid and not. I think we're a ways away from an operationalized CBDC. But that's the point of a CBDC. In theory, it is to remove the power of the private commercial banking sector and go straight to having this relationship directly between the state and each citizen with regards to money, and replace cash and have this liability of the central bank that you have in your pocket which they can easily inflate and do blacklisting, censorship, and surveillance in an easy way without having to deal with the banking sector or the tech sector. That's why the Chinese government has been pushing a CDBC. It's tired of fighting with these big tech companies.

Balaji: That's right.

Gladstein: I'd be careful about saying we're going to see an operationalization of you having a credit on your phone that is actually a liability of the phone in the next year or whatever but this paves the way for that. But in the near term as we saw while Janet Yellen was interviewed in congress the other day, the total politicization of bank deposits. Basically the Fed will determine what is important and not in concert with the Treasury and the government will start to take over this very private aspect of life. Hundreds of years ago money was much more private. We're witnessing the end of this era. At the same time, my interpretation of your bitcoin bet is that people have a choice. There's this optional choice that has become available and people now have a plan B available. Maybe the collective realization is that now this is an insurance policy on that happening.

Balaji: That's right.

Gladstein: I probably wouldn't make your bet, but I certainly wouldn't bet against it. This will likely happen in the next decade. We don't know when it will happen.

Balaji: A couple of thoughts. Have you seen FedNow? It's coming.

Gladstein: They all of the sudden have progress.

Balaji: Exactly. FedNow has been delayed for years and years. Suddenly on March 15th in the middle of this gigantic banking crisis, okay, which was obviously stopped the presses kind of thing... they also found the time to announce the launch of FedNow which is CBDC-like? Maybe it's not so much like CDBC and it actually is CDBC. Maybe at the end of all these bank runs it's effectively something where all the small banks, community banks, tech banks, basically if you want to be really talking about the tribes like blue tribe vs grey tribe vs red tribe. Blue tribe has gone after the tech banks like SVB and Silvergate etc. But it's also going after the red banks all these community banks. Whether it's intentional or not, or emergent, kind of doesn't matter. The emergent behavior is this: all of these- the tech banks and red banks get destroyed for different reasons and are effectively nationalized by the too-big-to-fail banks, which then of course- I mean, remember, banks are already terrible. But if there are only 3 or 4 or them it will be even worse. Once you have rounded up all the depositors into a small number of big players, then it's really easy to do a CDBC or get everyone using FedNow.

Balaji: The other thing that I haven't talked about is hyperinflation and CDBC happening at the same time with all the small banks getting wiped out or acquired. That's not really good at all. That gets you to- it gets you to a China-like state.

Gladstein: The fear of a lot of the commercial bank folks when they get interviewed about CBDCs is that in times of prosperity, bubble and stimulus, it's fine. But in times of risk and danger? Everyone will withdraw their funds from commercial bank assets over to CDBCs because they will have the full protection of the government because it's a direct liability of the Fed. That's the fear that a lot of people in the banking sector have. It could go down exactly as you say.

Balaji: If the local commercial banks, which are the barriers to the CBDC are suddenly all wiped out and destroyed in this gigantic chaos and loss of trust and thing that people trust going forward are the big banks- and why do they trust the big banks? The Fed causes the crisis one the one hand devaluing all these bonds and it faked out all the local banks and it has them buy huge amounts of bonds. They get huge amounts of deposits from the pandemic. It fakes them out, has them buy huge bonds, devalues all the bonds, crashes them to zero, but the Fed doesn't bail out the small banks. It gives it to the big banks to acquire the smaller banks. In the process of this, already $150 billion has hit the banks. Have you seen the graphs?

Gladstein: Yeah, it's insane. As Nic Carter points out though the other thing going on is Operation Chokepoint 2.0 because now they can say you're doing business with cannabis or crypto or prostitution or anything they don't like- like guns- they can just decide a sector oh we're not going to backstop you any more. That's an extinction event, moving forward. If you are using government money that is not guaranteed, or it's getting sanctioned or blocked because you're in an industry like guns that they don't like, and other people meanwhile get government money that is guaranteed- then it's game over.

Balaji: That's exactly right. Punk6529 had a good post a while back that there is no practical freedom without freedom to transact. For example, you want to buy a sign to go protest in the street. Well maybe you can't do that because that vendor is marked as "bad" by the CDBC or the government. They can do things like the money depreciates out of your account unless you spend it right now. Moreover, they can make it extremely difficult if not impossible to exit the system. Can you really move your data off of Facebook? Not really. You might be able to buy physical goods and carry them but you can't physically carry your liquid net worth. If there was something that allowed capital flight, then they would be able to stop that. The reason why we know this is possible is because China's rolling out a bunch of those things. The threat is real.

Gladstein: Just one more thing to stir the pot and then I'll let you react. In the global south we see things differently in terms of how economies face crises like this. A typical global south economy has high interest rates and very high inflation. What we may be starting to see in the United States is what you would call "deflation" where the economy potentially shrinks and you have a massive crash where credit is destroyed. I think people have been misled to believe that in deflationary events you wouldn't have high inflation in the currency. That's not the case at all. In fact, that's the norm in the global south. What you see is economies shrinking, getting destroyed, contracting and deflating while at the same time the local currency gets massively devalued. This is normal for most of the world's population. Egypt is having this happen right now. Domestic stocks get slaughtered. Domestic bonds get slaughtered. Food and energy gets really expensive. Some scarce assets like gold might develop a huge premium but a lot of the financial stuff that people trade around also crashes. I think there's a chance that we see something like that happening here if your bet happens at any point- things like food, real estate, energy, and bitcoin- some real estate and gold have a premium but a lot of other things get trashed. I think we need to open our minds that things might be different this time around. If the reserve currency stuff starts to get called into question, it won't look like this any more. It will look more like what it looks like in the rest of the world and they can teach us what that experience looks like and what you need to do to prepare yourself.

Balaji: Exactly. The thing is that, as an immigrant, many people who are immigrants are familiar with the situation where they basically things go to hell pretty quickly. People from China, Russia, from Vietnam, people from Iran, or from eastern europe or south america- much of the world has had a lot of tragedies in the past few decades. It's this thing where at least in the US you flip the channel and you say oh that sucks for them over there some guys and chaos or something and then you go flip to your soap opera. But why is this time different? Within banking or whatever, they will say- when people say "this time is different" they quote that and say you're stupid "ha ha" but the opposite of it is really "things never change". What they have done is taken a quote like talking about a deal that wouldn't work and reinterpret it to mean this time is never different and things are always the same and it's a mindless use of language. But things do change. What are the big differences from the 2008 crisis? The 2008 crisis by the way we're already beyond in terms of the discount barring levels. The Fed's discount window is lending to banks at 2008 levels using the new emergency loan program to shattering records. We're already past 2008 levels. Therefore comparisons to 2008 are not off base.

In 2008, though there was a "financial crisis" people know that we "printed our way out of it". This means a few different things. It means the American taxpayer bailed out the banks. That's true. The second and less well understood thing is that the world bailed out America. All the dollar holders abroad- the inflation was exported there. All the chaos caused in the Arab Spring was caused in part because of the food prices. Someone set themselves on fire in part because of the food prices. Do you remember that?

Gladstein: Yeah.

Balaji: Robert have you studied the exporting of inflation from the US?

RB: The deal with that is that you have 330 million US citizens and we have a 4.5 billion dollar holders worldwide. When we print dollars, we're "exporting" 90% of that inflation. Now that math isn't perfect because it's based on the number of people not based on the actual capital in hands but it's a rough proxy for what you're saying.

Balaji: Yeah, exactly, and one way to think about it is that the system has evolved- and when I say evolved- really like evolution. Nobody designed a chameleon. It just managed to have this camouflage. Nobody designed the "mimic octopus" or the beetles that look like their surroundings. What has happened is that finance has evolved so that everything that was easy to understand and whatnot, just basically got selected against because then people were able to see how the government was screwing them. A lot of finance is zero sum.... Within Wall Street they know to be suspicious to be of each other, but outside of Wall Street people still trust the banks. Everything is optimized to hide how they are screwing you. You can't get an exact figure on how many dollars there are or how much the dollar holders are being taxed to do this. The whole thing is setup so that it's hard to account for this. It's not like bitcoin and its 21 million hard limit.

Gladstein: The other weird thing is that this is not the government putting money directly into our bank accounts. Instead this is more like what people experience in the emerging markets where the system starts to crumble from the inside. You see these structural adjustment policies come into play. Our society does not want that. Britain has an energy price cap. They are draining their reserves and risking price inflation so that the people don't get angry about energy prices. In the advanced economies around the world, this is a luxury we are able to do. For now. A lot of these countries like Japan and Switzerland have massive reserves of US treasuries like $800 billion or $1 trillion dollars that they are able to draw down on just in case some shit goes down. But eventually if the quality of those treasuries starts to get called into question then that causes what you're saying... basically you're making a bet that moment is going to happen in the next 90 days.

Balaji: Yes, but it's sort of already happening. That graph where- I posted the bitsginal tweet before... the graph where it goes vertical. I posted that before the discount window graphs came online. It looks like all those graphs came out 2 or 3 hours. That's exactly what someone would predict. One of the big differences from 2008 is that social media is much more dominant and built out. People have been on social media for a while. There's all kinds of crises that have been responded to in real-time on social media. Number two, bitcoin exists. There's actually an exit to the dollar. Three, and this is totally different from bitcoin and this is bad- China and Russia- a bunch of countries have already been making progress on non-dollar denominated trades. All the petrodollar collapse stuff. It's like how remote work was at 20-30% or something prior to the pandemic. And then it just went totally vertical afterwards. The pandemic took existing solutions and then pushed them from 20% share to like 70 or 80% share. I think that's going to happen across the board with bitcoin. One of the other big differences from 2008 is that I do not remember bank runs in 2008-- it wasn't frantic consumers or something. It was all enterprise markdowns and big corporations. It was on the backend. It wasn't the liquid front and assets checking account.

Gladstein: I mean, the ecology of social media is - we saw it what happened the other weekend was terrifying. It really is.

Balaji: There's both a good and a bad to social media. There's obviously a bad aspect of social media. But there's also a good aspect to social media, which is that if there's a fire, if there's a digital fire in the room- if they can't print, if they are finding out that their money is gone in their bank in the middle of the mid west then that can be communicated now and integrated in a way that is outside the mainstream media. Of course one doesn't want to "panic" but it is also true that there are times when you need to say hmm maybe there actually is a fire and I want to calmly exit the building.

Gladstein: I am very pro American values, and I think the American government has done things that are shameful and criminal etc. But I think that what ends up happening here is not great for other dictatorial powers. I see a lot of people on here exciting about the Chinese, Saudis or Russians- and I'm against that. It's not going to work. Those systems rely on confiscation, censorship and closed capital markets. That's how the Chinese and Russians run themselves. The United States at its core is about free speech, property rights, and open capital markets. I think on the other end of this thing America comes out really strong. I'm really bullish on America in 15 or 20 years. But that doesn't mean that our currency won't start to collapse into something else. For most other countries they have already seen this before. Anyone from Turkey or Argentina could teach us about what happens when things stsart to shake- everyone goes to dollars. What happens now when the dollars go away?

Balaji: The new thing is that with social media and bitcoin out there and several hundred million people worldwide already with cryptocurrency, and also, crucially, there are banking rails that are outside the US. There's a lot of dollar holders outside the US. I think it will be challenging... I don't have a map of all the crypto banks worldwide but I think it will be extremely challenging to block all of the exits. They have shutdown Signature and Silvergate and as Nic Carter and 0xfoobar documented, Signature wasn't a bank run. It was a murder. It wasn't actually insolvent. So again, they are kind of blocking- in an emergent way- they are trying to block the exits but I don't think they can block all of the world's exits to bitcoin. There are many countries that are neutral or what have you. I think also there's a lot of average Americans- I'm very pro average American- but like them I'm not very pro the US government. I think now the difference between the two will be extremely obvious where like the government or at least specifically the media, the central banks, the banks and banking regulators have covered up a mass insolvency and have tried to get it to blow up in a fog of war so that everyone is confused about what is happening. Take a look at the references in my tweet. The most important thing that you can take home from that is that the banks, the banking regulators and the central bankers knew that the banks were insolvent and there is a huge crash coming from unrealized losses. They never warned depositors.

RB: Can we talk about the magnitude of quantitative easing that you're expecting to see here? They are basically going to monetize all the debt. Whta does that mean? Does that mean 30 trillion dollars of QE is coming down the pipe?

Gladstein: They did $9 trillion dollars in government securities and real estate between the end of the GFC and early 2022. Again most of that was not reflected in CPI in like the inflation we would normally talk about because it didn't come into the real economy but it made the most massive asset bubble of all time. So the question is are they going to do something similar to that where the effects are a giant asset bubble? But I think this is going to be the deflationary event in the size of the economy will start to shrink because the fiat bubble is just so big I don't know if it can get any bigger. But you will start to see certain things get more expensive and see the currency devalue.

Balaji: One thing about it is that they are not calling it quantitative easing this time. They are calling it the BTFP program this time. Part of the goal here is to just keep changing the words s othat someone who doesn't know everything can seem and look stupid or whatever. One thing though that you can track is and I have a thing here on this- when this so called BTFP program- the best article to read on this is Arthur Hayes' article on this. Awesome article on if you want the 150 IQ version about exactly how they are screwing you and you want all the mechanical details and so on. He will give that to you. But if you don't want that kind of article, then just look at the money going into the banks is going vertical and then you can figure out later the exact I don't know velocity and magnitude of the tsunami about to hit. In terms of the amount, well...

Balaji: The difference with this one is that it feels more perceptible. 40,000 companies were banking at SVB at this 40 year old institution. One day they woke up and learned that their money was gone. Importantly, these companies were then blamed for running a business checking account and wanting a bail out. Let's say you went somewhere and you wanted a helicopter airlift- that's a high risk activity and you want to get airlifted out of there, that's a bail out. But if you are just walking down a street and someone attacks you and you want police to help you, that's a paid-for. You took a low risk activity. Your taxes or subscription should pay for that. Similarly, if you make a risky investment or something like that, and you want your money back, then yeah that's a bail out. But to want the bank regulator whose salary that you are paying, to tell you that your bank is insolvent and give you some warning before a bank run, yeah that's a paid for. That's not a bailout. The most important question that any depositor at SVB can ask: why did the Federal Reserve and the FDIC know about the insolvency not just about SVB but about every other bank and allow them to just blow up and go bankrupt? That is the most important question. When you ask that question, you know, when you have that lense on the thing and look at the links in my tweet. When you realize that they knew that the banks were insolvent but didn't tell the deposits- which includes all of you, each of you have deposits at a US bank, and have an eye towards understanding that yeah they knew the banks were insolvent... that's not a bailout, that's the state conspiring against you or certainly not doing their job. What you paid for, didn't come through.

Gladstein: Do people start to realize that every single family unit or institution in the world should have some allocation to this thing (bitcoin) which cannot be confiscated or frozen or taken away by government fiat? Literally it has no counterparty risk. That's the question. Maybe it doesn't happen at this time and we coast. But this will happen at some point. It will happen this decade. You want to think of yourself on the other side of that moment happening, and you should wonder what you should do differently to prepare.

RB: My estimation is that pain is information. Most people learn the hard way by running their head into a wall. What is the total shortfall of these insolvent banks across the country?

Balaji: I shouldn't say that I have no idea. I can approximate it by- the FDIC unrealized gains on-- quoting this FDIC report to you. This is from March 6, 2023, a few days before SVB. The FDIC chairman- not some random- the main guy- said the total of these unrealized losses including maturities held to .... this is $620 billion. These are just the ones he's counting up there. The whole system is set up for opacity. If you look at the graphs they are putting out, like in my tweet, or unrealized losses on investment capital, etc. They are all down and to the right, and even an outsider can see that these are 6-7x off. In a macro sense, you know how people have been saying that America has been living on borrowed time? This is like the balloon payment coming at the end. People aren't contemplating that this is different from what came before. With debt, there's a balloon payment. If you take a debt, which you shouldn't do- if you took on debt, then often at the end there is one giant payment. In a sense, it's not exactly that, but you can kind of think about it like that. The bill is finally coming due for years of crazy money printing. It's all coming due at once in the messiest fashion possible which is like bank runs on 100 banks this week. On March 11, everybody was saying oh these evil tech guys I can't believe they took risky bets with their tech things etc but the only bet that SVB took that was super risky in retrospect was buying long-term government bonds. People were saying oh well they should have hedged interest rate risk. But if every single bank is going down in the same way, is that a bank problem or is that a central bank problem? It's clearly a central bank problem. March 11th- I said what we would likely see is that it's not a single bank issue it's a central bank issue. Everyone was trying to pin it on "tech guys" or something. 10 days ago there were 0 dead banks, now there are 5 dead banks- Credit Suisse, First Republic, Signature, SVB, and Silvergate. Dead banks are a pretty big deal because one dead bank includes hundreds of billions of dollars of assets. Now the Wall Street Journal has basically admitted and confirmed this. It probably waited until this time to put it out into print because they wanted to wait for the printed money to already be available but dozens of banks may have risked similar to SVB and there are 186 banks with similar risk profiles......

Balaji: I'm providing citations here, in my tweet. I'm providing charts. Figures. I've decoded enough of this to get the scale of it. I knew this was coming about a week ago. What I didn't fully get was that they were basically going to-- think of this as a digital pearl harbor of all dollar holders. The Federal Reserve itself is basically surprise attacking every dollar holder with a surprise dollar devaluation of all their dollars. This isn't too surprising because this is actually what they did in 2022. Tallib was yelling about this- he admits that betting on the long-term financial health of the USA in 2021 was one of the first bets you could make because everybody who did that buy 10-year bonds and other treasuries got absolutely destroyed in 2022. In 2021, the worst bet was betting on the long-term financial health, and today the worst bet is the one that people are making by locking up cash in 3 month treasuries. Right now the worst bet is betting on the short-term financial health of the US. If you lock up your money that way, you're subject to illiquidity risk and then devaluation risk because the dollar is worth less and your purchasing power declines. Obviously you're getting something, you don't get 5% interest rate for nothing- you sacrifice liquidity and devaluation risk. With billions of dollars flying around, the single most important thing to know is don't send your money to the big banks. Buy bitcoin instead.

Balaji: Bitcoin is the shelling point.

RB: I think shelling point is useful. The other thing is that this sounds like one of the biggest rugpulls in human history. Obviously the punch line is stay humble, stack sats, and get your dollars out of banks. What else should people considering in light of this?

Balaji: Yes, this is a gigantic rug pull. But the thing to remember is that sovereign defaults are actually not that uncommon. The US banking system did rugpull American citizens during the mortgage crisis. The same people doing BLM saying there were mostly peaceful protests when there were fires in the background- those were predominant in the state right now. It's not that implausible. Or think about trust in media. People used to think the media were neutral referees and now people realized that they are not aligned with consumers or the general public. Trust in media has collapsed. Yes, there's a rug pull. Who would have thought that your bank would do this to you? The stealth, scale and speed of this digital pearl harbor on dollar holders is bananas. But you can see what's coming. Forget what's coming on tiktok or TV. Just look for the term discount window. Why is there so much money rushing to these banks? Who can get their money out of the bank and into bitcoin faster- if you are just-- the false door is just sending your money into a GSIB. The right door though is bitcoin. What's the next step? You probably want to be in a crypto friendly jurisdiction. Did you see my tweet on Texas?

Balaji: So what's the shelling point? It's a point where people are able to coordinate. You hit a fire alarm, and people are going to go for the exit without having to be told what the plan is. Peter Thiel talked about the bitcoin price (the BTC/USD price) as the only unfakeable signal in global markets today. Everything else is fake. Chinese markets are totally fake. US markets some of them are very fake. But that signal was a signal of exit and it's hard to fake because it's a real signal. If that moons, then that's a fire alarm that says that something is very wrong and the money in the banking system is gone. That's a signal that says boom like this actually they are hyper-inflating the currency and printing so much and you should get to a safe haven. Once people see that around the world, other dollar holders will realize that a new reserve currency is being born. This is how bitcoin will become the global reserve currency of the world. It's just going to be messy and people thought it would be more gradual. There are some gradual aspects of this already of course, like El Salvador using this as a reserve currency and Florida has bitcoin mayors etc... the first point of the shelling point is that bitcoin is the shelling point. If, as you have already seen, independent of me, $150 billion more than 2008 is moving to the discount window now. Number two is there's already last year one of the things I talked about last year and I tweet about this stuff and people put it in place- anti-seizure bills. Basically the right to buy, sell, send and receive bitcoin shall not be infringed. That's the 0th amendment, right? That you can't take someone's money. The thing about this is that... you could talk about executive order 6502.

RB: In the 1930s, private ownership of gold was outlawed with what I think was 10 years of imprisonment or a million dollar fine which was a lot of money in 1933. That was said to be to support a war effort or something to that effect. But it's bullshit and anti-capitalistic. It was about confiscating gold and then re-pricing it. Everyone was given a 75% haircut on the price of gold by the government. On the shelling point, I like to think about it as the lowest common denominator strategy. If you are playing a game where people can't trust each other and their interests are at odds, then it's the thing that everyone defaults to. In a war, if everyone is bombing you, then you need to build the high altitude bombers right, that's the shelling point. I think of bitcoin as an irrepressible barometer for the ill fragility of the global financial system. .... take a look at the London Gold Pool where governmetns have colluded to manipulate and suppress the price of gold, for this very reason. Alan Greenspan said this a long time ago that you have to outlaw access to a sound store of value for a fiat currency system to work. If people had the option to put their money into something safe that couldn't be inflated or confiscated, the nthat's obviously where they are going to move their money, then you have to restrict their money away from that.

Balaji: On the shelling point thing, that's why I'm saying bitcoin and bitcoin only. We are all bitcoin maximalists now, accidentally. I do personally believe you're going to need scalable systems and other stuff on the other side of this. But just for now, just get to the exit and pile in and moon it so that people know something is wrong. One of the problems with the anti-seizure bill- one of the thesis in my book The Network State is that the 1950s was a peak centralization moment where there was 3 superpowers, 1 telephone company, and 3 television stations. In 1991, the Internet frontier opened but in 1890 the American frontier closed. ..... today we have a pro-gold movement which is basically bitcoin maximalism except obviously about bitcoin. ... Centralized states were able to seize people's gold because it was in depositories... the domestic version is what happened in the Soviet Union, when Lenin said take farms and hang the entrepreneurs the farmers in Russia, or Mao went after landlords and took their property. All these countries there is a history of asset seizure and killing the upper middle class or just ambitious people. This is the unfortunate hitsory of many people around the world. ... the seizure of assets that FDR executed was a least bad version of that, compared to what happened in communist regimes because it wasn't house to house with guns. One of the things that- physical gold was defeated by the state in the early 1930s. After 2008, a lot of gold bugs thought oh buy gold this will stop the-- the Fed will print so much and the gold will moon. But people would buy gold in a custodial way; and even if you did buy a physical block of gold it's not useful in the modern economy. It might be useful for a central bank. But it's heavy, it's hard to value for someone just looking at it you need physical instruments to figure out if it's real, and you can't chip off a flake and pay someone too easily, and when you sell it to someone OTC you can't get a price easily because there's no universal price... All of these problems are why gold just doesn't work.

RB: Also gold is not portable especially to something like bitcoin. There are huge economics that promote the centralization of gold into a depository and trading paper on top of it, and it encourages a paper gold market that suppresses the price. Bitcoin is fundamentally different again. Not your keys, not your coins. Not your gold, not your gold. A paper certificate is not enough. You need to have the gold or private keys in your physical possession to prevent inflation.

Balaji: Physical gold is allowed to stay around because the state has defeated gold. I'm glad people are still interested in gold, but digital gold has not been locked up and defeated.

RB: The central banks worldwide slash the state own about 25% of the global gold supply. That might be an old stat. That's not the case though with digital gold.

Balaji: In my book, The Network State, I have something about what is the most powerful force in the world- is it the almighty god? is it the state's military? or is it encryption? That's god, state and network. Those are three very different worldviews. The state beat the people of god in the early 20th century like when the Soviet Union went and killed lots of religious people or Nazi Germany doing the same. But the network has not really had the real showdown with the state. That's been the tension over the last 10 or 20 years where like tech companies, open-source protocols, p2p sharing, and all this stuff is running rings around state regulators and these folks with centralized power. This is a bubbling thing where there has been different battle fronts or tensions or points of conflict. Evne in the US, you can think of as conservatives like red tribe as people of god, or blue tribe as people of the state, and grey tribe is people of the network. There are some overlaps of course. But one of the fundamental conceptsi s that people of the state think that violence in some form is enough to solve any problem. Julian Assange htough pointed out that no amount of violence can solve a math problem like stealing private keys. You can hit dollars and mass inflate them and seize them, but you can't do that for bitcoin, or at least that's the thing that may get tested- can you actually seize bitcoin? There's both technological but also socio-political aspects to that. I think the Texas GOP thing-- so what do you do? Buy bitcoin. Crypto friendly jurisdictions are good to check out, like Texas and Wyoming. Tennessee. Florida and in particular Miami. Mississippi. Texas GOP is looking into this. There's a few states that have already gotten into cryptocurrency and what have you and these are good places where property rights are protected. Abroad there is El Salvador, UAE, the marshall islands, there's eastern europe, etc. Those jurisdictions are going to do well in the event something goes down and they will be crypto friendly and first movers.

RB: Everything the state has is stolen, and everything it says is a lie. A pretty damning indictment on the surface but we're starting to see this is pretty damn accurate especially in times of crisis. So you need to hold some form of wealth that cannot be easily confiscated or inflated away. There's nothing better than this in the world than bitcoin.

Balaji: There's a central banker, former head of the eurozone central banking, his quote is that when things get serious you have to know how to lie. Why would someone say that? It's like SBF saying FTX is fine everything is fine don't check on your money don't worry about it it's just false rumors. This is very similar to Jerome Powell saying that the capital positions of the US financial system is fine- would they actually have to say that if things really were fine? ... They're just saying don't worry about it, we have a backup plan, and on the other hand they are telling banks come and get some extra printed money. They have to do a lot to cover their actions and make sure you're to slow to react. Hopefully I have given you guys some time to react.

Balaji: One reason why I'm doing my bet, and keep in mind there's no way that I make money on this. If I'm right, or even close to being right, why would I not use the purchasing power to buy more bitcoin today? $1 million buys 40 BTC or something. The reason is that I'm doing this to ring the fire alarm. I do love many things about the current world and I do like-- I was born in the US and I think that Americans have been defrauded on this. I think it's good to ring the fire alarm on this. When I put up the bitsignal, this discount window graph hadn't hit. Now that it has, and it looks similar to that bitsignal, I think it's worth taking a look. Go see how much money they are printing. Do you really want to be holding dollars? Do you think maybe hedging your dollars at least a little would be a smart thing to do?