In this podcast episode, Caitlin Long, founder of Custodia, discusses the instability of the financial system, the impact of central banks’ policies, and the importance of resilience. The conversation delves into the fragility of the banking system, the concept of duration mismatch in banking, and the potential risks associated with traditional banking during a financial crisis. The podcast also explores the debate over Modern Monetary Theory (MMT) and its implications, the interpretation of the U.S. Constitution regarding the definition of money, and the role of the Supreme Court in potentially overturning constitutional principles.
Instability of the Financial System
- Central Banks’ Policies: Caitlin Long explains that during the COVID-19 pandemic, central banks printed large amounts of money, leading to inflation. She also criticizes banks like Silicon Valley Bank for taking on excessive interest rate risk by investing in long-term treasuries with demand deposits from tech companies.
- Duration Mismatch in Banking: The podcast clarifies the concept of duration mismatch in banking, where banks can become insolvent during a bank run due to the need to sell long-term assets at a loss to meet immediate withdrawal demands.
- Banking Business Model: Caitlin points out that the banking business model is based on confidence and that traditional banking assumes not all depositors will withdraw their funds simultaneously.
Debate Over Modern Monetary Theory (MMT)
- Deficits and National Debt: The host challenges the notion that deficits don’t matter, a concept associated with Dick Cheney, and points out that the national debt has historically increased more under Republican administrations, despite their rhetoric.
- Impact of MMT: The guest argues that MMT is subtly shifting wealth from the middle class to the upper and lower classes, contributing to the erosion of the middle class’s financial stability.
- Debt Tsunami: The conversation shifts to the inevitability of a “debt tsunami,” with the guest and a referenced tweet by James Lish agreeing on its eventual occurrence, though they differ on the timing.
Interpretation of the U.S. Constitution
- Definition of Money: The podcast discusses the interpretation of the U.S. Constitution, particularly regarding the definition of money and the role of the Supreme Court in potentially overturning constitutional principles.
- Interstate Commerce: The conversation touches on the concept of interstate commerce and its impact on the 10th Amendment, which emphasizes the states as the fundamental units of government, not the federal government.
- Role of the Supreme Court: The Supreme Court is mentioned as having allowed a fiat dollar system, diverging from the Constitution’s original specification of gold and silver as money.
- Bullish: The podcast expresses a bullish sentiment towards Bitcoin and other cryptocurrencies, with Caitlin Long mentioning her efforts to facilitate the adoption of Bitcoin by working to mitigate regulatory challenges. The host and Caitlin Long also discuss Trace Mayer’s perspective on the adoption of Bitcoin, noting that its progression aligns with Mayer’s expectations of network effects leading to Bitcoin becoming a global reserve currency.
- Bearish: The podcast expresses a bearish sentiment towards the current financial system and the policies of central banks. Caitlin Long criticizes the management of banks like Silicon Valley Bank for taking on excessive interest rate risk. She also critiques Modern Monetary Theory (MMT), which posits that debt and deficits are inconsequential.
- Neutral: The podcast maintains a neutral stance on the future of the U.S. financial system. While acknowledging its instability, the guest predicts that the U.S. will face insolvency at some point due to continuous borrowing, but suggests that the financial system is not as close to collapse as some naysayers believe.