US Gov Debt, Gold as Money, Bitcoin, History | Nik Bhatia

time to the channel. And if you love hearing the historical references, you are going to love what Nick has to say. He's just authored a new book called Layered Money, and it goes back through history, and it goes all the way back into future tens. As a matter of fact, we start talking about the treasuries, which is something I've been talking a lot about the U. S. Treasuries. The yield has been plummeting. And he is a professor at USC.

He talks about this to his students and he knows what's going on, and he's got a different take than what I've been saying, and it's one that you want to hear. Then we go back into history to learn about what happened that's actually sparked the renaissance, and then of course we bring it all the way back to current date. This is an interview you do not want to miss. Was one that I really enjoyed. So let's

go ahead and jump right into it. All right, everyone, Welcome to another episode of the Market Disruptor Show today. I am so excited to bring back for a second time. I think maybe only the second guest that's been back a second time. Nick is back with us. He is the author of the brand new book Layered Money, which we'll be talking about. He's also an adject professor at the USC Marshall School Business and Nick, it's just just an honor to have you back. Thanks for joining us.

Great to be Mark, thank you. Yeah. So, Um, you are an adjunct professor. Um, you had a career in finance. UM. I know you worked with treasuries. I want to talk about of course, you have this new book that's amazing that I've been loving. UM, and I want to talk about that, but maybe just real quick, give us a little bit of background on kind of your work in in big finance before and then kind of like which

we're where you are at right now? Sure? So, I started in the fixed income industry several years ago and I was working at a couple of different bond managers, and then the most recent job that I had was trading US treasuries on a trading desk for a large institutional investment manager and also helping on the interest rate strategy team, so global macro economics and trading US government

securities and other interest rate derivatives I was. I was doing that for several years and I really enjoyed being on the desk. That was something that Hey, just a real quick interruption to let you know that this video

is brought to you add free by block Fire. Now they're giving you the ability to hodal your bitcoin and your crypto as it goes up in value, and at the same time you can earn high yielding interest on it, so you can basically hold it for all the upside potential and then you can make cash flow off of it at the exact same time. Now, opening accounts super fast, super simple, and they've offered to give me up to two for every sign up, but I told them, you

know what, let's give it back to you. So you can now go and you can get the two fifty dollars whenever you set up your account, and all us to do is just check the link in the description for details, set up an account super quick and easy, and turn up to two and fifty dollars brought to

you by black Fires, So check them out. I learned so much from and I got to study the FED really intimately on a daily basis, read research from some of the greatest thinkers on Wall Street with regard to treasuries and interest rates and um, the way that the economy is going and especially how the financial system works.

So when I was there on the desk, I also started to fall down the bitcoin rabbit hole at the same time, and as time progressed, I started to read more and more about bitcoin, and then I started to write more about bitcoin, started publishing some research pieces out bitcoin and Lightning Network, and that really, um it really put pulled me in that in this direction of becoming a writer about bitcoin. And then I left the bond

market in late and spent the whole year writing layered money. Yeah, So I mean that's a it's kind of an interesting track that brought you to kind of where we are today. It seems like maybe I'm wrong, but it almost seems like maybe the more into the traditional financial system people are sometimes the harder it maybe for them to see um the the other way that it could be, right, almost like, uh, what does it see the forest through the trees or whatever it is? Um. But let's dig

into that for a minute. So you were working at a desk trading treasuries, So I want to talk about that for a minute because I've been talking about that quite a bit on my channel. And so obviously treasuries are a risk free asset or whatever they call that, UM, But lately they've been moving quite a bit. What have you been seeing in the treasury market. Let's just talk about that for a minute. Are you still following that? Yes?

I am. And you know I talked about the market with my students at USC I teach a fixed income course over there, so we talked about interest rates all the time. And you know, one of the questions right now is why are interest rates moving so much? Uh? And they seemed to move quite a bit higher in the last several months. What I always like to do is zoom out, take a moment, zoom out. Let's look

at the trend. Let's look at where we are I'm a I'm a chartist, I'm a technical analyst as well, and so I always like to look at price behavior through the lens of the chart and what what is the what are the buyers and sellers doing, and how is that reflected pictorially in in an image for us. So when I show them the forty year chart, I see a down channel and interest strings. That channel has not been broken by any stretch of the imagination. We

are still in this multidecade downward trend in interest rates. Now, on top of that, we had an extremely dramatic move lower in interest rates in February March of last year and on, you know, through the summer, as rates went to zero almost across the whole curve. So when you get a move like that, and you get a retracement, for example, that is in context of a normal move.

And so right now I would characterize the vast majority of this retracement higher and interest rates in the United States as a natural retracement of a very dramatic move

last year. As last year, the market starts pricing in total calamity and economic collapse, and then we realize that people are not deathly afraid to go outside of their homes and they're still spending money, and so the economy recovers and uh, interest rates rise back up to levels where you know they were around the beginning of the pandemic, and I don't you know, we're not even there yet.

It hasn't retraced all of that move. So you know, that's one side of the story, is that this could just be you know, things starting to get back to normal. The other side of the story is that, yes, there is more growth worldwide in the economy in the last three to six months then there was before that, and rates always priced in this rate of change and momentum and how things are going at the margin. Well, right now things that the margin are going better. So sell

the risk free asset treasuries. That decreases the price, raises the interest rates. So treasury rates right now headed higher. Um. If they start going above to pretent above two and a half percent and tenure part of the curve, then we can like start waiting some flags and say, hey, what is happening longer term year with United States treasuries. But I think it's far too far too premature to make any grand conclusions about treasuries as the risk free

asset right now. Um, I do personally anticipate uh treasuries to reach a yield level somewhere between here and two percent, meaning you know, one and a half to two percent on ten year yields. That actually starts to slow down the economy. And how does that happen? Higher interest rates are a tighter financial condition. If you have cash in the bank and you're looking at treasuries at zero point five percent, you you say, I'd rather invest that money

somewhere else. But if you see treasuries at two percent, you can lock that in for ten years. Investors are going to sell their risk assets, purchase treasuries and drive down interest rates. And higher interest rates themselves carry more interest costs for companies when they're borrowing. So higher interest rates are a natural, uh um tightening of financial conditions.

They do make things a little bit more difficult, and I think we're probably at that level and interest rates sometimes soon that they will start to reverse, and I do anticipate that rates will stay low for a long long time here in the United States. Yeah. So, I mean we saw them sell off down to about you know, fifty about point five, right, and then I think since that was August of last year, they've almost gone up

at back to the buck fifty range. As you said, Um, and you think they were just oversold or over bought, oversold, and now they're just kind of um, reverting to the mean almost if you will. Yeah, you know that's a good way. And it's always confusing when you talk about treasuries because you can say that the prices are rallying or selling off, or the yields or rallying or selling off. But yeah, the bottom line is that when yields go lower, it's when the price is going up that demand is

going up. And that's what happened last year. And and so yes, I do feel that people are selling their risk free asset right now and reinvesting that in other places as it's it's clear to us that um, you know, the economy is is surviving, this pandemic is growing out of it, and um that people are you know, starting to travel around the world again. But what about when you look a little bit deeper under the hood, right,

and you look at like who's buying the treasury? So um, right, it looks like maybe we have kind of a lack of foreign buyers. Maybe more buying from the Fed. In addition, looking forward, we have a lot more stimulus coming, you know to one point nine and the winds they're already talking about a three trillion and based off of the Biden administration and the New Green, New Deal whatever, like I mean, we could be who knows, five, six, ten, hilly And do you think that has anything to play

into those those yields on the treasuries as well? Um one the increase of stimulus, and two maybe is there a lack of buyers and the Fed has to start kind of controlling that a little, you know it. They're they're always these couple of things that are blamed when treasury go treasury rates go higher. One is that the Treasury is issuing a lot, so there's just a ton of extra supply, So where's the you know, the incremental buyer.

And the other is that, oh, there's gonna be fiscal stimulus that's going to create aggregate demand and the economy that's going to trigger inflation. And then you know, interest rates go up as a natural kind of result from

inflationary environment. UM. But I challenge, I always challenge these things because now we have this um, this additional buyer of the FED, which you mentioned, So it's a little bit nuanced, but really what you have to think about their thirty trillion treasuries existing, right the FED now owns seven plus approximately of them, so call it a quarter

of the market. If things go badly in the world, the actual amount of treasury is available for the public to buy that the FED doesn't own, that's not also tucked away. It's only a few trillion, and so you have, you know, a hundred plus trillion of assets that are trying to jam into only a couple of trillion of treasuries. And that's what makes this price go up and the yields go down. When when ship hits the fan, right, when things go badly in the economy, it's the flight

to safety. When we're in this um, we're in the opposite environment right now where there's no flight to safety. There's actually um you're leaving the safety to go invest in other way in other ways. Then there, you know, there's maybe this worry like where's the buyer, the foreign you know, demand has gone down, and we can see that maybe in the statistics a little bit. The domestic buyer or the investment managers themselves. They're not lining up

to buy because you know things are going well. They want to put that money to work elsewhere and get some credit spread on top of what treasuries yield. But then when rates go up and things actually start to go bad in the economy, it's a it's a reflexivity sort of situation where the higher rates actually cause things to break, and that causes people to go into the safety. The FED then also then threatens to buy more treasuries and actually remove the supply of risk free assets to

the rest of the world. And so there's always this FED being an infinite buyer in the back of people's minds, and it makes the marginal supply available to the market in crisis incredibly small. And so if you don't already own the treasuries as part of your portfolio, you're gonna be cha seeing a price higher and a yield lower as you try to lock in these yields for the next ten years and survive any you know, financial collapse that you know might be happening over the next couple

of years. If you don't own the treasure is already, you're just gonna struggle to get them. So I'm I'm very cautious to ever say that extra supplies causing yields to go up, or that fiscal stimulus is causing deals to go up, fiscal profligacy is causing deals to go up. I don't really buy all of those things unless we do end this bull market in bonds, unless yields go to If if treasure yields go to three percent in

the next three months, mark I'm definitely wrong. We can have another chat and I'll have to change my investment thesis, but not here at one and a percent. Definitely not at one got it? So last question about that, and then I want to move on and talk about how we tie this into the whole layered stack that that you that your thesis is on. But one more question about debt. So, just as you said, if it went to two two and a half, you wouldn't be so worried.

At three you would be willing to be right that Um, at what point does the FED get I mean, obviously they've talked about not raising rates, They've talked about, you know, potentially controlling the yield curve, etcetera. I mean, do you think they let it get up to almost three before they really come in hot and really try to control that. Or two and a half is where they're starting to kind of pay attention, especially considering the deficits that we're

running right now. Yes, especially because the deficits that we are running right now, and that that's really the core of it, right it's a mathematical restriction. You have a huge stock of debt. If you have to roll over that debt at three percent, all of a sudden, you're taking huge, huge revenue or i'm sorry, you're taking a huge chunk of money from the treasury going to interest you know, the interest holders, including the FED who owns

owns all of this treasury debt. Of course they remit any profits they make back to the treasure, but they're paying all these coupons and they're not going to be able to afford other things, and that is uh limiting to economic activity. Then it actually gets into the employment

picture when the FED is looking at it. And so there is definitely a level It's hard for me to say what it is, but there's a level close to here two two and a half, three percent, somewhere in that range where the FED starts to worry and says, we might have to, you know, start buying more treasuries on top of what they're already doing. Got it. So, um, that was great, Thanks for doing that. And and now I want to transition us for everybody listening, and I

want to transition us into my favorite subject. If you watched the channel, I always try to bring this historical reference in, and so Nick's written this great book. It's called Layered Money. If you like my videos where I bring historical references forward, then you're gonna love his book, Layered Money. But I want to tie. We'll tie. Treasury is back in because it's part of the stack. But let's go ahead and just start back into that book

and go back to history. You and I were talking off camera before we start recording and talking about how there was this, um, this this Renaissance that was created because the whole world had got onto like a standard unit of money, and then things started evolving from there. So maybe take us back to that point and kind

of give us that that frame of reference. During the Renaissance, the Florentine meant issued a coin in the year fifty two called the gold florin, and that gold florin had an unchanged purity and wait for over three hundred years, and that was this remarkable advance in UH currency denomination stability. And because what were they doing, what were they doing

before that? I mean, why was it so unstable? Yeah, of course it was so um it was so revolutionary what the Florentine meant did because before that, government after government, monarchy after monarchy dive their coins over time, they would have less gold content or silver content in the coins

that they would meant throughout time. So the coin from the year five d and the coin from the year five and fifty a d um, we're different from each other, even though they were called the same thing by the government, and that creates confusion and it creates um. Hey, just another quick interruption to let you know that this video

it's brought to you add free by Block five. Now they allow you to hold onto your bitcoin and your other cryptos for all the potential upside, and at the same time you can earn high yielding interest on it, so it basically cash flows. Now with Block five you can earn up to eight point six percent interest. You can also borrow against your crypto as well. It's super fast, it's super easy to set up an account and right now you can get up to two hundred and fifty

dollars when you set up your account. Check the link in the description that I have for details in order to claim that two hut. Because Block five is the future of finance. Just check the link in the description for all the details of how to claim aime you're two and fifty dollars today. Obviously it creates inflation. It is it is m technically a devaluation of your currency, um, you know, by definition. And so that was the trend before and it guess what, it's still the trend after.

So what what the Florigentine mint did during that time was very remarkable and gave this base for things to flourish on top of it. And of course the foreign as a coin ceased to exist just like every other one. But the fact that it lasted for so long during a time just like you were mentioning before we got on camera, during the time of a renaissance in so many other things science, mathematics, architecture, art, innovation, business structure, maritime, insurance.

I mean, you're talking about so many different advances as a human civilization during this time. It really um set forth this system a monetary system that could be built on top of the forum at the time. Yeah, so do you think my guess going back to the to the history, and we did talk about it, but I don't know. I didn't go back and study as well

as you did. But I've I've always kind of thought that maybe it was going to that standard unit of account that allowed for free trade to start flourishing, because now everybody could trade from country to country, everybody knew what that money was worth, which then allowed people to specialize. And then we had this explosion of of the Renaissance, right like, as you said, do the science and the arts and things. But um, were those two correlated that

you take it started before? Did the money help that? It's hard to know what. What I concluded in the book is that during the time this idea of an international economy, let's call it in the thirteenth century at the fourteenth century, the international economy was this series of traveling fairs between merchants. So imagine, you know, like a cloth trade er and a spices trader, um, you know, and all these different traders coming together across the European continent.

So Spain, France, Italy, Germany, Switzerland. They were traveling all over and when they met once a quarter every three or six months, they would trade. And so what started happening at these fairs bankers started following them and bridging debts between merchants for three to six months. And when they bridge debts, they are issuing these promises. They're issuing

credit form you know, credit instruments, forms of money. And when you can say, oh, I want to borrow a little money by my textiles, make my finished product, and then sell the clothes, and I financed that activity with a banker, that's going to cause the economy to grow because that I now am adding value to the economy that I wouldn't have been able to do had I not had access to credit, because I don't have the money to buy all that all that cloth or that

raw material to make clothes with. So yes, bankers issuing credit stimulated the economy during that time. And as the bankers traveled with the merchants from fair to fair across the European continent, the fairs started to become more important because not only could you trade, but you could also finance your business at the fairs. So and remember that had nothing to do with the Flora. That was just

bankers forming a network with each other. Now, if the floor in was part of transactions during that time, that has a compounding effect on this idea of an international economy where several, you know, people throughout several parts of the world are all denominating their balance sheets in floren. So not only are you doing you know, great trade between different commodities or finished products, but now you are thinking about moving capital around more dynamically using this network

of bankers and a shared denomination. But you know, we shouldn't confuse it and say that Floren was everybody's denomination. It was one coin, it was the most popular coin, It was of incredibly durable coin. But that the Floren alone didn't create this great system monetary system with a banking network. Sure, sure, but because they did have that standard unto account and they did have a more stable system, maybe it maybe it added to it. But so obviously

that helped, but it still had its inherent flaws. Right, gold was heavy and most uh and probably the biggest argument against It's hard to settle, right, especially when you have to settle it over space, And so that's where the layers started coming on. That's right, Maybe give us a kind of high level view of how those layers work. And then I think if people can understand that, they can understand kind of a better understand of what we're

looking at today. Definitely, the idea of layered money is is this idea that money has an inherent hierarchy to it. You think about different types of money today, you're checking account, the cash in your wallet, your Venemo balance. These are actually um People think of them as all forms of money,

but they actually fall into a hierarchy. The cash in your wallet is issued by the FED, and it's a higher form of money than you're checking account dollars because that's issued by a at a bank, and the Venemo balance is issued by a company that uses your banking balance. So they're not actually all equal. Not all forms of money are equal. They fall into a hierarchy, and the hierarchy is determined by really whose balance sheet the money

comes from. And so what I tried to do with layered money is eliminate this idea of balance sheets and assets and liabilities and just thinking of it as a first, second, and third layer of money, the first layer being the highest form of money and then on down we go. So in a historical context, a gold coin is a first layer money. It doesn't have a counterparty, it isn't issued by a bank. It is a physical item that

you can hold in your pocket. A gold certificate that says I promised to pay the bearer one gold coin on demand is a second layer money because it promises to pay a first layer money. It's issued by a financial institution or a banker. So this relationship between first layer money and second layer money is this natural hierarchy of money, and our whole financial system works with the hierarchy.

And I have these illustrations throughout the book where I show the first example of gold and gold certificates, but then we get into what does it look like today with the FED, and you can see that it's a highly complex system, but it's still is built like a hierarchy. So um, to kind of break this down a little bit, UM, So we have basically gold, which is as you said, it's the hardest form of money, the best form of money.

I can have it. If I have possession of it, I own it, but it's very difficult, it's slow, it's hard to ship from one cotton to the next, etcetera. Hard to break down, denominations, all these things. So then we deposit that into a into a bank and they give me paper gold certificates. That's the second layer, and those are much easier to transport around. I can carry paper in my pocket, it's easier to send to you, et cetera. And so really each layer gives you maybe

an extra layer of convenience. Um, so it does something different, it has an extra feature. But at the end of the day, like I could end up holding a piece of paper that I may not be able to redeem for the gold. And that's absolutely right. That's the tradeoff between the layers of money. Each layer serves a different function. The first layer is so that you don't have risk of a counterparty default. The second layer is for convenience,

but then you have the risk. Right exactly what you said, that paper can be worthless tomorrow, and so we do. But but listen, we do make that trade off in the past and today and in the future. We all make that trade off. And so, um, you know, that's

really what the layers represent. They represent this idea that we can have a we can have choice between how much counterparty exposure or how much risk that we are willing to carry with us on on on any given day, and just to fast forward to bitcoin, because that's the thesis of the book. Bitcoin empowers people to have directly to have access to the first layer of money, a counterparty free asset that they can hold themselves, no bank and default to them. I'm not talking about bitcoin on

an exchange. That's a second layer bitcoin. Still, it's a promise to pay bitcoin. You can withdraw it if the exchange honors your request. And listen, people still have bitcoin on exchanges and bitcoin in their own private key storage mechanism whatever they choose to do. So, even even the people that are let's call them the staunchest hoddlers, the people who say own your keys, not your keys, not your coins. The moment they put bitcoin on an exchange,

they have both first and second layer bitcoin. They have their own bitcoin, then they have bitcoin balances. Why did they do that because the bitcoin balances are going to get them quicker access to USD potentially That's why they did it in the first place. And so that trade off happens, it exists, it and we can see that, you know, looking back you know, a thousand years and

I try to do that in the book. Yeah, so we kind of had if if I want to recap this, so we had gold, and then because gold was big and heavy and slow and hard to settle, we had

we put in the bank. We got paper gold certificate, and then um, maybe we advanced and we got like checks, and then we got checks and then checks were too slow, so then we got like credit cards, and then credit cards were not not everybody can take a credit card, so then we got like so so it's like gold and then paper goaltificates and then checks and then credit

debit cards and then um, that still didn't work. So then we have like PayPal or Venmo, and that's like a sixth or seventh layer, right, all built on that stack. The problem is somewhere along the line that stack of six seven layers was built and then gold was just taken out of the bottom. So somehow the stacks still stayed even though the whole base disappeared. Right, that's right, And um, this is this idea of fiat currency, and um, you know, readers will notice I try to avoid the

words inflation, deflation, and fiat entirely in the book. Actually, the only time the word fiat appears is when Satoshi talks about fiat currency. It's a great quote um from early on in the Bitcoin network. But fiat just means that UM, the base is not there, right, the anchor of the system is not there. It's now by decree, it's a trust in the currency UM. But if you look at the layered system, it's not that the first layer of money isn't there anymore. It's what is the

what is the FED own? They own US treasures, so, you know, to pull it full circle, US treasuries are now the first layer of money because it's what the FED owns. It's what backs the dollar um that the FED issues, It's what backs the federal reserve reserve balances that they issue to the banks which issue deposits to you and I that you know, circulate as currency UM in the economy. So US treasuries today are the first layer of money. Gold doesn't exist within the dollar pyramid anymore.

It was removed UM, but that doesn't Again, the US dollar is still the world reserve currency. So just because it doesn't have gold as part of it doesn't mean that it can't function, is it now people don't trust it as much and are losing trust with the Fed doing what they're doing over the last decade plus UM and that's why it's part of why we see the price of gold higher today than it was ten years ago.

It's also why we see um bitcoin emerging as you know, a direct response to this idea that um feed currency doesn't have an anchor, it is simply by decree and uh, I do believe that setoci attempt to address that with bitcoin. Yeah, So moving on to bitcoin. So a lot of people that believe in bitcoin believe that bitcoin could be gold, and not just a lot of people that believe in it. I mean we've seen JP Morgan come out our City Bank and put out guidance and say it's going to

beat gold. I mean they say it's a better form of goal. So a lot of people think they equit to that digital gold. But then a lot of people that are against bitcoin or think bitcoin has these flaws would say that, well, bitcoin is too slow, it's not as fast as Visa or MasterCard. And I think that's where your thesis picks back up on it. Is that right?

You want to fill us in on that? Yeah, you know when you if you're done reading my book and you still this comparison to Visa and MasterCard, then you didn't comprehend. That doesn't get people to read the book. But yeah, no, and you're absolutely right. That's what I tried to do, is I I try to show that it's just like you're talking about the sixth or the seventh layer of money Venmo and PayPal. Uh, it's not the same thing as bitcoin at all. Bitcoin is its

own new virtual numerical commodity. It's not it's not a payment network. First, it happens to have this uh transaction mechanism that people can transact, and that happens to be a little slow. But the fed wire went down today and so and it's so it's a week day, it's the middle of the week, and it was the middle of the day. So the first layer of money, uh in the dollar system doesn't move very quickly either. And so UM the Lightning network enables big point to be

transacted instantly. You're gonna have full counterparty money. So like if you know, people wanted to have exchange balances sending to each other, not using bitcoin, they can do that today. Also, UM instantly and so if you want to instantly transact bitcoin, just use a different layer of bitcoin. If you want to final settle bitcoin, you're gonna have to wait ten minutes. And if you don't want to then you can go

find yourself another version of money. Yeah great, all right, Nick, thanks so much forgiving us that overview of layered money. And for anybody who wants that historical reference like I talked about all the time, definitely go read it. And then anybody who thinks that bitcoin can't solve this problem go back and read it as well. Um, I'm gonna put links to it down below for anybody that wants to follow Nick wants to get more of his writing, and of course by the book, so I'll have set

it down there. Nick, thanks so much for joining us, Thanks Mark, everybody go check out Layer of Money, and and thanks for having me on. All right, Thanks so much, Nick. H